In 2013, total settlement dollars from securities class actions totaled $4.8 billion.1 Due in part to the large sums of money involved, securities class action litigation has become an expensive proposition for plaintiff and defense counsel alike. Against that backdrop, interest in the outcome of Halliburton Co. v. Erica P. John Fund was high as the Supreme Court was going to hear a case that goes to the heart of the legal underpinnings of securities class action litigation.
In general, plaintiffs in a class action securities claim under Securities Exchange Act Rule 10b-5 must prove that they relied on a misrepresentation of an issuer when transacting in the securities of that issuer. In Basic Inc. v. Levinson, the Supreme Court adopted the economic theory known as the “efficient capital markets hypothesis,” which assumes that capital markets integrate all public information into the market price of a security, therefore the price of any transaction in that security is affected by any known material misrepresentation. The resulting “fraud on the market presumption” lets plaintiffs avoid the legal hurdle of proving that they relied on a particular misrepresentation when purchasing the security. The presumption also permits classes of plaintiffs to satisfy the class action requirement that each individual claim is sufficiently similar to justify litigation as a class.
Presented with an opportunity to dramatically rework its approach to securities class action litigation by getting rid of the fraud on the market presumption in Halliburton Co. v. Erica P. John Fund, the Supreme Court declined to do so. Instead, the Court decided to permit defendants to present evidence at the class certification stage in order to rebut the presumption that the misrepresentation in question had any connection to the market price of its securities. This provides defendants with the opportunity to defeat class action securities litigation at an earlier (and less expensive) stage of litigation. In addition, by rebutting the presumption, defendants will cause each shareholder in the class to prove that they relied on the misstatement in question – possibly undermining the ability of the claim to be brought as a class action.