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March 5, 2014

Do Securities Class Actions Actually Help Investors?

By Lisa A. Rickard
Originally appeared in Investor’s Business Daily on March 4, 2014

Perhaps no business case before the Supreme Court this term has generated more predictions of seismic significance than the Halliburton v. Erica P. John Fund case before the court this week.

It is easy to understand why. Halliburton re-examines the legal theory of “fraud-on-the-market,” which created the modern securities class-action lawsuit.

The 1988 Basic Inc. v. Levinson decision made it easier for plaintiffs’ lawyers to create class actions by removing the requirement that investors prove they relied on specific corporate public misstatements when purchasing stock. The case spawned one of the richest veins in the plaintiffs’ bar’s gold mine.

But beyond law and economics, the more fundamental question is: Do securities class actions actually help investors?

Plaintiffs’ lawyers claim these lawsuits alone give investors justice and punish bad corporations. They declare that ending Basic closes the courthouse doors. It’s a catchy story, but it’s pure fantasy.

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