Halliburton Redux: Will Fraud-on-the-Market Survive?


On November 15th, the U.S. Supreme Court granted certiorari in the Halliburton case… again. While the Court’s original Halliburton decision concerned whether loss causation needs to be shown at the class certification stage (it does not), the current case before the Court deals with the continued validity of the “fraud-on-the-market” presumption of reliance enunciated some 25 years ago in Basic Inc. v. Levinson, 485 U.S. 224 (1988). (For a case history, see our September 30 blog.)  Recall that Justice Alito previewed the Court’s concern with this issue in his concurrence in Amgen, though pointing out that the continued viability of Basic’s presumption of reliance was not before the Court.

Petitioners essentially make two arguments. First, they contend that the economic underpinnings of the fraud-on-the-market theory are not valid–misinformation is not necessarily reflected in the price of a stock. As Petitioners argue: “Basic’s naive understanding of market efficiency and its simplistic view that market prices rationally convey information are at war with economic reality.” And second, they argue that permitting a presumption of reliance in the securities class action context is contrary to the rigorous analysis insisted upon in other class certification contexts, as most recently articulated in the Supreme Court’s Wal-Mart and Comcast decisions.

The questions presented for review are as follows:

1. Whether this Court should overrule or substantially modify the holding of Basic Inc. v. Levinson, 485 U.S. 224 (1988), to the extent it recognizes a presumption of classwide reliance derived from the fraud-on-the-market theory.

2. 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 its stock.

This case appears to provide the Justices the vehicle they need to decide whether to put securities plaintiffs on the same footing plaintiffs in other contexts at the class certification stage, or whether some sort of compromise solution would work, such as placing the burden on plaintiffs to demonstrate market efficiency before getting the benefit of the presumption. The securities bar will be watching this case closely, as its outcome is likely to change the dynamic of class certification in the securities context.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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