Supreme Court Clarifies the Rebuttable Presumption of Reliance under the "Fraud-on-the-Market" Theory

In Halliburton Co. v. Erica P. John Fund (2014 WL 2807181), the defendant sought to overturn the longstanding "fraud-on-the-market” theory established in Basic Inc. v. Levinson (485 U.S. 224) for class plaintiffs under §10(b) or Rule 10b-5 claims. To recover damages under a §10(b) or Rule 10b-5 claim, a plaintiff must prove reliance on a misrepresentation in buying or selling stock. The “fraud-on-the-market" theory adopted in Basic provides class plaintiffs a presumption of reliance, based on the premise that the price of shares traded in an efficient market reflects all publicly available information, including any material misrepresentations.

Here, EPJ Fund filed a putative class action against Halliburton for violations of §10(b) and Rule 10b-5. After initially being denied class certification, the Supreme Court vacated the denial and allowed EPJ Fund to invoke the Basic presumption. On remand, Halliburton argued certification was nevertheless inappropriate because evidence demonstrated that the misrepresentation had no price impact, effectively rebutting the presumption. Thus, class members would have to prove reliance on an individual level - meaning that individual issues would predominate over common issues and class certification would be inappropriate under F.R.C.P. 23(b)(3). The district court rejected Haliburton’s defense and certified the class. Halliburton appealed, seeking to overturn Basic, claiming the theory was both inconsistent with Congressional intent and undermined by changing economic theory.

The Supreme Court found the arguments unpersuasive for overturning precedent. The Court was unpersuaded by the arguments that the market is not always efficient and that investors do not always rely on the integrity of the market. The Court also refused to modify prerequisites for the presumption, holding that plaintiffs are not required to prove price impact to invoke the theory to satisfy reliance.

The Court did agree with Halliburton’s argument that defendants should have the opportunity to rebut the presumption at the class certification stage by proving no price impact. This effectively means that the price impact of alleged misrepresentations and, in particular, the expert testimony that surrounds the issue of price impact will now be addressed much earlier in securities class actions.  While this is likely to increase costs for all parties, it affords defendants an earlier opportunity to defeat class treatment.