As all lawyers and many laypeople know, truly settled law is a rare thing indeed. Most areas of the law are subject to constant revision and reinterpretation, often following a precedent-shifting outcome in a particular court case. In 2014, as reported by the Wall Street Journal, the U.S. Supreme Court ruled (in a case called Halliburton v. Erica P. John Fund) that the “fraud on market” theory was a sound legal basis for securities fraud law cases brought by plaintiffs’ firms like Robbins Geller, validating decades of case legal work by said firms.
What Is Fraud on Market?
The legal concept of fraud on market first arose in the late 1980s as result of the plaintiff-friendly outcome of Basic v. Levinson. The concept is relatively straightforward: According to the Wall Street Journal, it requires plaintiffs to show that the price of a stock “had been tainted by fraud in a generally efficient market.” In most cases, this is done by watching the price of a particular company’s stock for signs of unusual activity, such as sudden drops, and tying that activity back to the company’s action. In most cases, such activity centers around an absence of “complete information” — intentional withholding, misstatements, or outright fraud on the part of the company.
This is the basis of fraud on market: Companies that willfully mislead their investors are fundamentally undermining the efficiency of the financial markets. If investors buy and sell stock on the basis of such statements (or lack thereof), they could be blindsided when damaging information comes to light after the fact — and, if the stock price drops as a result, suffer substantial financial harm.
Robbins Geller has pursued dozens of successful securities fraud class actions, many of which attracted national attention and secured hundreds of millions in settlement or recovery monies on behalf of aggrieved shareholders. In fact, the firm helped secure billions in compensation for clients in cases against Enron, UnitedHealth and WorldCom, all major companies accused under the fraud on market principle. Doing away with the fraud on market principle entirely would have been a devastating blow to the rights of individual and institutional investors.
That said, the Supreme Court did inject a new wrinkle into the concept of fraud on market. The court’s ruling provided some leeway for defendants (i.e. companies) to argue that the market activity in question isn’t related to the alleged fraud or impropriety — that the company’s actions weren’t responsible for the drop in the stock’s value, and thus the stock’s price wasn’t artificially inflated to begin with. Companies can now make this argument during the class certification phase of the action, when Robbins Geller typically organizes and presents its case to aggrieved investors.
What It Means for Class Certification
There remains some debate over the precise impact that the Halliburton decision will have on future securities fraud law cases. In one sense, the situation is unlikely to change radically: By explicitly leaving fraud on market intact, the Supreme Court made it clear that the concept remains a sound legal basis for cases brought by Robbins Geller and other plaintiffs’ firms.
On the other hand, defendants can now neuter a potential lawsuit before it begins by arguing that aggrieved investors — i.e., members of the plaintiff class — have no standing to bring the case. Robbins Geller and peer firms typically didn’t have to deal with this argument until the trial phase of an action, so it does complicate their activities and will likely result in changes to how securities fraud cases are pursued. Still, there’s no fundamental change to the rights of individual and institutional investors — a critical victory for stockholders everywhere.