AICPA Amicus Brief Asks U.S. Supreme Court to Overrule Securities Litigation Case

March 31, 2014

The American Institute of CPAs (AICPA) has filed an amicus brief in the case of Halliburton Company v. Erica P. John Fund, which U.S. Supreme Court watchers say is one of the most important securities litigation cases in years.  At issue is a 26-year-old precedent that makes it easier for plaintiffs to bring securities fraud class action lawsuits against publicly traded companies. 

During oral argument on March 5, justices appeared to look for a compromise that would give defendants earlier opportunities to defend against securities class actions without overruling entirely the so-called “Basic presumption of reliance.”

In 1988, the court embraced the "fraud on the market" theory in the case of Basic Inc. v. Levinson.  This assumes that public information about a company is known to the market.  Plaintiffs in securities class action litigation cases do not have to show that they relied on a specific misrepresentation, only that they purchased or sold shares before the truth came out and suffered a loss.

In its January 6 amicus brief, the AICPA contends that Basic’s presumption of reliance has created a shortcut to class certification in securities fraud cases that is outdated in light of the Court’s more recent decisions.  Furthermore, the AICPA asserts that Basic’s presumption of reliance has a particularly detrimental effect on accountants – who are not part of the company but are required by the securities laws to make public statements. 

“The combined effect of Basic and the federal law requirements that accounting firms provide audit reports makes accountants easy targets,” the AICPA’s amicus brief stated.  “The accounting profession plays a critical role in facilitating disclosure by auditing many financial statements issued by public companies.  Regulators demand that auditors make their statements public, and those demands are likely to increase.  The broad class-action liability that the presumption of reliance perpetuates threatens the willingness and ability of accounting firms to engage in these audits.”

The AICPA asks the Supreme Court to overrule Basic Inc. v. Levinson and hold that securities plaintiffs are required to prove, rather than presume, reliance.  If the Court declines to overrule Basic, the AICPA asks that it allow defendants to rebut the presumption of reliance at an earlier stage of the litigation, which may save defendants significant litigation and settlement costs that are common to securities class action litigation regardless of the merits of a particular case. 

A decision on the case is expected by June.