The U.S Supreme Court did not issue its long-awaited decision in the Halliburton case yesterday and so it looks as if we will have to wait a little while longer to find out whether or not the Court will throw out the fraud on the market theory. The Court will for sure release its opinion some time during June, before the end of its current term at the end of the month. But we don’t have to just sit around drumming our fingers impatiently in the meantime. There are some interesting related issues we can contemplate while we wait.
1. What will happen if instead of either tossing the fraud on the market theory or keeping it unchanged, the U.S. Supreme Court takes a middle course and requires securities plaintiffs seeking to take advantage of a presumption of reliance in class actions to establish that the alleged misrepresentation had a price impact? As discussed here, in the March 5, 2014 oral argument in the case, Justice Kennedy, seeking to find “midpoint” between the two extreme outcomes, invoked a proposal from the amicus brief of two law professors (Adam Pritchard of Michigan Law School and Todd Henderson of U. Chicago) that in order for there to be a presumption of reliance at the class certification stage there should be an event study to establish that the allegedly misleading statement distorted the company’s share price,.
Obviously, there is no way to know for sure how this case will turn out or whether the Court’s decision will incorporate some form of the price impact proposal. But as discussed in a May 30, 2014 Law 360 article entitled “Halliburton’s Middle Ground Still Promises Sweeping Change” (here, subscription required), even the “middle course” that the two law professors’ suggested “presents unknowns that could tie up the court with knotty new questions or expose new classes of defendants to litigation.” As one commentator asked in considering what a price impact requirement might mean. “Do you have to disaggregate the amount of information that came out at one time? Do you need expert testimony saying this failure to take an impairment caused this price to move?” It will, as another commentator noted, “be important to see what preconditions [the Court] sets on when to use an event study and what other tools could be used to determine price impact.”
The net result, the article note, could be “longer, more expensive processes.” And the cases that survive the gauntlet “probably will demand a much higher price to settle than they would have before,” according to another attorney quoted in the article.
In addition, allowing price impact evidence in order to be able to evoke the presumption of reliance could allow plaintiffs to go after other kinds of defendants. The article quotes Professor Pritchard as saying that the price impact approach could “help plaintiffs go after issuers of less-liquid securities, such as over-the-counter securities or municipal bonds, where it cannot be presumed an efficient market exists.”
2. If the U.S. Supreme Court goes ahead and tosses the fraud on the market theory altogether, could it mean an influx of securities litigation in Canada? A May 28, 2014 Financial Post article entitled “If U.S. Retreats on Securities Class Actions, Canada Stands Ready to Fill the Gaps” (here) raises the question whetehr an adverse ruling for plaintiffs in Halliburton could divert prospective securities claimants to Canada. As one commentator quoted in the article notes, “it does make you wonder whether that will have an impact on the number of securities class actions in Canada at large and in Ontario specifically.”
Another commentator quoted in the article notes that in recent years as the U.S. Supreme Court has made it more difficult for U.S. plaintiffs counsel to mount U.S. securities class actions, “Canadian courts have been welcoming,” adding that “Canada may become the overflow jurisdiction for some of these cases that aren’t finding a home in the U.S. as a result of some of these changes.” Among other things, Canadian courts have certified global classes in securities suits under Canadian law, and Canadian courts have declined to follow the U.S. Supreme Court ‘s Morrison holding, and have certified shareholder classes that include investors who purchased their shares outside of Canada.
There are of course a number of hurdles that would complicate things for prospective litigants considering the possibility of filing claims in, say, Ontario. Plaintiffs must first seek and obtain the court’s permission before pleading the statutory action under Ontario law, and the Ontario law places a cap on damages. In addition, the jurisdictional test requires a “real and substantial “connection to Canada in order for the Canadian court to have jurisdiction, which could restrict the occasions on which foreign claimants might be able to proceed in a Canadian court.
3. There are yet other Supreme Court cases to think about while we are awaiting the U.S. Supreme Court’s decision in Halliburton. As Alison Frankel noted in a May 28, 2014 post on her On the Case blog entitled “After Halliburton, SCOTUS has Another Securities Litigation Puzzler” (here), “Halliburton has cast such an enormous shadow that the court’s next big securities case hasn’t gotten much attention.”
As I discussed in an earlier post (here), in March 2014, the U.S. Supreme Court granted cert in the IndyMac MBS case to determine whether or not the filing of a class action lawsuit tolls the running of the three-year statute of repose under the Securities Act of 1933. The Second Circuit ruled in the case that the three-year statute of repose provide defendants with a “substantive right’ to be free of exposure to Securities Act litigation, and therefore that the filings of a securities class action lawsuit does not toll the statute of repose.
As Frankel discusses in her article, the claimants in the IndyMac case have now filed their merits briefs, in which they argue that the Second Circuit’s ruling in the case unsettled long-standing practices with regard to the principles of tolling and that the appellate court’s ruling that the filing of a class action suit is inconsistent with the idea of class action litigation in which the class representative acts on behalf of class of absent class members. A separate amicus brief filed on behalf of over 40 pension funds raised the practical argument that if the statute of repose cannot be tolled the funds will have to monitor and analyze a large number of pre-certification securities suits to ensure that the limitations period does not run. Federal dockets could be swamped with individual investors worried about protecting potential Securities Act claims even if they are already members of the class asserting the same causes of action.
And as if that were not enough, there will be yet another securities case before the Supreme Court during its next term. As discussed here, in March 2014, the U.S. Supreme Court agreed to take up the Omnicare case, to determine whether or not to survive a dismissal motion it is sufficient for a plaintiff in a Section 11 case to allege that a statement of opinion was objectively false, or whether the plaintiff must also allege that the statement was subjectively false – that is, that the defendant did not believe the opinion at the time the statement was made. As noted here, the Court extended the time within which the petitioners must file their merits brief, but they will be filing their briefs later this week. In other words, as hard as it is to look beyond Halliburton, even after the Court has finally ruled on that case, there will be lots of action yet to come in securities case at the Supreme Court.
So there is much to think about while we await the outcome of the Halliburton case and much to look forward to in the months that will follow the Court’s decision. That should help fill the time in the interim.