Significantly, decision doesn’t reverse ‘fraud on the market,’ upholding investors’ ability to claim reliance on misleading public statements
On June 23 the US Supreme Court issued its opinion in Halliburton v. Erica P. John Fund and made it a little easier for companies to prevent class certification in securities fraud cases. However, the Court’s majority refused to reverse its ‘fraud on the market’ doctrine, created by its 1988 decision in Basic v. Levinson. Only three justices—Thomas, Scalia and Alito—were willing to go that far. In short, Halliburton (and the defense bar) can claim a significant victory in this closely watched case, but the win is relatively limited compared to what reversing ‘fraud on the market’ would have meant. All in all, ‘defendants got another arrow in their quiver,’ says Jordan Eth, chair of Morrison & Foerster’s securities litigation enforcement & white collar defense group.
A critical element plaintiffs in private securities fraud litigation must prove is ‘reliance’—that the plaintiffs knew about the allegedly false and material public statements and relied on them when deciding to purchase or sell their shares of the company’s stock. Relying on the premise that markets are efficient and that material public statements  are  priced into a stock, the Basic court decided that class-wide reliance could be presumed. That is, because the stock’s price reflected the allegedly fraudulent statements, anyone purchasing or selling the stock between when the statements were made and when they were corrected inherently relied on them. During that window of time, the entire market was relying on the statements. Hence the name ‘fraud on the market.’
Before the June 23 opinion defendants could rebut the reliance presumption, but mostly at trial. Companies can now defeat class certification by showing that the allegedly false material public statements did not impact their stock prices.
This decision ‘provides defendants an opportunity to challenge class certification in a much more meaningful way than before,’ says Eth. ‘What often used to happen was because class certification was often assumed or agreed, after surviving a motion to dismiss, the case would launch into discovery [phase]. Now defendants have a new tool to oppose class certification.’ Defeating class certification is significant, explains Eth, because then ‘instead of having 50 million or 100 million shares in a case, you would only have those [owned by] individuals who came forward [saying they relied on the company’s public statements], dramatically reducing the stakes.’
Proving the allegedly false material public statements did not impact stock prices is not necessarily straightforward, whether attempted at trial or at the class certification stage. ‘It’s likely in many of these incidents there will be experts and events studies,’ says Eth. Despite being complex and potentially making it expensive to litigate this issue, Eth continued, the decision will also change how often defendants make the no-price-impact argument.  ‘Something that was infrequently litigated will now be considered by defendants in almost every case and litigated in many more than in the past,’ he says. ‘The court has breathed life into what it means to rebut the presumption of reliance.’
