More stock fraud by big companies could be in store if a coming Supreme Court decision makes it harder for investors to file class action lawsuits, prominent Georgetown University Law Professor Donald Langevoort cautioned Wednesday at a Washington, D.C. Bar Association seminar.

Langevoort’s warning came shortly after the Supreme Court heard arguments in a case where it is being asked to decide whether investors in a class action can continue to win by showing they had a general faith in the market and that lies by company officials eventually led to a decline in the value of the business’s stock, the so-called "fraud-on-the-market theory."

In the case, a group of investors led by the Erica P. John Fund, sued energy company Halliburton for allegedly being misled about its asbestos litigation liability.

The professor said that the number of class actions could shrink if the court throws out that long-standing precedent and mandates investors to prove the more difficult position that they made their investments based on specific statements by a company that eventually harmed the stock price.

A ruling to that effect in the Halliburton case heard Wednesday hurting investors could also spur the Securities and Exchange Commission to devote more of its resources to pursuing large-company accounting and financial fraud and less staff time and expertise to other enforcement areas, the professor predicted.

“It’s a scary thought,” the professor said.

While pension funds and other large investors have research staffs and information sources unavailable to most Americans, institutional investors rely heavily on the “fraud on the market” protection in current law and their belief in the basic efficiency and reliability of the markets because their assets are more heavily concentrated in passive investments than the savings of retail investors, Council of Institutional Investors General Counsel Jeff Mahoney said.
The importance institutional investors place on the integrity of the markets is also acute because they rely on automated trading, which is significantly cheaper for humongous holdings than individual stock picking, said private securities attorney Steven Bradbury with the Washington, D.C., office of Dechert.

Both Langevoort and Bradbury sat in on the Supreme Court while justices questioned both sides in the Halliburton case.

They predicted the court will uphold the fraud-on-the-market doctrine, but require allegedly aggrieved investors in class action suits to have studies regularly costing hundreds of thousands of dollar showing that one or more misleading statements led to a drop in a stock price or that in another way the price would have been different if the company officials had told the truth.