United States: Halliburton Watch – Highlights From The Amicus Filings

Last Updated: May 8 2014
Article by Daniel J. Dunne

This is the second post in our series on the Supreme Court's coming ruling in Halliburton Co. v. Erica P. John Fund, Inc., Case No. 13-317.  Here's our post from last week concerning background information about the case.

As the securities litigation bar holds its breath while the Supreme Court deliberates the fate of the fraud-on-the-market presumption of reliance, we take a moment to review some of the positions submitted by amici in Halliburton v. Erica P. John Fund, Inc.

The Law Professors – a Middle Way Based on Event Studies. The Law Professors' amicus brief has received significant attention following questioning at oral argument.   Characterizing the view expressed in Basic v. Levinson of capital markets efficiency as "unrealistic," the Professors argued that that the fraud-on-the-market theory does not require showing capital markets to be generally efficient in order to demonstrate reliance.  Instead, they proposed that a plaintiff should introduce focused evidence that a particular misstatement "affected" the market price of the security.

In particular, the Law Professors advocated for the use of event studies, "the 'gold standard' technique for determining whether the market relied on a misstatement."  The event study is also a useful tool in the case of an omission, or a misstatement concerning meeting expectations, because in those cases the event study can be used to determine the market effect of a corrective disclosure.

The Law Professors did not, however, advocate for discarding the general market efficiency test altogether.  Instead, in cases where the class can only point to evidence of general market efficiency to support certification, they suggested that damages should be limited to disgorgement and not out-of-pocket damages.

SIFMA – Overrule Basic and Leave the Issue for Congress.  The Securities Industry and Financial Markets Association ("SIFMA") took the view that the fraud-on-the-market presumption is deeply flawed, that an alternative proposal to require §10(b) plaintiffs to demonstrate actual price impact lacks a sound basis (disagreeing with the Law Professors' view), and that the better course would be to abrogate the presumption and "leave to Congress the task of analyzing global markets and evaluating economic theory to determine whether and to what extent §10(b) plaintiffs should be relieved of the burden of proving actual reliance in a class setting."

Arguing for the Court to overturn the presumption, SIFMA pointed to research showing that putative class securities lawsuits that survived dismissal, where a large class is certified, and even if the case is weak, can result in "blackmail settlements" that are induced by a small probability of an immense judgment.  In a footnote, SIFMA also alluded to the enormous financial incentives to bringing securities class actions that have from time to time engendered illegal or questionable conduct by some members of the plaintiffs' bar.

The United States of America – Keep the Presumption Intact; Meritorious Private Securities Fraud Cases Complement Criminal Prosecutions and Civil Enforcement Actions.  Coming out in favor of the respondent, the federal government argued that the premise behind Basic remains sound, and that Congress ratified private securities causes of action and declined to disturb the fraud-on-the-market-presumption in subsequent legislation, the PSLRA and SLUSA.  (Note:  two amicus briefs, taking competing views of the significance of the PSLRA and SLUSA on the question of the presumption, were filed by members of Congress, staff members, and others.)  The government also argued that, under the Supreme Court's ruling in Amgen, proof of impact on price should not be a prerequisite to class certification.

The government argued that the specific academic debate about the efficient market hypothesis really isn't the issue.   The fundamental premise of Basic, that markets process public information about a company into the price of securities, remains uncontroversial.  That premise, combined with conclusions of law made by the Basic Court (with respect to proximate causation and the view that investors may reasonably rely on the integrity of market price), continues to justify damage recoveries by private securities litigants.

The Civil Procedure Scholars – Uphold Basic Because of the Rules Enabling Act & Discovery Concerns.  In another brief from the academic community, the "Civil Procedure Scholars" argued that the presumption should be upheld, looking to the Rules Enabling Act and highlighting discovery concerns, among other things.  Under the Rules Enabling Act, it would be improper for the Supreme Court to discard or narrow the fraud-on-the-market presumption, a substantive doctrine of securities law, by interpreting a procedural rule like Federal Rule 23.  The scholars described Rule 23 as intended to encourage the more frequent use of class actions, a policy objective in harmony with the continued viability of the presumption.

The Civil Procedure Scholars also contended that allowing the parties to litigate price impact at the class certification stage would require adjudicating an intensely factual issue prior to the completion of fact and expert discovery, or delaying the decision on class certification until discovery was completed.

Financial & Testifying Economists – Basic's Basic Premise Remains Sound, and Event Studies Are an Important and Useful Tool.  Two groups of economists submitted amicus briefs – both in support of respondents and the fraud-on-the-market presumption.  The first brief, by "Financial Economists,"  argued that disagreement and debate about market efficiency existed when  Basic was first decided, and continues today (with the amici taking various positions), but that despite the debate, and despite specific technical disagreements among economists, there generally is not disagreement about whether market prices respond to new material information in a predictable direction.  This conclusion, according to the Financial Economists, is consistent with the view that sometimes there can be anomalies in how markets process information, and that "bubbles" can exist, and anomalies and bubbles do not undercut the premise of the fraud-on-the-market presumption.

The second brief, filed by "Testifying Economists," made a similar argument that the fraud-on-the-market presumption creates a rebuttable inference that buyers and sellers of securities rely on market price to reflect public information, and that this inference remains well supported by economics literature.

That inference is further established in securities fraud cases by scientific, valid economic evidence.  On this point, the Testifying Economists provided an extended discussion of event studies, noting that there is little dispute among economists that statistically significant change in price in response to new, public and material information supports the notion that such information is being promptly incorporated into the price of securities.  The Testifying Economists went on to describe the use of event studies in various circumstances, concluding that an economist using an event study as one tool among many should not be limited to having to demonstrate price increase only at the time of the misrepresentation for the fraud-on-the-market presumption to apply.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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