18 Nov Supreme Court Takes Case Challenging All Securities Class Actions

Back in 1988, the US Supreme Court opened the floodgates for class action claims by shareholders against public companies. In a case called Basic v. Levinson, the Court ruled that you could be an official class suing a company for misrepresentation even if you haven’t proven that people relied on that misrepresentation. The case was unusual as three justices recused themselves (apparently for financial reasons), so the case won on a rare 4-vote majority.

This “fraud-on-the-market” theory led to a massive number of cases brought by plaintiff’s law firms set up as mega-machines of litigation. Many were settled rather than spend years battling, even where companies honestly believed they had done nothing wrong. Some cases were based on nothing more than a questionable press release and a dropping stock price. Of course in some cases bad acting companies also appropriately paid the price. Some of these law firms and their leaders, however, were brought down following allegations that they improperly paid people to serve as “lead” plaintiffs in the cases.

Now, in a case involving oil giant Haliburton, of all companies, the Supremes want to take another look at this theory and just announced they will hear the case. Justices including Alito and Thomas have written in other cases that it might be time to reconsider the Basic presumption of reliance. It appears the Court now will do just that. We will keep an eye on this.