In an action that may augur a major blow to securities class-action plaintiffs, the U.S. Supreme Court on November 15 granted Halliburton Co.’s petition for writ of certiorari in Halliburton Co., et al. v. Erica P. John Fund (Case No. 13-317). As a result, the Court will now consider, in the words of the first question presented in Halliburton’s petition, whether it “should overrule or substantially modify the holding of Basic Inc. v. Levinson, 485 U.S. 224 (1988), to the extent that it recognizes a presumption of classwide reliance derived from the fraud-on-the-market theory.”
In Basic Inc., one of the foundational decisions of modern securities law, the Court endorsed the fraud-on-the-market theory, a legal doctrine derived from the so-called “efficient markets” hypothesis in economics. The theory holds that, because securities markets are “efficient,” a security’s market price will always automatically reflect misstatements made by its issuer. In Basic Inc., the Court accepted the theory as the basis for a presumption of reliance, a necessary element of a securities-fraud cause of action under Rule 10b-5, in favor of a plaintiff and putative class members who purchased the security after the misstatement was made and before its inaccuracy came to light.
Without the benefit of the fraud-on-the-market theory, class-action plaintiffs and putative class members as individuals could be required to demonstrate actual reliance on the alleged misstatement. Consequently, an eventual pro-issuer decision by the Court could, depending on its breadth, significantly curtail, or even effectively eliminate, class actions as a viable avenue for securities-fraud claims based on alleged misstatements under Rule 10b-5.
With so much at stake, Halliburton Co. is likely to be one of the most closely watched business cases of the Court’s October 2013 term.