This week, the U.S. Supreme Court (“USSC”) heard oral argument in Haliburton Co. v Erica P. John Fund, Inc. (“Haliburton”). In Haliburton, the USSC is expected to revisit the availability of the “fraud-on-the-market” presumption, which is a powerful tool for securities plaintiffs in the U.S.
The Haliburton decision could shift the U.S. securities class action landscape, and make Canada more attractive to class action plaintiffs.
The “Fraud-On-The-Market” Presumption
The USSC first applied the fraud on the market presumption in its 1988 decision Basic Inc v Levinson. Both in Canada and the U.S., one of the requirements in a securities misrepresentation action is that the plaintiffs establish that they relied on the alleged misrepresentation. The need for thousands of investors to prove reliance on an individual basis can make it effectively impossible to proceed with a class action.
The fraud on the market theory posits that “an efficient market will reflect all publically available information about a company; accordingly, a buyer of the security may be presumed to have reliedon that information in purchasing the security.” This presumption makes it much easier to establish liability on a class-wide basis.
Misrepresentation, Reliance, and Securities Class Actions in Canada
Canadian courts have consistently declined to adopt the “fraud-on-the-market” theory, starting with Carom v. Bre-X Minerals Ltd in which the Ontario court declined to apply American jurisprudence to a Canadian common law claim. Since that time, plaintiffs have made numerous attempts incorporate something like the fraud on the market theory in Canada. However, as recently as last month, the Ontario Court of Appeal confirmed that the “fraud-on-the-market” theory is not available in a common law claim.
Some provincial legislatures have created a statutory cause of action that expressly relieves class members of the burden of proving reliance. The trade off is that these statutory causes of action incorporate procedural limitations, including limits on damages, which make them less attractive to plaintiffs.
Why Haliburton Could Increase Focus on Canadian Securities Class Actions
Depending on the outcome in Haliburton, it may become dramatically more difficult to establish liability on a class-wide basis in U.S. securities class proceedings. If that happens, it could make jurisdictions that have statutory causes of action under which it is not necessary to demonstrate individual reliance, such as Ontario, much more attractive jurisdictions from which to pursue such claims. Plaintiffs would still have to establish that there is a sufficient connection to Ontario, so as to give the Ontario court jurisdiction over the claim. However, in cases where plaintiffs have a choice of pursuing proceedings in the U.S. or a Canadian jurisdiction, the Haliburton decision may have the effect of tilting the balance in favour of Canada. For that reason, both sides of the securities bar will be watching for the Haliburton decision with interest.