The Supreme Court May Soon Take Away This Important Right

The Supreme Court May Soon Take Away This Important Right

JohnButts@JBMedia - Reports:
If the controversial oil-services company Halliburton (NYSE: HAL  )
has its way, then small investors may soon lose one of their most
potent weapons against corporate fraud: the ability to file class-action
lawsuits under the Securities Exchange Act of 1934.

At the end of last year, the U.S. Supreme Court agreed to hear
Halliburton's appeal in a class-action case brought by investors against
it and former CEO David Lesar for "knowingly or severely recklessly
misleading" the public more than a decade ago about the company's
liability for asbestos claims.

Indeed, it's no exaggeration to say that the very existence of
securities fraud class actions hinges almost entirely on the outcome of
this case.

The facts of the caseThe facts involve
statements made by Halliburton in 2001 about the extent of exposure to
asbestos litigation assumed in its acquisition of Dresser Industries.

In January of that year, the company reported that "prospective
asbestos liabilities ... should have minimal adverse impact on the
company going forward." In August, it claimed that "asbestos exposure
concerns appear to be overblown." And in November, it stated that "open
asbestos claims will be resolved without a material adverse effect on
our financial position or the results of operations."

Yet less than a month after the last statement, Halliburton was hit
with a $30 million asbestos verdict, causing investors to lose faith in
the company's assurances and fear the worst. Shares in the oil services
company proceeded to plummet, dropping by 42.7% on the day of the
announcement.

The current class-action lawsuit was filed on behalf of investors
soon thereafter and has made its way through various courts ever since.

A critical legal wrinkleThe specific issue
before the Supreme Court is a nuanced one. Halliburton isn't simply
professing its innocence or asking the justices to hold that it didn't
mislead investors. Instead, it's moving the court to bar plaintiffs from
litigating the case as a class action as opposed to separate lawsuits.

On the surface, this doesn't seem like a big deal. Who cares if
investors have to sue Halliburton individually as opposed to as a class?
What difference does it make to people who didn't own Halliburton stock
when the alleged misrepresentations took place?

The answer is that it makes a huge difference.

This is because Halliburton is asking the court to overturn a legal
doctrine known as the "fraud on the market" theory, which creates a
rebuttable presumption that investors rely on statements of material
fact made publicly by corporate executives. Without this presumption,
securities fraud cases would be far too complicated to litigate as class
actions, leaving individual investors to fend for themselves against
deep-pocketed corporations.

The implications of this would be considerable. Most importantly, for
nearly three decades, the securities laws have been predicated on both
public and private enforcement -- the former by the SEC and Justice
Department and the latter by private class-action lawsuits. Without the
latter, in turn, the market would lose a critical overseer and, one can
only assume, be far more susceptible to deceit.