Halliburton: Supreme Court changes little about securities fraud class actions
By Sarah A Good, Bruce A Ericson, David M Furbush and G Allen Brandt
In a widely anticipated decision, the Supreme Court has upheld a 26-year-old precedent that plaintiffs in securities fraud class actions may satisfy the reliance element by showing that they traded on an ‘efficient market’ presumed to reflect all public material information, including material misstatements. For the first time, the court also held that defendants may rebut this presumption at the motion for class certification stage with actual evidence that the alleged misrepresentation did not affect the stock price. The decision is likely to increase litigation budgets as both sides commission expensive expert reports on stock prices. Some D&O carriers may seize this development to raise premiums for public companies. Some plaintiffs’ counsel may decide not to invest the additional resources required and exit the securities class action business in favour of focusing on other kinds of securities litigation with a lower barrier to entry. Otherwise, the decision will change little about the securities fraud class action landscape.
Unlike Sunday’s World Cup match between the US and Portugal, there was no sudden surprise ending in Halliburton Co v Erica P John Fund Inc, No. 13-317. Rather, the court did what most commentators expected: it declined to overrule Basic Inc v Levinson, 485 US 224 (1988), but held that a defendant may, at the class certification stage, offer evidence to rebut Basic’s presumption that the alleged misstatements affected the price of the stock in question.
In a private securities fraud action, investors may only recover money damages if they prove they relied on the defendants’ misrepresentations in deciding whether to buy or sell a company’s stock. In Basic, the court held that investor plaintiffs could satisfy this reliance requirement by invoking the ‘fraud-on-the-market’ theory, i.e. by alleging that investors purchased the stock at the market price and showing that the stock traded in an efficient market reflecting all public, material information, including material misstatements. The Basic presumption was in theory rebuttable, for example, by showing that the alleged misrepresentation did not actually affect the stock price (also known as a lack of ‘price impact’). But few courts seriously entertained such evidence once the plaintiff showed a market to be efficient…
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