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Supreme Court Preserves Fraud on the Market Theory in Securities Class Actions But Creates a New Defense

Companies need investors to fund the company’s progress. As a result, in the same way that companies try to play up the positive attributes of a product they are trying to sell, while leaving out the negative, so companies often paint themselves in a better light to try to attract shareholders. However, because shareholders are investing their money (rather than giving it away), companies maintain certain obligations to their shareholders.

When a company fails to hold up their end of the deal in treating fairly with their shareholders, investors have the option of suing the company for damages. When multiple shareholders are wronged, they can file as a class action, giving them greater leverage in the courts. Companies have long looked for ways to put a stop to class actions before they can attain class certification. Now it looks like they have finally gotten a foothold, but how significant that foothold is, remains to be seen.

A group of shareholders of Halliburton Co. filed a class action securities lawsuit against the company, alleging that Halliburton misled investors about cost overruns, its exposure to asbestos liabilities, and the benefits of its 1998 merger with Dresser Industries Inc. According to the lawsuit, by providing false information (or failing to reveal crucial information), Halliburton allegedly caused prices of its shares to increase artificially.

In the past, plaintiffs in securities class actions have only had to prove that their stock was tainted by fraud while it was being traded in a generally efficient market. They have never before had to prove that they actually relied on false information when they purchased shares in a company in order to qualify for class status. In the recent legal dispute involving Halliburton, plaintiffs were afraid that the Supreme Court would change this, and increase the burden of proof that plaintiffs have to bear. That did not happen, though, so plaintiffs consider this latest Supreme Court ruling a win.

Defendants are calling it a win for their side, too, though. Historically, plaintiffs have only had to show that they have a valid claim, that their claims are all sufficiently similar, that their claims are large enough to warrant a class action, and that the class representatives are capable of fairly representing the class. Once plaintiffs achieve class status, they wield significantly more leverage in the court room. In order to avoid long and costly legal battles that could end in a court-ordered award of millions of dollars while their legal bills pile up, defendants often choose to settle class action lawsuits shortly after the plaintiffs are named as a class.

Now, the Supreme Court has thrown defendants a bone by allowing companies to prove, at an early stage, that the alleged fraud had no effect on stock prices. Normally, companies are not given the opportunity to do this until later in the trial period, by which point many class actions have already settled. With this chance to prove that the allegations are unfounded early in the trial, the companies are hoping that they will have greater opportunity for cutting off class actions before they are certified.

Plaintiffs’ attorneys are not concerned about this new development, though. Ann M. Lipton, for example, a former plaintiffs’ securities litigator, said of the Supreme Court decision, “I don’t think it changes the legal landscape very much.” Other plaintiffs’ attorneys have shared a similar lack of concern, saying that shareholders are already smart enough not to file a lawsuit unless they have sufficient evidence to prove that they were wronged. Instead, proving a negative (that alleged fraud had no effect on the market) will be so difficult for defendants that the recent Supreme Court ruling won’t make much of a difference.Our Chicago class action lawyers near Park Ridge and Glenview bring class action, privacy law and individual consumer rights lawsuits. We bring suit for many types of class action lawsuits for consumer fraud issues and for unpaid overtime, junk fax, junk text messages, privacy rights violations, property damages due to pollution, false advertising and other claims. Super Lawyers has selected our Kane, DuPage and Cook County class action lawyers as among the top 5% in Illinois. Our Chicago class action attorneys only collect our fees if we win or settle your case. For a free consultation call us at our toll free number (877) 990-4990 or contact us on the web by clicking here.