Halliburton: SCOTUS Reaffirms Fraud-on-the-Market Presumption, Allows Attack at Class Cert Stage

by Perkins Coie

On Monday the Supreme Court issued its much anticipated decision in Halliburton Co. v. Erica P. John Fund, Inc., No. 13-317, 2014 WL 2807181 (U.S. June 23, 2014), rejecting all pleas to overturn the fraud-on-the-market presumption of reliance established in Basic Inc. v. Levinson, 485 U.S. 224 (1988).  Writing for five other Justices (Kennedy, Ginsburg, Breyer, Sotomayor and Kagan), Chief Justice Roberts announced the Court will “adhere” to its prior ruling in Basic that plaintiffs are not required to show actual reliance to establish a Rule 10b-5 fraud claim.  Instead, they may satisfy the reliance element “by invoking a presumption that a public, material misrepresentation will distort the price of stock traded in an efficient market, and that anyone who purchases the stock at the market price may be considered to have done so in reliance on the misrepresentation.”  

Defendants, however, were not left without some relief under Monday’s ruling.  The Court also ruled that defendants may rebut the presumption at the class certification stage by showing lack of “price impact,” i.e., “evidence that an alleged misrepresentation did not actually affect the market price of the stock.” 

The Halliburton Case

In the underlying lawsuit, filed by a class of Halliburton investors in 2002, the Texas district court initially denied the plaintiffs’ class certification motion for failure to show loss causation (a causal connection between any alleged misrepresentations and plaintiffs’ losses), and the Fifth Circuit affirmed. The Supreme Court later reversed, holding that securities fraud plaintiffs do not need to prove loss causation at the class certification stage. 

On remand, Halliburton argued that the same evidence disproving loss causation also negated price impact, thereby rebutting the fraud-on-the-market presumption.  The district court disagreed and certified the class.  The Fifth Circuit again affirmed, holding that Halliburton could rebut the fraud-on-the-market presumption with price impact evidence only at trial, not at the class certification stage.

No Economic or Other “Special Justification” for Overturning Basic

Halliburton argued on appeal that the Basic presumption both “contravenes congressional intent” in passing the 1934 Exchange Act, and “has been undermined by subsequent developments in economic theory.”  Although the Court’s judgment was unanimous, Justice Thomas (joined by Justices Scalia and Alito) also wrote a separate concurrence arguing that Basic should be overruled because today’s economic realities have “undermined the foundations of the Basic presumption.” 

The Court found, however, that Basic had considered and rejected the same legislative intent arguments more than 25 years ago.  Further, none of the economic “debates” cited by critics “so discredits Basic” or establishes the “special justification” required to overturn long-settled precedent.  Dickerson v. United States, 530 U.S. 428, 443 (2000).  

For example, evidence that markets are not always efficient in reflecting public information is no reason to abandon the “efficient capital markets hypothesis.”  Even the harshest critics “acknowledge that public information generally affects stock prices.”  The presumption therefore “does not rest on a ‘binary’ view of market efficiency,” and “in making the presumption rebuttable, Basic recognized that market efficiency is a matter of degree and accordingly made it a matter of proof.” 

Similarly, the presence of value investors who view price integrity as only “marginal or irrelevant” does not destroy the premise that investors invest “in reliance on the integrity of [the market] price.”  They too must “implicitly rel[y] on the fact that a stock’s market price will eventually reflect material information—how else could the market correction on which [their] profit depends occur?” 

The Court also rejected suggestions that Basic is inconsistent with recent decisions in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994), and Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008), both of which declined to eliminate (or diminish) the reliance element by extending Rule 10b-5 liability to new categories of defendants who had not made any misrepresentations (e.g., aiders and abettors). The Basic presumption, in contrast, merely permits another means of satisfying the reliance element.

Defendants Can Rebut Fraud-on-the-Market at the Class Certification Stage

Lastly, the Court determined that prohibiting defendants from rebutting fraud-on-the-market presumptions before class certification “makes no sense.”  Defendants already “may introduce price impact evidence at the class certification stage” to counter evidence of market efficiency.  And plaintiffs themselves often try to prove such efficiency with price impact evidence in the form of “event studies” or other regression analyses.  There is no reason defendants should not be able to rely on the same evidence to rebut the Basic presumption altogether at the class certification stage. 

Nothing in the Court’s recent class certification ruling in Amgen Inc. v. Connecticut Retirement Plans and Trust Funds requires a different result.  There, the Court held that the issue of materiality should be left to the merits stage, because it does not bear on the predominance requirement of Rule 23(b)(3), even though materiality is also a prerequisite for showing the Basic presumption. Evidence of price impact, in contrast, is “Basic’s fundamental premise,” and therefore “has everything to do” with the issue of predominance at the class certification stage.  To “maintain the consistency of the presumption with the class certification requirements” of Rule 23, defendants must be allowed a chance “before class certification to defeat the presumption through evidence that an alleged misrepresentation did not actually affect the market price.”

Monday’s decision in Halliburton was certain to bring sighs of relief from investors and plaintiff securities lawyers, many of whom feared that a ruling forbidding fraud-on-the-market presumptions would deal a death blow to securities class action litigation.  While the high court’s decision exposes the Basic presumption to earlier attack, which will give both the courts and defendants more tools to eliminate meritless cases, it stopped short of eliminating the rule altogether.

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.

© Perkins Coie | Attorney Advertising

Written by:

Perkins Coie

Perkins Coie on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.