U.S. justices to hear Halliburton securities class action

Reuters

By Lawrence Hurley and Jonathan Stempel

Nov 15 (Reuters) - The U.S. Supreme Court, which in recentyears has ruled for business in a string of high-profile cases,agreed on Friday to hear a case that could herald a dramaticdecline in securities class action litigation.

The case will give the justices an opportunity tore-appraise a 25-year-old precedent, Basic v. Levinson, thatmade it easier for securities class action cases to go beyondthe preliminary certification stage.

Shareholders, led by the Erica P. John Fund Inc, suedHalliburton Co, saying the company understated itsasbestos liabilities while overstating revenues in itsengineering and construction business and the benefits of itsmerger with Dresser Industries. Halliburton sought Supreme Courtreview after losing in lower courts.

In the 1988 case, the court ruled that investors did nothave to prove that their loss could be directly traced to thealleged fraud. Instead, the court held that anymisrepresentation about a security would be incorporated intothe market price. Any investor who purchased the security atthat time could be presumed to have been directly affected bythe misrepresentation.

The ruling effectively launched the securities class actionindustry that exists today, according to Adam Pritchard, aprofessor at the University of Michigan Law School.

"Overruling 'Basic' would scale back securities classactions tremendously," he said.

Jay Brown, a professor at the University of Denver, SturmCollege of Law, said it would be bad news for investorplaintiffs if the court required them to show they actuallyrelied on false statements when making investment decisions.

"It will make securities class actions almost impossible topursue," he said.

Several former members of the U.S. Securities and ExchangeCommission filed a friend-of-the-court brief asking the court totake the case.

"At issue in this case is the viability and scope of themost powerful engine of civil liability ever established inAmerican law," their attorney, George Conway, wrote in referenceto the "fraud-on-the-market" theory.

There were 3,050 private securities class action casesbetween 1997 and 2012 leading to settlements worth more than$73.1 billion, the brief stated.

Conway said in an interview that the court's decision tohear the case was a consequential development.

"It's simply unlikely that the Supreme Court took this casewith an eye to leaving 'Basic' in place," he said.

The U.S. Chamber of Commerce and the National Association ofManufacturers also asked the court to hear the case.

Aaron Streett, one of Halliburton's lawyers, said in anemail that his team is "confident that we will prevail" afterthe court hears oral arguments, likely in February.

Lead plaintiffs' attorney David Boies declined to comment.

AMGEN RULING

Four of the nine current justices have indicated concernsabout the "fraud-on-the-market" theory. Justice Samuel Alitosaid the court should consider overruling the 1988 case in aseparate opinion he wrote after concurring with the majority ina securities class action case decided in February in favor ofplaintiffs, Amgen v. Connecticut Retirement Plans.

Three other justices dissented in that case. Alito wrote inhis opinion that there was recent evidence the"fraud-on-the-market" theory "may rest on a faulty economicpremise."

The Halliburton case returns to the court for a second time.In January 2011, the court unanimously ruled that a U.S. appealscourt erred in rejecting class certification.

The lawsuit was filed in 2002 on behalf of all buyers ofHalliburton stock between June 1999 and December 2001.

The alleged misstatements artificially pumped upHalliburton's stock price, the lawsuit said, adding that theHouston-based company eventually made corrective disclosuresthat caused its stock price to fall.

After the first Supreme Court ruling, Halliburton arguedthat the class could still not be certified because the allegedfraud did not affect the stock price. In January 2012, a federaldistrict judge rejected that argument, as did an appeals courtin an April 2013 ruling.

A ruling is expected by the end of June. The case isHalliburton Co. v. Erica P. John Fund, U.S. Supreme Court, No.13-317.

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