The fraud-on-the-market presumption of reliance will not go down without a fight in Halliburton v. Erica P. John Fund (No. 13-317), a Supreme Court case that may reshape securities litigation for years to come. At issue, according to Respondents, is (1) whether a “statutory interpretation precedent that Congress has left unchanged for more than a quarter century” should be overruled or modified and (2) whether evidence of price impact may be considered at class certification to rebut the presumption. The Respondents have lined up their cavalry, with eleven amici in their support. The plaintiffs’ bar has risen to the occasion, with heavy hitters Milberg LLP, Bernstein Litowitz Berger & Grossmann LLP, Berger & Montague PC, Labaton Sucharow LLP, Kessler Topaz Meltzer & Check LLP, Pomerantz LLP, and others all authoring briefs in support of Respondents.
Three central arguments are raised by the Respondents and their supporting amici. First, Respondents appeal to the common sense rationale of Basic. Millions of shares change hands daily in modern securities markets, and “the market is interposed between seller and buyer and ideally transmits information to the investor in the processed form of a market price.” They reason that “material statements typically affect the price of a stock through the conduct of analysts who report on significant public statements and market professionals and others who trade on that information,” which price is then relied upon by the ordinary investor.
Countless Securities and Exchange Commission (SEC) regulations are based on the premise that securities prices react to material information. See, e.g., Revisions to the Eligibility Requirements for Primary Securities Offerings on Forms S-3 and F-3, 72 Fed. Reg. 73,534, 73,536 (Dec. 27, 2007); Amendments to Regulation SHO, 75 Fed. Reg. 11,232, 11,234 (Mar. 10, 2010); Selective Disclosure and Insider Trading, 65 Fed. Reg. 51,716, 51,719 (Aug. 24, 2000); Self-Regulatory Organizations, Exchange Act Release No. 30,569 (Apr. 10, 1992). Respondents also note that defendants rely on efficient market theory in presuming that cautionary language and disclaimers are reflected in the market price. Even the famed author of the Efficient Capital Markets Hypothesis itself—Professor Eugene Fama—has submitted an amicus brief arguing that disagreement among economists concerning the extent to which stock prices reflect underlying values is not the same as a disagreement over whether prices respond to information. That simple proposition underlying Basic, Professor Fama and others argue, is overwhelmingly accepted in academic literature.
The second and strongest argument of Respondents is stare decisis, the principle that courts should adhere to precedent. The Supreme Court’s decision in Basic has been allowed to stand for more than twenty-five years and in that time, Congress passed the Private Securities Litigation Reform Act of 1995 (“PSLRA”) and the Securities Litigation Uniform Standards Act of 1998, never disturbing the presumption central to private securities class actions. Indeed, U.S. Senator Barbara Boxer (D-CA), U.S. Senator Ed Markey (D-MA), and nine current and former representatives of Congress, submitted an amicus brief in support of Respondents, outlining much of the legislative history of the PSLRA and noting that proposed bills that would have eliminated the fraud-on-the-market presumption were rejected by Congress.
They rebut Petitioners’ arguments that their position is inconsistent with Supreme Court jurisprudence. The venerable Professor Arthur R. Miller, coauthor of the treatise Federal Practice & Procedure, submitted a brief in which he argues that the fraud-on-the-market presumption is consistent with modern class-action jurisprudence. And securities scholars line up right behind Miller, with Professors James Cox, Jill Fisch, Thomas Hazen, and others arguing that the fraud-on-the-market presumption is consistent with securities jurisprudence.
Finally, although no member of the Supreme Court would base its decision on policy alone, there is no question that the policy considerations raised by Respondents and their amici are significant. Overruling Basic “would preclude certification in the vast majority of private securities-fraud class actions.” The Department of Justice and former SEC Chairmen have added their voices to the chorus of briefs arguing that private securities litigation is an “essential supplement” to civil and criminal proceedings. State attorneys general from 22 states and territories agree and state that class actions are an essential enforcement tool, particularly where regulators’ resources are limited.
Investors themselves have joined together, arguing that private class actions are the only way to achieve essential recovery for all investors and deterrent effects for corporate fraud. Some investors have gone so far to say that without the presumption of reliance, “consequences could be dire,” “could trigger significant market disruption,” and “would topple the central pillar of institutional investors’ investment strategies and raise a serious question as to whether, consistent with their fiduciary duties, they can continue to rely on them.” In sum, they say that Halliburton’s position “would likely doom private enforcement of the securities laws.”
With 22 amicus briefs and heavy hitters on both sides, there is no doubt that the Supreme Court’s decision in Halliburton will be anxiously awaited by all. The Supreme Court’s questioning during oral argument, scheduled for early March, should lend some insight into whether Halliburton will become Basic Inc. v. Levinson’s last stand.