Class Action
Litigation Report
®
Reproduced with permission from Class Action Litigation Report, 15 CLASS 772, 07/11/2014. Copyright 姝 2014 by
The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com
SUPREME COURT
SECURITIES
The U.S. Supreme Court’s recent ruling in Halliburton v. Erica P. John Fund provides defendants with the ability to advance previously little-used arguments for defeating class certification in securities cases at a relatively early stage in the proceedings Jason M. Halper
and colleagues say in this BNA Insight. The authors analyze the ruling, and counsel defendants to consult experts to begin preparing typical supporting evidence such as event studies almost from the outset of the case in order to argue against price impact at the earliest
point possible.
Halliburton v. Erica P. John Fund: Supreme Court Retains Basic,
But Permits Defendants to Rebut Price Impact at Class Certification
BY JASON M. HALPER, GREGORY A. MARKEL,
MARTIN L. SEIDEL, PETER J. ISAJIW,
RYAN J. ANDREOLI AND WILLIAM J. FOLEY
Jason M. Halper, Gregory A. Markel, Martin
L. Seidel and Peter J. Isajiw are partners,
Ryan J. Andreoli is special counsel, and William J. Foley is an associate in the litigation
department of Cadwalader, Wickersham &
Taft LLP. Litigation associate Chao Huang
assisted with the preparation of this article.
COPYRIGHT 姝 2014 BY THE BUREAU OF NATIONAL AFFAIRS, INC.
n June 23, 2014, the Supreme Court issued its long
anticipated decision in Halliburton Co. v. Erica P.
John Fund, Inc., 2014 BL 172975, No. 13-317 (June
23, 2014). The Court declined to overturn the 25 yearold decision in Basic Inc. v. Levinson, 485 U.S. 224
(1988), which established the ‘‘fraud-on-the-market’’
presumption of reliance1 in Section 10(b) class actions,
but resolved a conflict among the circuits by confirming
O
1
The fraud-on-the-market theory, established in Basic, presumes that publicly available information is generally reflected
in a security’s market price. Given this presumed price impact,
Basic also presumes that an investor who buys or sells stock
on an efficient capital market is relying on the integrity of that
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that under Basic, defendants can challenge and defeat
the presumption of reliance at the class certification
stage. This article discusses the opinion with a focus on
how defendants in practice can successfully rebut the
fraud-on-the- market presumption.2
Background
The Halliburton action was initiated by the Erica P.
John Fund, Inc. on behalf of a purported class consisting of shareholders in Halliburton Company (‘‘Halliburton’’) who purchased or sold stock between June 3,
1999, and December 7, 2001. Plaintiffs alleged that Halliburton made misrepresentations that artificially inflated Halliburton’s stock price, which caused injury to
shareholders when corrective disclosure was publicly
disseminated. Halliburton opposed class certification
on the grounds that the Company’s alleged fraud did
not affect the market price of its stock. The district
court rejected this argument and certified the class. The
Fifth Circuit affirmed, and in November 2013, the Supreme Court granted Halliburton’s petition for certiorari.3
The Court’s Ruling
In the Court’s majority opinion, Chief Justice Roberts4 expressly declined to overrule Basic’s presumption of reliance and require each securities plaintiff to
show actual reliance on the defendant’s misrepresentation. Id. The majority considered each of Halliburton’s
arguments for overruling Basic in turn.
s Halliburton argued that Basic was premised on
the flawed assumption that market efficiency is a ‘‘ ‘binary, yes or no question.’ ’’ Id. (citation omitted).
Rather, according to Halliburton, ‘‘a single market can
process different kinds of information more or less efficiently, depending on how widely the information is
disseminated and how easily it is understood.’’ Id. The
majority rejected this assessment of Basic as overly narrow, noting that Halliburton had ‘‘fail[ed] to take Basic
on its own terms.’’ Id. ‘‘Basic,’’ Chief Justice Roberts
wrote, ‘‘d[id] not rest on a ‘binary’ view of market
efficiency[:] in making the presumption rebuttable, Basic recognized that market efficiency is a matter of degree and accordingly made it a matter of proof.’’ Id.
s The majority next addressed Halliburton’s assertion that current economic thinking rejects the efficient
capital markets hypothesis, which provides the analytical justifications for Basic’s presumption of reliance on
price, including public statements embedded in that price. This
renders the issue of reliance common to the class.
2
Several of the authors previously considered the various
outcomes to Halliburton, and the implications for each. See Jason M. Halper, et al., Halliburton Co. v. Erica P. John Fund,
Inc.: Assessing Possible Modifications to Basic and The Fraudon-The-Market Theory, Fin. Fraud L. Rep. 405 (May 2014).
3
This is the second time that the dispute between Halliburton and plaintiffs reached the Supreme Court. In 2011, the
Court issued a decision in Erica P. John Fund, Inc. v. Halliburton Co., 131 S. Ct. 2179 (2011), holding that securities fraud
plaintiffs need not prove loss causation at the class certification stage. Id. at 2186.
4
Joining the Chief Justice were Justices Kennedy, Ginsburg, Breyer, Sotomayor and Kagan.
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market prices. While conceding that the ‘‘efficient capital markets hypothesis may have ‘garnered substantial
criticism since Basic,’ ’’ id. (citation omitted), the majority held that ‘‘Halliburton has not identified the kind of
fundamental shift in economic theory that could justify
overruling a precedent on the ground that it misunderstood, or has since been overtaken by, economic realities.’’ Id.5
s The majority also observed that Congress has the
power to overturn Basic but had declined to do so notwithstanding its adoption of legislation in this area, including statutes such as the Private Securities Litigation
Reform Act (‘‘PSLRA’’), which the Court found addressed the ‘‘specific harmful consequences’’6arising
out of the Basic decision cited by Halliburton and its
amici.7
s The Court also rejected as unpersuasive realworld examples offered by Halliburton when investors
do not rely on the integrity of market prices. For instance, Halliburton pointed to ‘‘value investors’’ as a
class of investors for whom ‘‘ ‘price integrity’ is . . .
‘marginal or irrelevant.’ ’’8 The majority, however, held
that even a value investor ‘‘implicitly relies on the fact
that a stock’s market price will eventually reflect the
material information [because] how else could the market correction on which his profit depends occur?’’9
The majority opinion also considered Halliburton’s
two proposed alternatives to overruling Basic: (1) requiring plaintiffs to prove that a defendant’s misrepresentation actually affected the stock price (i.e., ‘‘price
impact’’) in order to invoke Basic; or (2) allowing defendants to rebut the presumption of reliance with evidence of a ‘‘lack of price impact’’ at the class certification stage. Id.
The majority rejected the first alternative, finding
that it would ‘‘radically alter the required showing for
the reliance element of the Rule 10b-5 cause of action.’’
Id. Requiring plaintiffs to prove price impact directly
would eviscerate the first constituent presumption of
5
Chief Justice Roberts also cited the Court’s deference to
long-settled precedent, finding that a party must provide a
‘‘special justification’’ for overturning a case such as Basic,
rather than merely offering ‘‘an argument that the precedent
was wrongly decided.’’ Id. (citation omitted).
6
Halliburton also argued that Basic has produced ‘‘serious
and harmful consequences,’’ including the perpetuation of a
system that encourages or permits large, extortionary settlements for meritless claims, excessive costs on businesses (and
their shareholders) that are forced to defend against these
claims, and the consumption of a disproportionately large
share of judicial resources. Id. The majority found that ‘‘[t]hese
concerns are more appropriately addressed to Congress,’’ citing Congress’s prior legislation in the securities area such as
the PSLRA and the Securities Litigation Uniform Standards
Act of 1998. Id.
7
In his concurrence, Justice Thomas (joined by Justices
Alito and Scalia), disputed the inference that Congress’s silence with respect to the Basic presumption indicated approval. Id. (‘‘it is inappropriate to give weight to ‘Congress’ unenacted opinion’ when construing judge-made doctrines, because doing so allows the Court to create law and then
‘effectively codify’ it ‘based only on Congress’s failure to address it’ ’’) (citation omitted).
8
Id. (citation omitted). The opinion defines a value investor
as one who ‘‘believes that certain stocks are undervalued or
overvalued and attempts to ‘beat the market’ by buying the undervalued stocks and selling the overvalued ones.’’ Id.
9
Id.
COPYRIGHT 姝 2014 BY THE BUREAU OF NATIONAL AFFAIRS, INC.
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Basic—that public and material misrepresentations regarding a security traded on an efficient market are presumed to have affected the price of that security. Id. For
all the reasons that the Court decided not to jettison Basic, the majority decided not to require plaintiffs to
prove price impact. Id.
The majority did, however, adopt Halliburton’s second proposed alternative permitting defendants to
show lack of price impact at class certification. While it
has long been accepted that Basic allowed defendants
to introduce price impact evidence at the class certification stage to counter a plaintiff’s showing of market efficiency, in practice, defendants rarely attempted to defeat the presumption of reliance on the basis of lack of
market impact. Although Chief Justice Roberts contended that such an argument was always permissible
under Basic, Halliburton effectively endorses and requires lower courts to consider arguments by defendants that there was no price impact with respect to the
specific misrepresentation(s) at issue in the lawsuit,
and therefore, that the presumption does not apply. Id.
(Basic ‘‘does not require courts to ignore . . . direct . . .
salient evidence showing that the alleged misrepresentation did not actually affect the stock’s market price
and, consequently, that the Basic presumption does not
apply’’).10 The majority premised this holding on the
idea that while market efficiency and other prerequisites for invoking the fraud-on-the-market theory have
always constituted an ‘‘indirect way’’ of showing price
impact, such an ‘‘indirect proxy’’ should not ‘‘preclude
direct evidence when such evidence is available.’’ Id.11
The Concurring Opinions
Justice Thomas12 wrote the primary concurring opinion, which reads more like a dissent. Justice Thomas
begins by stating that ‘‘[l]ogic, economic realities, and
our subsequent jurisprudence have undermined the
foundations of the Basic presumption,’’ and therefore,
‘‘Basic should be overruled.’’ 2014 BL 172975.
Similar to his dissent in Amgen, Justice Thomas’ concurring opinion here posits that Basic was based on a
10
The Court also acknowledged that a defendant could rebut the presumption of reliance by showing that a plaintiff
‘‘would have bought or sold the stock even had he been aware
that the stock’s price was tainted by fraud.’’ Id. This suggests
an argument that certain classes of investors (e.g., value investors and index funds) would not be suitable class representatives because the presumption of reliance would not apply to
them.
11
The majority distinguished its decision in Halliburton
from its 2013 holding in Amgen Inc. v. Connecticut Retirement
Plans & Trust Funds, 133 S. Ct. 1184 (2013), where the Court
found that securities plaintiffs need not prove materiality—
itself a prerequisite for invoking the Basic presumption—at the
class certification stage in order to show Rule 23(b) predominance. In Amgen, the Court held that the materiality determination is ‘‘an objective one,’’ in that the court’s determination
of whether the alleged statements are material will by necessity apply to the entire class. 2014 BL 172975. The Halliburton
majority found that price impact is ‘‘crucial[ly]’’ different: The
common issue of materiality can be left to the merits stage
without affecting whether individual issues will predominate
over common ones, whereas ‘‘[t]here is no dispute that at least
. . . indirect proof of price impact ‘is needed to ensure that the
questions of law or fact common to the class will ‘predominate.’ ’’ Id. (citation omitted).
12
Justice Thomas’s concurrence was joined by Justices
Alito and Scalia.
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‘‘questionable understanding of disputed economic
theory and flawed intuitions about investor behavior.’’
Id. Justice Thomas also states that Halliburton is inconsistent with the Court’s recent class action jurisprudence, noting that, in other cases, the Court has required ‘‘plaintiffs seeking class certification to ‘affirmatively demonstrate’ certification requirements like the
predominance of common questions.’’ Id. (citation
omitted).13
Halliburton, in contrast, retains a presumption that
absolves plaintiffs of such a showing at the class certification stage. For these reasons, Justice Thomas contended that ‘‘Basic should be overruled in favor of the
straightforward rule that . . . actual reliance, not the fictional ‘fraud-on-the-market’ version—‘is an essential element of the § 10(b) private cause of action.’ ’’ 2014 BL
172975. (citation omitted).
Justice Thomas’s concurrence does not describe
which part of the majority’s decision he is concurring
with, although presumably Justices Thomas, Scalia and
Alito reluctantly agree with the Court’s alternative decision to allow defendants to introduce direct evidence of
lack of price impact at the class certification stage in order to defeat the presumption.
Justice Ginsburg14 penned a brief, four-sentence concurrence recognizing that the majority’s opinion could
‘‘broaden the scope of discovery available at certification.’’ Id. Justice Ginsburg premised her concurrence in
the outcome on the understanding that defendants bear
the burden of showing the absence of price impact so as
not to impose a ‘‘heavy toll on securities-fraud plaintiffs
with tenable claims.’’ Id.
Implications
The impact of Halliburton for defendants is decidedly
mixed. According to Chief Justice Roberts, nothing has
changed. And it is undeniable that Halliburton is far
from the outcome that corporate America had hoped
for. In practice, however, defendants now have the ability to advance previously little used arguments for defeating class certification at a relatively early stage in
the proceedings. In particular, defendants are now entitled to rebut a plaintiff’s indirect proof of price impact
under the fraud-on-the-market theory by showing that
the alleged misrepresentation did not impact the market price of the issuer’s stock at the time it was made.
That timing provides defendants with a potentially potent weapon for defeating class actions rather than having to go through costly discovery and then settle in order to avoid an adverse summary judgment decision
and/or trial.
Before Halliburton, as the majority and even plaintiffs acknowledged, there was no dispute that at the
merits stage of the case, i.e., on summary judgment or
rarely, at trial, defendants had the ability to show that
alleged misstatements or omissions had no impact on a
security’s market price. Such a showing would defeat
Basic’s presumption of reliance. But by the time a defendant typically would be able to file a motion for summary judgment, fact and perhaps expert discovery
would be complete and there would be mounting pres13
See Comcast Corp. v. Behrend, 133 S. Ct. 1426, 1432
(2013).
14
Justice Ginsburg’s concurrence was joined by Justices
Breyer and Sotomayor.
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sure to settle. See 2014 BL 172975, n.7 (Thomas, J., concurring) (‘‘The absence of postcertification rebuttal is
likely attributable in part to the substantial in terrorem
settlement pressure brought to bear by certification’’).
Moreover, while Chief Justice Roberts suggested that
under Basic courts always had the ability to consider arguments from defendants rebutting the presumption of
reliance based on lack of price impact, the concurrence
pointed out the reality that such arguments were by and
large neither made nor decided at class certification. As
Justice Thomas observed, ‘‘[o]ne search for rebuttals on
individual-reliance grounds turned up only six cases out
of the thousands of Rule 10b-5 actions brought since
Basic.’’ Id.
In Halliburton, however, Chief Justice Roberts made
clear that defendants may rebut the presumption of reliance at class certification by demonstrating a lack of
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price impact, including through direct evidence severing the link between alleged misstatements and market
price movements. In effect, the Court’s decision gives
defendants a green light to make at the class certification stage arguments that otherwise had been relegated
to late stage proceedings such as summary judgment.
Defendants therefore appear to have substantial incentives to advocate for early class certification discovery
and motion practice in the hope of defeating class certification before significant merits discovery occurs.
Likewise, defendants need to marshal evidence supporting such arguments earlier. Defendants should consult with experts, and begin preparing typical supporting evidence such as event studies almost from the outset of the case in order to be positioned to argue against
price impact at the earliest point possible.
COPYRIGHT 姝 2014 BY THE BUREAU OF NATIONAL AFFAIRS, INC.
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