“Investors can recover damages in a private securities fraud action only if they prove that they relied on the defendant’s misrepresentation in deciding to buy or sell a company’s stock.” Halliburton Co. v. Erica John Fund, Inc., 573 U.S. ___, slip. op. at 1 (June 23, 2014) (“Halliburton II”). Basic v. Levinson, 485 U.S. 224 (1988), held that investors could satisfy this requirement by invoking the presumption that the price of stock traded in an efficient market reflects all public material information—including material misstatements—and that anyone who buys or sells the stock at market price may be considered to have relied on those misstatements. 1 On June 23, 2014, the Court confirmed that defendants in a private securities class action can rebut this presumption at the class certification stage by, among other things, showing that the alleged misrepresentation did not actually affect the stock’s price, that is, that the misrepresentation had no price impact. Halliburton II, slip. op at 1-2, 18. In many ways, the Court’s ruling merely confirmed what Basic had already said, including the standards, such as materiality, necessary to invoke the presumption. However, the Court’s 4-3 split in Basic, its reluctance to consider these issues in Halliburton I, 2 the Court’s intervening opinion in Amgen Inc. v. Connecticut Retirement Plans and Trust Funds (which held that materiality need not be shown to obtain class certification), 3 left the outcome substantially in doubt. Significantly, however, a hypothetical in the Court’s opinion calls into question whether or not “no price impact” can be established based solely on evidence that the misrepresentation did not prompt an aberrational stock price change on the date that the misrepresentation was first published. If so, the showing required to rebut the Basic presumption (and thus defeat class certification) has been substantially lessened in jurisdictions, such as the Fifth Circuit, which have previously required that the defendant demonstrate “both that the stock price did not increase when the misrepresentation was announced, and that the price did not decrease when the truth was revealed.” 4 Efforts should be made to preserve that argument in future cases. Back to the Basics. Halliburton II largely confirms what Basic already stated. Basic arose in the context of a case that, like Halliburton II, had been certified as a class action, but, unlike Halliburton II, the district court later disposed of by summary judgment on grounds that the alleged misrepresentations were immaterial. 5 While unanimously affirming the Sixth Circuit’s reversal of the district court’s summary judgment, a depleted and divided Court in Basic narrowly adopted (4-3) the district court’s “fraud on the market” presumption. 6 The Court also agreed with the district court (albeit in dicta) that the presumption could be rebutted. 7 Halliburton II did little to change that Basic guidance. A comfortable six-Justice majority did reaffirm Basic’s essential premise, that is, that reliance can be presumed if investors purchase or sell at market price a stock whose price reflects public information about the company whose shares are traded. 8 In addition, the Court also reaffirmed the four-part showing required to invoke the presumption, namely, (1) that the alleged misrepresentations were publicly known, (2) that they were material, (3) that the stock traded in an efficient market, and (4) that the plaintiff traded the stock between the time the misrepresentations were made and when the truth was revealed. 9 The Court also held that the presumption could be rebutted at the class certification stage—specifically “through evidence that the misrepresentation did not, in fact, affect the stock price.” 10 Importantly though, the hypothetical the Court used to demonstrate its reasoning strongly suggests that the Court meant what it said in Halliburton I—that the reasons for a stock decline following a corrective disclosure have “nothing to do” with reliance 11 —and that the Basic presumption, therefore, can be rebutted based solely on the absence of an aberrational price change at the time the misrepresentation is made. Other language and analysis in Halliburton I and II, including the Court’s repeated descriptions of what price impact means and the relationship between reliance and price impact and price impact and loss causation also supports this view. However, the Court’s reluctance to directly address this issue, especially given the Fifth’s Circuit’s analysis of Amgen, cautions that substantial disagreement may exist among the Justices as to what relevance, if any, stock declines following corrective disclosures have regarding the lack of price impact needed to rebut the Basic presumption. An Event Study. To understand the significance of the Court’s hypothetical, one must first understand the event study evidence illustrated. An event study compares a stock’s financial performance over a given period of time with a reference index (market or industry) to calculate, using regression analysis, the parameters of the typical relationship between that stock’s actual returns (closing price on consecutive days) and the reference index. This baseline, in turn, gives the analyst the ability to differentiate the extent to which price changes can be attributed to company specific events (such as news stories about that company) from general market or industry specific forces. If the difference between the expected return and the actual return on a pre-selected event date is statistically significant, the aberration can be attributed to company-specific factors rather than general market or industry fluctuations. Further analysis can then be used to isolate a specific event of concern from other events that may coincide on that same date to estimate the price change attributable to a specific statement or news story.As one might expect, an analysis of several different pre-selected events can be used to establish an efficient market for that stock, that is, that the market price for a company’s stock tends to respond to publicly reported events pertinent to that company. In fact, Erica P. John Fund, Inc. (“EPJ Fund”), the lead plaintiff, had submitted just such a study to demonstrate an efficient market for Halliburton stock. 12 However, an event study can also be used to determine the impact that a specific event (such as a misrepresentation or corrective disclosure) had on stock price. In addition to a more global challenge of the Basic presumption, the specific issue in Halliburton II concerned whether evidence that showed that a specific misrepresentation had no price impact could be used to rebut the presumption that investors had relied on the misrepresentation. According to Halliburton, if, in fact, the misrepresentation had no impact on the market price for that stock then investors could not have relied on the representation simply by purchasing or selling stock at the market price. Thus, the defendant could and should be permitted to rebut the presumption of reliance by such evidence. The Supreme Court agreed. 13 The Event Study Hypothetical. In concluding that rebuttal evidence should be permitted, the Court emphasized the “bizarre results” that would follow if a defendant were not allowed to present such “no price impact” evidence. To illustrate this point, the Court offered a hypothetical that strongly implied that the absence of price impact could be established based solely on the misrepresentation event, that is, the price change, if any, that occurred when the misrepresentation was published. In the words of the Supreme Court: Suppose a defendant at the certification stage submits an event study looking at the impact on the price of its stock from six discrete events, in an effort to refute the plaintiffs’ claim of general market efficiency. All agree the defendant may do this. Suppose one of the six events is the specific misrepresentation asserted by the plaintiffs. All agree that this too is perfectly acceptable. Now suppose the district court determines that, despite the defendant’s study, the plaintiff has carried its burden to prove market efficiency, but that the evidence shows no price impact with respect to the specific misrepresentation challenged in the suit. The evidence at the certification stage thus shows an efficient market, on which the alleged misrepresentation had no price impact. And yet under EPJ Fund’s view, the plaintiffs’ action should be certified and proceed as a class action (with all that entails), even though the fraud-on-the-market theory does not apply and common reliance thus cannot be presumed. 14 In other words, no question exists that a defendant could refute market efficiency using an alleged misrepresentation as one of several pre-selected events. But, it would make no sense to presume reliance if the event study revealed that the misrepresentation event had no price impact even if the remaining events reflected market efficiency. Thus, an event study that showed that the misrepresentation had no price impact, that is, that actual returns for the date in question did not vary abnormally from predicted returns, would effectively rebut reliance. Noticeably, the hypothetical does not include a corrective disclosure as one of the six events compromising the study. The omission is especially peculiar given the key role stock declines following corrective disclosures played (as seen below) in the Fifth Circuit’s analysis in both Halliburton I and II. Nor does the Court’s opinion give any reason to assume that the Court anticipated that the effect of corrective disclosure would be accounted for in any regression analysis of the misrepresentation event. Thus, the hypothetical would seem to imply that an event study could rebut the Basic presumption without addressing the subsequent effect of corrective disclosures on stock price. The Price Impact / Loss Causation Distinction. Undeniably, the language and history of Halliburton I and II show a conscious effort by the Supreme Court to put the focus of price impact evidence on the misrepresentation event, that is, how the misrepresentation affects market price at the time it is made. Hence, it makes sense that the defendant’s rebuttal evidence would focus on that event. If anything though, when viewed in the light of Halliburton II, the bright line distinction that Halliburton I draws between reliance and loss causation may mean that the Court does not consider stock price changes following corrective disclosures even relevant or admissible to establish a misrepresentation’s price impact. Halliburton I began with the district court’s initial denial of class certification on grounds that plaintiffs had failed to meet their burden of proving loss causation. 15 Under Fifth Circuit precedent, to presume reliance, plaintiffs needed to prove that “the misstatement actually moved the market,” 16 which the Fifth Circuit equated with loss causation, 17 a point which the district court also emphasized. 18 This requisite showing could be made “in one of two ways: (1) demonstrating an increase in the stock price after the release of false positive news; or (2) demonstrating a decrease in price following a corrective disclosure.” 19 Since Plaintiffs had “no evidence of false, nonconfirmatory positive statements causing a positive effect on the stock price,” 20 certification would turn on proof of the second alternative, which the district court elaborated also required the plaintiff to “demonstrate that there is a reasonable likelihood that the cause of the decline in price is due to the revelation of the truth and not the release of the unrelated negative information.” 21 Failing to meet that “high burden”, 22 the district court reluctantly denied class certification. 23 On appeal, the Fifth Circuit concluded that the district court had correctly recognized and applied Fifth Circuit precedent, 24 specifically affirming the district court’s denial of class certification on grounds that Plaintiffs had failed to prove loss causation. 25 In its subsequent review, the Supreme Court observed that the Fifth Circuit had reasoned that “in order to invoke a rebuttable presumption of reliance, EPJ Fund needed to prove that the decline in Halliburton’s stock was ‘because of the correction to a prior misleading statement’ and ‘that the subsequent loss could not otherwise be explained by some additional factors revealed then to the market,’” 26 or the second of the two alternatives showings required by the district court. Tellingly, the Supreme Court also remarked that: “This is the loss causation requirement as we have described it.” The Court, however, flatly rejected the correlation that the Fifth Circuit drew between loss causation and reliance, stating that: The fact that a subsequent loss may have been caused by factors other than the revelation of a misrepresentation has nothing to do with whether an investor relied on the misrepresentation in the first place, either directly or presumptively through the fraud-on-the-market theory. 27 Remarkably, that statement has been given little weight since. However, Halliburton II clarifies that the Basic presumption merely allows a Plaintiff to establish indirectly what price impact evidence shows directly, that is, the affect that a misrepresentation has on a stock price. 28 In other words, an efficient market for a particular stock allows a court to presume price impact which allows a court to presume reliance. If that’s true though, that a corrective disclosure’s effect on stock price has nothing to do with reliance also implies that a corrective disclosure’s effect on stock price has nothing to do with the evidence needed to negate that presumption either. Price Impact Defined. The language that the Supreme Court consistently uses in Halliburton I and II to define price impact also repeatedly emphasizes that the price impact event that Supreme Court considers relevant consists of the market response to the publication of the misrepresentation and not the market response to the publication of a corrective disclosure. After insisting that the effect of a corrective disclosure on stock price—the touchstone of loss causation—had nothing to do with reliance, the Court in Halliburton I went on to consider Halliburton’s argument that the lower court’s actual inquiry concerned “price impact” and not “loss causation”. 29 Significantly, although the Court adopted Halliburton’s catch-phrase “price impact” to describe the relevant showing, nothing in what the Court said suggested that the Court also adopted what Halliburton meant. Halliburton used “price impact” synonymously with the two alternative showings considered by the district court, including the impact of a corrective disclosure, stating, for example, that: “[EPJ Fund’s] only burden under the Fifth Circuit caselaw was to show price impact, and they could show it either of two ways. . . . They can show price inflation upon a misrepresentation, which, as this Court made clear in Dura, is not synonymous with loss causation. Or failing that—and they could not show that here because their own proof showed that none of the alleged misrepresentations moved the market. So, the alternative way to show price impact is simply to show a price decline following a corrective disclosure. 30 However, despite referencing this portion of Halliburton’s argument, the Supreme Court declined to define “price impact” in terms of these alternative showings. Instead, the Court defined price impact more narrowly stating that “[p]rice impact simply refers to the effect of a misrepresentation on a stock price” or “whether the alleged misrepresentations affected the market price in the first place.” 31 In Halliburton II, the Supreme Court maintained and built upon this narrow definition, describing “price impact” as “showing that the alleged misrepresentation did not actually affect the stock’s price,” 32 as concerning “whether the alleged misrepresentations affected the market price in the first place,” 33 and as the “fact that a misrepresentation was reflected in the market price at the time of the transaction.” 34 Price Impact vs. Loss Causation. In retrospect, Halliburton I also effectively drew the same bright line distinction between loss causation and price impact that it drew between loss causation and reliance. In the words of the Court: As we have explained, loss causation is a familiar and distinct concept in securities law; it is not price impact. At the time, the Court’s reference to what it had explained may not have been self-evident, but Halliburton II clarifies the evidentiary role “price impact” plays in establishing reliance in the class action context. According to Halliburton II, price impact is reliance. The four-part Basic test only allows a plaintiff to establish indirectly what price impact establishes directly. Therefore, in the Court’s view, its assertion—that a corrective disclosure caused a subsequent decline in stock price had nothing to do with reliance—applied equally to price impact. A Conceptual Distinction Only? Unfortunately, the Supreme Court’s repeated complaints about the Fifth Circuit’s use of the phrase “loss causation” in Halliburton I largely obscured whatever significance the Court’s language may have had. At the end of its discussion, while foreshadowing a willingness to consider price impact evidence, the Supreme Court refused Halliburton’s invitation to view the Fifth Circuit’s opinion in that light based on the Fifth Circuit’s “repeated and explicit references to ‘loss causation,’” 35 expressly declining to consider whatever the Fifth Circuit may have “meant to say” [price impact] because of “what it said” [loss causation]. 36 In fact, even when pointing to language in the Fifth Circuit’s opinion “consistent with a ‘price impact’ approach,” 37 the Supreme Court referred ambiguously to a passage that while identifying the “main concern” as “whether allegedly false statements actually inflated the company’s stock price” also reasoned that a decline in price following a corrective disclosure would infer “that the original, allegedly false statement caused an inflation in the price to begin with.” 38Accordingly, some may interpret Halliburton I as drawing a conceptual distinction (i.e., that loss causation and price impact were distinct concepts) and not an evidentiary one (i.e., that evidence pertinent to loss causation was not also pertinent to price impact). That’s certainly what the Fifth Circuit believed. On remand, the Fifth Circuit still maintained that “[p]rice impact [could] be shown either by an increase in price following a fraudulent public statement or a decrease in price following a revelation of the fraud.” 39 “To successfully prove a lack of price impact,” the Fifth Circuit reasoned, “Halliburton would thus be required to demonstrate both that the stock price did not increase when the misrepresentation was announced, and that the price did not decrease when the truth was revealed.” Enter Amgen. The Court in Halliburton II also carefully avoided addressing the significance of stock price declines following corrective disclosures, even though the Fifth Circuit’s analysis of Amgen indisputably implicated it, perhaps (but not necessarily) signaling disagreement among the majority as to the relevance of such subsequent price changes to prior price impact. After articulating the price impact standard set forth above, the Fifth Circuit concluded that the Supreme Court’s post-Halliburton I decision in Amgen precluded proof of no price impact at the class certification stage. In Amgen, the Supreme Court considered whether materiality, one of the elements of the Basic presumption, must be proven (or may be rebutted) at the class certification stage. 40 For the Supreme Court, the “privotal inquiry [was] whether proof of materiality is needed to ensure that the questions of law or fact common to the class will predominate over any questions affecting only individual members as the litigation progresses.” 41 Since negating materiality, an essential element of any Section 10(b) claim, would necessarily “end the case for one and for all,” no risk existed that individual reliance issues would predominate if resolution of materiality was relegated to the merits. 42 Using this same logic, the Fifth Circuit reasoned that the same could be said of price impact. In the Fifth Circuit’s eyes, to successfully prove no price impact, the defendant would have to show that the price did not drop when the truth was revealed. 43 If that were so, no risk existed that individual issues would predominate because no plaintiff could establish loss causation, also an essential element of a Section 10(b) claim. 44 Back on review, however, the Supreme Court declined to address this argument. Rather than agree or disagree that proof of no price impact would negate loss causation, the Court chose, instead, to focus on the central role price impact plays in the Basic presumption. Essentially, the Court reasoned that the publicity and market efficiency at the heart of the fraud-on-the-market presumption merely indirectly infer price impact. 45 And without price impact there would be no presumption of reliance and thus no predominance of common questions or law or fact in the first place. 46 Thus, no reason existed to exclude direct evidence of price impact at the class certification stage because without such price impact common questions or law or fact would not predominate to begin with. That having been said, the Court’s painfully non-committal response 47 to the argument that had prevailed before the Fifth Circuit could reflect a disagreement among the majority on the showing required to rebut price impact. Of course, the Court may have simply decided to focus on what it regarded as the more important argument. But that does not explain why the Court would not agree or disagree with the Fifth Circuit’s analysis even briefly. Conclusion. Regardless, the Halliburton II hypothetical strongly suggests that the standards for rebutting the Basic presumption may be far less than what jurisdictions, such as the Fifth Circuit, require. Future cases, therefore, even those cases, such as Halliburton, where stock declines caused by corrective disclosure cannot be shown or can be rebutted, should be careful to preserve this argument.