Shareholder class actions—the bane of corporate management—had a near-death experience at the Supreme Court but survived a ferocious assault from business interests. In curbing but not eliminating the controversial form of litigation, the high court’s conservative majority revealed again a fascinating fissure between Chief Justice John Roberts and three of his more aggressive colleagues.
Today’s closely watched ruling amounted to a partial victory for Halliburton (HAL), as the high court imposed new requirements on shareholders pressing class-action fraud suits. The justices stopped short, however, of granting the oil services giant—and an army of business advocates supporting it with friend-of-the-court briefs—the sweeping decision they sought. Halliburton and its backers had asked the high court to throw out a landmark 1988 Supreme Court precedent that provides the foundation for most shareholder class actions.
Aaron Streett of the law firm Baker Botts, who represented Halliburton, praised (faintly) the decision, which he said would “restore a measure of rationality and balance to securities class actions … by holding that defendants may defeat class certification with evidence that the alleged [management] misstatements did not distort the stock’s market price.”
Why does all this matter? Greg Stohr, who pounds the Supreme Court beat for Bloomberg News, offers this helpful context: “Securities-fraud litigation has thrived in recent years even as Congress has tried to rein it in. More than 4,000 class-action suits have been filed since 1996, producing almost $80 billion in settlements, according to Nera Economic Consulting.” In other words, mass shareholder litigation is a big business in and of itself. Today the Supreme Court attempted to make it somewhat smaller in the future.
The shareholders in this case were represented by the legendary courtroom attorney David Boies. The plaintiffs contend that from 1999 to 2001, Halliburton falsified earnings reports, played down estimated asbestos liability, and overstated the benefits of a merger. Halliburton stock dropped 42 percent on the day those statements were shown to be false, Boies told the justices.
In the often-cited 1988 precedent Basic v. Levinson, the Supreme Court said that judges considering fraud claims such as those against Halliburton should presume that investors take public misstatements by management into account when buying shares. That presumption—known as “the fraud on the market” theory—makes it far easier for shareholders to overcome legal requirements that they show they relied on the alleged fraud and that they share sufficient attributes to justify a class, or group, lawsuit.
Writing for the court, Chief Justice Roberts refused to overturn the Basic ruling. Instead, he said Halliburton should have an opportunity, before the class action is approved, to argue that the alleged misrepresentation didn’t affect its stock price.
The Roberts opinion was joined in part by all eight of his colleagues. Three of the court’s other conservatives, however—Justices Clarence Thomas, Samuel Alito, and Antonin Scalia—said they would have gone ahead and tossed out Basic. By resisting that more dramatic gesture, the chief justice retained a sort-of unanimous court in a contentious and important case. His more cautious approach also means, as a practical matter, that federal trial judges will continue to have some flexibility in deciding whether to allow shareholder class actions to get aloft.
