Yesterday, the Supreme Court unanimously ruled that defendants in securities class actions under Section 10(b) of the Securities Exchange Act of 1934 must be allowed to present evidence at the class-certification stage of the case that the company’s alleged misstatements did not distort the market price of the stock. The Court vacated a lower court’s order allowing a class of investors to proceed against Halliburton.
Under the Court of Appeals’ opinion that the Supreme Court vacated, lower courts could not consider evidence at the class-certification stage that the alleged misrepresentations did not affect market price. The Supreme Court declared that “this restriction makes no sense, and can readily lead to bizarre results.” The Supreme Court’s reasoning is important because in this case and many other securities cases, there is little proof that the company’s alleged misstatements distorted the stock price.
The Supreme Court squarely held that, “Price impact is thus an essential precondition for any Rule 10b-5 class action.” According to Aaron Streett, head of Baker Botts’ Supreme Court practice who argued the case for Halliburton, “This decision is good news for companies and shareholders that have suffered under the weight of meritless class actions.”
While the Supreme Court declined to overrule its precedent that permitted so-called fraud-on-the-market class actions, the Court’s ruling for Halliburton will enable lower courts to weed out meritless cases before classes are certified. As a result, plaintiffs’ lawyers will have less ability to extort settlements from companies’ shareholders, something that would have been more common if the lower court’s decision had been affirmed. “We are pleased that the Supreme Court restored a measure of rationality and balance to securities class actions in its ruling today,” Baker Botts’ Streett said.
This is the second time the case has been to the Supreme Court. In 2011, the Court rejected the Court of Appeals’ holding that securities plaintiffs must show “loss causation” to achieve class certification and remanded the case. When the trial court certified the class without allowing Halliburton the opportunity to rebut the presumption of reliance at the class certification stage, Halliburton appealed this action with the case eventually winding up in the Supreme Court that ruled on the matter today.