On June 23, the U.S. Supreme Court issued its much-anticipated
decision in Halliburton Co. v. Erica P. John Fund, No.
13-317, 573 U.S. __ (2014) ("Halliburton"). The
Court held that defendants in securities fraud class actions may
rebut the presumption of investor reliance on public and material
misrepresentations before class certification, by presenting
evidence that the alleged misrepresentations did not actually
affect the stock price. However, the Court rejected arguments that
the presumption should be replaced with a requirement that
plaintiffs prove actual reliance on the alleged
misrepresentations.
The State of the Law Before
Halliburton
In Basic v. Levinson, 485 U.S. 224 (1998)
("Basic"), the Supreme Court adopted the
fraud-on-the-market theory and established the general presumption
that stock prices in an efficient market reflect all public and
material information. Since Basic, plaintiffs in
securities fraud class actions have invoked this presumption to
establish reliance on material misrepresentations when purchasing
or selling stocks. Some circuits precluded defendants from
introducing evidence to rebut the Basic presumption until
after class certification. By then, however, it is usually too
late. Once a class is certified, a defendant often is pressured to
settle even untenable claims.
The State of the Law After
Halliburton
In Halliburton, the Supreme Court held that defendants may
rebut the Basic presumption before class certification,
with evidence that the alleged misrepresentation did not affect the
stock price.1 The Court concluded that before class
certification, courts should not ignore direct evidence that the
Basic presumption did not apply. However, the Court
rejected arguments that the Basic presumption should be
abandoned entirely. The Court concluded that Halliburton's
claims that the presumption was inconsistent with congressional
intent or with recent developments in economic theory did not
justify overturning its earlier precedent. As a result, the
Basic presumption of investor reliance on public and
material misrepresentations remains intact.
The Potential Impact of
Halliburton
The Halliburton decision would have marked a sea change
had it eliminated the Basic presumption. Because the Court
will enable defendants to rebut the presumption before class
certification, the decision's more modest impact may be to
deter some untenable claims by securities fraud plaintiffs by
providing defendants with an additional tool to fend off class
certification. The lower federal courts will have to sort out what
evidence is sufficient for a defendant to show the absence of price
impact in order to rebut the Basic presumption. With price
impact issues front and center, class certification proceedings are
likely to see more intense litigation involving discovery, expert
studies and the like.
[1] The precise scope of the Court's holding that
defendants can present evidence to rebut the presumption
"before class certification" remains unclear. Lower
courts will have to decide whether "before class
certification" means (1) at the class certification stage
before a class is certified, or (2) at any time prior to class
certification (including the motion-to-dismiss stage).
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