The US Supreme Court’s decision in Halliburton Co. v. Erica P. John Fund, Inc., Slip op., No. 13-317 (Jun. 23, 2014), unanimously held that before certifying a class in a securities fraud case, federal courts must allow defendants to challenge plaintiffs’ claim that alleged misrepresentations or omissions impacted securities prices. Because proving price impact is a necessary element of a securities action, this ruling, written by Chief Justice Roberts, provides defendants with an important weapon to defeat class certification—a critical milestone in any class action case that generally occurs before the bulk of pre-trial discovery. Thus, after Halliburton, at the class certification stage, parties will not be able to rely solely on legal arguments that class certification elements have been met or rebutted; rather, they must also be prepared to present factual evidence going to the merits of the case through fact and/or expert witnesses.
In a 6-3 ruling, the Court also refused to overrule the so-called fraud-on-the-market presumption, created over 25 years ago,1 which allows plaintiffs in securities fraud actions to allege that in an efficient market the price of a security reflects the overall mix of material public information—meaning that plaintiffs can claim that the entire class uniformly relied on this information so that plaintiffs do not have to make individualized proof of reliance. A rejection of the fraud-on-the-market presumption, which was urged by Justices Thomas, Alito and Scalia, would have effectively ended the availability of class treatment of securities fraud actions. Although the decision is an important victory for the plaintiffs’ class action bar in that respect, such victory is tempered by the Court continuing its trend of permitting defendants to litigate fact issues at the class certification phase and thereby potentially dispose of class action cases before expensive and full-blown pre-trial discovery.
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