The Wall Street Journal is criticizing the Supreme Court's recent securities class action decision that refused to overrule 25 years of precedent because of the "mischief" of successful investor class actions, even though the Court adopted a compromise that the Journal had previously advocated for.
On June 23, the Supreme Court ruled in Halliburton v. Erica P. John Fund that investors who had been harmed by corporate fraud could continue to rely on the "fraud on the market" theory to pursue class action lawsuits. That theory, first outlined in Basic v. Levinson in 1988, recognizes that in a relatively efficient regulated market, publicly available information about a corporation will be reflected in its stock price, including fraudulent statements or disclosures made by corporate officers. "Fraud on the market" allows a subsequent lawsuit on the presumption that when making investment decisions, shareholders are relying on the assurance that the stock price is not distorted by a corporation's fraud.
As the Journal knew, Halliburton had the potential to gut this well-established precedent for investor class actions, which allow institutional investors -- like union pension funds -- to protect their investments from fraud, because it would be nearly impossible to litigate individualized reliance on the fraudulent information before buying or selling stock. Often, these misrepresentations are buried in thousands of pages of financial disclosure documents, but nevertheless are incorporated into and impact the overall price of a company's stock. Rather than accept Halliburton's invitation to reject both its own case law and subsequent federal legislation that affirmed the "fraud on the market" theory, the Court instead adopted a version of a "midway compromise" discussed at oral arguments. The Court held that corporate defendants can now introduce studies at the class certification stage (before the class action commences) that show that the price of the stock was not affected by material misstatements made by corporate officers, evidence that has typically been evaluated later at trial.
But the Journal is upset at this turn of events -- even though it had previously lobbied the Court to "require some evidence of price movement resulting from a misstatement before a class is formed," because securities class action lawsuits are supposedly "economically destructive." The Journal is no great fan of class actions in any form, despite the fact they are often the most efficient and economical way for groups of injured people to access justice and obtain legal relief. In its coverage of Halliburton, the editorial board has parroted right-wing myths propagated by the U.S. Chamber of Commerce, calling class actions "frivolous" and not much more than a "windfall" for plaintiffs' lawyers.
In its most recent editorial on Halliburton, the Journal complained that the decision was "a champagne day for trial lawyers ... as the Justices voted to maintain the status quo." The editorial went on to condemn the Court's refusal to radically reject stare decisis and overturn the "fraud on the market theory" because it had no "special justification" for doing so:
We'd say one justification is that the Court's current legal framework has created no end of mischief by the plaintiffs lawyers who know that if they can get a class certified, the sheer scale of the litigation costs and damages can force companies to settle. Since 1996 more than 4,000 class actions have been filed and only 20 ever went to trial.
The Court did give a narrow technical victory to Halliburton by overturning the Fifth Circuit Court of Appeal's ruling that the company could not include at the class certification stage evidence that a misstatement did not affect its stock price. That shifts the line of scrimmage a few inches, but it still leaves the burden on the defendant to rebut the presumption created by the fraud-on-the-market theory.
In the real world, plaintiffs and defendants will both come to court armed with "experts" to testify, and few class certifications will be denied. In a concurring opinion joined by Justices Antonin Scalia and Samuel Alito, Justice Clarence Thomas writes that Basic had created an "unrecognizably broad cause of action ready made for class certification" and should have been overturned.
The judicial giveaway to the impact of the case is Justice Ruth Bader Ginsburg's concurrence. In her one paragraph opinion joined by Justices Stephen Breyer and Sonia Sotomayor, Justice Ginsburg writes that the Court's decision "recognizes that it is incumbent upon the defendant to show the absence of price impact." The court's judgment, therefore, "should impose no heavy toll on securities-fraud plaintiffs with tenable claims."
In other words, more paydays for the tort bar, so she's happy with the Chief's opinion.
Although the Court's reaffirmation of "fraud on the market" was a significant rebuke to the Chamber of Commerce, a pro-business lobbying group that has an unprecedented winning streak in front of the conservative Roberts Court, the compromise was another reminder of the anti-class action tendencies of the chief justice. Chief Justice John Roberts' opinion yet again changed civil procedure rules to make it more difficult for class action plaintiffs to argue the merits of their case before a jury, by introducing a new pre-trial hurdle that allows corporations to introduce price impact evidence earlier than before. Justice Ruth Bader Ginsburg was careful to note in her concurrence that lower courts should not allow the costs associated with this new requirement to shift to the injured plaintiffs and unfairly prevent meritorious claims from proceeding.
The compromise position is better than the alternative -- gutting securities class actions entirely -- but there is still concern that allowing price-impact evidence to be introduced before the case even gets to court will unnecessarily hinder legitimate claims. According to Paul Bland, executive director of public interest law firm Public Justice, the decision is "good news," but "the Court has made it more expensive and time consuming to pursue a securities fraud class action. Investor plaintiffs will now have to win the central evidentiary issues twice -- once before the judge on class certification, and a second time before the jury at trial." The progressive legal group Alliance for Justice echoed that sentiment, stating that the Court had "placed new barriers in front of shareholders that could make it far more difficult for them to stand up for their rights in court against corporations that have defrauded them out of their hard-earned money."
But veteran securities litigators also warned that even if lower courts and corporations abuse this compromise contrary to Ginsburg's instructions, this is one hurdle that might "turn out to be a 'be careful what you ask for' decision." Investor class actions have long been prepared for this tactic -- after all, if they couldn't prove price impact, successful litigation wouldn't exist. Meritorious claims can rebut corporations' whitewashing of their fraud at certification in much the same way they would do so at trial.
Contrary to right-wing media misinformation, corporate fraud on the stock market remains a real problem that class actions continue to correct through restitution and deterrence.
In fact, most investor class actions are grounded in legitimate legal claims that Congress and the Securities Exchange Commission have recognized are an essential private co-partner to public regulation and enforcement of securities law, and do in fact provide meaningful relief for plaintiffs who have been harmed. According to a recent report from consumer advocacy group Public Citizen, the idea that securities class actions are "abusive and meritless does not withstand scrutiny." Moreover, institutional investors who typically bring securities class actions like the one in dispute in Halliburton have no incentive to bring frivolous lawsuits against the companies they've invested in:
[I]nstitutional investors have a long-term perspective that aligns their interests with those of the companies in which they invest. Institutional investors have no incentive to favor meritless securities litigation, which only harms their own investments, but they have a strong interest in policing fraud and enforcing the securities laws. Thus, it is telling that institutional investors strongly favor the [fraud on the market] presumption and that institutional investors representing millions of retirees and pension fund beneficiaries and trillions of dollars of assets under management filed two briefs in support of the fraud-on-the-market presumption in the Halliburton case.
The claim that securities lawsuits are abusive and meritless does not withstand scrutiny, either. The evidence shows that, even before legislative reforms enacted [by Congress] in 1995, securities lawsuits were generally meritorious. Since 1995, the meritorious nature of suits has only become clearer. Nearly two-thirds (64%) of class actions are resolved after a court has adjudicated a motion to dismiss, which is a preliminary legal indicator that the suit has some merit. If anything, the evidence is that "highly meritorious suits are brought, but settled for too little."
Finally, criticisms that attorneys' fees are too high are unsupported by the facts. Investors typically pay less than 20 percent of their recoveries to their attorneys, even though securities cases have substantial contingent risk and high litigation costs. This is substantially less than the 33 to 40 percent range of attorneys' fees for other kinds of contingency cases. Further, evidence also shows that fees in securities cases drop as a percentage as the amount of the recovery increases.
But the Journal seems to have exchanged its support of the compromise for anger at Roberts' refusal to overturn precedent, and strange assumptions about how access to justice advocates celebrate wins before the Supreme Court. Apparently, the Journal won't be satisfied unless the Court takes it upon itself to destroy class actions once and for all.