US Supreme Court Refuses to Overturn Fraud-on-the-Market Presumption

    View Authors June 2014

    The United States Supreme Court, on the morning of Monday, June 23, 2014, issued its highly-anticipated decision in Halliburton Co. v. Erica P. John Fund, No. 13-317. Contrary to the hopes of many business interests, the Court did not overrule the “fraud-on-the-market” presumption established more than 25 years ago in Basic v. Levinson, 485 U.S. 224 (1988), which provides securities fraud plaintiffs with a rebuttable presumption that they relied on the purported misrepresentations made by the defendant. This presumption has allowed the certification of classes in the absence of proof of actual, individual reliance and is based on the premise that market efficiencies build all relevant information into a security’s price.

    But, in what is quickly being characterized as a blow to securities class actions, the Court also held that defendants may, at the early class certification stage, defeat Basic’s fraud-on-the-market presumption by introducing direct evidence that the purported misrepresentations did not affect the company’s stock price – that is, the misrepresentations had no actual “price impact.” Challenging whether alleged misrepresentations had price impact at the class certification stage can defeat a class action far earlier than at the merits stage, after expensive discovery has been completed. Of course, the certification of a class, and the attendant risk created for defendants, often drives settlement of even weak claims.