Australia: Causation in shareholder class actions: the fraud on the market theory and the impact of the US decision in the Halliburton case


The highly anticipated decision of Halliburton Co v Erica P John Fund Inc [2014] WL 2807181 (Halliburton), handed down in the United States Supreme Court on 23 June 2014, has the potential to impact the shareholder class action landscape in Australia. The result, an affirmation of the 'fraud on the market' presumption in the US, at the least will provoke renewed discussions in Australia as to the extent to which Australian courts should consider or adopt this presumption here.

'Fraud on the market'

In Australia, shareholder class actions are typically founded on allegations that a company's disclosure (or non-disclosure) of material information was misleading, deceptive or in breach of obligations. Proving that the alleged disclosures or non-disclosures caused shareholder loss is an essential element of these claims.

Critically, however, the method for establishing causation in shareholder class actions has not yet been finally determined by Australian courts. Whether each claimant must prove actual reliance on the misrepresentation, or whether a lesser requirement of indirect causation through a general reliance on the market is sufficient, remains an open question.

In the US however, the case of Basic Inc v Leninson (1988) 108 s Ct 978 (Basic) established the 'fraud on the market' theory of causation in response to this issue.

Essentially, the 'fraud on the market' theory establishes the presumption that the price of stock which is trading in an efficient market will incorporate and reflect all material information, including any misrepresentations or contravening statements. Accordingly, investors who buy or sell shares do so in presumptive reliance on any misrepresentations made by the company.

While this presumption is rebuttable, it means that shareholder class action plaintiffs in the US need not prove actual individual reliance on the company's misrepresentations, but rather can establish reliance on a class-wide basis.

The Halliburton litigation

The Halliburton litigation commenced in the US more than a decade ago, when a class of plaintiffs invoked the 'fraud on the market' presumption as part of their petition for class certification to demonstrate class-wide reliance on the defendant company's financial statements and projections. The plaintiffs alleged that the company misrepresented material facts to investors by understating its projected liability for asbestos claims, overstating its revenues and exaggerating cost savings in relation to a merger.

The Federal District Court initially prevented Halliburton from introducing evidence to rebut the 'fraud on the market' presumption at the class certification stage, and proceeded to certify the shareholders as a class. This view was affirmed by the 5th US Circuit Court of Appeals, which found that evidence to rebut the 'fraud on the market' presumption could not be introduced prior to a trial on the merits. Halliburton appealed and, in doing so, challenged the presumption in its entirety.

The US Supreme Court decision in Halliburton

In its long-awaited decision, the US Supreme Court declined Halliburton's invitation to jettison the 'fraud on the market' presumption. It held that the original decision in Basic was settled law and that Halliburton had failed to demonstrate the 'special justification' required for overturning such a precedent. The majority noted that Basic rested on the "fairly modest premise that 'market professionals generally consider most publicly announced material statements about companies thereby affecting stock market prices'".

If the presumption had been invalidated, shareholder class action plaintiffs would likely have had to establish actual reliance by individual class members, which would have made class certification virtually impossible.

Importantly for defendants, the majority of the Supreme Court did, however, find that defendants are able to introduce evidence at the class certification stage that the alleged misrepresentation did not in fact affect the stock price. This will allow defendants to rebut the 'fraud on the market' presumption and defeat class certification, prior to any trial on the merits.

Impact of the decision in Australia

In recent years, Australian commentators have closely followed the Halliburton litigation in the US and have considered the potential application of the 'fraud on the market' theory to securities class actions in Australia.

Many economists have criticised the theory, arguing that it overstates market efficiency and erroneously presumes that all investors rely on the integrity of stock prices. Companies, the potential targets of shareholder class actions, have also criticised the 'fraud on the market' presumption as contributing to the meritless bringing and joining of additional individuals in claims, the magnification of plaintiff settlement leverage and the flow on effects which are burdensome to business such as increased insurance costs, legal costs and pay-outs.

However, the adoption of the theory into Australian law is attractive from a plaintiff lawyer's perspective in relation to the convenience of not requiring each shareholder to give evidence to prove that the relevant alleged conduct caused the particular loss. It also allows small investors to have the means to challenge misleading conduct by large corporations, while concurrently supporting securities regulators. This would however be a significant change from the way Australian courts have traditionally viewed actions under s1041I of the Corporations Act 2001 (Cth) (and its predecessor).

The issue remains that the 'fraud on the market' theory does not sit comfortably with existing authority in the Australian courts on causation and reliance. Most recently, in Woodcroft Brown v Timbercorp Securities Limited (in liq) & Ors [2013] VSCA 284, the Victorian Court of Appeal placed importance on the requirement to prove actual reliance on the relevant misrepresentations. In that case, following the High Court ruling in Kenny & Good Pty Ltd v MGICA Ltd1 and the findings of the NSW Court of Appeal in Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Market Ltd2, the Court of Appeal confirmed that in order to argue a misrepresentation case:

" was necessary for the appellant to establish that there was reliance placed upon the non-disclosures and the misleading conduct so as to cause entry into the investment product and, therefore, subsequently to cause loss".

However, it should be noted that in this case there were a number of other issues which may be distinguished on the facts, including that the investor's primary motivation in purchasing was to secure a tax benefit; that the securities acquired were under a PDS and not on the open market and that the Court of Appeal considered it open to the trial judge to find on the evidence that the directors were not required to disclose risks, that the risks were not significant, and that the evidence of the plaintiff relating to reliance was not considered credible.

In light of the affirmation of the 'fraud on the market' presumption by the US Supreme Court in its decision in Halliburton, and the fact that if adopted in Australia causation issues for shareholder class action plaintiffs would be simplified to a significant extent, we may well see class action plaintiffs in Australia seeking to run this argument before the courts for determination, particularly up to higher courts for a more definitive declaration in relation to the theory. This is an issue we will be monitoring closely.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Ben Allen
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.