Opinion

Alison Frankel

Halliburton alert! New briefs argue Congress never endorsed Basic

By Alison Frankel
January 7, 2014

Last February, when Chief Justice John Roberts and Justice Samuel Alito of the U.S. Supreme Court sided with the court’s liberal wing in Amgen v. Connecticut Retirement Plans, they joined an opinion that left intact the standard for certification of a class of securities fraud plaintiffs. Amgen, as you probably recall, had asked the court to impose a requirement that shareholders prove the materiality of supposed corporate misrepresentations in order to win class certification. The majority refused, in a decision written by Justice Ruth Ginsburg. Among other things, Justice Ginsburg said that if Congress had wanted to tinker with the Supreme Court’s 1988 precedent on securities class certification, Basic v. Levinson, it could have done so in 1995, when lawmakers passed the Private Securities Litigation Reform Act, or again in 1998, when the Securities Litigation Uniform Standards Act became law. Instead, Justice Ginsburg wrote in Amgen, “Congress rejected calls to undo the fraud-on-the-market presumption of classwide reliance endorsed in Basic.”

But is that really what Congress did in 1995? The answer to that question could have a big impact on the future of securities class actions.

The Amgen case, as you know, led directly to this term’s securities blockbuster: Halliburton v. Erica P. John Fund, which puts Basic’s presumption of shareholder reliance on supposed corporate misstatements – and thus the foundation of most securities fraud class actions – directly before the justices. Halliburton’s lawyers at Baker Botts filed their merits brief last week, urging the court to undo Basic as bad law based on misguided economic theory. On Monday, Halliburton’s amici joined in. They’re mostly the usual suspects: the U.S. Chamber of Commerce and other pro-business organizations; the Securities Industry and Financial Markets Association; the American Institute of Certified Public Accountants; the Washington Legal Foundation; and DRI – The Voice of the Defense Bar. Two different groups of law professors filed briefs, one a technical argument about the efficient-market theory underlying Basic and the other a scholarly condemnation of securities class action litigation.

I was particularly intrigued, though, by a brief that purports to support neither side, filed by five former Republican members of Congress and seven former Congressional and Securities and Exchange Commission staffers, all of whom were involved in the passage of securities litigation reform in 1995. (The SEC staffers served under Democrat-appointed SEC chairman Arthur Levitt.) According to this brief, Justice Ginsburg wasn’t quite right when she concluded in Amgen that Congress rejected calls to do away with Basic. The 1995 law passed by both houses, overriding a veto by President Clinton, didn’t actually end up addressing the fraud-on-the-market theory of classwide investor reliance at all – which, according to the brief, should not be construed by the Supreme Court as a rejection of efforts to repudiate the precedent.

“Congress did not answer any of the competing calls to overturn, modify, or codify the Basic presumption,” Sullivan & Cromwell argued for the amici. “Congress was simply silent in response to those various requests, and this court should not take Congress’s silence as implicit acceptance or rejection of Basic’s fraud-on-the-market theory.”

The brief, which is signed by former New York Senator Alphonse D’Amato and former Virginia Congressman Thomas Bliley, among others, exhaustively recounts the legislative history of the securities litigation reform law, which began with a House bill that did attempt to undo Basic, included House and Senate hearings on the presumption of reliance and proposals to involve the SEC in the determination of market efficiency, and ended with a law that squeaked past Clinton’s veto. The final version, a compromise designed to attract bipartisan support, skirted several points of controversy, including not only the presumption of investor reliance but also the standard of proof for intent to defraud. “It was not possible in that situation for Congress to speak to any and all issues related to private securities-fraud litigation,” the brief asserted. In such political circumstances, the former lawmakers and staffers argued, the justices should not infer that Congress endorsed Basic’s reasoning.

That’s especially true, they contended, because the Exchange Act of 1934 does not explicitly grant private investors a right to sue for securities fraud at all. As the Supreme Court discussed in its Basic decision, federal judges inferred that private cause of action in the statute, in a backdoor sort of lawmaking that is disdained by the current Supreme Court. “This court has repeatedly cautioned against relying on legislative inaction as evidence of acquiescence,” the brief said. “That caution is especially warranted here…. Whatever the court’s normal reluctance to infer acquiescence from legislative inaction, it should be especially loath to assume that Congress implicitly ratified a judicially-created evidentiary presumption.”

If the Supreme Court wants to look at legislative history, it should consider instead the record of the passage of the Exchange Act itself, according to the briefs of both Halliburton and the law professors represented by Wachtell, Lipton, Rosen & Katz and Stanford’s Joseph Grundfest. In the provision of the 1934 law that specifically addresses the rights of private investors, Section 18, Congress insisted that shareholders show they relied on purported misstatements. (That reliance requirement is why investors almost never sue under Section 18 but instead assert classwide claims under Section 10b5.) “The 1934 Act’s legislative history leaves no doubt that, had the Seventy-Third Congress addressed the question, it would not have created a private Section 10(b) right unless that right required proof of actual reliance,” the law profs’ brief said. “That history further underscores that Congress would not have condoned a presumption of reliance.”

This issue of congressional endorsement is much more than an opportunity for nostalgia for a few superannuated lawmakers. Remember, the majority’s decision in Amgen rested in part on the idea that Congress had implicitly accepted Basic’s premise of investor reliance. If Halliburton and its amici can knock out that premise, shareholders will lose one of their best arguments for leaving Basic precedent alone.

By joining the majority in the Amgen decision, Chief Justice Roberts and Justice Alito demonstrated the Supreme Court’s institutional squeamishness about overturning rulings by their predecessors. That’s why Halliburton and several of its amici take pains to argue why the Basic decision is not entitled to the Supreme Court’s typical deference to its own precedent. Those arguments will be easier for Roberts and Alito to swallow if Basic doesn’t also have Congress’s backing.

 

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Comments
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Good analysis (as usual), Ms. Frankel. It may be worth noting Justice Alito’s concurring opinion in Amgen, in which he emphasized that the Court had not in that case been asked to reconsider the Basic presumption and strongly hinted that he would be willing to go along with the Amgen dissenters in rejecting/modifying Basic. So it’s really only the Chief’s vote that appears to be in play.

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