Supreme Court Preserves 'Fraud-On-The-Market' And Validates Use Of 'Price Impact' Defense Against Class Certification In Securities Class Actions

In its long-awaited decision in Halliburton Co. v. Erica P. John Fund, Inc. ("Halliburton II"), the US Supreme Court upheld the validity of the fraud-on-the-market presumption set forth in Basic Inc. v. Levinson, 485 US 224 (1988), while clarifying that a defendant in a securities fraud class action must be permitted to rebut Basic's presumption of reliance at the class certification stage with evidence that alleged misrepresentations had no price impact at the time of investment. This ruling confirms the existence of an important defense against class certification in federal securities fraud class actions and raises significant new questions for consideration by the lower courts.

1. Background

Plaintiff Erica P. John Fund, Inc. (the "EPJ Fund") brought a putative class action against Halliburton Company and its CEO David Lesar (together, "Halliburton") alleging that Halliburton violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 by making misrepresentations in Halliburton's SEC filings between June 1999 and December 2001. The EPJ Fund's attempts to bring a viable suit and certify a class based on the fraud-on-the-market presumption have resulted in more than a decade of litigation and two significant Supreme Court decisions, including Halliburton II, which was issued on June 23, 2014.

The fraud-on-the market presumption was adopted by the Supreme Court in its landmark opinion in Basic. It established that plaintiffs may satisfy the reliance element of a claim under Rule 10b-5 without showing that they were actually aware of alleged misrepresentations if they can establish "(1) that the alleged misrepresentations were publicly known, (2) that they were material, (3) that the stock traded in an efficient market, and (4) that the plaintiff traded the stock between the time the misrepresentations were made and when the truth was revealed."1 The presumption, which is based on the efficient capital markets hypothesis (which, in simple terms, theorizes that the price of actively traded public securities will reflect all material public information), assumes that (a) material public information in an efficient market is reflected in a security's price, and (b) investors therefore necessarily rely on all such information when they purchase or sell securities in an efficient market.2 The presumption is a key element in modern securities class action practice. Without it, plaintiffs would not be able to meet the...