On March 5, 2014, the Supreme Court heard oral arguments in the landmark securities class action case, Halliburton v. Erica P. John Fund, Inc., to decide whether the Court should overrule or modify its previous ruling in Basic Inc. v. Levinson, 485 U.S. 224 (1988). TheBasic decision recognizes a presumption of class-wide reliance based on "fraud-on-the-market," as opposed to specific reliance on fraudulent misrepresentations or omissions. The Supreme Court also considered whether a company may rebut a presumption of reliance (to prevent class certification) by introducing evidence that the alleged misrepresentations had no impact on the market price of its stock.
The Supreme Court's line of questioning over the hour-long oral argument suggests that the Court remains largely divided whether to overrule, modify or uphold the over 25-year-old precedent announced in Basic. In Basic, the Court recognized a "fraud on the market" theory, which presumes that an efficient market incorporates all public information about a company in determining the company's stock price, including allegedly misleading statements. This presumption allows investors to satisfy the reliance requirement of a Section 10(b) (of the Securities Exchange Act) and SEC Rule 10b 5 in a securities fraud class action without demonstrating actual reliance upon any specific misrepresentations. In practical effect, the Court's "fraud on the market" theory has allowed plaintiffs to satisfy the requirements for class certification easily, leading to large class action settlements.
At least four of the justices on the liberal wing of the Court expressed varying degrees of support Basic. Justice Kagan pointed out that Congress had enacted securities reforms yet declined to overruleBasic. Justice Kennedy, a frequent swing vote, seemed interested in exploring a compromise short of overturning Basic, namely, adopting a requirement that plaintiffs submit economic "event studies" at the class certification stage to demonstrate that the alleged misrepresentations substantially affected the stock price.
With the Court apparently split, the future of Basic is unclear. While overruling Basic would have a profound impact on the future of securities class action suits (vastly reducing them) the practical impact of a compromise decision is uncertain.