From Basic to Halliburton
The Supreme Court has struggled for 25 years with the wrong turn it took in Basic. The fraud-on-the-market (FOTM) regime established in Basic shifts money from one shareholder pocket to another at enormous expense. In Halliburton II, the Court extinguished any hope that it would fix its prior error. The Court’s institutional commitment to stare decisis—perhaps coupled with an awareness of its own limitations—kept it from making any meaningful change. Congress and the Securities and Exchange Commission have both had the opportunity to fix the problem created by Basic, but neither of those institutions has risen to the occasion. Shareholders bear the costs of the FOTM regime, and shareholders have the power to end those costs by adopting arbitration provisions. That “nuclear option” comes at a cost, however, as it eliminates entirely the deterrent value of securities class actions.