On November 15, in a much-anticipated move, the Supreme Court granted certiorari in Halliburton Co. v. Erica P. John Fund, Inc., No. 13-317, to reexamine the "fraud on the market" doctrine -- a central tool for securities fraud class action plaintiffs that the Court first articulated more than a quarter century ago in Basic Inc. v. Levinson, 485 U.S. 224 (1988). The "fraud on the market" doctrine 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. Armed with the "fraud on the market" doctrine, plaintiffs in private actions under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 can establish their own reliance, and the reliance of proposed class members, on alleged misstatements they never saw and of which they may have been entirely unaware. Academic literature subsequent to Basic has questioned in some respects the economic theory that underpins the "fraud on the market" doctrine. And earlier this year, in Amgen, Inc. v. Conn. Ret. Plans & Trust Funds, 133 S. Ct. 1184 (2013), Justices Alito, Kennedy, Scalia and Thomas signaled their willingness to revisit Basic and the appropriate contours of the presumption it created.
The Court's grant of certiorari last Friday is the latest chapter in a multi-year battle over class certification in Halliburton, and marks the case's second trip to the Supreme Court. Two years ago, reversing a Fifth Circuit decision, the Court held that, at the class certification stage, the plaintiff in a private action under Section 10(b) and Rule 10b-5 need not show loss causation. However, the Court did not address the defendants' argument that, at that stage, they could defeat application of the "fraud on the market" presumption of reliance by demonstrating that the alleged misrepresentations on which the plaintiff based its claims had no impact on the market price of the Halliburton common stock. Erica P. John Fund, Inc. v. Halliburton Co., 131 S. Ct. 2179 (2011). On remand, defendants raised that argument unsuccessfully. Affirming a district court's certification of a plaintiff class, the Fifth Circuit reasoned, in light of Amgen, that "the fraud-on-the-market elements that should be addressed at class certification are limited to those matters which bear on common question predominance and the propriety of class resolution: trade timing, market efficiency, and publicity (but not materiality). . . . The Amgen Court's analysis leads to the conclusion that price impact fraud-on-the-market rebuttal evidence should not be considered at class certification." Erica P. John Fund, Inc. v. Halliburton Co., 718 F.3d 423, 432, 435 (5th Cir. 2013). Notably, contrary to the Fifth Circuit's decision, the Second and Third Circuits have held that defendants may defeat application of the "fraud on the market" doctrine by making a sufficient showing that an alleged misstatement had no impact on the market price of the relevant security. See In re Solomon Analyst Metromedia Litig., 544 F.3d 474, 484 (2d Cir. 2008); In re DVI, Inc. Sec. Litig., 639 F.3d 623, 638 (3d Cir. 2011).
Defendants in Halliburton now ask the Supreme Court to address two questions: (1) whether the holding in Basic should be overruled or substantially modified to the extent it recognizes a presumption of classwide reliance derived from the "fraud on the market" theory; and (2) whether, in a case where the plaintiff invokes the presumption of reliance to seek class certification, the defendant may rebut the presumption and prevent class certification by introducing evidence that the alleged misrepresentations did not distort the market price of the security at issue. Depending on how the Court answers those questions, its decision could have a profound impact on the ability of investors to bring securities fraud class actions, the ability of class action plaintiffs to obtain monetary settlements, and the strategies by which public companies and their directors, officers and outside professionals defend such cases. Thus, Halliburton promises to be another in the Court's series of momentous decisions over the past decade concerning the private right of action under Section 10(b) and Rule 10b-5.
The Supreme Court is expected to issue a decision in Halliburton by mid-2014.