In its highly anticipated decision in Halliburton Co. v. Erica P. John Fund, Inc. released this week, the U.S. Supreme Court confirmed that plaintiffs in securities class actions could continue to rely on the “fraud-on-the-market” presumption. Where available, the presumption eliminates the need for plaintiffs to demonstrate reliance on an alleged misrepresentation on an individual basis. Industry commentators had speculated that the Court might eliminate or materially modify the fraud-on-the-market presumption, and in the process deal a critical blow to the viability of securities class actions in the United States.
In a class action for misrepresentation under the U.S.’s federal securities law regime, investors must demonstrate individual reliance on an alleged misrepresentation in their respective decisions to buy or sell a company’s securities. In 1988, the U.S. Supreme Court, in Basic Inc. v. Levinson, held that where certain conditions are met, investors could avoid the need to demonstrate individual reliance by invoking a presumption that the price of shares traded in an efficient market reflects all public, material information (which would include actionable misrepresentations). Defendants could rebut this presumption, including by showing that the market that the shares traded on was not efficient or that the alleged misrepresentation did not actually affect the price of shares.
In its appeal to the Supreme Court, Halliburton sought to have the presumption overturned or modified, with the result that investors would have to go to back to proving reliance individually (which would, in turn, make securities class actions largely unsuitable for certification, given that the individual issues would overwhelm those common to the whole class). Halliburton argued that overwhelming empirical evidence now suggests that capital markets are not fundamentally efficient, thus the theory underlying Basic was no longer economically sound. Although Justices Thomas, Scalia and Alito agreed with Halliburton, the majority of the Court held that Halliburton had not shown the “special justification” needed to overturn the precedent of the Court’s earlier decision in Basic.
The Court did accept Halliburton’s alternative argument that defendants should have the opportunity before certification to rebut the presumption, through evidence that the alleged misrepresentation did not actually affect the price of the shares. The lower courts had held that the plaintiff had to wait to seek to rebut the presumption until trial on the merits.
Had the Supreme Court done away with the fraud-on-the-market presumption, there would have been some potential for Canada to become a more attractive destination for plaintiffs’ class action lawyers (Ontario’s Securities Act, for example, does not require a plaintiff to demonstrate reliance on an alleged misrepresentation in a secondary market misrepresentations class action). As it stands, the Halliburton decision is unlikely to have much impact on securities class actions in Canada. Issuers who are cross-listed in the United States and Canada, and U.S.-listed issuers who are located or who operate in Canada, will continue to face the risk of exposure to parallel securities class actions in both jurisdictions.