On 23 June 2014, the US Supreme Court reached a long-awaited decision in Halliburton Corporation v. Erica P. John Fund. The Court affirmed the continued validity of the fraud-on-the-market presumption that allows plaintiffs to plead reliance in the class action context, but gave defendants a new way to rebut that presumption at the class certification stage.
Rule 23 of the Federal Rules of Civil Procedure requires plaintiffs seeking to certify a case for class action treatment to show, among other things, that common questions of law or fact predominate across the class over questions affecting potential class members individually. In Basic v. Levinson (1988), the Supreme Court rejected the argument that each purported class member in a securities class action brought under Section 10(b) of the Exchange Act must prove that he or she relied individually on the defendant's alleged misrepresentations or omissions when purchasing the security. That standard would have made securities claims unsuitable for class treatment because of the individualised nature of questions of reliance. The Court in Basic held instead, based on the economic theory known as the efficient-capital-markets hypothesis―which provides that prices of shares traded on well-developed markets reflect material, publicly available information―that plaintiffs can be presumed to have relied on material public misrepresentations when making their stock trades.
In Halliburton, the Court refused to overrule Basic, thereby affirming the validity of the presumption of reliance, because "[e]ven the foremost critics of the efficient-capital-markets hypothesis acknowledge that public information generally affects stock prices." The Court also ruled that the Basic presumption is consistent with the rule that plaintiffs must prove the requirements for class certification because plaintiffs must still prove the prerequisites (other than materiality) for applying the presumption. The Court declined to hold that plaintiffs must prove at the class certification stage that the alleged misstatements impacted the price of the stock―one of the main premises underlying the Basic presumption. But the Court ruled that defendants may present evidence to show a lack of "price impact" at the class certification stage—something that the lower court held could not be done until after a class is certified and the merits are being considered.
While Halliburton had the potential to upend securities fraud class actions by calling the Basic presumption into doubt, the Court largely left the prior legal landscape intact. But the Court's allowance for defendants to offer evidence of the lack of price impact at the class certification stage provides defendants with a new way to defeat securities class actions at this early stage, before feeling pressured to settle because of the size of potential damages after a class has been certified. Only time will tell whether this change in the landscape will have a significant impact on the outcome of securities class actions.
Further information on Halliburton is available at:
A related report, based on a multi-firm effort that we led before the case was decided, on the possible impact of the case is available at:
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