June 23, 2014, the U.S. Supreme Court released its decision in Halliburton v. Erica P. John Fund, No. 13-317. As discussed in our previous alert, the decision was easily one of the most eagerly anticipated of the Court's current term and involved fundamental questions about the viability of securities fraud class action litigation. At issue was the so-called "fraud-on-the-market" presumption of reliance created by the Court in Basic v. Levinson some 25 years ago, which allows plaintiffs to obtain certification of securities fraud class actions without having to demonstrate each putative class member's individual reliance on an alleged misrepresentation. This plaintiff-friendly presumption rests on the "efficient market" theory – that is, the idea that the share price of a publicly traded security reflects all publicly available information about that security, including alleged misrepresentations. A showing of individual reliance, therefore, is unnecessary if the alleged misrepresentation was public since the average shareholder relies on a company's share price when buying or selling shares. The loss of the "fraud-on-the market" presumption would have made it much harder, if not impossible, for plaintiffs to pursue claims for securities fraud under § 10(b) of the 1934 Act and/or Rule 10b-5 as class actions – a major concern for law firms specializing in such work. As many predicted, however, such concerns were overblown. In its unanimous decision, the Supreme Court refused to overturn the "fraud-on-the-market" presumption.
The Supreme Court did, however, provide defendants with an important tool at the all-important class certification stage. Plaintiffs typically must introduce indirect evidence of price impact to establish entitlement to the presumption of reliance (via evidence of market efficiency and the public nature of an alleged misrepresentation). Now, defendants are allowed to rebut the presumption of reliance using evidence that no "price impact" had occurred. "Defendants must be afforded an opportunity before class certification to defeat the presumption through evidence that an alleged misrepresentation did not actually affect the market price of the stock." (Emphasis supplied).
This decision cements class certification as a key battleground for securities class actions (provided, of course, that the action survives a motion to dismiss) and will give economists and damage experts new work as defendants try to determine whether they can provide evidence to rebut the presumption of reliance.
Britt Latham was quoted in a piece for Law360 discussing the Halliburton case, which was published June 23, 2014. The full article is available here.