SCOTUSblog: Halliburton Co. v. Erica P. John Fund, Inc.
putative class of shareholders who allege that they suffered material losses as a result of fraudulent misrepresentations by Halliburton (see here for this case's first trip to the Supreme Court back in 2011). The Fund's claims are based upon the "fraud-on-the-market" theory, which suggests that that an efficient, well-organized market will reflect all of the information that there is about a given security. Under this theory, investors can be presumed to have relied upon the distortions made by Halliburton's allegedly fraudulent misrepresentations without specific proof that they had done so. The Court adopted this theory in Basic Inc. v. Levinson, although that decision was made in 1988; three of the justices (including Justices Kennedy and Scalia) recused themselves at the time, and three justices in last term's Amgen case said they the Court should perhaps review Basic's premise. Halliburton attempted to show evidence that its allegedly fraudulent mispresentations caused no market price impact, but the District Court ruled that Halliburton was not entitled to do so. The Fifth Circuit affirmed.
Issue: The questions before the Court are (1) whether this Court should overrule or substantially modify the holding of Basic Inc. v. Levinson, to the extent that it recognizes a presumption of classwide reliance derived from the fraud-on-the-market theory; and (2) 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 its stock.
Holding: In a 9-0 decision, the Supreme Court ruled that Halliburton has not shown a special justification for overruling Basic’s presumption of reliance. For the same reasons the Court declines to overrule Basic’s presumption of reliance, it also declines to modify the prerequisites for invoking the presumption by requiring plaintiffs to prove “price impact” directly at the class certification stage. The Court agrees with Halliburton, however, that defendants must be afforded an opportunity to rebut the presumption of reliance before class certification with evidence of a lack of price impact.