WASHINGTON — The Supreme Court seemed to be looking for middle ground Wednesday while considering what has been called the biggest business case of the year: a battle between shareholders and corporations over securities-fraud class-action lawsuits.

The corporations want the court to junk a 1988 precedent that has been a crucial factor in a series of suits in which investors have jointly sued over corporate statements they say misstate the health of companies and inflate their stock prices. Settlements in such cases have reached upwards of $70 billion.

After an hour of arguments Wednesday, it did not seem apparent that there were five justices willing to get rid of the “fraud on the market” presumption the court adopted in Basic v. Levinson. But it also seemed unlikely Wednesday that the court would be satisfied with the status quo.

The “fraud on the market” theory presumes that false statements by a company can improperly inflate the market price for its shares, so investors who buy stock at that price are overpaying and thus can later claim they were defrauded. According to this thinking, investors who claim they were defrauded do not have to show that they personally relied on the misstatements – or were even aware of them – in buying the stock.

Corporations claim the 1988 decision stacks the deck in favor of plaintiffs and forces companies into huge settlements. Four of the court’s conservatives have questioned the decision and called for a case in which they could revisit it.

Justice Anthony Kennedy, likely to be in the majority on a split court no matter how the case is decided, suggested that the court could leave the “fraud on the market” presumption in place but add a requirement – making investors show before a class action is certified that the stock was actually affected by whatever false statements are alleged.

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“I call it the midway position,” Kennedy said.

The case before the court involves a group of shareholders, called the Erica P. John Fund, that is suing Halliburton. The fund seeks to represent all purchasers of the company’s stock between 1999 and 2001. They contend that the company lowballed its potential liabilities involving asbestos, inflated the potential benefits of a merger and misstated earnings reports.

The Supreme Court rejected Halliburton’s attempt to have the suit thrown out on other grounds in 2011, and lower courts certified the class and allowed the case to go forward.

The “fraud on the market” presumption is essential to such suits because it helps investors meet two class-action requirements: that they show they relied on a company’s false statements and that they share a common harm.

Houston lawyer Aaron Streett said Basic “was wrong when it was decided . . .” because it “substituted economic theory for the bedrock common-law requirement” intended by Congress, which is that shareholders must show they actually relied on the misrepresentations.


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