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.
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.