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Supreme Court upholds decision favoring class actions

Virginia shareholders may be interested in reading about a recent U.S. Supreme Court decision. The Court ruled that, although shareholders will still be allowed to bring class action lawsuits against companies, there will be new requirements for shareholders who are bringing securities fraud class actions.

The defendant in this case, the oil giant Halliburton, had been asking the Supreme Court to overturn a landmark decision from 1988, a case which provided the foundation for many of the class action lawsuits brought by shareholders. The 1988 case said that shareholders could file a class action lawsuit for fraud based on the presumption that investors take public misstatements into account when deciding whether to purchase shares, a presumption known as "the fraud on the market" theory. This presumption made it easier for shareholders to become certified as a class.

In this most recent case against Halliburton, the shareholder plaintiffs were alleging that the falsified earnings reports that were issued by Halliburton's management hurt the investors, since Halliburton's stock dropped by 42 percent on the day that it was shown that Halliburton's statements and representations about its asbestos liability and the benefits of an upcoming merger were false. However, the Supreme Court did say that Halliburton should have an opportunity to show that an alleged misrepresentation did not affect the price of its stock, which put a dent in the automatic presumption of fraud on the market.

A backer of Halliburton said that the decision would reduce the cost of business litigation, although the source said that the 1988 decision should have been overturned. With class action lawsuits still a possibility for shareholders, businesses may want to consult with an attorney to discuss ways in which to avoid taking actions that may lead to allegations of fraud or breach of fiduciary duty to investors.

Source: Bloomberg Businessweek, "Supreme Court Curbs, but Doesn't Kill, the Shareholder Class Action", Paul M. Barrett, June 23, 2014

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