On June 23, 2014, the U.S. Supreme Court decided Halliburton Co. et al. v. Erica P. John Fund, Inc., holding that plaintiffs in securities fraud class action cases may continue to invoke Basic Inc. v. Levinson's rebuttable presumption that they relied on defendants' misrepresentation, but defendants may rebut the presumption before a class is certified by direct evidence that a company's alleged misrepresentation did not impact the price of the company's stock.
Erica P. John Fund, Inc. (EPJ Fund) is the lead plaintiff in a putative class action against Halliburton Co. alleging violations of section 10(b) of the Securities and Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5. EPJ Fund alleged that during the relevant period Halliburton attempted to inflate its stock price by making "a series of misrepresentations" regarding its potential liability in asbestos litigation, among other things. According to EPJ Fund, Halliburton made several corrective disclosures, which caused the company's stock price to drop and investors to lose money.
EPJ Fund moved to certify a class of "all investors who purchased Halliburton common stock during the class period." The district court initially refused to certify a class, concluding that EPJ Fund had not demonstrated a causal connection between Halliburton's alleged misrepresentations and the plaintiffs' economic loss. The Fifth Circuit affirmed, but the Supreme Court vacated the judgment and remanded the case for the lower courts to consider "any further arguments against class certification" that Halliburton had preserved.
On remand, Halliburton argued that its alleged misrepresentations had not "actually affected its stock price," and thus the district court could not presume that proposed class members had relied on the company's alleged misrepresentations when they purchased or sold Halliburton stock. Without a presumption of reliance, Halliburton argued, the investors would individually have to prove reliance and class certification would be inappropriate. The district court declined to consider Halliburton's argument and certified the proposed class. The Fifth Circuit affirmed, concluding that direct evidence of price impact is irrelevant at the class certification stage.
The Supreme Court vacated the Fifth Circuit's opinion and remanded the case, holding that plaintiffs in securities fraud class action cases may invoke Basic's presumption of reliance, but that "defendants must be afforded an opportunity before class certification to defeat the presumption through evidence that an alleged misrepresentation did not actually affect the market price of the stock." Previously, defendants were permitted to introduce evidence that the misrepresentation did not actually affect the market price only after class certification.
Basic's rebuttable presumption of reliance is based on the "fraud-on-the-market" theory, which holds that "the market price of shares traded on well-developed markets reflects all publicly available information, and, hence, any material misrepresentations." While Halliburton contended that Basic's presumption of reliance contravenes congressional intent and is based on outdated analysis, those arguments had been considered and rejected in Basic. The Supreme Court found no "special justification" to overrule Basic's holding that plaintiffs in securities fraud class actions are entitled to a presumption of reliance upon a showing that alleged misrepresentations were publicly known, that they were material, that the stock traded in an efficient market, and that the plaintiff traded at the relevant time. The Court also rejected Halliburton's argument that plaintiffs in securities class actions should be required to prove that a defendant's misrepresentation actually affected stock price, concluding that this approach would "radically alter" and effectively overrule at least part of Basic.
While declining to require plaintiffs to prove that the misrepresentation affected price, the Court altered the Basic standard by permitting a defendant to present – before class certification – direct evidence that the alleged misrepresentation did not affect the company's stock price during the relevant period. The Court noted that plaintiffs may introduce evidence of the price impact of misrepresentations at the class certification stage and it is inequitable to deny the defendants the right to present the same type of evidence in the same phase of the litigation. Additionally, a district court should not be required before class certification to "ignore a defendant's direct, more salient evidence showing that the alleged misrepresentation did not actually affect the stock market's price and, consequently, that the Basic presumption does not apply." The Court therefore concluded that a defendant must be afforded an opportunity, before class certification, to defeat the Basic presumption with evidence that the alleged misrepresentation did not affect the price.
Chief Justice Roberts delivered the unanimous opinion of the Court. Justice Ginsburg filed a concurring opinion, in which Justices Breyer and Sotomayor joined. Justice Thomas filed an opinion concurring in the judgment, in which Justices Scalia and Alito joined.