HIGH COURT DEALS BLOW TO SECURITIES CLASS ACTIONS

The Supreme Court held today in Halliburton Co. v. Erica P. John P. Fund, Inc. that defendants may defeat class certification of securities fraud claims by showing that the alleged misrepresentations did not have a price impact on the stock at issue. Under the so-called fraud-on-the-market theory articulated in Basic v. Levinson, plaintiffs are entitled to a rebuttable presumption that they relied on the alleged fraudulent statements where they show: (1) that the alleged misrepresentations were publicly known, (2) that they were material, (3) that the stock traded in an efficient market, and (4) that the plaintiff traded the stock between the time the misrepresentations were made and when the truth was revealed. Per the majority’s opinion, defendants may now rebut this presumption at the class certification stage through evidence that the alleged misrepresentations had no price impact on the stock. The majority reasoned that the fraud-on-the-market presumption is an indirect way of showing price impact, and that the presumption should not be applied when there is direct evidence that the price was not in fact impacted. Without the fraud-on-the-market presumption, a securities fraud claim cannot proceed as a class action because each plaintiff would have to prove reliance individually, and therefore common issues would not predominate over individual issues, as required by Rule 23(b)(3). In their concurring opinion, Justices Ginsburg, Breyer, and Sotomayor noted that one consequence of this holding may be to broaden the scope of discovery available at class certification. Justices Thomas, Scalia, and Alito, concurring in the judgment, would have overturned Basic as based on the inaccurate assumption that investors rely on the price of a stock to accurately reflect public information. The Supreme Court vacated the judgment of the Court of Appeals for the Fifth Circuit and remanded the case for further proceedings. The Supreme Court’s decision will have a significant impact on securities fraud litigation, including intensifying expert witness issues at the class certification stage.