The Fraud on the Market Presumption in Securities Class Actions: Deja Vu All over Again

Commentary and analysis of the Supreme Court appeal in Halliburton v. Erica P. Fund, to be argued in March 2014. The Court will consider two issues: (1) should the Court overrule or substantially modify its holding in Basic Inc. v. Levinson, 485 U.S. 224 (1988), which recognized a presumption of classwide reliance based on a fraud on the market theory, and (2) may a defendant rebut the presumption and defeat class certification by producing evidence that the defendant’s alleged misrepresentations did not distort its stock market price?This appeal represents the second coming of securities class litigation between Halliburton Co. (Halliburton) and the Erica P. John Fund, Inc., because the Court previously visited the same facts and similar issues between these litigants in 2011. See Erica P. Fund, Inc. v. Halliburton Co., 131 S.Ct. 2179 (2011) (Halliburton I). In that case Halliburton unsuccessfully mounted an attack against the presumption of classwide reliance provided by the fraud on the market presumption established in Basic Inc. v. Levinson. Just last term, corporate defendants again unsuccessfully attacked and failed to make inroads on the fraud on the market presumption. See Amgen, Inc. v. Conn. Ret. Plans & Trust Funds, 133 S.Ct. 1184 (2013). This year — based on hints in Amgen that at least four justices might consider overturning the Basic decision — Halliburton has returned with a full-bore attack on the presumption, asking the Court to finally and definitely overrule this precedent.This Halliburton II appeal is significant because it directly asks the Court to overturn the long-standing Basic presumption of fraud on the market, which has provided securities fraud plaintiffs with an easier path to class certification than plaintiffs in other types of class actions. If the Court agrees with Halliburton and overrules the Basic presumption, then there will be a new game in town for securities class litigation, one which is likely to be much more difficult for plaintiffs.Almost all the competing arguments that the parties raise have been asserted and briefed to the Court before in Halliburton I and Amgen; hence this round should very much be an exercise in deja vu, all over again. Of course, the most tantalizing aspect of this appeal is whether the four justices who hinted in Amgen that they believed Basic to be founded on sketchy economic ground are ready to overrule Basic, joined by some like-minded fifth or sixth justice. What this may come down to is whether Halliburton’s appeal has presented the Court with the appropriate factual and legal scenario to overturn Basic. In Halliburton I and Amgen, the Court characterized loss causation and materiality as elements of the 10b-5 claim, concluding that placing a burden of proof on the plaintiffs was an impermissible, premature intrusion into merits issues at class certification. Thus, if the Court analogizes the issue of price impact to its prior discussions of loss causation and materiality — if the Court follows that same path — then this case may not be the death of the Basic presumption. Additionally, a different majority will have to rationalize away the Court’s prior affirmations of the Basic presumption, overlooking congressional inaction as supporting the presumption. Further, the Court might have to entertain a digressive exegesis on the doctrine of stare decisis, as it applies (or not).If the Court declines to overrule Basic, Halliburton’s fallback request to modify Basic to require plaintiffs to prove market price impact at class certification, or to permit defendants to produce rebuttal price impact evidence, seems a hard row to hoe in light of Halliburton I and Amgen. But, if the Court decides to go there, we are likely to witness some complicated and intricate doctrinal tap dancing by the Court.