Last week the Supreme Court decided Erica P. John Fund v. Halliburton, 573 U.S. ___ (2014), its latest securities law decision. For those who worried that the Court would eliminate Basic v. Levinson’s fraud on the market presumption, Halliburton is a victory. Halliburton means private plaintiffs can continue to have a role in enforcing the federal securities laws, in stark contrast to the Court’s more hostile approach to consumer class actions. But the effect of Halliburton’s second holding, that a defendant may rebut evidence of “price impact” at the class certification stage, is less clear. Expanding the scope of litigation at the class certification stage will front-load securities class actions, essentially creating a mini-trial early in the case, and will change the calculus for plaintiffs and their lawyers in deciding whether to bring cases. It will almost certainly drive down the settlement value of securities class actions and will probably result in some otherwise meritorious lawsuits not being brought.
Halliburton is important, first and foremost, because it reaffirms the Basic v. Levinson presumption of reliance. Basic says that in a public market like the New York Stock Exchange, a stock’s price incorporates all publicly available information about the stock. A purchaser of that stock, relying on the integrity of the stock price, is thus deemed to rely on all public information, including any misstatements. Halliburton holds that despite evidence that public markets do not always perfectly incorporate information into a stock’s price, plaintiffs may still make use of the Basic presumption to certify a securities class action. 573 U.S. ___ (slip op. at 11-13). Without Basic, securities class actions would not be viable because plaintiffs would always need to show actual individual reliance on the alleged misstatements, making it impossible to meet Rule 23’s requirements for class certification. For that reason, Halliburton is a good outcome for those who think investors should be able to bring class actions to right wrongs under the federal securities laws.