Nov 22

Supreme Court to Address Fraud-on-the-Market Presumption in Securities Fraud Cases

The Supreme Court granted certiorari last Friday in Halliburton Co. v. Erica P. John Fund, Inc., No. 13-317—a case the Court had before it once already in 2011, but this time presents the questions (1) whether the Court should overrule or substantially modify the holding in Basic Inc. v. Levinson, 485 U.S. 224 (1988), which created a rebuttable presumption of reliance in certain types of securities fraud cases based on the fraud-on-the-market theory and (2) whether, in cases where the plaintiff invokes the presumption of reliance, the defendant can try to defeat class certification by rebutting the presumption with evidence that the alleged misrepresentations did not affect the market price of the stock.

The availability of a reliance presumption is often the critical question that determines class certification in securities fraud cases.  The Supreme Court created the rebuttable presumption in Basic v. Levinson at least in part because it would “facilitat[e] Rule 10b-5 litigation[.]”  485 U.S. at 245.  The Court recognized that “requiring proof of individualized reliance from each member of the proposed plaintiff class effectively would have prevented [plaintiffs] from proceeding with a class action.”  Id. at 242.  But earlier this year, in Amgen, Inc. v. Connecticut Retirement Plans & Trust Funds, 133 S. Ct. 1184 (2013), four justices signaled their willingness to reconsider the validity of Basic’s presumption of reliance.  If a majority of the Court now overrules or substantially modifies Basic, it would have an enormous impact on securities fraud class actions.

The first time the Court considered the Halliburton case, it held unanimously that a securities fraud plaintiff need not prove loss causation as a prerequisite to obtaining class certification based on the fraud-on-the-market presumption of reliance.  Erica P. John Fund, Inc. v. Halliburton, 131 S. Ct. 2179 (2011).  More recently, in Amgen, a divided Court held, by a 6-3 vote, that a securities fraud plaintiff need not prove materiality as a prerequisite to obtaining class certification based on the presumption—and that a lower court could properly refuse to consider the defendant’s rebuttal evidence at the class certification stage if the evidence was directed at rebutting the presumption by disproving materiality.

The second question now before the Court in Halliburton is whether another type of rebuttal evidence—namely, evidence that the claimed misrepresentations had no impact on the price of the stock—is permissible at the class certification stage.  The Fifth Circuit held that it was not permissible, relying on Amgen.

By accepting Halliburton on both questions, the Supreme Court has set in motion what could be a key decision in securities fraud class actions.

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