The U.S. Supreme Court’s grant of certiorari in Halliburton Co. v. Erica P. John Fund, No. 13-317, suggests a dramatic change in private securities litigation is possible. On November 15, 2013, the Court accepted Halliburton’s request to hear argument that it should reconsider the “fraud-on-the-market” presumption of reliance that applies in class actions under Section 10(b) of the Securities Exchange Act and SEC Rule 10b-5.
Adopted in Basic v. Levinson, 485 U.S. 224 (1988), the fraud-on-the-market presumption eliminates the need for plaintiffs to prove their reliance on alleged corporate misstatements in cases involving publicly traded securities. The premise of Basic, known as the “efficient market” theory, is that any such misrepresentations are always reflected in the price of a company’s stock. If the Court eliminates this presumption, each member of a proposed plaintiff class would have to prove they somehow relied on the defendant’s alleged misrepresentation.
An amicus brief by four former SEC commissioners in support of Halliburton calls Basic “the most powerful engine of civil liability ever established in American law.” Private plaintiffs must prove each element of securities fraud, namely, (1) a misstatement or omission (2) of a material fact (3) with scienter (i.e., fraudulent intent) (4) in connection with the purchase or sale of a security (5) on which the plaintiff reasonably relied and (6) which proximately caused the plaintiff’s loss. In order to prosecute claimed securities fraud as a class action under Federal Rule of Civil Procedure Rule 23(b)(3), common questions must predominate over questions involving individual class members. Basic made this possible by allowing courts to presume all class members indirectly relied on a company’s alleged misrepresentations when they bought or sold the company’s stock. Without this presumption, courts would have to stop certifying classes in securities cases where proof of reliance is required.
Halliburton argues that over the past 25 years the premise of Basic has proven false. Giving as examples the technology bubble in the late 1990s and the economic crisis in 2008 when declining stock prices supposedly lagged corporate misconduct, it argues the presumption of classwide reliance must be overruled or substantially modified. Halliburton also stresses the private rights of action under Section 10(b) and Rule 10b-5 are “implied” and not “express” in legislation. It argues the Court’s recent practice is to interpret implied rights to correspond with analogous express rights, all of which it claims require proof of individual reliance.
This challenge follows recent similar criticism of Basic by Justices Alito, Scalia, Thomas and Kennedy in Amgen v. Connecticut Retirement Plans and Trust Funds, 133 S. Ct. 1184 (2013). Alternatively, Halliburton seeks to rebut the presumption and prevent class certification by introducing evidence that a corporate defendant’s alleged misrepresentation did not distort the market price of its stock. A decision is expected in the summer of 2014.