Halliburton and the Fraud on the Market Presumption: A Bad Day for Defense Counsel in the Supreme Court

In Halliburton Co. v. Erica P. John Fund, Inc., No. 13-317 (June 23, 2014), the Supreme Court dealt a serious blow to securities class action defendants. In that case, six justices refused to overrule the presumption of reliance recognized under the fraud on the market theory accepted in Basic Inc. v. Levinson (1988). The majority reached this conclusion over the strong contrary opinion of Justice Thomas, who was joined by Justices Scalia and Alito. These three justices would have overruled Basic.

Chief Justice Roberts’ opinion for six justices made several points. First, he ruled that since Basic was a “long-standing precedent,” it was necessary for defendants to provide a “special justification” to overrule that decision. Instead, defendants (in his view) only repeated the same arguments made in the dissenting opinion in Basic. Second, despite a vigorous attack on the economic underpinnings of the efficient market theory accepted and developed in Justice Thomas’ opinion, the majority concluded that there had not been a “fundamental shift in economic theory.” Third, principles of  stare decisis had “special force” in cases involving the interpretation of a statute. Fourth, the presumption of reliance on an efficient market assisted plaintiffs in satisfying the otherwise difficult requirement of  showing the predominance of common issues to obtain class certification.

Chief Justice Roberts noted three different times that plaintiffs needed to prove four things to invoke the presumption of reliance. These are (1) a public misrepresentation, (2) which was material, (3) the security traded in an efficient market, and (4) the purchase or sale by the plaintiff occurred after the misrepresentation and before the truth was revealed. Defendants could then rebut the presumption of reliance by demonstrating either that the misrepresentation did not affect the market price of the security, or that the plaintiff would have engaged in the securities transaction even if he or she was aware that the price was “tainted by fraud.”

Defendants did prevail on one point, the significance of which remains to be developed in future litigation. Chief Justice Roberts ruled that defendants were entitled to rebut the presumption of reliance at the class certification stage, and could utilize “direct evidence” to defeat the “indirect proxy” supplied by the efficient market theory. Moreover, as Justice Ginsburg noted in her concurring opinion for herself and Justices Breyer and Sotomayor, “Advancing price impact consideration from the merits stage to the certification stage may broaden the scope of discovery available at certification.” In her view, this imposed “no heavy toll on securities-fraud plaintiffs with tenable claims.”

Given the surprisingly strong majority opinion rejecting the attack on the presumption of reliance in the face of a powerful opinion by Justice Thomas arguing in detail against that presumption, defendants should take little solace from the one point on which they prevailed. The majority opinion, as well as Justice Ginsburg’s concurring opinion, make it crystal clear that defendants retain the heavy burden of demonstrating that a misrepresentation did not affect the price of the security at issue both at the class certification as well as at the merits stage. As Justice Thomas noted in his opinion, out of the thousands of opinions decided under Rule 10b-5, only a miniscule six in number have reported a successful rebuttal of individual reliance. This, a theoretical chance for rebuttal is a thin reed for defense counsel to rely upon in the real world of securities class action litigation.











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