A case currently before the US Supreme Court sets the stage for a review of a key tenet of US securities fraud cases, the “fraud on the market” or “efficient market” theory.
If the US Supreme Court materially changes the way courts apply this key tenet or, overturns its use entirely, securities fraud plaintiff’s attorneys will lose a valuable tool to obtain class certification and, therefore, lose the leverage they currently enjoy against public companies.
I addressed the history and issues at stake in prior posts:
It appears from questions posed by several Justices that some are considering a modification of the ruling, not the elimination of the ruling preferred by corporations and their counsels.
In a now famous 1988 court case, the US Supreme Court ruled that fraudulent information was reflected in the stock price under the efficient market theory. Therefore, all parties who bought and sold stock were impacted whether they read and relied on the fraudulent information. This has made obtaining class action certification relatively easy.
Several law professors filed a “friend of the court” brief which proposed what has been characterized as a “midpoint” modification. In this modification, plaintiffs would be required to show that fraudulent information had a significant effect on the stock price.
One of the professors commented that the proposed modification would make it more difficult to obtain class certification but would not prevent it.
If this modification makes it more difficult for securities fraud plaintiff’s attorneys to qualify for class action status, I believe it will have a dramatic effect. It will eliminate key leverage enjoyed by the plaintiff’s attorneys. Statistics show that once a securities fraud class has been certified, companies commonly settle.
We will share developments in this case as it progresses.