On June 23, 2014, Chief Justice Roberts delivered an opinion in Halliburton v. Erica P. John Fund (“Halliburton II”) addressing two issues of importance to the process of litigating securities class actions, namely:
- Whether to overrule or else substantially modify the holding of Basic Inc. v. Levinson (“Basic”), to the extent that it recognizes a presumption of class-wide reliance derived from the fraud-on-the-market theory; and
- Whether, in a case where the plaintiff invokes the presumption of reliance to seek class certification, the defendant may rebut the presumption and prevent class certification by introducing evidence that the alleged misrepresentations did not distort the market price of the defendant’s stock.
At a glance, the Supreme Court’s decision, as it pertains to each issue described above, can be summarized as follows:
|The Court Held:||Explanation:|
|1. Halliburton did not show a “special justification,” for overruling Basic‘s presumption of reliance.||The “fraud-on-the-market” theory, first introduced Basic, holds that investors in a class do not need to prove their individual reliance on false or misleading information, because in an efficient marketplace, a class-wide presumption of reliance is implied. Halliburton II affirmed the Court’s earlier decision from Basic, thereby upholding the fraud-on-the-market theory as a valid economic framework for proving reliance in securities class actions.|
|2. Defendants must be afforded an opportunity to rebut the presumption of reliance before class certification with evidence of a lack of price impact.||Defendants in securities class actions have always had the right to introduce evidence showing that the allegedly fraudulent behavior did not impact the price of the relevant securities. However, in Halliburton II the Court holds that defendants have the right to introduce such evidence earlier in the litigation process – specifically before class certification.|
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