Today the Committee on Capital Markets Regulation submitted an amicus brief in connection with the pending Supreme Court litigation on securities class action suits and the “fraud-on-the-market” presumption in the case of Halliburton v. Erica P. John Fund, scheduled to be heard on March 5, 2014.
The case raises the issue of whether the Court should revise its “fraud-on-the-market” rule that it adopted in 1988 in Basic v. Levinson. This rule presumes that investors rely on the market price when buying stock, which the Court assumed would incorporate any false information issued by a company. As a result, investors do not have to prove that they knew of the false information and actually relied on it. This is important because if investors had to prove such actual reliance, securities class actions would not be possible because individual members of the class would differ as to their reliance, and thus the “common question” requirement for class actions could not be satisfied.
“From the very inception of the Committee, in its 2006 Report on Competitiveness, we have been highly critical of the adverse impact securities class actions by shareholders against their companies have had on our capital markets. The brief details those effects and shows that securities class actions fail to achieve the twin objectives of compensation and deterrence,” said Professor Hal S. Scott, director of the Committee on Capital Markets Regulation.
The brief is available here.