Debevoise & Plimpton

Supreme Court to review ‘fraud on the market’ presumption of reliance in securities class actions

On 15 November 2013, the US Supreme Court agreed to consider two questions that have the potential to transform the landscape of private securities litigation. Specifically, the court granted a petition for a writ of certiorari in Halliburton Co v Erica P John Fund and agreed to review: (i) whether the ‘fraud on the market’ presumption of reliance adopted in Basic Inc v Levinson, 485 US 224 (1988) should be overruled or substantially modified; and (ii) whether, in a class action, a defendant may rebut the presumption and defeat class certification by introducing evidence that the alleged misrepresentations did not distort the market price of the defendant’s stock.

In the 25 years since Basic, the ‘fraud on the market’ presumption has been a lynchpin of private securities class actions, allowing plaintiffs to submit common proof of reliance on the theory that individual investors rely upon the integrity of a stock’s trading price and, when the stock trades in an efficient market the market price reflects all public information, including any alleged material misstatements.

This much watched case is widely regarded as a potential game changer for securities litigation, because plaintiffs would have only a limited prospect of successfully supporting class certification in securities fraud cases if each class member’s individual reliance on alleged misstatements was at issue…

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