Supreme Court Reaffirms Basic v. Levinson Presumption Of Reliance

On June 23, 2014, the Supreme Court of the United States issued its much-anticipated decision in Halliburton Co., et al. v. Erica P. John Fund, Inc., No. 13-317 (2014). The Court vacated and remanded the decision of the United States Court of Appeals for the Fifth Circuit refusing to allow Halliburton to rebut the Basic Inc. v. Levinson, 485 U.S. 224 (1988), presumption of reliance at the class certification stage with evidence of a lack of price impact. In doing so, the Court rejected Halliburton's invitation either to overturn the Basic presumption of reliance for securities fraud claims, or to require securities class action plaintiffs to prove price impact at the class certification stage. But the Court agreed with Halliburton that defendants should be permitted to provide evidence of the lack of price impact at the class certification stage, rather than putting off such proof to the merits stage.

The decision falls far short of the hopes of frequent targets of securities class actions of drastically changing the securities litigation landscape. The decision takes the least disruptive approach in eliminating the wholly inconsistent construct that allowed, in connection with class certification proceedings, plaintiffs to submit evidence that price impact exists; and defendants to submit evidence of price impact solely as evidence that the market is not efficient; but prevented defendants from submitting that same evidence of price impact to rebut the Basic presumption. And while the decision represents little change in the Second and Third Circuits—those courts already allowed defendants to rebut the presumption of reliance at the class certification stage by demonstrating that the alleged misrepresentation did not distort the market price—the decision will come as welcome relief in the Fifth and Seventh Circuits, which have until now held that price impact may not be considered at the class certification stage.

Background

The Erica P. John Fund, Inc. ("Fund") sued Halliburton under Section 10(b) and Rule 10b-5 of the Securities Exchange Act ("Act"). The Fund asserted that Halliburton issued several misrepresentations about certain liabilities, expected revenue, and the benefits of a merger, which it subsequently attempted to correct through a number of corrective disclosures. When the Fund sought to certify a class, the District Court concluded that, although the class had satisfied all of the requirements of Federal Rule of Civil Procedure 23(a), the Fund did not prove "loss causation" in order to invoke the presumption of reliance, as required by Fifth Circuit precedent. The District Court denied class...