Securities Class Action Defendants Can Rebut the Basic Fraud-on-the-Market Presumption of Reliance at the Class Certification Stage

by Eversheds Sutherland (US) LLP

The U.S. Supreme Court held yesterday that defendants in securities fraud class actions can defeat the Basic fraud-on-the-market presumption of reliance at the class certification stage “through evidence that the misrepresentation did not in fact affect the stock price.” Halliburton Co. v. Erica P. John Fund, Inc., No. 13-317, 573 U.S. ___, 2014 WL 2807181 (June 23, 2014) (Roberts, C.J.).

The fraud-on-the-market presumption of reliance, first articulated in Basic Inc. v. Levinson,  485 U.S. 224 (1988), posits that publicly available information is reflected in the market price of stocks traded on efficient, well-developed markets; that the typical investor buys and sells in reliance on the integrity of the stock price; and that therefore an investor who purchased a stock during the period when the stock price was affected by a misrepresentation may be presumed to have relied on the misrepresentation. Since its inception, the Basic presumption has been a driving force of securities class actions.

Halliburton asked the Supreme Court to overrule Basic or to modify it to require plaintiffs to prove that a misrepresentation affected a company’s stock price before gaining the benefit of the presumption. Alternatively, Halliburton asked that Basic’s fraud-on-the-market presumption be pared down to give defendants an opportunity to rebut the presumption at the class certification stage by demonstrating a lack of price impact.

The Court held that none of Halliburton’s arguments for overruling Basic or for modifying Basic to require plaintiffs to demonstrate price impact constituted a “special justification” for overturning the long-established precedent. Halliburton, 2014 WL 2807181, at *6 (quoting Dickerson v. U.S., 530 U.S. 428, 443 (2000)). Halliburton had pointed to recent academic studies purporting to debunk the economic theory upon which the fraud-on-the-market presumption rests. In rejecting Halliburton’s argument, the Court stated that “Halliburton’s criticisms fail to take Basic on its own terms.” Id. at *9. Basic did not adopt a particular theory of market efficiency, the Court continued, but instead “based the presumption on the fairly modest premise that ‘market professionals generally consider most publicly announced material statements about companies, thereby affecting stock market prices.’” Id. (quoting Basic, 485 U.S. at 247, n.24). The Court therefore declined to require plaintiffs to prove price impact directly.

The Court agreed, however, with Halliburton’s argument that defendants should be allowed to defeat the presumption at the class certification stage through evidence that the misrepresentation did not have an effect on a company’s stock price. Id. at *18. The U.S. Court of Appeals for the Fifth Circuit had held that defendants could not use price impact studies at the class certification stage to rebut the presumption altogether. Erica P. John Fund, Inc. v. Halliburton Co., 718 F.3d 423, 435 (5th Cir. 2013).

In reversing the Fifth Circuit, the Court noted that defendants may already introduce such evidence at the merits stage to rebut the Basic presumption, as well as at the class certification stage to counter a plaintiff’s showing of market efficiency. Prohibiting defendants from rebutting the Basic presumption altogether at the class certification stage “makes no sense, and can readily lead to bizarre results” that are inconsistent with Basic’s own logic. Halliburton, 2014 WL 2807181, at *16. Because the fraud-on-the-market theory is an “indirect proxy” for price impact, it “should not preclude direct evidence when such evidence is available,” and “‘[a]ny showing that severs the link between the alleged misrepresentation and … the price received (or paid) by the plaintiff … will be sufficient to rebut the presumption of reliance’ because ‘the basis for finding that fraud had been transmitted through market price would be gone.’” Id. at 20 (quoting Basic, 485 U.S. at 248).

What does the Court’s holding mean for securities class actions? Even though Halliburton did not persuade the Court to overrule Basic or to require plaintiffs to prove price impact to take advantage of the Basic presumption, Halliburton scored an important win for securities class action defendants by giving them an opportunity to rebut the Basic presumption at the class certification stage by demonstrating a lack of price impact. In a concurring opinion, Justice Ruth Bader Ginsburg, joined by Justices Stephen Breyer and Sonia Sotomayor, wrote that the Court’s holding “may broaden the scope of discovery available at certification,” but that the “Court recognizes that it is incumbent upon the defendant to show the absence of price impact,” so the “Court’s judgment, therefore, should impose no heavy toll on securities-fraud plaintiffs with tenable claims.” Halliburton, 2014 WL 2807181, at *18 (Ginsburg, J., concurring).

What lies ahead? In a scathing opinion, Justice Clarence Thomas, joined by Justices Antonin Scalia and Samuel Alito, concurred in the judgment, saying that “Basic should be overruled” and that “Basic’s presumption of reliance remains [the Supreme Court’s] mistake to correct.” Id. at *18, *26 (Thomas, J., concurring in judgment). According to Justice Thomas, both of the assumptions underlying Basic – that in a well-developed market public statements are generally reflected in the market price of securities and that investors in well-developed markets transact in reliance on the integrity of that price – are invalid. Id. at *21. Justice Thomas also expressed his view that Basic is inconsistent with recent cases clarifying Federal Rule of Civil Procedure 23’s class certification requirements because it provides plaintiffs with an end-run around the requirement to demonstrate through evidentiary proof that common questions of law or fact predominate over questions affecting only individual members. Id. at *24-*25. In Justice Thomas’ view, “Basic should be overruled in favor of the straightforward rule that … actual reliance, not the fictional ‘fraud-on-the-market version” is an essential element of a securities fraud class action. Id. at *26.

That three justices hold this view may invite defendants in securities class actions to challenge the Basic presumption in the future, even though Halliburton’s efforts fell short in this salvo.

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.

© Eversheds Sutherland (US) LLP | Attorney Advertising

Written by:

Eversheds Sutherland (US) LLP

Eversheds Sutherland (US) LLP 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 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:

- 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.