Supreme Court hears case against frivolous securities class-action lawsuits

In a press release, the National Association of Manufacturers (3/5) said the Supreme Court heard arguments on Wednesdayagainst the legal precedent that has led to a proliferation of securities class-action lawsuits over the past 25 years in Halliburton Co. v. Erica P. John Fund, Inc. National Association of Manufacturers (NAM) Senior Vice President and General Counsel Linda Kelly issued this statement following Wednesday’s sitting. Kelly said, “Securities class action lawsuits not only siphon productive capital out of the economy, but they also inflict significant cost burdens on manufacturers, while impairing their ability to grow and create jobs. The result is no net benefit to shareholders and enormous amounts of resources diverted toward legal fees and settlements.” Kelly also said, “Manufacturers are hopeful that the Court will exercise its right to rein in these lawsuits.”

The Washington Post (3/5, Barnes) reports that the Supreme Court “seemed to be looking for middle ground” on Wednesday “while considering what has been called the biggest business case of the year: a battle between shareholders and corporations over securities-fraud class-action suits.” The corporations “want the court to junk a 1988 precedent that has been a crucial factor in a series of suits in which investors have jointly sued over corporate statements they say misstate the health of companies and inflate their stock prices.” The Post adds that after “an hour of arguments Wednesday, it did not seem apparent that there were five justices willing to get rid of the ‘fraud on the market’ presumption the court adopted in Basic v. Levinson,” but “it also seemed unlikely Wednesday that the court would be satisfied with the status quo.”

The New York Times (3/6, Liptak, Subscription Publication) reports that the court “seemed ready to impose new limits on securities fraud suits that would make it harder for investors to band together to pursue claims that they were misled when they bought or sold securities,” but “did not seem inclined to issue a ruling that would put an end to most such suits.” According to the Times, companies “facing fraud class actions prefer to address as many issues as they can before judges decide whether to certify a class,” and they say that once a class is certified, “the damages sought are often so enormous that the only rational calculation is to settle even if the chances of losing at trial are small. ‘Once you get the class certified, the case is over,’ Justice Antonin Scalia said on Wednesday.”

USA Today (3/5, Wolf) reports that “several justices asked whether it might be better to require that investors prove that the fraud affected the price.” Four “conservative justices previously had made clear their desire to modify or overturn” the court’s 1988 ruling in Basic v. Levinson, which would “take a huge burden off U.S. corporations but make class-action challenges more difficult to bring.” Attorneys for the investors’ fund and the Obama Administration, “which opposes overruling Basic, argued that very few traders buck the market under the assumption they know a fraudulent scheme is afoot,” and even when they do, Deputy Solicitor General Malcolm Stewart said, “the traders are trying to beat the system before the market figures it out – proving their ultimate efficiency.”

The Los Angeles Times (3/6, Savage) reports that Chief Justice John Roberts and Justice Kennedy “explored the idea of a ‘midway’ ruling that would make it slightly harder, but not impossible, to bring such suits,” and they “suggested the court could require a lawyer filing a suit for a group of investors to show evidence that the company’s misleading statements caused its stock price to inflate.”

The Wall Street Journal (3/6, Kendall, Subscription Publication) and Reuters (3/6, Hurley) also report on the arguments.

WSJournal Says Supreme Court Has Chance To Fix Flawed 1988 Securities Ruling. In an editorial, the Wall Street Journal (3/6, Subscription Publication) notes that the Supreme Court on Wednesday heard arguments in a case that would allow them to revisit the 1988 Basic v. Levinson ruling that launched the wave of securities class-action suits. The Journal says that Chief Justice John Roberts appears to be the swing vote on the issue, and the paper hopes that he alters the previous ruling to make it more difficult for plaintiffs to successfully launch such suits.