Supreme Court to Revisit the Fraud-on-the-Market Theory

Last Friday, the Supreme Court granted certiorari in Halliburton v. Erica John Fund.  Defendant Halliburton asked the Supreme Court to revisit its 1988 decision in Basic v. Levinson in which the Court adopted the so-called fraud-on-the-market presumption of reliance.  Under that presumption, any information in the marketplace -- including any false and misleading information -- is automatically incorporated into the market price of any security that trades on an efficient market.  Accordingly, all investors, including those who never saw or heard or read the allegedly false information, can be thought to have relied upon it because the investor relied upon the integrity of the market and the stock price it generates.  Because, under this theory, all investors are presumed to rely on material false information, there is no need for a class action plaintiff to prove that each member of the class actually saw or heard and relied on the false information in the marketplace. If the Supreme Court overturns Basic and the fraud-on-the-market presumption, it might then be necessary for every purchaser or seller in a plaintiff class to prove that he or she relied on the allegedly false and misleading information.  In that case, class litigation would be difficult -- if not impossible.  Thus, the significance of Halliburton is difficult to overstate.  At present, securities actions while difficult on the merits are rather easy to certify as class actions.  That could change dramatically, leading to much more common individual actions, each substantially smaller in terms of total damages than a class action.  Thus, issuers' exposure could be reduced, and the entire industry of securities litigation from plaintiffs' firms to defense firms to experts could be affected very significantly.