Supreme Court’s Halliburton Decision Opens New Line of Defense

In Halliburton Co. v. Erica P. John Fund, Inc., a rebuttable presumption must yield to the evidence at class certification.

On June 23, 2014, the United States Supreme Court sustained the “fraud-on-the-market” doctrine that has long aided the plaintiff’s bar in advancing shareholder class action lawsuits. The fraud-on-the-market doctrine presumes that where a company’s stock trades in an efficient market, publicly known, material misrepresentations or omissions will be absorbed into the stock price which most investors rely upon in making their investment decisions. Thus, under this doctrine, if a shareholder purchases stock after a company’s misstatement is made but before the truth is revealed, the courts will presume that shareholders relied upon the defendant’s misrepresentations and omissions when deciding to purchase shares in the company. Critically, if the presumption of reliance applies, plaintiffs do not need to prove they in fact relied on or even knew about the defendant’s misrepresentation — an element of a securities fraud claim that otherwise cuts against class certification. In Halliburton, notwithstanding developments in economic theory casting doubt on the efficient market hypothesis, the Supreme Court left intact the fraud-on-the-market doctrine and its all-important presumption of shareholder reliance.

The Supreme Court, after sustaining the fraud-on-the-market doctrine in the form of a legal presumption of reliance, then addressed at what stage of the lawsuit a defendant may properly rebut the presumption with evidence that the alleged misrepresentation did not in fact impact the share price. In Halliburton, plaintiff argued that a defendant’s so-called rebuttal evidence on lack of price impact should not be considered until the parties reach the merits of the case, such as trial. Halliburton, the defendant, argued in contrast that lack of price impact evidence should be admissible for purposes of deciding whether the lawsuit should be certified as a class action. The Supreme Court sided with Halliburton. As a result, going forward, defendants in securities fraud cases may submit evidence on lack of price impact in order to defeat class certification.

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