Since last November -- when the Supreme Court granted certiorari in Halliburton Co. v. Erica P. John Fund, Inc., No. 13-317 ("Halliburton II"), to reconsider the viability and operation of the "fraud on the market" presumption of reliance in securities class actions -- issuers and their directors, officers and outside professionals have been waiting with bated breath for a decision that had the potential to fundamentally alter, or even eliminate, securities fraud class actions as they have existed for decades. The Supreme Court decided Halliburton II yesterday. In an opinion by Chief Justice Roberts, the Court held that defendants in proposed class actions under Section 10(b) of the Exchange Act and SEC Rule 10b-5 may, at the class certification stage, seek to rebut application of the "fraud on the market" doctrine with evidence that alleged fraudulent misrepresentations did not affect the market price of the security at issue. Although the Justices unanimously agreed that defendants should have this additional, early opportunity to challenge application of the "fraud on the market" presumption, the Court stopped short, by a 6-3 vote, of overruling Basic Inc. v. Levinson, 458 U.S. 224 (1988), and abolishing the "fraud on the market" doctrine altogether.
The "fraud on the market" doctrine, which the Court first endorsed more than 25 years ago in Basic, posits that the price of a security trading in an efficient market reflects all publicly available information about that security, and gives rise to a rebuttable presumption that investors rely on misrepresentations that are reflected in the prices of such securities at the time they transact. Because the "fraud on the market" doctrine can eliminate the need for individualized proof of reliance by each member of a proposed plaintiff class, it is a central tool in the arsenal of securities fraud class action plaintiffs and their counsel. However, in Basic, the Court expressly recognized that "[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, will be sufficient to rebut the presumption of reliance." Basic, 485 U.S. at 248. As a logical matter, under that reasoning, evidence that a given misrepresentation had no impact on the market price of a security would defeat application of the "fraud on the market" doctrine. Thus, prior to Halliburton II, the Second and Third Circuits had recognized that defendants in proposed securities fraud class actions could present evidence of that nature, seeking to rebut the "fraud on the market" presumption and thus avoid certification of a plaintiff class. The Fifth Circuit, in Halliburton II itself, reached the opposite conclusion.
The Supreme Court's decision in Halliburton II allows defendants an additional opportunity to litigate, at the class certification stage, questions concerning the economic impact of allegedly fraudulent misstatements. Presumably, defendants will litigate those issues through the use of statistical and economic evidence that, prior to Halliburton II, they might not have been able to present until after the certification of a plaintiff class. Thus, Halliburton II, while not overruling Basic as some defendants had hoped would occur, nonetheless represents a shift in favor of defendants of the balance of power in private federal securities fraud cases.