Two days ago, the Supreme Court issued its opinion in Halliburton Co., et al. v. Erica P. John Fund, Inc., No. 13-317, holding that at the class certification stage of a securities fraud class action, a defendant may offer direct evidence to rebut the presumption of reliance permitted by Basic v. Levinson, 485 U.S. 224 (1988). Prior to the Court’s Halliburton decision, in at least some Circuits, such rebuttal evidence was only permitted at the merits stage, after the certification had already been granted. The opinion was delivered by Justice Roberts, and joined by Justices Kennedy, Ginsberg, Breyer, Sotomayor, and Kagan. Justice Ginsberg filed a concurring opinion, joined by Justices Breyer and Sotomayor. Justice Thomas filed an opinion concurring in judgment, joined by Justices Scalia and Alito.
In securities fraud cases under Section 10b-5 of the Securities and Exchange Act of 1934, to recover damages, a plaintiff must prove “(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.” Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, 568 U. S. ___, ___ (2013) (Slip op., at 3–4). Halliburton focuses on the reliance element. In Basic v. Levinson, the Court held that securities fraud plaintiffs could satisfy the reliance element by invoking a presumption that the price of the stock at issue traded in an efficient market reflects all public, material information, including misstatements. Thus, for anyone who buys or sells at the market price from the point when misrepresentations were made and when the truth became public, reliance can be presumed. Halliburton considers two questions: (1) whether the presumption allowed by Basic should be overturned; and (2) if not, whether, at the class certification stage, either (a) a plaintiff should be required to prove that the misrepresentations affected the stock price (“price impact”), or (b) if not that, a defendant could rebut the Basic presumption by offering direct evidence of a lack of price impact.
With respect to the request to overturn Basic, the Court declined, reasoning that there was no “special justification” that would warrant overturning long-standing Supreme Court precedent. Slip Op. at 4. Basic reasoned that a requirement of demonstrating individualized reliance would put too heavy an evidentiary burden on securities fraud plaintiffs and would mean an end to securities fraud class actions because individualized issues would always predominate. Slip Op. at 5-6. The Court held in Basic that a plaintiff could invoke the presumption of reliance by a showing that (1) the alleged misrepresentations were publicly known; (2) they were material; (3) the stock traded in an efficient market; and (4) the plaintiff bought or sold the stock between the time the misrepresentations were made and when the truth was disclosed. Basic, 485 U.S. at 248. Halliburton argued that the presumption was erroneously permitted because it contravened congressional intent and ignored economic realities. Slip Op. at 8. The Court determined that neither of these reasons justified overturning Basic. Id. Congress has not, in the 25 years since Basic, indicated that the presumption should not apply, even though it has considered the securities laws on more than one occasion. Id. at 7-8. Further, the market economic theories argued by Halliburton were made and considered at the time of Basic and otherwise was addressed by Basic’s holdings. Id. at 8-12.
The Court fairly quickly dispensed with the argument that a Plaintiff should have to prove at the class certification stage that the misrepresentation had price impact. The Court held that such a requirement would “radically alter” what a plaintiff must show with respect to reliance. “First, if a plaintiff shows that the defendant’s misrepresentation was public and material and that the stock traded in a generally efficient market, he is entitled to a presumption that the misrepresentation affected the stock price. Second, if the plaintiff also shows that he purchased the stock at the market price during the relevant period, he is entitled to a further presumption that he purchased the stock in reliance on the defendant’s misrepresentation.” Slip Op. at 17-18. Making a plaintiff directly show price impact guts the first presumption and has the effect of overturning Basic which the Court had already declined to do.
The Court did, however, agree that a defendant should be able to rebut the presumption at the certification stage by showing that the misrepresentations had no impact on price, rather than having to wait until the merits stage. Slip Op. at 18. The Court reasoned that defendants are already permitted to present such evidence at the merits stage and even at the certification stage, so long as at that stage it was offered only to counter a plaintiff’s showing of market efficiency. The Court could not fathom a rationale for permitting evidence for the purpose of rebutting one aspect of the presumption (efficiency), but not for the purpose of rebutting another (price impact), at the same stage. Id. at 19-20. Further reasoning, the Court held that price impact is interwoven with publicity and market efficiency, both of which are challengeable at the certification stage.
The fact that a misrepresentation “was reflected in the market price at the time of [the] transaction”—that it had price impact—is “Basic’s fundamental premise.” Halliburton I, 563 U. S., at ___ (slip op., at 7). It thus has everything to do with the issue of predominance at the class certification stage. That is why, if reliance is to be shown through the Basic presumption, the publicity and market efficiency prerequisites must be proved before class certification. Without proof of those prerequisites, the fraud-on-the-market theory underlying the presumption completely collapses, rendering class certification inappropriate.
Slip. Op. at 22.
So what does Halliburton mean? Maybe not that much – although many commentators have indicated otherwise. In the scheme of blows to class action litigation that the Supreme Court has dealt over the last several years, Halliburton seems fairly mild. Indeed, Justices Thomas, Scalia, and Alito would have overturned Basic completely, effectively ending 10b-5 securities class actions altogether because, absent a presumption of reliance, individual issues would always predominate. The six other Justices saved the cause of action and the potential for class action treatment for the time being. It appears that the Supreme Court thinks its decision means mostly that defendants will be able to use evidence they may already have and might already be presenting to argue an inefficient market, to also argue that the misrepresentations had no impact on price, at the certification stage. But evidence of an inefficient market can be demonstrated using economic analysis that doesn’t necessarily specifically relate to the misrepresentations at issue, unlike evidence demonstrating a lack of price impact. In that case, Halliburton could be said to, at least, have added, and maybe significantly, to discovery and the presentation of evidence at the class certification stage. Regardless, it inarguably weakens the Basic presumption and, like the other recent class decisions, makes it more difficult to sustain a class action.
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