class actions

The Second Circuit has upheld the certification of class actions against law firm Mel Harris and Associates, as well as a debt-buying company and a process serving agency, for allegedly intentionally failing to serve debtors in debt-collection cases and obtaining default judgments in New York City Civil Court, the New York Law Journal's Mark Hamblett reports.

The plaintiffs allege that more than 90 percent of the debtors were never served and the defendant provided bogus proof of service and affidavits of merit attesting to their personal knowledge of the debts to win default.

Supreme Court Chief Justice John Roberts joined with "unexpected allies--his liberal colleagues--in an alliance that drew some of the Supreme Court's major decisions closer toward the ideological middle in the term just concluded," the Wall Street Journal reports. For example, Roberts aligned with the liberal justices and conservative Justice Anthony Kennedy to uphold a precedent allowing securities fraud class-action plaintiffs to rely on the theory that market prices reflect all publicly available information and that keeping information from investors can constitute fraud on the market. But the test was refined so that corporations can more easily get class actions thrown out, WSJ reports.

The U.S. Supreme Court has kept alive the main legal theory behind securities fraud class actions: that plaintiffs can rely upon the assumption that stock prices in efficient markets reflect all publicly available information and misstatements about a company's financial situation is a fraud on the market.

But the Supreme Court has increased the ability of defendants to rebut the presumptions that plaintiffs rely upon to allege that they were defrauded by company misstatements, the Legal Times' Tony Mauro reports. Now defendants will be able to rebut, before class certifications, that misstatements impacted stock prices.

The U.S. Supreme Court will wrap up its term a week from today, and there are several major cases left to be decided, USA Today reports. A couple highlights of issues to be decided: 

One, what is the scope of the presidential power to make appointments when the Senate is in recess?

Two, can the Environmental Protection Agency change the threshold for greenhouse gas emissions?

Three, can shareholders alleging securities fraud rely on the assumption that stock price reflects all available information instead of having to prove specifically that fraud affected stock prices? 

If the U.S. Supreme Court rules against the theory that share prices reflect all publicly available information and that there is a fraud on the market when corporations misrepresent the truth publicly, major companies in the banking, pharmaceutical and casino industries would benefit, Reuters reports.

At least during oral argument, it seemed that the justices weren't in favor of completely overthrowing the fraud on the market theory: and were seeking "to find a middle ground that would require plaintiffs to show that the misrepresentation had a significant effect on the stock price but that would not overturn [the court's prior precedent] Basic [v. Levinson]. During oral arguments, some of the justices appeared to signal that the middle option would be their preference," Reuters further reports.

If the U.S. Supreme Court decides to curb securities fraud litigation, it's widely expected that they'll use the arguments advanced by law school professors Joseph Grundfest or Adam Pritchard, Reuters' Alison Frankel reports. Both filed competing amicus briefs in Halliburton Co. v. Erica P. John Fund. 

The case is challenging the theory that share prices reflect all publicly available information and that there is a fraud on the market when corporations misrepresent the truth publicly, Frankel writes. Grundfest argued that investors can't recover money damages at all without showing they relied on misstatements, while Pritchard suggests that investors "should be required to show that corporate misrepresentations distorted share prices by offering evidence of a market correction when the truth was revealed," Frankel reports.

During oral argument, Justice Anthony Kennedy cited Pritchard's position, Frankel said.

USA Today reports on the U.S. Supreme Court oral arguments this week in a case that will shape the future of securities class actions in America: "The Supreme Court searched for a compromise Wednesday that would help businesses avoid some class-action lawsuits charging securities fraud without making them virtually extinct. Faced with the real prospect of overturning a 26-year-old precedent permitting class-action cases based on investors' trust in market prices, several justices asked whether it might be better to require that investors prove that the fraud affected the price. Four conservative justices previously had made clear their desire to modify or overturn the 1988 decision. That would take a huge burden off U.S. corporations but make class-action challenges more difficult to bring. During oral arguments in the case of Halliburton v. Erica P. John Fund, however, both Justices Anthony Kennedy and John Roberts appeared to be searching for a middle ground. Even Justice Antonin Scalia, an opponent of the court's earlier decision in Basic v. Levinson, mused about the court adopting 'Basic writ small.'"

As the U.S. Supreme Court takes up the fraud-on-the-market theory underpinning most securities fraud class actions, the Wall Street Journal asks if this sort of class action will become an endangered species and if the "balance of power between companies and the lawyers who sue them" will be rebalanced.

Under the fraud-on-the-market theory, shareholders don't have to show a direct connection between the alleged fraud and their losses, WSJ reports. Instead, the theory is that stock proices reflect all relevant information, including fraudulent information.

Analysts predict that there may very well be five votes on the court to overturn 1988 precedent that approved the theory, WSJ also reports.

The Supreme Court did not grant certiorari in appeals over allegedly defective washing machines that accumulated mold, The Wall Street Journal reports. "The court's decision to stay out of the dispute marks a breather for justices who in recent years have issued a string of rulings disallowing class-action cases," WSJ notes. The Seventh Circuit and Sixth Circuit held that the lawsuits could be certified as class actions because they involved a uniform design defect.

Two Supreme Court watchers got into a bit of a tit-for-tat this week on the eighth anniversary since Justice Clarence Thomas last asked a question from the bench.

Jeffrey Toobin opined that Thomas' famous habit of not asking questions during oral arguments is "disgraceful" because "they are, in fact, the public's only windows onto the Justices' thought processes, and they offer the litigants and their lawyers their only chance to look thse arbiters in the eye and make their case."

Then Adam Liptak wrote that "the real work of the Supreme Court is done in written opinions, and there Justice Thomas has laid out a consistent and closely argued vision."

Most interesting to me in all of this is Liptak's analysis of how Thomas might treat stare decisis in a case that could shape the future of securities class actions. At issue is the viability of the "fraud on the market" theory and the presumption that a company's stock price reflects all important publicly available information. If the case gets overturned, then securities class actions will likely be extinct.

The defendants argue the precedent in the case deserves less adherence because it involves "'largely a procedural and evidentiary construct.'" Liptak closes his piece with the comment that "we will have to wait until the court decides the case, probably in June, to see how just how weak [Thomas'] 'affinity for stare decisis' is."