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  4.  | US Supreme Court makes some securities fraud cases harder to prove

US Supreme Court makes some securities fraud cases harder to prove

On Behalf of | Jan 24, 2024 | Firm News

The U.S. Supreme court issued an opinion allowing securities fraud defendants to present evidence that there statements did not affect stock prices.

On June 23, 2014, the U.S. Supreme Court issued an opinion in Halliburton Co. v. Erica P. John Fund, Inc.This is the second time that the case has been before the Court, and this time the question the Court needed to decide was whether defendants in class action securities fraud cases can defeat certification of a class by showing that alleged misrepresentations the defendant made did not actually affect the price of stock.Experts predict that the Court’s decision in the case will make it more difficult for class action securities fraud claims to proceed.

Class action suit alleging securities fraud

The group of shareholders known as the Erica P. John Fund originally filed suit against Halliburton alleging the company committed securities fraud because the company made misstatements about its asbestos liabilities, overestimated the benefits of a potential merger and lied in its earnings statements. The suit was filed as a class action, seeking to represent everyone who purchased Halliburton stock from 1999 through 2001.

Halliburton had petitioned the Court to dismiss the suit on other grounds in 2011, but the Court allowed the certification of the class. This time, Halliburton asked the Court to overturn a doctrine called the “fraud on the market” theory that the Court adopted in 1988.

Fraud on the market theory

Class action securities fraud lawsuits rely on the “fraud on the market” theory. The theory states that in an efficient market, false statements issued by a company presumably inflate the price of the company’s stock. Those who buy the stock at inflated prices are thus the victims of securities fraud. Plaintiffs in these lawsuits need not show that they actually relied on the company’s false statements when purchasing stock. The fraud on the market theory is critical in securities fraud class actions, as it helps the class meet two of the four criteria necessary for class certification: the plaintiffs share a common harm and there is a common question of law or fact in every class member’s claim.

The Court declined to completely discard the fraud on the market theory. Instead, the Court held that defendants can present evidence at the class certification of these lawsuits that the information from the company did not affect the price of the stock, rather than having to wait until the merits stage of the lawsuit as they had previously needed to do.

Pursuing securities fraud claims

Some believe that the Court’s decision could potentially make it more difficult for class action securities fraud claims to proceed because defendants now have a greater opportunity to prevent the class from being certified so that the suit can move forward. Others suggest that because the Court did not explain how a defendant can show that their statements did not affect stock prices, most class action securities fraud claims will still proceed to the merits stage.

Securities fraud claims are very complicated, and it is important for the victims of securities fraud to have the help of an attorney with experience litigating such cases. If you believe you have been the victim of securities fraud, consult an experienced securities fraud litigator who can help you recover just and proper compensation for your losses.

Keywords: securities fraud litigation; shareholder litigation; class action