Suits against companies for disclosure violations of securities
laws are common -- from 1997 to 2012, more than 3,050 cases were
brought. A coalition is pushing a case in the Supreme Court to end
A group of pro-corporate forces has begun a behind-the-scenes
fight at the U.S. Supreme Court. You may not have heard about it,
but it could just end shareholders' ability to sue companies for
Securities fraud litigation -- suits against companies for
disclosure violations of the federal securities laws -- has been a
big business over the years. From 1997 to 2012, more than 3,050
securities litigation cases were brought, according to Cornerstone
Research, a financial and economic consulting firm. Companies and
their insurers paid $73.1 billion in judgments and settlements, and
plaintiffs' lawyers alone collected almost $17 billion in fees,
Cornerstone's research shows.
Not surprisingly, corporate America has spent decades criticizing
this type of litigation as little more than costly nuisance suits.
Not only that, since the chief executives and other officers who are
accused of having made fraudulent statements never have to pay out
of their own pockets, the companies end up paying their own
shareholders. In other words, shareholders are really paying this
money to themselves.
Shareholders and their advocates argue that fraud is fraud, and
that shareholder litigation is merely punishing companies for their
wrong conduct. They point to the more than $7.3 billion recovered in
the case of Enron or the $6.1 billion from WorldCom.
Now, a loosely organized coalition is seeking to end such
litigation, and it is pushing a case at the Supreme Court to do
The case is Erica P. John Fund v. Halliburton, the oil services
company. The Erica P. John Fund exists to support the Catholic
Archdiocese of Milwaukee.
The fund's lawsuit was initially brought in 2002, and it accused
Halliburton and its chief executive then of lying to the market
about Halliburton's asbestos liabilities. The company and chief
executive were also accused of overstating revenue and hyping claims
about the company's merger with Dresser Industries.
As Dickens memorably portrayed in "Bleak House," litigation can
be interminable, and this case is no exception.
The parties in this case have spent a decade fighting over
whether the case can be brought as a class action, meaning whether
it can be brought on behalf of all shareholders.
The Supreme Court considered a related issue in the case in 2011,
unanimously reversing a decision that the Erica P. John Fund had to
show that the allegedly false statements had led to a loss for
shareholders before the class action could be certified.
The case was sent back to a lower court, which has now certified
the class action, but Halliburton is still fighting. The oil company
is asking the Supreme Court to reconsider the case in a petition
filed last month.
In its argument, Halliburton is asking the Supreme Court to
confront one of the fundamental tenets of securities fraud
litigation: a doctrine known as "fraud on the market."
The doctrine has its origins in the 1986 Supreme Court case Basic
v. Levinson. To state a claim for securities fraud, a shareholder
must show "reliance," meaning that the shareholder acted in some way
based on the fraudulent conduct of the company.
In the Basic case, the Supreme Court held that "eyeball" reliance
-- a requirement that a shareholder read the actual documents and
relied on those statements before buying or selling shares -- wasn't
necessary. Instead, the court adopted a presumption, based on the
efficient-market hypothesis, that all publicly available information
about a company is incorporated in its stock price.
Applying this doctrine, the Supreme Court reasoned that any fraud
would affect a company's price. The court held that therefore a
shareholder need not prove reliance because the shareholder's
purchase or sale was based on an inaccurate share price, a price
that changed as a result of false information. …