The U.S. Supreme Court’s ruling in Halliburton Co. et al. vs. Erica P. John Fund Inc. is a significant victory for institutional investors in pursing securities class-action lawsuits.
Writing for a unanimous decision of the court June 23, Chief Justice John Roberts refused to overturn a presumption of reliance in buying or selling a security on what turns out to be a securities litigation defendant’s alleged misrepresentations. The decision protects securities class-action litigation plaintiffs from having to directly demonstrate that any misrepresentations affected the price of a security to qualify for class-action certification.
The court’s refusal to overturn its 25-year-old precedent in its 1988 ruling in Basic Inc. vs. Levinson preserves investors’ long-standing right to invoke the presumption at the class certification stage in actions brought under Securities and Exchange Commission’s Rule 10b-5 and the Securities Exchange Act of 1934’s Section 10(b), which prohibit any action or omission resulting in fraud or deceit involving the purchase or sale of any security.
Halliburton attorneys and the company’s backers had asked the high court to throw out the landmark Basic presumption precedent that provides the foundation for most shareholder class actions in the United States.
That presumption known as the “fraud-on-the-market” theory “holds that ‘the market price of shares traded on well-developed markets reflects all publicly available information,’” including material misrepresentations, the Halliburton decision noted.
The presumption helps shareholders overcome two separate legal hurdles: the securities-law requirement that they show they relied on a company’s misstatement, and the class-action requirement that the plaintiffs’ claims have enough similarities to warrant a group lawsuit.
Without the presumption, each shareholder would have to show individual reliance on an alleged misstatement. That requirement, in turn, would preclude class actions because it would force judges to conduct a case-by-case inquiry into the circumstances of each shareholder.
In its defense of its case, Halliburton attorneys said the Basic ruling relied on the idea that securities markets operate efficiently, a premise the company said has been shown by experience and research to be faulty. The company cited a litany of examples, including the 1998-‘01 technology bubble and the “Black Monday” stock crash in October 1987.
Mr. Roberts said those types of examples didn’t undermine Basic’s “modest premise” that capital markets usually operate efficiently.
The ruling places on defendants in securities class-action litigation the burden to prove a lack of price impact in order to defeat the Basic decision’s presumption of reliance. That ruling means defendants will have to provide evidence that their “misrepresentation did not in fact affect the stock price” to overcome the presumption of reliance.
The court’s decision to preserve Basic was unmistakable.
As Mr. Roberts wrote: “Halliburton urges us to overrule Basic’s presumption of reliance and to instead require every securities fraud plaintiff to prove that he actually relied on the defendants’ misrepresentation in deciding to buy or sell a company’s stock. Before overturning a long-settled precedent, however, we require ‘special justification,’ not just an argument that the precedent was wrongly decided. ... Halliburton has failed to make that showing.”
The court’s decision in Halliburton avoids the dramatic shift sought by the company and other defendants regarding what investors must show in order to obtain class certification, and avoids a heightened burden of proof on plaintiffs at the class certification stage. As precisely noted in Justice Ruth Bader Ginsberg’s concurring opinion, the “court’s judgment ... should impose no heavy toll on securities-fraud plaintiffs with tenable claims.”
The Supreme Court’s ruling in Halliburton should not curtail the rights of investors, and the conduct of securities class actions in the U.S. also should not substantially change. In fact, the Halliburton ruling might cause the average U.S. securities class action to get longer and cost more because defendant corporations most likely will put on evidence that plaintiffs will have to respond to during the class certification stage. As result, it might reduce the number of questionable cases that are brought, as plaintiffs’ counsel will need to more seriously consider the costs and risks involved in deciding which cases to bring.
The Halliburton decision is also significant because the court squarely rejected Halliburton’s policy arguments contending that Basic should be overturned because of so-called “harmful consequences” of securities class actions. The court completely rejected these arguments, properly noting the forum for addressing these concerns is Congress, not the courts. This portion of the Halliburton ruling will hopefully put an end to repeated and baseless anti-investor policy arguments raised by defendants with the courts in an attempt to curtail investor rights.
Noah R. Wortman is the Philadelphia-based director of global business development of Goal Group Ltd., London, whose focus includes providing support services to pension funds and other institutional investors in securities litigation in the U.S. and non-U.S. markets.
