Known Knowns and Unknowns: The Future of Securities Class Actions

Known Knowns and Unknowns: The Future of Securities Class Actions

 Donald Rumsfeld is not always popular or easily understood, but he is often quotable. For example, in one of his most famous encounters with the media while serving as U.S. secretary of defense prior to the Second Gulf War, Rumsfeld stated:

“As we know, there are known knowns; there are things that we know that we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns, the ones we don’t know we don’t know.”

Rumsfeld’s philosophical musing at that briefing became the subject of much commentary and derision, which perhaps explains why it is not likely to be forgotten.

It’s also equally probable that his remarks will be borrowed for use in other contexts. Indeed, they could be applied to many Supreme Court decisions that clarify an issue but also leave unanswered questions—and, undoubtedly, present variables that are yet to be realized or fully understood.

The court’s recent decision in Halliburton Co. v. Erica P. John Fund, Inc. could easily be regarded as one of those cases that result in things that we now know we know, along with some things that we know we don’t know and, in all likelihood, things that are yet to be revealed [an enhanced version of this opinion is available to lexis.com subscribers].

Not the Outcome Some Expected

In fact, questions abound following the court’s ruling. Near the top of the list for many observers is one related to lingering confusion over how the case unfolded.

In Halliburton, the court agreed in 2013 to hear arguments to determine if it should reverse or substantially modify its 1988 decision in Basic Inc. v. Levinson, a case that for almost three decades has provided the basis for certifying many U.S. securities fraud class action suits [enhanced version]. Yet in its ruling, which came near the end of its term in June 2014, the court decided to leave Basic intact, prompting many to scratch their heads and speculate as to why the court bothered with the case in the first place.

For its part, The Wall Street Journal described the outcome in the closely watched matter—once regarded as potentially one of the most important cases in securities law in decades—as “The Big Securities-Fraud Ruling That Wasn’t.”

In a forthcoming emerging issues analysis for LexisNexis, another observer goes even further, adding bluntly that the principal significance of the Halliburton decision is that “it is not particularly significant” after all.

Or is it?

Court-Made Law Under Scrutiny

One argument advanced to explain why the court agreed to hear Halliburton is that it signaled a willingness—some might say eagerness—among a sufficient number of the justices to revisit Basic and perhaps find cause to see it overturned. What we do know is that the court’s 2013 holding in Amgen, Inc. v. Connecticut Retirement Plans and Trust Funds revealed deep reservations concerning the fraud-on-the-market theory at the heart of Basic [enhanced version].

Those and other worries were undoubtedly debated in Halliburton. In the end, the court’s 6–3 decision, based largely on the principles of stare decisis, came with strongly worded dissents from Justices Thomas, Scalia and Alito, suggesting that the fight is not over yet.

Meanwhile, the majority opinion in Halliburton left open another possibility: it seemed to invite, if not challenge, Congress to take a more active role in crafting a clearer legislative and regulatory framework to replace the largely court-made body of law that governs securities fraud class actions today.

Experts Share Their Views

In Halliburton, the court also decided a second, less momentous issue, ruling that defendants in securities fraud class actions may rebut a presumption of reliance (as established by Basic) by introducing evidence in the class certification phase that alleged misrepresentations did not distort the market price of a stock. But even that seemingly innocuous decision has prompted questions, many of which fall into the category of “what now?”

In a recent LexisNexis panel discussion, three esteemed legal experts discussed that question and other practical matters arising from Halliburton. Hosted by Dick Phillips, a senior partner with K&L Gates, LLC in San Francisco, “Clear Cut or Clear as Mud: The Impact and Open Questions of the Halliburton Decision” also featured Mike Eisenberg, a former deputy general counsel with the U.S. Securities and Exchange Commission and now Adjunct Senior Research Scholar and Lecturer in Law at Columbia University, and Stanley Grossman, senior counsel at Pomerantz LLP in New York.

The panelists agreed that several key points quickly rise to the top of a list of known unknowns as a result of the court’s decision. For example, hearings regarding certification are expected to become even more expensive and fiercely fought; however, we’ll have to wait and see if that happens. We also don’t know yet if the decision will change certification results in a significant number of cases.

For Grossman, one of the most intriguing questions open to debate relates to the ability of defendants to now show a lack of price impact in their rebuttals. “What does that mean, ‘show’?” Grossman asked. “[The justices] never say ‘prove.’ They say ‘show.’ It’s such a vague term.” He added: “I think there’s going to be a lot of litigation [over it] as a result.”

Others in the legal profession may draw their own Rumsfeldian-like conclusions about what is clearly a hot topic: the future of securities class actions as a result of yet another Supreme Court ruling.

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