The U.S. Supreme Court’s 2014 decision in Halliburton v. Erica P. John Fund was expected to result in significant changes to the way plaintiffs can obtain class certification in securities cases involving the fraud-on-the-market presumption of reliance. While the decision ultimately did not dramatically transform the law, it will still likely lead to discreet but meaningful changes to class certification in specific securities cases.
In an article published in the 2015 edition of Inside the Minds’ “New Developments in Securities Litigation,” Munger, Tolles & Olson attorney James C. Rutten explores the Halliburton decision and discusses the impact the decision will have on a variety of securities class actions.
The Halliburton plaintiffs allege that the defendant violated the Securities Exchange Act of 1934 by making false statements about expenses, earnings and the benefits of a potential merger. After winding its way up and down the federal courts, the case reached the Supreme Court for the second time in 2014. The Court addressed two questions: 1) whether the Court should overrule or dramatically change the holding in Basic Inc. v. Levinson, which recognized the fraud-on-the-market presumption of reliance (a presumption that obviates the need for plaintiffs to prove reliance on an investor-by-investor basis and thus makes it easier for plaintiffs to obtain class certification), or 2) whether in cases where the plaintiff invokes the presumption at the class certification stage, a defendant may rebut it with evidence that the alleged misrepresentations did not distort the stock price. Surprising many, the Supreme Court did not dramatically change the holding of Basic, although it did hold that a defendant may rebut the presumption by showing a lack of price distortion.
Despite not being the blockbuster many expected it to be, the court’s ruling should not be ignored, Mr. Rutten cautions. He identifies several subtle but important implications that affect both plaintiffs and defendants in securities class actions.
Under the Halliburton ruling, plaintiffs may have an easier time obtaining class certification in cases where the securities are thinly traded or the market shows other signs of inefficiency. The ruling supports the notion that if the market is efficient enough that the alleged misstatements can be expected to have affected the price to some degree – even a small one – a court can presume that investors relied on those statements when purchasing the securities at the prices they paid. Therefore, it is likely that under some circumstances when courts previously would have denied certification for lack of robust market efficiency, they may now grant certification on the theory that the markets are efficient enough for investors to have relied on the allegedly misleading statements.
Conversely, there are likely to be cases in which class certification previously would have been granted in which it now will be denied. Before the ruling, defendants in some circuits were only able to argue a lack of price impact at the certification stage to show that the market was not efficient. Under Halliburton, by contrast, defendants now can show a lack of price impact to rebut the fraud-on-the-market presumption altogether, even if the market was efficient. Under Halliburton, therefore, a plaintiff’s evidence of market efficiency, no matter how compelling, should be irrelevant if a defendant shows that the challenged statements did not affect the stock price.
Lastly, the Halliburton ruling breathes new life into the question of how to show price impact or a lack thereof. Before Halliburton reached the Supreme Court for the second time, the Fifth Circuit indicated that a defendant could show a lack of price impact by proving either that the price did not increase in response to the challenged statement, or that it did not decrease when corrective statements were made. This simplistic statement obscures many complexities, which Mr. Rutten explores in his article.
Based in Munger Tolles’ Los Angeles office, Mr. Rutten focuses his practice on complex securities and shareholder derivative litigation, as well as class action and other commercial litigation matters. He has extensive experience representing both plaintiffs and defendants in securities cases in federal and state courts throughout the United States.