Supreme Court to review fraud-on-the-market doctrine

November 21, 2013 by

Stocks and sharesThe U.S. Supreme Court may reconsider a 25-year-old legal theory underpinning securities class actions; the fraud-on-the-market doctrine.  The high court granted a petition for certiorari in Halliburton Co. et al. v. Erica P. John Fund, a class action alleging the energy giant misled investors about key information like its liability in asbestos litigation.

Halliburton has asked the court to overturn its 1988 decision in Basic Inc. v. Levinson, which established the fraud on the market doctrine. The doctrine assumes that investors who buy stock in an efficient market rely on a defendant’s alleged misstatements because they are accurately reflected in the company’s stock price.

If the court were to reverse the doctrine, investors may be forced to demonstrate reliance on an individual basis, rather than as a single bloc. Plaintiffs — even large, institutional investors — may not have the funds necessary to pursue cases on their own.

Defense attorney Paul R. Bessette, stated that “If the Supreme Court rejects the ‘fraud-on-the-market’ presumption of reliance altogether, then it would effectively end securities class action litigation in the United States.”

In a February decision in Amgen v. Connecticut Retirement Plans and Trust Funds, four of the nine justices said the fraud-on-the-market theory may have outlived its usefulness.

Justice Samuel Alito warned that the theory “may rest on a faulty economic premise.” Justices Clarence Thomas and Anthony Kennedy called it “questionable.” And Justice Antonin Scalia, never one to mince words, said it was “invented by the court” in Basic.

Steve Larson
An experienced trial lawyer who handles both hourly and contingent fee cases, Steve has expertise in class actions, consumer cases, antitrust litigation, securities litigation, corporate disputes, intellectual property disputes, unfair competition claims, employment matters, and disputes involving family wealth. Steve regularly represents individuals and businesses in federal and state court and has obtained class-wide recovery in multiple class actions. A veteran practitioner, Steve's clients value his creative approach to resolving complex litigation matters.

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