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The Supreme Court appeared divided into three camps on whether to overrule or alter a long-standing legal precedent that provides the foundation for many class-action lawsuits alleging securities fraud.
The court heard an hour-long oral argument in a case involving Halliburton Co. and whether to overturn a 1988 Supreme Court decision which held that investors in securities-fraud lawsuits don’t have to prove they relied upon any misleading statements by a company.
By the end of an hour-long argument session, it appeared some justices were looking for a middle-ground to resolve the case.
The court, in Basic v. Levinson, said it was enough that investors rely on the integrity of stock prices, which are a reflection of publicly available company information. That legal doctrine, known as fraud-on-the-market, has provided a basis for allowing investors to pool their claims into one large class-action lawsuit. Read the full WSJ story here.
If the court abandons its earlier precedent it could make it difficult for investors to bring class-actions alleging they were misled.
The court’s four liberal justices, including Justice Elena Kagan, voiced resistance Wednesday to overturning the 1988 decision.
Justice Kagan said Congress has been active in passing securities-law reforms and has had “every opportunity” to overrule or alter the court’s Basic decision, but hasn’t done so. She and other liberal justices suggested there was no strong justification for the court to overrule its prior precedent, which the court generally is reluctant to do.
Conservatives justices expressed concern about the court’s 1988 ruling, but appeared divided on how to proceed.
Justices Antonin Scalia and Samuel Alito voiced skepticism of the premises behind the court’s earlier decision, suggesting it had made it too easy for investors to have their lawsuits certified to proceed as class-actions. Justice Scalia said once investor cases are allowed to go forward as class-actions, company defendants feel pressure to settle even weak cases.
But Justice Anthony Kennedy, a moderate conservative justice, repeatedly asked questions that sought a compromise in deciding the case. He asked whether companies defending against securities-fraud allegations ought to have a chance, before a class-action is certified, to argue that any alleged company misrepresentations didn’t have an impact on the company’s stock price. The court could embrace that approach without abandoning its earlier case, he suggested.
Other justices later voiced interest in Justice Kennedy’s line of questioning. By the end of the session, it didn’t appear that a majority of the court was prepared to fully abandon the 1988 precedent.
The case is being closely watched in investing circles and by the business community. The underlying dispute focuses on a decade-old lawsuit covering investors who bought HalliburtonHAL +1.02% shares between 1999 and 2001. The plaintiffs allege that Halliburton misled the public about its asbestos liabilities, about revenue on construction contracts, and about the benefits of its 1998 merger with Dresser Industries. Halliburton argued that any misrepresentations alleged by the plaintiffs had no actual impact on the company’s share price.
Halliburton asked the court to overturn the 1988 precedent, but as a fallback position, has also advocated for changes to the legal process that are similar to the ones raised by Justice Kennedy.
A ruling is expected by the end of June.