Australia: The Basic presumption: securities class actions: Basic, Inc. v. Levinson, 485 U.S. 224 (1988)

On November 15, 2013, the Supreme Court granted certiorari in a case, Halliburton Co. v. Erica P. John Fund, Inc., No. 13-317, that should be on the radar of every securities lawyer. The reason is that the Court will consider the continuing validity of the class-wide reliance presumption set forth in Basic, Inc. v. Levinson, 485 U.S. 224 (1988). If Basic is overruled or significantly modified, the case will have a significant impact on putative federal securities class actions.

The Court's 1988 ruling in Basic was a watershed for class certification in securities cases. This is because the Court eliminated the need for plaintiffs to show individual reliance on alleged misrepresentations in cases brought under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. Instead, reliance on alleged misrepresentations can be presumed. This presumption is based on the theory that efficient markets incorporate all publicly available information, including alleged misrepresentations, about the company into the share price. Accordingly, when investors buy or sell shares at market price, they do so in presumptive reliance on the alleged misrepresentations.

In recent years, many, including members of the Court, have questioned the Basic presumption. In Amgen, Inc. v. Connecticut Retirement Plans and Trust Funds, 133 S. Ct. 1184 (2013), four Justices either authored or joined in opinions that were critical of Basic's theory. Justice Thomas wrote a dissent that Justices Scalia and Kennedy joined. In that dissent, Thomas said the "Basic decision itself is questionable." Justice Alito, who wrote a concurring opinion, was even more overt, stating that "recent evidence suggests that the presumption may rest on a faulty economic premise" and "reconsideration of the Basic presumption may be appropriate."

See also:

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.