In an earlier edition of the Jere Beasley Report, we outlined the basics – pardon the play on words – of the Halliburton Co. v. Erica P. John Fund Inc., case and the possible outcomes. To summarize: this term in Halliburton, the Court was asked to reverse the seminal securities case, Basic Inc. v. Levinson, that allows a fraud-on-the-market presumption of reliance in securities class actions. Under Basic, the publicly traded market is presumed to be efficient, meaning that a court will assume that whatever misrepresentations the Defendant is accused of making had an effect on the market price of the Defendant’s stock. It is further presumed that the Plaintiff relied on those misrepresentations in making a decision to purchase the Defendant’s stock during the damages period (the time between when the misrepresentation should have been disclosed and when it actually was disclosed).
We noted earlier that there were several options available to the Supreme Court for dealing with Basic at this juncture. The Court could either:
• completely overturn Basic and require individualized reliance (a result that most academics did not recommend and legal scholars did not foresee, but that Justice Thomas argued for in his opinion concurring in the judgment);
• alter the Basic presumption to require Plaintiffs to demonstrate that the misrepresentations actually did affect the market (the favored approach of the academic world);
• allow Defendants to rebut the presumption during the class-certification stage (Justices Breyer and Kagan, at least, seem opposed to this proposition); or
• leave Basic alone and affirm the Fifth Circuit.
Other than the final choice, which nobody really expected, the Court chose the most conservative option. In a unanimous judgment and a 6-3 opinion, the Chief Justice chose to uphold Basic in its entirety, but saw no reason why a Defendant should be forced to wait until the merits stage to rebut the presumption with direct evidence.
So, what does the Halliburton decision mean going forward? Not much, at least as far as initial pleadings go. There is no change to the Plaintiff’s requirements; the Basic presumption is intact. As Justice Ginsberg noted in her concurring opinion, this should be a minimal change for the parties, but would allow more discovery at an earlier stage in the litigation. Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. ___, (J. Ginsburg, slip op. concurring, at 1) (2014).
But, if a Defendant exercises the option to rebut the reliance presumption at class certification, which they will, the Plaintiff will then have to counter that evidence. Halliburton tried to convince the court that one way to defeat the presumption is to demonstrate that the members of the class would have still purchased the stocks had they been aware of the misrepresentations – that class members did not actually rely on the misrepresentations. The Court disagreed, reasoning that even “value investors,” an example provided by Halliburton, presumably try to estimate how undervalued or overvalued a stock is and that estimation is still “skewed by a market price tainted by fraud.” Halliburton, 573 U.S., (slip op., at 12). The only option remaining to a defendant is to attack price impact; a defendant can present direct evidence to show that the misrepresentations had no effect on the market price.
Technically, Halliburton won this round – the Court reversed the Fifth Circuit’s decision. Halliburton has not won its case yet; on remand, the court is to reconsider class certification in light of Halliburton’s evidence regarding the lack of price impact. But, the real takeaway here, though, is that the Plaintiff in a class action securities case premised on 10b-5 does not need to do anything new.
At class certification, at least, the burden is on the Defendant to demonstrate an absence of price impact; it is not on the Plaintiff to prove the existence of price impact. The Court’s decision is probably the best result that investors could have gotten. If you need more information about this subject, contact Rebecca Gilliland, a lawyer in our firm’s Consumer Fraud Section, at 800-898-2034 or by email at Rebecca.Gilliland@beasleyallen.com.
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