Supreme Court Allows for Rebuttal of Fraud-On-The-Market Presumption in Securities Actions at Class Certification Stage
On June 23, 2014, the United States Supreme Court issued its highly-anticipated decision in Halliburton Co. v. Erica P. John Fund, Inc., No. 13-317, 2014 U.S. LEXIS 4305 (U.S. June 23, 2014), declining to overrule or modify Basic, Inc. v. Levinson, 485 U.S. 224 (1988), which forms the basis for the fraud-on-the-market presumption. The presumption created by Basic allows investors to pursue securities fraud claims without establishing actual reliance on a material misstatement. Instead, there is a rebuttable presumption that investors relied upon material misrepresentations regarding a specific stock, so long as the stock is traded in a well-developed, efficient trading market.
Chief Justice Roberts delivered the majority opinion of six justices, declining to recognize any “special justification” for overruling Basic as long-settled precedent. Notably, in a concurring opinion, Justice Thomas, with whom Justices Scalia and Alito joined, would have overruled Basic based on challenges to the continued viability of its underlying premises that the market price of securities trading in a “well-developed market” accurately reflects public statements and that investors actually rely on the integrity of that price.
Although the Court in Halliburton affirmed the validity of the fraud-on-the-market presumption, it also held that defendants should be afforded an opportunity to rebut the presumption at the class certification stage by showing, through direct or indirect evidence, that the alleged misrepresentation did not actually have a “price impact.” Specifically, the Court expressly approved the use of an event study – regression analysis used to analyze and quantify the impact of an event such as a disclosure on the price of a company’s stock – to rebut the Basic presumption. The Court further clarified that its holding was not inconsistent with the Court’s holding in Amgen 1 that plaintiffs need not prove the materiality of alleged misstatements or omissions prior to class certification; rather, unlike materiality, price impact “has everything to do with the issue of predominance at the class certification stage.” 2014 U.S. LEXIS 4305, at *43.
Consequently, Halliburton should provide a meaningful opportunity for defendants to end securities litigation at the class-certification stage, prior to reaching the merits and expending significant resources on discovery. Meanwhile, it also provides a powerful incentive for defendants to invest in a robust price impact analysis through an event study prior to certification.
1 For further analysis of the United States Supreme Court’s opinion in Amgen, Inc. v. Connecticut Retirement Plans & Trust Funds, 568 U.S. ___, 133 S. Ct. 1184 (2013), refer to http://www.troutman.com/securities-fraud-plaintiffs-do-not-need-to-prove-materiality-to-obtain-class-certification-03-12-2013.
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