On June 23, 2014, the United States Supreme Court issued a highly anticipated unanimous decision in Halliburton v. Erica P. John Fund, Inc. The Court reaffirmed the "fraud-on-the-market" doctrine, established in the 1988 Basic v. Levinson decision, that has been a cornerstone of modern securities class action litigation for the past 25 years. The Court, however, held that defendants may defeat theBasic presumption at the class certification stage through proof that any alleged misrepresentation did not impact the price of the relevant securities, a holding that will provide significant benefit to defendants in securities cases.
Basic greatly facilitated the class treatment of securities fraud claims by instituting a presumption of reliance for securities class action claims. Rather than requiring each individual plaintiff to prove that he relied on the alleged misrepresentation or omission, Basic's presumption of reliance holds that in an efficient market, the market price of any given stock reflects the alleged misrepresentation or omission. As such, plaintiffs can be shown to have relied on an efficient market, leaving defendants the tough task of challenging whether or not the market is efficient.
In the Halliburton case, Halliburton attempted to rebut plaintiffs' invocation of the Basic presumption of reliance by arguing that any alleged misrepresentation or omission had no "price impact" on its stock price, and as such, individual reliance was the appropriate standard, and class certification should be denied. The District Court disagreed, and certified the class, with the Fifth Circuit affirming the decision of the District Court. The Supreme Court granted certiorarion two questions: first, whether the Court should "overrule or substantially modify" Basic, and second, in a case where the Basicpresumption is invoked, whether the defendant may rebut the presumption at the class certification stage by introducing evidence that the alleged misrepresentations did not distort the market price of its stock.
The Court declined to overrule Basic or substantially modify it by requiring plaintiffs to prove that the alleged misrepresentation or omission affected a stock price. The Court held that any modification to the Basic presumption of reliance must come from Congress rather than the Supreme Court. Instead, the Court modified the existing rule, pursuant to which defendants may not rely on evidence of a lack of price impact to rebut the Basic presumption and defeat class certification. The Court opined that this "restriction makes no sense, and can readily lead to bizarre results." Going forward, defendants in securities class actions may now defeat the Basicpresumption through evidence that an alleged misrepresentation or omission did not actually affect the market price of a stock.
The Halliburton decision affords defendants in securities class action litigation a valuable new tool in the early defense of such cases. Defendants will be able to challenge and sometimes defeat class certification in a number of class actions that would otherwise have survived due to Basic. It is unlikely that the decision in Halliburton will result in a decrease in securities class actions being filed, but it will improve defendants' prospects for defeating class certification, an important impact given the tremendous effect class certification has on the settlement leverage of securities plaintiffs.