In a decision authored by Chief Justice Roberts, the US Supreme
Court yesterday reversed the Fifth Circuit's decision
certifying a class in a securities fraud class action brought under
section 10(b) of the Securities Exchange Act of 1934 and Securities
and Exchange Commission Rule 10b–5. In reversing the Fifth
Circuit, the Court let stand the "presumption of
reliance," which permits plaintiffs in securities fraud class
actions to satisfy the statutory reliance requirement by invoking a
presumption that the price of stock traded in an efficient market
reflects all public, material information, including material
misstatements. See Basic Inc. v. Levinson, 485 U.S. 224
(1988). However, the Court concluded that defendants could rebut
this presumption of reliance at the class certification stage by
introducing evidence that an alleged misrepresentation did not
actually affect the market price of the stock. This decision helps
clarify what evidence a court may consider in determining whether
to certify a class in a securities fraud class action suit.
In its decision, the Court began by considering—and
rejecting—Halliburton's argument that the Court should
overrule Basic, thus requiring plaintiffs to prove actual
reliance in all securities fraud claims under Rule 10b–5.
After noting that all securities fraud plaintiffs must prove
"reliance upon the misrepresentation or omission," the
Court explained that, under the rule created in Basic,
plaintiffs could satisfy the reliance element of a Rule 10b–5
action by invoking a rebuttable presumption of reliance. This
presumption was based on the so-called
"fraud-on-the-market" theory, which maintains that the
market price of shares traded on developed markets reflects all
publicly available information, including any material
misrepresentations. The Court disposed of Halliburton's
challenge to the Basic presumption, finding that none of
its arguments for overruling Basic so discredit the
decision as to constitute a "special justification" for
abandoning this longstanding precedent.
However, the Court agreed with Halliburton that defendants should
have a chance to rebut the presumption of reliance prior to class
certification (as opposed to waiting until the merits of the case
were reached) with evidence of a lack of a price impact.
Basic allows plaintiffs to establish price impact
indirectly, by showing that a stock traded in an efficient market
and that a defendant's misrepresentations were public and
material. But this indirect proxy, the Court determined, did not
foreclose consideration of a defendant's "direct, more
salient evidence showing that the alleged misrepresentation did not
actually affect the stock's market price and, consequently,
that the Basic presumption does not apply." As such,
the Court held that the Fifth Circuit erred by refusing to consider
such price impact evidence when considering the predominance
prerequisite for maintaining a class under Rule 23(b)(3).
In a brief concurring opinion, Justice Ginsburg, joined by Justices
Breyer and Sotomayor, noted that advancing price impact
consideration from the merits stage to the class certification
stage may broaden the scope of discovery available at
certification. She also emphasized that the Court's decision
would place the burden on defendants—not plaintiffs—to
show the absence of a price impact as part of the class
certification process.
Justice Thomas, joined by Justices Scalia and Alito, concurred in
the judgment but wrote separately to opine that the Court should
have accepted Halliburton's invitation to overrule
Basic.
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