Can a corporation defending against a stock fraud class action defeat class certification by using evidence that its actions had no effect on the stock’s price? In Halliburton Co. v. Erica P. John Fund, Inc., Docket No. 13-317, the Supreme Court of the United States will soon address this question.
Halliburton involves a class of shareholders (the “Shareholders”) alleging that Halliburton Company (the “Company”) made fraudulent misrepresentations about its business that artificially inflated its stock price. The Shareholders claim that the stock price fell when the truth was ultimately revealed, which financially harmed them because they bought the stock after the misrepresentations were made and before their falsehood was discovered. After protracted litigation with numerous appeals, the Company and the Shareholders ultimately agreed that the Shareholders meet Rule 23(a)’s numerosity, commonality, typicality, and adequacy of representation requirements for class certification.
The Shareholders and the Company disagree over whether the Shareholders meet Rule 23(b)(3)’s requirement that common factual or legal issues predominate among the class members, which the Shareholders must prove in order to obtain class certification. Reasoning that the Company was not permitted to provide evidence that its actions had no effect on the stock’s price, the District Court found that the Shareholders met the Rule 23(b)(3) predominance requirement and certified the class. The Company disagreed and appealed to the Fifth Circuit, which affirmed. 718 F.3d 423 (5th Cir. 2013). The Supreme Court granted the Company’s appeal from the Fifth Circuit to resolve a narrow question related to how Rule 23(b)(3)’s predominance requirement operates in securities fraud cases like Halliburton.
As the Fifth Circuit noted, courts’ assessment of whether Rule 23(b)(3)’s predominance requirement has been met in a securities fraud class action often turns on the issue of reliance: whether plaintiffs in classes like the Shareholders can prove that they all relied on statements made by defendants like the Company. In Basic Inc. v. Levinson, 485 U.S. 224 (1988), the Supreme Court adopted the “fraud-on-the-market” presumption for securities fraud class actions (“FOMP”), which created a rebuttable presumption that a plaintiff who purchased a company’s stock at market price relied on that company’s statements. FOMP reasons that because the market in which the stock is traded is efficient, it instantaneously incorporates all material, public representations made by the company into the stock’s price; thus, anyone who bought a company’s stock after that company made fraudulent statements would have detrimentally relied on those statements.
The Court in Basic noted that corporate defendants could defeat FOMP by proving that their statements did not affect the share price. The Court in Basic did not decide whether FOMP could be rebutted at the class certification stage, which is the issue inHalliburton. More specifically, the issue facing the Supreme Court in Halliburton is whether the Company can use evidence showing that its statements did not affect its share price in order to defeat FOMP at the class certification stage.
So far, only the Company has filed its merits brief with the United States Supreme Court. In its brief, the Company makes three arguments: (1) Basic should be overruled because its reliance on purely efficient markets is faulty and unrealistic; (2) even if FOMP is still viable, it should be modified to require class plaintiffs to show that defendant companies’ statements affected the stock price; and (3) even if Basic and FOMP remain doctrinally untouched, the absence of any effect on price can rebut FOMP at the class certification stage. How the Court will decide is anyone’s guess, but as the Company pointed out in its brief, four Justices on the current Court recently acknowledged the weakness of Basic’s reasoning in Amgen Inc. v. Conn. Ret. Plans and Trust Funds, 133 S.Ct. 1184 (2013). Only time will time if the Company can persuade a fifth Justice that it should be permitted to defend against class certification by using evidence that its statements had no effect on its share price.