Halliburton Co. v. Erica P. John Fund, Inc.: Assessing Possible Modifications To Basic And The Fraud-On-The-Market Theory

Securities class action lawsuits have long been a fact of life for public companies traded on a U.S. exchange. Since 1997, plaintiffs have filed more than 3,200 securities fraud lawsuits1 that have resulted in approximately $75 billion in settlements.2 The threat posed by such suits has been cited as a major deterrent to listing on a U.S. stock market; indeed, the number of U.S. exchange-listed companies has declined by 46% since 1998.3 The prevalence of securities litigation under Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") has been fueled in large part by the Supreme Court's adoption in Basic Inc. v. Levinson, 485 U.S. 224 (1988), of the fraud-on-the-market presumption of reliance. However, the Supreme Court's much anticipated decision in Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 636 (2013) ("Halliburton") (expected later this Spring) could fundamentally alter the securities litigation landscape depending on whether it reaffirms, reverses or modifies Basic. If the Court opts for a middle course—neither outright reversing nor affirming Basic (an outcome that appears quite possible based on the Justices' questioning at the March 5 oral argument)—litigants may face a period of substantial uncertainty in the absence of a developed body of caselaw interpreting a new rule and in the face of novel theories and tactics from securities plaintiffs. This article explores these possibilities.

FRAUD-ON-THE-MARKET

The fraud-on-the-market doctrine permits securities plaintiffs to side-step what previously had been a thorny issue: establishing for purposes of class certification under Fed. R. Civ. P. 23 that common issues predominate notwithstanding that actual reliance on allegedly false statements (typically an individual issue not susceptible to common proof) is an essential element of a Section 10(b) claim. Basic held that publicly available information, including an alleged misstatement, is generally reflected in a security's market price. Given this presumed price impact, the Court likewise endorsed a presumption that an investor who buys or sells stock on an efficient market is relying on the integrity of that price, including public statements embedded in that price, rendering the issue of reliance common to the class. See Basic, 485 U.S. at 245-47.4 While the Basic presumption of reliance is nominally rebuttable, cases in which the presumption has been rebutted are, as one prominent observer noted, "as rare as hen's teeth."5

The fraud-on-the-market presumption was controversial from the outset, and now appears to be under full assault. In February 2013, the Supreme Court issued its decision in Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, 133 S. Ct. 1184 (2013), in which it found that securities fraud plaintiffs need not prove the materiality of the alleged misstatements at the class certification stage in order to invoke the fraud-on-the-market presumption.6 However, four Justices appeared to question the continuing vitality of Basic's presumption of reliance altogether. In dissent, Justice Scalia referred to the "regrettable consequences of the four-Justice opinion in Basic." 133 S. Ct. at 1206. In a three-sentence concurring opinion, Justice Alito observed that "recent evidence suggests that the [fraud-on-the-market] presumption may rest on a faulty economic premise," and stated that "reconsideration of the Basic presumption may be appropriate." Id. at 1204. Justice Thomas's dissent, which was joined by Justice Kennedy, called Basic "questionable," but indicated that, in the Amgen case, "the Court ha[d] not been asked to revisit Basic's fraud-on-the-market presumption." Id. at 1208 n.4.

Unlike in Amgen, the petitioners in Halliburton have specifically asked the Court to revisit the fraud-on-the-market presumption articulated in Basic.

THE HALLIBURTON CASE

Plaintiff Erica P. John Fund, Inc. ("Plaintiffs") commenced a purported class action against Halliburton Company ("Halliburton" or the "Company") and its Chief Executive Officer for alleged violations of Section 10(b). Plaintiffs alleged that defendants made false statements between 1999 and 2001 concerning: (i) Halliburton's asbestos-related legal liability; (ii) Company revenues; and (iii) the cost savings Halliburton would derive from a 1998 merger. See Erica P. John Fund, Inc. v. Halliburton Co., 718 F.3d 423, 426 (5th Cir.), cert. granted, 134 S. Ct. 636 (2013).7

In opposing class certification, Halliburton argued that the "evidence revealed that [Halliburton's] alleged fraud did not affect the market price of the stock; that is, its alleged misrepresentations did not cause 'price impact' or 'price distortion.'" 718 F.3d at 427. As a result, according to Halliburton, plaintiff could not invoke the fraud-on-the-market presumption. The district court rejected this argument and certified the class. Id. The Fifth Circuit affirmed, and on November 15, 2013, the Supreme Court granted Halliburton's petition for certiorari in which it seeks to overturn or substantially modify Basic. See Halliburton, 134 S. Ct. 636. The Court heard oral argument on March 5, 2014.

POTENTIAL OUTCOMES OF HALLIBURTON AND THEIR IMPACT

Corporate America, plaintiffs' advocacy groups, the plaintiff and defense bars, and various other constituencies are intensely interested in the outcome of Halliburton. There are, potentially, several ways that the Supreme Court could rule.

Affirming the Fifth Circuit

The Supreme Court could decide that Basic has continued viability, rule in favor of the plaintiff-respondents and affirm the Fifth Circuit. This outcome would, of course, endorse the status quo.

Overruling Basic

A second potential outcome would be to reverse Basic entirely...