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Justices May Limit Securities Suits ; Supreme Court Appears to Favor Higher Bar for Pursuing Claims of Fraud

Article excerpt

The Supreme Court appears to be leaning toward setting a higher bar for groups of investors to pursue claims they were misled.

The United States Supreme Court appears ready to impose new limits on securities fraud suits that would make it harder for investors to band together to pursue claims that they were misled when they bought or sold securities. But the justices do not seem inclined to issue a ruling that would put an end to most such suits.

The new limits would be in keeping with earlier decisions from the court led by Chief Justice John G. Roberts Jr., which has made it more difficult for workers and consumers to pursue class actions.

The decision in the case argued Wednesday, expected by June, seems likely to do something similar in cases brought by investors.

Companies facing fraud class actions prefer to address as many issues as they can before judges decide whether to certify a class.

Once a class is certified, they say, the damages sought are often so enormous that the only rational calculation is to settle even if the chances of losing at trial are small.

"Once you get the class certified, the case is over," Justice Antonin Scalia said on Wednesday.

Several justices suggested that this phenomenon could be partly addressed through a proposal in a supporting brief filed by two law professors, which argued that plaintiffs should be required to show at an early stage "whether the alleged fraud affected market price."

Justice Anthony M. Kennedy seemed particularly taken with the brief, referring to it several times. "I call it the midway position," he said.

Aaron M. Streett, a lawyer for the Halliburton Company who had argued for broader limits, said he welcomed that approach as a fallback position. But David Boies, a lawyer for the plaintiffs, resisted it.

"That's very complicated," Mr. Boies said. "It takes a lot of time. It's very expensive. It's a lot of expert testimony."

The plaintiffs contend that Halliburton made false statements on three topics that were intended to inflate its stock price: its financial exposure to asbestos claims, the prospective earnings from its engineering and construction business and the expected benefits of a merger.

Mr. Boies said the difficulty of making the showing suggested by Justice Kennedy would vary depending on the statement, because it can be hard to untangle the impact of a misstatement from other factors that affect stock prices.

Perhaps surprisingly, a Justice Department lawyer, arguing in support of the plaintiffs, seemed open to the compromise position when Justice Kennedy asked him for his view "of the consequences if we adopt the law professors' view?"

"If anything," the lawyer, Malcolm L. Stewart, said, "that would be a net gain to plaintiffs, because plaintiffs already have to prove price impact at the end of the day."

As that answer suggested, the likely outcome in the case will be to erect a new but often surmountable hurdle in securities fraud cases. Most observers said such a result would be a minor victory for corporate defendants, allowing them to defeat some securities fraud claims at the outset, but a tolerable burden for class-action plaintiffs' lawyers. …