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The Boston Globe

Business

Court raises bar for securities class action cases

WASHINGTON — The Supreme Court on Monday made it tougher for investors to join together to sue corporations for securities fraud, a decision that could curb the number of multimillion-dollar legal settlements.

But the unanimous ruling stopped short of tossing out a quarter-century-old legal theory that might have ended securities class action lawsuits altogether. Only three of the nine justices said they would have gone that far.

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Writing for the court, Chief Justice John Roberts said companies should have a chance in the early stages of a lawsuit to show that any alleged fraud was not responsible for a drop in the company’s stock price.

The change could make it more expensive and time consuming for plaintiffs at the early stages of litigation. That gives corporations a better chance to mount a defense and could discourage lawyers from bringing weaker securities cases.

The ruling is a partial victory for Halliburton Co., which is trying to block a class-action lawsuit claiming the energy services company inflated its stock price. A group of investors claim they lost money when Halliburton’s stock price dropped after revelations the company misrepresented revenues, understated its liability in asbestos litigation, and overstated the benefits of a merger.

The case now goes back to the lower courts, where Halliburton will have another chance to block the investors from joining together as a class.

The decision is a minor win for business groups that complain the growth of class actions is a drain on corporate profits and a windfall for plaintiff lawyers. Investor groups say the lawsuits help deter corporate fraud and abuse.

The justices rejected Halliburton’s broader request to overturn the court’s 1988 decision in Basic v. Levinson, which sparked a surge in securities class-action lawsuits. Under Basic’s ‘‘fraud on the market’’ theory, shareholders who claim fraud don’t need to show they relied on specific false statements. The theory presumes a company’s false statements inflated its stock price.

Roberts said Halliburton offered no ‘‘special justification’’ for overruling Basic’s fraud-on-the-market presumption. He said even the biggest critics of the theory ‘‘acknowledge that public information generally affects stock prices.’’

Business groups had urged the court to overturn Basic. They argued that the doctrine has led to significant costs for investors and businesses and bred confusion in the courts. But the Obama administration asked the court not to overrule the precedent, saying its premise remains sound.

In a separate decision, the court unanimously upheld the broad application of a federal bank fraud law, sustaining the conviction of Kevin Loughrin, who used stolen checks as part of a scheme to take merchandise and cash from a Target store in Utah.

Using checks from a bank brought Loughrin under the bank fraud statute. He was sentenced to three years in prison.

Justice Elena Kagan said for the court that the law does not require the government to prove a defendant intended to defraud a bank. The Obama administration had argued that the law should be read broadly because banks lose about $1 billion a year to fraud.

Loughrin said a broad application would improperly apply the law to many crimes that are usually prosecuted by state authorities. He also said Congress would have written the law differently if it had wanted his crime to fall under it.

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