United States: The Supreme Court’s Halliburton Decision: Reliance Can Still Be Presumed In Securities Class Actions, But Defendants May Now Rebut The Presumption At An Earlier Stage

In a highly anticipated decision issued June 23, 2014, the Supreme Court in Halliburton Co. v. Erica P. John Fund, Inc., No. 13-317 (June 23, 2014), declined an invitation to overrule the "fraud-on-the-market" presumption — a result that would have sounded the death knell for most securities class actions. Nonetheless, the Court opened the door for defendants to rebut the presumption at the class certification phase, and thereby offers a new weapon for disposing of some class actions before companies are forced to incur the substantial costs of full-blown merits discovery.

The Reliance Requirement In Securities Class Actions

Halliburton pivots on the interplay between the requirements for class certification and the substantive elements of a Section 10(b) claim — and, in particular, the element of reliance. To certify a class action, a plaintiff must establish (among other things) that "the questions of law or fact common to class members predominate over any questions affecting only individual members." Fed. R. Civ. P. 23(b)(3). Thus, to certify a class, a plaintiff must show that common questions of reliance predominate over individual issues.

To show direct reliance, a plaintiff must establish that it was aware of a defendant's statement and relied on it in purchasing or selling a security. Applied strictly, the reliance element would present enormous challenges to shareholders seeking to show that common issues predominate over individual ones: after all, direct reliance is almost always an inherently individualized inquiry. In Basic Inc. v. Levinson, 485 U.S. 224 (1988), the Supreme Court endorsed an "indirect" method of establishing reliance through the fraud-on-the-market presumption. That doctrine is based on the premise that "the market price of shares traded on well-developed markets reflects all publicly available information, and, hence, any material misrepresentations," (Basic, 485 U.S. at 246), and allows courts to "presume that investors trading in efficient markets indirectly rely on public, material misrepresentations through their 'reliance on the integrity of the price set by the market.'" Amgen Inc. v. Connecticut Ret. Plans & Trust Funds, 133 S. Ct. 1184, 1192-93 (2013) (quoting Basic, 485 U.S. at 245). By virtue of this "indirect" method, plaintiffs have generally been able to obtain class certification, which is viewed by the plaintiffs' bar as almost automatic in securities class actions.

Since Basic, many commentators have called into question the continuing viability of the fraud-on-the-market presumption. That criticism reached a new level last year, when Justices Alito and Thomas (concurring and dissenting, respectively, in Amgen) suggested that the Court might consider jettisoning the doctrine altogether. That is precisely what the defendants in Halliburton asked the Court to do.

The Issues Raised In Halliburton

In Halliburton, the Erica P. John Fund, Inc. ("plaintiff") brought a securities class action alleging that, by misrepresenting potential liabilities in asbestos litigation, expected revenue from certain construction contracts, and anticipated benefits from a merger with another company, defendants violated Section 10(b) of the Securities Exchange Act of 1934. Halliburton contended that the class should not be certified because the evidence it introduced showed that the alleged misrepresentations had not affected the stock price — i.e., the statements did not cause "price impact." The absence of any price impact, Halliburton argued, served to rebut the Basic presumption of reliance. And, without the presumption of reliance, plaintiffs would have to prove individualized reliance, thereby precluding class certification. The District Court, however, declined to consider the evidence that Halliburton proffered on this point, and certified the class. The Fifth Circuit affirmed.

The Supreme Court granted certiorari to consider two issues: (1) whether it should overrule or substantially modify Basic's fraud-on-the-market presumption of reliance; and (2) if not, whether the defendant may rebut the presumption and prevent class certification by introducing evidence that the alleged misrepresentations did not distort the market price of its stock.

The Disappointing News: The Fraud-On-The-Market Presumption Survives

Although Amgen raised the tantalizing specter of the demise of the fraud-on-the-market theory, only three members of the Court (Justices Alito, Scalia and Thomas) expressed the view that Basic should be overturned. The majority made clear that the fraud-on-the-market presumption is here to stay — until and unless Congress wants to change it.

In making the argument that Basic should be overturned, Halliburton argued (among other things) that the case rested on an economic principle that could no longer survive judicial scrutiny. Pointing to Basic's premise that "the market price of shares traded on well-developed markets reflects all publicly available information, and, hence, any material misrepresentations," Halliburton asserted that Basic relied on a "robust view of market efficiency" that was no longer supportable. According to Halliburton, empirical data now showed that markets were not fundamentally efficient. The Court, however, was not persuaded. It noted that Basic itself acknowledged the debate among economists as to market efficiency and declined to "conclusively...adopt any particular theory of how quickly and completely publicly available information is reflected in the market price." Instead, Basic rested "on the fairly modest premise that 'market professionals generally consider most publicly announced material statements about companies, thereby affecting stock market prices.'" Moreover, the Basic presumption "recognized that market efficiency is a matter of degree and accordingly made it a matter of proof," allowing defendants to rebut the presumption of reliance.

The Good News: Defendants May Rebut The Fraud-On-The-Market Presumption At The Class Certification Stage With Evidence Of Lack Of Price Impact

While it permitted the fraud-on-the-market presumption to survive, Halliburton makes clear that defendants may try to rebut the presumption at the class certification stage with evidence that the alleged misstatements did not impact the company's stock price. Many lower courts (some relying on Amgen) had refused to consider the issue on class certification, holding that efforts by defendants to rebut the presumption with evidence of a lack of price impact were only proper later, at the merits stage (in other words, after extensive discovery had commenced or been substantially completed). The Supreme Court held that this "restriction" on defendants' ability to rebut the presumption at an earlier phase "makes no sense" and invites "bizarre results." Because price impact is an "essential precondition" for any class action under Section 10(b) and Rule 10b-5, the Court held that that it would hardly be fair to allow plaintiffs to introduce evidence of market efficiency as a proxy for price impact in order to invoke the fraud-on-the-market presumption, while ignoring 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."

What The Decision Means For Securities Class Actions

In the run-up to the Halliburton decision, the securities bar faced the possibility — albeit an unlikely one — that the Supreme Court would overturn Basic, thereby depriving shareholders of the fraud-on-the-market presumption of reliance, eviscerating class action litigation under Section 10(b) and Rule 10b-5, and changing the face of securities litigation as we know it. Although that scenario did not come to pass, at the end of the day, the defense bar did win a significant victory in Halliburton. In holding that defendants may rebut the fraud-on-the-market presumption at the class certification stage with evidence of lack of any such price impact, the Court gave defendants a potentially lethal weapon to combat securities class actions, at least in those cases where price impact is a serious issue.

In addition, the Supreme Court provided a much-needed reminder that the fraud-on-the-market presumption is rebuttable. Over the years, some lower courts seemed to have lost sight of that principle — a point made by Justice Thomas in his concurrence. Not only does Halliburton correct that misperception, but it gives defendants another potential basis for disposing of a case relatively early, even if a motion to dismiss is denied. Indeed, there are a number of cases where defendants will be able to provide compelling evidence that the alleged misstatements underlying plaintiffs' claims did not have an impact on the stock price. Under Halliburton, a district court must now consider that evidence at the class certification stage — and if defendants are able to prevail, the case may effectively be resolved before the full costs of merits discovery are incurred.

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.

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

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

Authors
Events from this Firm
30 Nov 2017, Conference, San Francisco, United States

The 2017 agenda addresses significant pending legislative and regulatory changes along with our annual substantive updates.

5 Dec 2017, Webinar, California, United States

This highly interactive colloquium will provide a deep understanding and practical advice regarding major e-discovery challenges facing organizations today.

6 Dec 2017, Seminar, California, United States

Network and be seen as an information security thought leader. “The Exchange” colloquium is designed for senior business executives and security practitioners from both the public and private sector.

 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (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 www.mondaq.com

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 Mondaq.com’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.

Disclaimer

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.

Registration

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 unsubscribe@mondaq.com 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.

Cookies

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.

Links

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.

Mail-A-Friend

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.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

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 webmaster@mondaq.com.

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 EditorialAdvisor@mondaq.com.

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 enquiries@mondaq.com.

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