A Push to End Securities Fraud Lawsuits

By Davidoff, Steven M | International Herald Tribune, October 17, 2013 | Go to article overview

A Push to End Securities Fraud Lawsuits


Davidoff, Steven M, International Herald Tribune


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 them.

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.

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 exactly that.

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. …

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