In a decision that will provide some cheer to securities class-action defendants, the U.S. Supreme Court today in Halliburton Co., et al. v. Erica P. John Fund (Case No. 13-317), while reaffirming the viability of the “fraud-on-the market” theory and the related presumption of reliance, also held, in the words of Chief Justice Roberts, “that defendants must be afforded an opportunity before class certification to defeat the presumption through evidence that an alleged misrepresentation did not actually affect the market price of the stock.” Formerly, a defendant generally could present this type of evidence only at the summary judgment stage.
The case had raised the question of whether the Court “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 class-wide reliance derived from the fraud-on-the-market theory,” and the Court did neither.
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.
With so much at stake, Halliburton has been one of the most closely watched business cases of the Court’s October 2013 term.