On June 23, 2014, the U.S. Supreme Court decided Halliburton Co. v. Erica P. John Fund, Inc., which addressed whether the "fraud on the market" doctrine established in the 1988 decision in Basic, Inc. v. Levinson should be overruled or modified. Relying on the "efficient capital markets hypothesis," Basic held that reliance can be presumed in federal securities fraud actions where material misrepresentations are disseminated to an efficient market. The doctrine facilitates class certification in cases involving publicly-traded securities by providing class-wide proof of reliance.
The Halliburton defendants argued that subsequent economic research has undermined Basic’s "robust" view of market efficiency and its assumption that investors uniformly trade in reliance on the integrity of a security’s market price. The Court, however, concluded that those concerns were known and addressed by its opinion in Basic. The Court thus declined to overrule Basic or to adopt the "radical" modification of requiring a plaintiff to prove that an alleged misstatement actually affected the market price – so-called "price impact" – as a prerequisite to invoking the Basic presumption.
The Court did, however, agree that defendants can rebut the presumption at class certification with evidence showing the absence of price impact. This gives defendants a new weapon in cases where certification might otherwise be considered a given. Indeed, the decision might reclaim some of the ground lost by defendants in Amgen v. Connecticut Retirement Plans and Trust Funds and an earlier opinion in Halliburton holding, respectively, that materiality and loss causation are not proper class certification arguments. Because a lack of price impact frequently means a lack of materiality or causation, Halliburton may enable defendants to attack these kinds of issues under another theory. How the lower courts will harmonize these decisions remains to be seen.
