On June 23, 2014, the United States Supreme Court issued its decision inHalliburton Co., et al. v. Erica P. John Fund, Inc., No. 13-317 (2014). The Supreme Court vacated and remanded the decision of the 5th Circuit U.S. Court of Appeals and did not part from its 1988 decision in Basic Inc. v. Levinson, 485 U.S. 224 (1988). In Basic, the Supreme Court established a presumption of reliance for securities fraud claims at the class certification stage where there is evidence of a lack of price impact. In doing so, the Supreme Court rejected Halliburton’s invitation to either overturn the Basic presumption of reliance for securities fraud claims, or require securities class action plaintiffs prove price impact at the class certification stage. However, the Supreme Court agreed with Halliburton that defendants should be permitted to provide evidence of the lack of price impact at the class certification stage, rather than holding off such proof until procedural advancement to the merits stage of a trial.
Halliburton was sued under Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, as amended, by the Erica P. John Fund, Inc. (the “Fund”) which alleged that Halliburton made several misrepresentations about certain liabilities, expected revenue, and the benefits of a merger, which it attempted to correct through a number of subsequent disclosures. When the Fund sought to certify a class, the Federal District Court concluded that, although the class had satisfied all of the requirements of Federal Rule of Civil Procedure 23(a), the Fund did not prove “loss causation” in order to invoke the presumption of reliance, as required by precedent established by the Fifth Circuit. Price impact, the Supreme Court noted, is “Basic’s fundamental premise” and “has everything to do with the issue of predominance at the class certification stage.” Given the choice “between limiting the price impact inquiry before class certification to indirect evidence, or allowing consideration of direct evidence as well . . . we see no reason to artificially limit the inquiry at the class certification stage to indirect evidence of price impact.”
This decision does not drastically change the securities litigation landscape for those frequent targets of securities class actions. However, the decision makes consistent in the Fifth and Seventh Circuits, what was already permitted in the Second and Third Circuits, that defendants may rebut the presumption of reliance at the class certification stage by demonstrating that the alleged misrepresentation did not distort the market price. Previously, the Fifth and Seventh Circuits held that price impact may not be considered at the class certification stage.