*Editor’s Note: This post taken with permission from Willis Wire
Last week the US Supreme Court handed down its much-anticipated decision in Halliburton Co. v. Erica P. John Fund, Inc. (Halliburton II), which had been closely monitored by the legal and insurance communities for its potential to turn the world of securities class actions upside down.
In Halliburton II, the Court granted defendant companies an additional opportunity to preempt securities class action litigation in its early stages. However, the Court did not go so far as to overturn the 26-year old precedent set in Basic v. Levinson, which first established the fraud-on-the-market presumption that eased the class certification burden for plaintiff shareholders.
The Basic Precedent
Per Basic, in order to certify as a class in securities litigation, plaintiffs are entitled to rely on a presumption that all public information about a company—including the alleged misrepresentation that forms the basis of the plaintiffs’ complaint pursuant to SEC Rule 10b-5, a regulation targeting securities fraud—has been considered by the market and is reflected in the price of the company’s securities.
The Basic holding and its presumption of fraud-on-the-market has for years facilitated securities class action fillings by not requiring individual plaintiffs to show that they relied on the alleged misrepresentation in question.
What Halliburton Changed
In Halliburton II, the court declined to overturn Basic and the fraud-on-the-market theory itself, thus avoiding a major disruption in precedent. However, it did grant defendant companies the opportunity to rebut the presumption at the class certification stage by introducing evidence that the alleged misrepresentation did not in fact affect the stock price—thereby providing the company an opportunity to deny class certification. This holding could ultimately result in fewer securities class actions as a whole and the ability for companies to seek dismissal of a class earlier on in litigation.
At a minimum, Halliburton II sets the stage for a “battle of the experts” over the alleged misrepresentations – something that is likely to lead to increased costs for defendant companies in the form of expert witness fees as they seek to establish a lack of pricing impact at the class certification stage.
What Halliburton Means for Insurance
From an insurance perspective, we do not anticipate a major market reaction to Halliburton II at this time, other than a general awareness that it has the potential to drive greater defense costs at the class certification stage. We expect that insurers—especially those providing capacity at low attachment points such as the primary and first excess layers—will be closely monitoring trends in defense costs post-Halliburton II.
In terms of coverage, publicly traded companies will want to review their D&O policies to make sure that the definition of defense costs provides broad coverage for expert fees and the like.
Willis will also be watching the marketplace for various new product offerings.