In what amounted to a 6-3 decision, the Supreme Court held in Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. ___ (2014) that the presumption of reliance based on the fraud-on-the-market theory, first articulated in Basic Inc. v. Levinson, 485 U.S. 224 (1988), continues to apply to securities class actions alleging violations of Section 10(b) of the Exchange Act and Rule 10b-5, promulgated thereunder. The Court also held that defendants may introduce evidence at the class certification stage — including “event studies” — to defeat this presumption. Event studies are regression analyses that examine the impact, if any, that certain events or disclosures have on the market price of a company’s stock.
The majority concluded that the defendants had not provided any “special justification” for overruling Basic. Instead, the Court held that Basic rested on “the fairly modest premise” that investors “generally” rely on the integrity of the market price when purchasing securities. The majority concluded that the debate regarding the degree to which the market price of a security reflects public information “is not new” and was acknowledged by the Court in Basic. Indeed, “in making the presumption rebuttable, Basic recognized that market efficiency is a matter of degree and accordingly made it a matter of proof.” Therefore, the majority held that “Halliburton has not identified the kind of fundamental shift in economic theory that could justify overruling a precedent on the ground that it misunderstood, or has since been overtaken by, economic realities.”
With respect to the second question, the Court concluded that because defendants were already allowed to submit price impact evidence at the class certification stage to counter the plaintiff’s showing of market efficiency, restricting defendants from using this same evidence to rebut the presumption of reliance “makes no sense, and can readily lead to bizarre results.” Thus, the majority held that “[d]efendants may seek to defeat the Basic presumption at that stage through direct as well as indirect price impact evidence.” Justice Ginsburg, joined by Justices Breyer and Sotomayor, wrote a one paragraph concurrence noting that the Court’s judgment “may broaden the scope of discovery” at the class certification stage, but “should oppose no heavy toll on securities-fraud plaintiffs with tenable claims” because “it is incumbent upon the defendants to show the absence of price impact.”