November 15, 2013
Today, the Supreme Court granted certiorari in one case of interest to the business community:
Securities Class Actions—Presumption of Reliance—Fraud on the Market
To prevail in a securities-fraud case under Section 10(b) of the Securities Exchange Act of 1934, a plaintiff must establish—among other things—reliance on the defendant’s misrepresentation. When a plaintiff brings such a case as a class action under Fed. R. Civ. P. 23(b)(3), it must show that “the questions of law or fact common to class members predominate over any questions affecting only individual members.” Twenty-five years ago, a four-Justice majority recognized a rebuttable presumption of classwide reliance based on the “fraud on the market” economic theory. See Basic Inc. v. Levinson, 485 U.S. 224 (1988). That theory assumes that in an efficient market, all publicly available information about a stock is reflected in the stock’s price; and thus, purchases at that price are made in reliance on the information—including representations—known to the market. Whether any individual buyer or seller either knew of alleged misrepresentations or acted in reliance on them is irrelevant.
Today, the Supreme Court granted a writ of certiorari in Halliburton Co. v. Erica P. John Fund, Inc., No. 13-317, to address the continuing validity of Basic’s endorsement of the fraud-on-the-market presumption, and the showing a defendant must make to rebut the presumption and thereby prevent class certification.
The plaintiffs are shareholders in the Halliburton Company who filed a class action alleging that their investments in that company’s stock lost money when the company issued corrective statements that allegedly caused the stock price to fall. In an earlier round of litigation, the Supreme Court vacated the denial of class certification, holding that in order to invoke the Basic presumption of classwide reliance, a securities-fraud plaintiff need not prove loss causation—i.e., that the corrective statement in fact caused the stock price to fall. See Erica P. John Fund, Inc. v. Halliburton Co., 131 S. Ct. 2179 (2011). The Court specifically declined to address “any other question about Basic, its presumption, or how and when it may be rebutted.” Id. at 2187.
On remand, the district court certified the class, without addressing Halliburton’s argument that it had rebutted the Basic presumption with evidence relating to “price impact”—in short, evidence that the alleged misrepresentation did not affect the stock’s price. While Halliburton’s appeal from that order was pending before the Fifth Circuit, the Supreme Court held that a plaintiff in a fraud-on-the-market case need not prove materiality to obtain the benefit of the presumption of reliance at the class-certification stage. See Amgen, Inc. v. Connecticut Retirement Plans & Trust Funds, 133 S. Ct. 1184 (2013). In two separate opinions, four justices questioned the economic premises of Basic’s rebuttable presumption, and suggested they would be open to reconsidering the decision in an appropriate case. See id. at 1204 (Alito, J., concurring); id. at 1208 n.4 (Thomas, J., dissenting, joined by Scalia and Kennedy, JJ.).
The Fifth Circuit affirmed the order granting class certification. The court of appeals interpreted Amgen as focusing the Rule 23(b)(3) inquiry on whether all class members “will fail or succeed together.” 718 F.3d 423, 431 (5th Cir. 2013). The court of appeals noted that “price impact” rebuttal evidence may be established with proof common to the class, and that if the evidence successfully rebuts the presumption, all class members’ claims will fail together. Accordingly, the court of appeals likened price-impact evidence to those issues that cannot be resolved at the class-certification stage (materiality), rather than those that can (trade timing, market efficiency, and publicity).
Halliburton is highly significant for the business community because its resolution will clarify the standards applicable to certification of securities-fraud class actions and the showing required to obtain class certification.
Absent extensions, amicus briefs in support of the petitioner (or in support of neither party) will be due on January 6, 2014, and amicus briefs in support of the respondent will be due on February 5, 2014. Any questions about this case should be directed to Timothy S. Bishop (+1 312 701 7829) or Joshua D. Yount (+1 312 701 8423) in our Chicago office, or to Andrew J. Pincus (+1 202 263 3220) in our Washington office.
The Supreme Court also recently invited the Solicitor General to file a brief expressing the views of the United States in one case of interest to the business community:
Arab Bank, PLC v. Linde, No. 12-1485: The question presented in this case arising under the Anti-Terrorism Act is whether the Second Circuit erred when it failed to vacate severe sanctions against the defendant bank for non-production of records located in countries where production would subject the bank to criminal penalties. Mayer Brown is one of the counsel for the petitioner.
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