The Supreme Court has issued its decision in Halliburton Co. v. Erica P. John Fund, Inc., unanimously holding that defendants may attempt to defeat certification of a class of investors by introducing evidence that alleged misstatements had no impact on stock price. In an opinion delivered by Chief Justice Roberts, the Court also declined generally to deprive securities class action plaintiffs of the presumption of reliance based on the fraud-on-the-market theory as first recognized in Basic Inc. v. Levinson.
In Basic, the Court recognized the difficulty inherent in proving at the class certification stage that each individual shareholder actually relied on specific alleged misrepresentations in buying or selling securities. As a practical matter, such a requirement would make securities class actions all but impossible. For this reason, the Court ruled that a proposed class would be entitled to a rebuttable presumption of class-wide reliance if the plaintiffs could show (1) that the company’s stock traded on an efficient market and (2) that the alleged misstatements were both public and material. The Court based its reasoning on the “efficient market hypothesis” that stock prices on efficient, well-developed markets quickly incorporate the material information available to investors.
Following Basic, a circuit split developed with some Courts of Appeals, including the Fifth Circuit in the case of Halliburton, holding that a securities class action defendant could not introduce evidence at the class certification stage that, despite the efficient market hypothesis, the misstatements at issue had no actual impact on the company stock price. In rejecting this approach, the Court recognized that defendants are already allowed to introduce such evidence at the merits stage, as well as at the class certification stage to rebut a showing of overall market efficiency. Although the practical difficulties of proving class-wide reliance counsel for allowing plaintiffs to continue to establish price impact indirectly, the Court found no reason to prevent a defendant from introducing direct evidence that an alleged misrepresentation had no effect on the company’s stock price even at the early class certification stage.
As regards the invitation to completely overturn Basic, the Court noted the absence of the “special justification” needed to directly overturn a prior ruling, as well as Congress’s ability to step in if it determines that the Court has misinterpreted the securities statutes. The Court also disagreed with the argument advanced by petitioners that recent developments in economic theory undermined the Basic Court’s assumptions about market efficiency. The Court stated that Basic’s presumption of reliance is premised on the “fairly modest premise” that “market professionals generally consider most publicly announced material statements about companies, thereby affecting stock prices,” not on strict academic theories of market efficiency. The Court similarly declined to require that plaintiffs affirmatively prove price impact directly at the class certification stage.
Despite the retention of the Basic presumption of reliance, the Halliburtondecision is a significant win for securities class action defendants because of the particular importance attached by parties to achieving or preventing class certification.