On June 23, 2014, the Supreme Court issued its second decision in the long-running securities fraud class action against Halliburton (Halliburton II).1 In the parties’ second appearance before the Court, Halliburton sought the reversal of the “fraud on the market” rebuttable presumption of reliance, i.e., the death knell of securities fraud class actions. In the alternative, Halliburton argued the Court should impose on plaintiffs seeking class certification the burden of demonstrating that defendants’ alleged misstatements affected the company’s stock price. In the event the Court refused to impose this burden on plaintiffs, Halliburton requested the Court permit defendants to rebut the presumption of reliance at the class certification stage by proving their alleged misstatements had no price impact on the company’s stock. The last of Halliburton’s wishes were granted. The Court (i) reaffirmed the “fraud on the market” rebuttable presumption of reliance which plaintiffs must invoke for a securities case to be certified as a class action, (ii) refused to impose on plaintiffs the burden of affirmatively demonstrating impact, (iii) but held defendants may rebut the presumption at the class certification stage by showing a lack of “price impact.” While the ability to rebut the presumption by showing a lack of price impact was important to Halliburton’s defense, the most significant aspect of Halliburton II is the Court’s acknowledgement that defendants possess the right to rebut the presumption of reliance at the class certification stage. Because eight of the eleven Circuit Courts of Appeal had barred defendants from rebutting the presumption before trial, and less than one-third of 1% of securities fraud class actions are tried, Halliburton II is a victory for all defendants.
The Fraud on the Market Presumption
In all private securities fraud actions, the plaintiff must prove that at the time it traded in the defendant company’s stock, it actually relied on a material false or misleading statement made by a defendant. Proof of actual reliance was a barrier to securities fraud cases proceeding as class actions because proof of each absent class member’s actual reliance would overwhelm the Court and destroy the efficiency that the class action procedure is designed to achieve. InBasic v. Levinson,2 the Court removed this obstacle by adopting the “fraud on the market” rebuttable presumption of reliance.3 This presumption is “that the price of stock traded in an efficient market reflects all public, material information – including material misstatements.”4 When the presumption is invoked, “anyone who buys or sells the stock at the market price may be considered to have relied on those misstatements.”5 Basic held that to invoke the presumption of reliance, the plaintiff must “allege and prove: (1) that the defendant made public misrepresentations; (2) that the misrepresentations were material; (3) that the shares were traded on an efficient market; and () that the plaintiff traded the shares between the time the misrepresentations were made and the time the truth was revealed.”6 Basic also granted defendants the right to rebut the presumption by “[a]ny showing that severs the link between the alleged misrepresentation and either the price received (or paid) by the plaintiff, or his decision to trade at a fair market price.”7 The Court offered several examples of evidence that would sever the link, including that the market price of the company’s stock was not “affected by [the defendants’ alleged] misrepresentations.8 Unfortunately, Basic did not expressly hold that defendants could rebut the presumption at the class certification stage; it was silent on this timing issue. In the past few years, the securities class action bar has wrangled over what plaintiffs must prove to invoke the presumption of reliance and when the defendants may offer evidence to rebut it. The upshot has favored plaintiffs. In Halliburton I, the Court held that to invoke the presumption of reliance on a motion for class certification, plaintiffs do not need to establish “loss causation.” In plain English, plaintiffs need not prove their losses were caused by defendants’ allegedly material false statements.9 In Amgen, the Court held that plaintiffs need not prove the materiality of the alleged misstatement.10 And in Halliburton II, the Court has now held that to invoke the presumption, plaintiffs need not prove “price impact,” i.e., that the alleged misstatement impacted the defendant company’s stock price. When the Defendant is Allowed to Rebut the Presumption is Dispositive Although the Court denied Halliburton most of the relief it sought, the Court did agree that defendants should be permitted to rebut the presumption of reliance at the class certification stage with “appropriate evidence” which includes “evidence that the asserted misrepresentation (or its correction) did not affect the market price of the defendant’s stock.”11 Halliburton II is broadly significant for two reasons. First, in the 25+ years between the time Basic and Halliburton II were decided, the majority of courts had refused defendants the opportunity to rebut the presumption at the class certification stage.12 Because approximately 75% of class certification motions are granted,13 only 7% reach the summary judgment stage,14 and only one-third of 1% of securities class actions are tried,15 the courts that have denied defendants the right to rebut the presumption at the class certification stage have effectively barred defendants from ever rebutting the presumption and granted plaintiffs an immense settlement advantage. As the Supreme Court has recognized repeatedly, and Justice Scalia bluntly observed during the Halliburton II oral argument, “[o]nce you get the class certified, the case is over.”16 More than 90% of securities cases certified as class actions are settled shortly after certification is granted. These actions are not necessarily settled because they are meritorious. The in terrorem value of class certification forces defendants to settle even the most meritless of certified securities fraud class actions.17 Second, both the Court’s opinion and Justice Thomas’ concurring opinion discuss the current state of market efficiency theory which, at a 30,000 foot level, now recognizes that even generally efficient markets can be inefficient at certain times and the market for a specific company’s stock can be inefficient for a variety of reasons. Halliburton II does not address how plaintiffs can establish market efficiency. Nevertheless, the decision contains a wealth of information that the majority accepts as correct and that Justice Thomas’ concurrence relies on in arguing Basic should be reversed. Where the evidence warrants, defendants should use these arguments at the class certification stage to (i) argue that plaintiffs now bear a higher burden in establishing an efficient market, and (ii) to oppose class certification to refute plaintiff’s claim that the company’s stock was efficient during the relevant time frame. At a minimum, defendants: (1) should not admit that the market for their company’s stock was efficient, and (2) should, early in the case, retain an economist to conduct a market efficiency study of the market for the defendant company’s stock generally and an analysis of the alleged misstatement’s impact or lack thereof on the price of the defendant company’s stock.