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The U.S. Supreme Court recently issued its long-awaited decision in Halliburton v. Erica P. John Fund, Inc., and the result was very much in line with the forecasts of those who predicted a kind of split decision: The Court provided securities fraud defendants with a significant weapon to use in opposing class certification, but declined to jettison the fraud-on-the-market theory that has served as the basis for securities class actions for the past 25 years.
Despite the urging of Halliburton and its supporters, the Court did not overturn Basic Inc. v. Levinson, 485 U.S. 224 (1988), which conferred on plaintiffs the benefit of a presumption that all purchasers of stock trading in an efficient market relied on any alleged misrepresentation, because public securities markets are presumed to digest and thus reflect all publicly available, material information.
Rebuttable Presumption
However, the Court held that defendants could rebut that presumption at the class certification stage, rather than having to wait until summary judgment motions or trial.
While it will take some time to see how lower courts apply the decision, it seems likely to intensify defendants' focus on trying to defeat class certification through evidence, particularly experts' event studies, that rebuts claims that alleged misrepresentations affected the price of a company's securities. It was generally understood that defendants could take on this fight at trial or summary judgment. Having the chance to challenge price impact on a class certification motion, as Halliburton now permits, should be of real value to defendants.
The significance of the Halliburton decision arises from Basic. That case eased the burden that plaintiffs' lawyers had to meet in order to obtain class certification in a securities fraud action under Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5. Instead of requiring each investor in the class to prove that he or she had relied on the alleged misstatements, Basic created a presumption of reliance ' not on any particular statement by a company in its financial statements or SEC filings, but rather, reliance on the fact that all available public information was reflected in the company's stock price.
The Majority Opinion
In declining to overturn Basic, the majority opinion, written by Chief Justice Roberts, invoked stare decisis , the principle against overruling precedents absent “special circumstances.” It also rejected what it said were mischaracterizations of Basic by the defense side advocates: “Halliburton's criticisms fail to take Basic on its own terms.” The Court was also unmoved by defense arguments that the Basic presumption encourages the filing of meritless claims that impose significant costs on businesses and consume judicial resources, stating that those concerns would be better addressed by Congress. The majority also emphasized that the Basic presumption was a rebuttable one from the start, and that Basic only concluded that most, not all, investors, rely on market efficiency.
In addition to failing to overturn Basic, the defendants also lost in their effort to have the burden placed on plaintiffs seeking class certification to prove that the defendants' misrepresentations actually affected the stock price, or caused price impact.
Where the defense bar succeeded was in its quest for a rule that permitted defendants to “rebut the presumption of reliance with evidence of a lack of price impact, not only at the merits stage ' which all agree defendants may already do ' but also before class certification.”
That evidence would come in the form of “event studies,” which are regression analyses concerning how the market price of issuers' stock responds to various publicly reported events. Both plaintiffs and defendants in securities cases that get past the motion-to-dismiss stage already use these studies. Plaintiffs, the Court noted, use them to demonstrate how the market for a company's stock considers material public information. Defendants counter with their own studies. While the Halliburton plaintiffs' lawyers did not dispute that defendants could use event studies on a class certification motion to address general market efficiency, they argued that such studies should not be considered with respect to actual price impact until a merits determination on summary judgment or trial.
In its key holding, the Court rejected this argument and held that defendants may use event studies to refute price impact at the class certification stage.
Conclusion
Considering how vigorously Halliburton was contested and the large number of business and investors' advocates who weighed in, it was striking that the Court issued an opinion with no dissents. But that did not evidence unanimity. Justice Thomas, joined by Justices Scalia and Alito, issued a concurrence that made clear those three thought the Court should have gone further and overruled the fraud-on-the-market theory adopted in Basic . Justice Ginsburg, joined by Justices Breyer and Sotomayor, issued a one-paragraph concurrence saying she joined the majority on the basis that defendants still bore a key burden in opposing class certification. Justices Kennedy and Kagan simply joined in the Chief Justice's majority opinion.
The U.S. Supreme Court recently issued its long-awaited decision in Halliburton v. Erica P. John Fund, Inc., and the result was very much in line with the forecasts of those who predicted a kind of split decision: The Court provided securities fraud defendants with a significant weapon to use in opposing class certification, but declined to jettison the fraud-on-the-market theory that has served as the basis for securities class actions for the past 25 years.
Despite the urging of Halliburton and its supporters, the Court did not overturn
Rebuttable Presumption
However, the Court held that defendants could rebut that presumption at the class certification stage, rather than having to wait until summary judgment motions or trial.
While it will take some time to see how lower courts apply the decision, it seems likely to intensify defendants' focus on trying to defeat class certification through evidence, particularly experts' event studies, that rebuts claims that alleged misrepresentations affected the price of a company's securities. It was generally understood that defendants could take on this fight at trial or summary judgment. Having the chance to challenge price impact on a class certification motion, as Halliburton now permits, should be of real value to defendants.
The significance of the Halliburton decision arises from Basic. That case eased the burden that plaintiffs' lawyers had to meet in order to obtain class certification in a securities fraud action under Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5. Instead of requiring each investor in the class to prove that he or she had relied on the alleged misstatements, Basic created a presumption of reliance ' not on any particular statement by a company in its financial statements or SEC filings, but rather, reliance on the fact that all available public information was reflected in the company's stock price.
The Majority Opinion
In declining to overturn Basic, the majority opinion, written by Chief Justice Roberts, invoked stare decisis , the principle against overruling precedents absent “special circumstances.” It also rejected what it said were mischaracterizations of Basic by the defense side advocates: “Halliburton's criticisms fail to take Basic on its own terms.” The Court was also unmoved by defense arguments that the Basic presumption encourages the filing of meritless claims that impose significant costs on businesses and consume judicial resources, stating that those concerns would be better addressed by Congress. The majority also emphasized that the Basic presumption was a rebuttable one from the start, and that Basic only concluded that most, not all, investors, rely on market efficiency.
In addition to failing to overturn Basic, the defendants also lost in their effort to have the burden placed on plaintiffs seeking class certification to prove that the defendants' misrepresentations actually affected the stock price, or caused price impact.
Where the defense bar succeeded was in its quest for a rule that permitted defendants to “rebut the presumption of reliance with evidence of a lack of price impact, not only at the merits stage ' which all agree defendants may already do ' but also before class certification.”
That evidence would come in the form of “event studies,” which are regression analyses concerning how the market price of issuers' stock responds to various publicly reported events. Both plaintiffs and defendants in securities cases that get past the motion-to-dismiss stage already use these studies. Plaintiffs, the Court noted, use them to demonstrate how the market for a company's stock considers material public information. Defendants counter with their own studies. While the Halliburton plaintiffs' lawyers did not dispute that defendants could use event studies on a class certification motion to address general market efficiency, they argued that such studies should not be considered with respect to actual price impact until a merits determination on summary judgment or trial.
In its key holding, the Court rejected this argument and held that defendants may use event studies to refute price impact at the class certification stage.
Conclusion
Considering how vigorously Halliburton was contested and the large number of business and investors' advocates who weighed in, it was striking that the Court issued an opinion with no dissents. But that did not evidence unanimity. Justice Thomas, joined by Justices Scalia and Alito, issued a concurrence that made clear those three thought the Court should have gone further and overruled the fraud-on-the-market theory adopted in Basic . Justice Ginsburg, joined by Justices Breyer and Sotomayor, issued a one-paragraph concurrence saying she joined the majority on the basis that defendants still bore a key burden in opposing class certification. Justices Kennedy and Kagan simply joined in the Chief Justice's majority opinion.
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