US Supreme Court Decision on Securities Fraud Actions

The US Supreme Court yesterday
issued its opinion
in a significant case that determines the state of the law on class actions for
securities fraud. The background and the issue in question have been set out in
the ruling as follows:
Investors
can recover damages in a private securities fraud action only if they prove
that they relied on the defendant’s misrepresentation in deciding to buy or
sell a company’s stock. In Basic Inc. v. Levinson, 485 U. S. 224 (1988), we
held that investors could satisfy this reliance requirement by invoking a
presumption that the price of stock traded in an efficient market reflects all
public, material information—including material misstatements. In such a case,
we concluded, anyone who buys or sells the stock at the market price may be
considered to have relied on those misstatements.

We also
held, however, that a defendant could rebut this presumption in a number of
ways, including by showing that the alleged misrepresentation did not actually
affect
the
stock’s price—that is, that the misrepresentation had no “price impact.” The
questions presented are whether we should overrule or modify Basic’s presumption of reliance and, if not, whether defendants should
nonetheless be afforded an opportunity in securities class action cases to
rebut the presumption at the class action certification stage, by showing a
lack of price impact.
Through a majority opinion, the
Supreme Court declined the invitation to overrule Basic. Instead, by following a mid-path, it held that it is open to
the defendant in a securities action to rebut the presumption by demonstrating
that an alleged misrepresentation did not cause an impact on the market price
of the issuer company.
For a detailed analysis of the
decision, please see The
D&O Diary
and the New
York Times
.
It appears that private suits in the
form of class actions will continue to play a strong role in securities
enforcement in the US. However, with the opening provided by the Supreme Court
to defendants to rebut the presumption, a substantial part of such litigation
may be centered on resolving this question of impact of market price at the
stage of certification itself.
This decision is
unlikely to have a direct impact on Indian corporate or securities law,
although Indian companies listed on US stock exchanges will be subject to this
position. Indian law follows a more detailed rule-based approach under the SEBI
Act and various regulations on matters pertaining to securities fraud (such as
insider trading, market manipulation, etc.), while the US follows a broader “fraud-on-the-market”
theory which emanates from section 10-b and rule 10b-5 under the Securities
Exchange Act of 1934. At the same time, on various matters such as insider
trading cases, SEBI as well as courts and tribunals in India have extensively
relied on the US legal position in while determining matters under Indian law,
and to that extent these implications are noteworthy from an Indian
perspective.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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