Choosing not to wait until yesterday’s conference, the Supreme Court on Friday accepted certiorari in Halliburton Co. v. Erica P. John Fund, Inc. (No. 13-317), a case that was before the Court just two years ago and that asks the Court to address two questions involving the application of Basic Inc. v. Levinson, 485 U.S. 224 (1988), a frequently contested securities fraud decision that established the “fraud-on-the-market theory.”
As previously noted, the fraud-on-the-market theory assumes that market prices of securities trading in an efficient market reflect all publicly available information. This assumption, summarized by the Halliburton petition, stems “from the two-part economic theory that well-developed capital markets efficiently incorporate material information into a stock’s market price and that investors, in turn, purchase stock in reliance on the market price to convey a company’s true value.” In Levinson, the Supreme Court established a rebuttable presumption of plaintiff reliance on the truthfulness of the public information, which can be employed at the class certification stage.
In a recent decision earlier this year addressing Levinson, the Supreme Court decided against raising the bar for the certification of securities class actions by requiring a plaintiff class to establish the materiality of those representations upon which it relied before benefiting from the presumption of reliance granted by the Court in Levinson. See Amgen Inc. v. Conn. Retirement Plans and Trust Funds, 133 S. Ct. 1184 (2013). Somewhat relatedly, the accepted Halliburton petition asks the Court to decide (1) “[w]hether this Court should overrule or substantially modify the holding of Basic Inc. v. Levinson, 485 U.S. 224 (1988), to the extent that it recognizes a presumption of classwide reliance derived from the fraud-on-the-market theory”; and (2) “[w]hether, in a case where the plaintiff invokes the presumption of reliance to seek class certification, the defendant may rebut the presumption and prevent class certification by introducing evidence that the alleged misrepresentations did not distort the market price of its stock.”
In the first instance, Petitioners Halliburton Company and David Lesar want the Court to finally overrule its decision in Levinson or, in the alternative, find that price distortion can be rebutted at the class certification stage. In their petition for certiorari, Petitioners argue that Levinson’s “theoretical framework has been subjected to withering scholarly and empirical attack” and, furthermore, that Levinson’s “legal reasoning conflicts with this Court’s insistence that class-action plaintiffs prove in fact that common issues predominate over individual ones.” Should the Court decide to overrule Levinson, this will allow defendants to demand more exacting proof before class certification is granted. We will continue to follow developments at the Supreme Court on this important issue.