On June 23, 2014, the Supreme Court issued its opinion in Halliburton Co. v. Erica P. John Fund, Inc. This case presented two questions. The first was whether the Supreme Court should overrule or modify its decision in Basic Inc. v. Levinson, to the extent that it recognizes a presumption of classwide reliance derived from the “fraud-on-the market theory,” which posits that a company’s material misrepresentation regarding a security traded in the open market that affects the price of the security is presumed to have been relied on by a plaintiff who purchased the security and suffered a loss; and second whether, in a case where the plaintiff invokes the presumption of reliance to seek class certification, the defendant may rebut the presumption and prevent class certification by introducing evidence that the alleged misrepresentations did not distort the market price of its stock.
In a unanimous opinion delivered by Chief Justice John Roberts, the Court noted that under section 10(b) of the Securities Exchange Act of 1934 and the SEC’s rule 10(b)(5), investors can recover damages in a private securities fraud action only if they prove that they relied on the defendant's misrepresentation in deciding to buy or sell a company's stock. In Basic, the Court held that investors could satisfy this reliance requirement by invoking a presumption that the price of stock traded in an efficient market reflects all public, material information-including material misstatements. Given that Congress can change the law, Halliburton failed to provide the “special justification” necessary for the Court to overrule its prior decision in a statutory case. For the same reason, class action plaintiffs may rely on the Basic presumption to avoid having to directly prove in the first instance that the misrepresentation affected the stock price at the class certification stage. But nothing in Basic or any other Supreme Court decision prevents defendants from defeating this presumption at the class certification stage through evidence that the misrepresentation did not in fact affect the stock price, and courts should give them the opportunity to do so. The Court vacated and remanded the decision of the Fifth Circuit.
To discuss the case, we have Adam Pritchard, who is the Frances and George Skestos Professor of Law at the University of Michigan School of Law.