Halliburton Decision Could Change the Game, But Won’t End It

Since 1996, more than 40 percent of corporations listed on major stock exchanges have been targeted by a securities class action suit. U.S. companies were 83 percent more likely to be the target of a securities class action in 2013 than from 1996-2000, despite significant legislation designed to reduce such suits and decisions of the U.S. Supreme Court making them harder to bring. The Supreme Court’s agreement to hear a case presenting the primary basis for securities class actions – the so-called fraud-on-the-market doctrine – may be a watershed.

The fraud-on-the-market doctrine is what permits most securities cases to be brought on a class basis. It presumes that the market absorbs all material facts both true and false. Hence, anyone buying or selling securities that trade in an efficient market can show “reliance,” because the trading price by definition reflects allegedly misleading disclosures. Therefore, proof that the securities traded in an efficient market permits plaintiffs to satisfy the reliance requirement on a class basis.

Late last year, the Court agreed to hear Haliburton v Erica P. John Fund, which will permit revisiting the ruling that allows plaintiffs to show reliance. Many believe it will be reversed.

The authors say that if it is reversed, class actions may be replaced by actions filed by institutional investors singly or in groups, which will represent exposure of some magnitude to defendants. Accordingly, however Halliburton is decided, companies will not be able to reduce D&O coverage.