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Halliburton: U.S. Supreme Court Holds Presumption of Reliance Based On Fraud on the Market Theory Still Viable in Securities Actions

On June 23, 2014, the U.S. Supreme Court released its potentially transformative decision in Halliburton Co. v. Erica P. John Fund. Rejecting the defendants’ argument, the Supreme Court held that the presumption of reliance based on the fraud on the market theory that it first recognized in its 1988 decision Basic Inc. v. Levinson, 485 U.S. 224 (1988), remained a viable substitute for proving individual reliance in securities class actions.

The case had the potential to mark a significant shift in civil securities litigation in the United States. The Court did hold, however, that defendants may seek to rebut the presumption of reliance at the class certification stage, based on the absence of price impact – a modification to existing law that will likely only make the class certification stage more costly.

Writing for a six-justice majority – all nine concurred in the judgment – Justice Roberts wrote that a securities class action defendant may seek to rebut the presumption at the class certification stage by showing that the alleged misrepresentation did not impact the company’s share price. Justice Thomas, joined by Justices Scalia and Alito, wrote a concurring opinion in support of the Court’s narrow holding reversing the Fifth Circuit and remanding for further proceedings – but took the opportunity to set forth a criticism of the fraud on the market theory first propounded in Basic.

Pending since 2002, the case had last come before the Supreme Court in 2011, when the Court unanimously rejected the argument that a plaintiff must first establish loss causation to obtain class certification.

For the foreseeable future, this latest Halliburton opinion lays to rest attacks on the underpinnings of the efficient market theory and the fraud-on-the-market presumption it spawned. Rather, in an efficient marketplace, a company’s share price reflects all publicly available information about a company, including the alleged misrepresentation, and that a plaintiff class may rely on the market price instead of on each individual alleged misrepresentation.

The Supreme Court opinion may be found here.

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