US Supreme Court to hear appeal that could curtail shareholder lawsuits

Halliburton argues that fraud doesn’t automatically affect share price

The US Supreme Court has agreed to hear an appeal that could sharply curtail shareholders’ ability to launch class action lawsuits. It could also oblige shareholders claiming damages from corporate misstatements to prove they based investment decisions on faulty company information.

The appeal, brought as Halliburton defends itself against claims of misrepresenting liabilities and revenue, could eliminate the legal presumption that corporate fraud or misleading statements automatically affect stock price.

Halliburton, which is fighting a suit by the Erica P John Fund and other shareholders, argues that misrepresentations are not necessarily reflected in a company’s stock price and shareholders should not benefit from the presumption that they do. Halliburton argues that the alleged fraud did not affect the company’s stock price.

If the Supreme Court rules in Halliburton’s favor, it could overturn the 1988 decision in Basic vs Levinson, which established that material fraudulent or misleading statements were factored into a company’s share price and automatically affected all investors, including those that didn’t base their stock purchase decision directly on the misleading information.

The decision gave a boost to class action shareholder lawsuits in the US by giving all shareholders a common grievance in cases of fraud or misstatements. A reversal would severely affect the ability of shareholders to get a class action lawsuit certified. It could also require investors seeking compensation to prove they relied on information from the false statements to make their investment decisions.

In the Halliburton case, the shareholders argue that the company misrepresented certain portions of its liabilities and revenue and overstated the benefits of the company’s merger with Dresser Industries. The class action lawsuit includes all shareholders that bought stock between June 1999 and December 2001.

Several former SEC officials, as well as the US Chamber of Commerce and the National Association of Manufacturers, have publicly sided with Halliburton and urged the Supreme Court to hear the appeal. The court is scheduled to hear the case in February and reach a decision in the middle of next year.

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