Does the Halliburton case mean that it’s time to reduce your D&O insurance limits? The Halliburton buzz might make you think so . . . but hold off for now.
“Halliburton” is the short hand folks are using to refer to the case currently in front of the U.S. Supreme Court, Halliburton v. Erica P. John Fund. This case challenges the way classes have been certified in Section 10(b) cases ever since the U.S. Supreme Court decided Basic, Inc. V. Levinson in 1988. In Basic, the Supreme Court agreed with plaintiffs that there was no need to prove that each individual potential member of a class relied on a corporation’s alleged misrepresentations. Instead, the plaintiffs could benefit from the fact that securities are traded in an efficient marketplace.
The idea is that, in an efficient market like the market for publicly traded stock in the United States, the price at which a share of stock trades reflects all known information—including false information disseminated by a company. This presumption, known as the “fraud on the market presumption,” has made it relatively easy for plaintiffs to get a class certified: the plaintiffs get to skip the onerous step of having to show that each class plaintiff relied on a particular misrepresentation before transacting in a company’s stock
By agreeing to hear Halliburton, the Supreme Court is effectively reconsidering the fraud on the market presumption. If the Supreme Court were to set aside this presumption, it would be more difficult for plaintiffs to bring class action suits under Section 10(b) of the Securities Exchange Act.
However, as I recently discussed in the February edition of Inside Counsel Magazine, the Supreme Court may well leave Basic’s fraud on the market presumption in place. After all, there have been major revisions to federal securities laws since Basic was decided in 1988. When Congress was making big changes to the federal securities law landscape at the time of Sarbanes-Oxley or Dodd-Frank it certainly could have clarified that the fraud on the market presumption is inappropriate. However, Congress took no such steps. It seems unlikely that the current, conservative court would take upon itself the task of upending what has been the law of the land for more than 25 years.
So is it time to reduce your D&O limits? Not yet, but oral arguments take place in front of the Supreme Court on March 5 . . . stay tuned.
UPDATE: The Supreme Court issued its opinion in this case in June 2014. The result of the case is discussed in this blog post.
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