Today, the Supreme Court issued its ruling in Halliburton Co. v. Erica P. John Fund, Inc., No. 13-317 (U.S. June 23, 2014), the most anticipated securities decision since its landmark ruling over 25 years ago in Basic, Inc. v. Levinson, 485 U.S. 224 (1988). Today’s Halliburton decision leaves intact the fraud-on-the-market presumption of reliance that the Basic Court adopted. At the same time, the decision goes beyond Basic by forging new ground. Defendants may now seek to defeat Basic’s fraud-on-the-market presumption by introducing evidence at the class certification stage of litigation showing that an allegedly fraudulent statement (or its correction) did not actually affect the stock price of the defendant corporation.
THE BASIC PREMISE -
In Basic, the Court ruled that investors pursuing claims for securities fraud under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 could satisfy the element of reliance by invoking the fraud-on-the-market presumption of reliance in lieu of showing direct reliance on an alleged misrepresentation. The fraud-on-the-market presumption holds that a public, material misrepresentation will distort the price of stock traded in an efficient market, and that anyone who purchases the stock at the market price may be considered to have done so in reliance on the misrepresentation. Without the benefit of that presumption, plaintiffs would have to prove reliance on an individual basis, meaning that individual issues would predominate over common ones and class certification would be inappropriate under Federal Rule of Civil Procedure 23(b)(3).
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