(Article from Securities Law Alert, December 2014)
For more information, please visit the Securities Law Alert Resource Center.
In Basic Inc. v. Levinson, 485 U.S. 224 (1988) (Blackmun, J.), a plurality of the Supreme Court endorsed a “fraud-on-the-market” theory, which permits securities fraud plaintiffs to invoke a rebuttable presumption of reliance on public, material misrepresentations regarding securities traded in an efficient market. However, the Basic Court ruled that “[a]ny showing that severs the link between the alleged misrepresentation and either the price received (or paid) by the plaintiff, or his decision to trade at a fair market price, will be sufficient to rebut the presumption of reliance.”
In Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014) (Roberts, C.J.), the Supreme Court held that investors may continue to invoke a rebuttable presumption that they relied on an alleged misrepresentation when they purchased securities in an efficient market. The Court was divided 6-to-3 on whether to jettison the Basic presumption altogether and require that plaintiffs prove actual reliance. Chief Justice Roberts, writing for the majority, concluded that the Basic presumption should be preserved. The majority opinion explained that “[b]efore overturning a long-settled precedent,” the Court “require[s] ‘special justification,’ not just an argument that the precedent was wrongly decided.” In a concurring opinion joined by Justices Scalia and Alito, Justice Thomas wrote that Basic should be overruled entirely.
Significantly, the Supreme Court held that defendants must have an opportunity to rebut the Basic presumption of reliance at the class certification stage with evidence that the alleged misstatement did not distort the market price of the stock. The Court observed that in many misrepresentation-based cases the parties already introduce competing price impact evidence at the class certification stage to address the question of whether the market is efficient—a prerequisite for invoking the Basic presumption. The Court recognized that it would be a “bizarre result[ ]” not to allow such evidence for the purpose of rebutting the Basic presumption altogether.
Notably, the Court declined to put the burden on plaintiffs to prove price impact at the class certification stage on the grounds that it would “effectively jettison half of [the Basic presumption].”
For more information please visit the Securities Law Alert Resource Center.