In Halliburton Co. et al v. Erica P. John Fund, Inc., 573 U.S.___ (2014), the Supreme Court revisited its decision in Basic, Inc. v. Levinson, 485 U.S. 224 (1988), in which it held that class action plaintiffs bringing Rule 10b-5 actions could establish the reliance element by invoking a rebuttable presumption that the national markets are efficient and the price of a stock traded on these markets reflects "all public, material information—including material misstatements." The Basic Court held further that one way a defendant could rebut the "efficient market" presumption was to show that the alleged misrepresentation had no impact on the stock's price. Neither of these holdings was disturbed by the Halliburton decision.
Halliburton argued that the efficient market theory was no longer valid in today's markets where, for example, trades are completed in nanoseconds by value investors. Thus, Halliburton reasoned that since the hypothesis underlying the presumption is invalid, Basic should be reversed and individual plaintiffs should be required to show reliance by direct evidence.
Writing for the majority, Chief Justice Roberts observed that for most investors the efficient market theory was valid. The Court declined to depart from its decision in Basic and instead opted for Halliburton's fallback position: defendants should be permitted to overcome the presumption at the class certification stage by showing that the misrepresentation, in fact, had no "price impact."
Class plaintiff EPJ Fund argued that a defendant should be permitted to introduce price impact evidence at the certification stage solely for the purpose of countering plaintiff's evidence of market efficiency but not to rebut the presumption itself. Chief Justice Roberts noted that this formulation could lead to a "bizarre" result where the class would be certified because "[t]he evidence...shows an efficient market" even though "the alleged misrepresentation had no price impact" on that market.
So, what is the net effect of Halliburton? Plaintiff and defense counsel have each claimed victory. But on balance, the important impact of the decision is that defense counsel will now be able to offer event studies at the certification stage to rebut the presumption and, if successful, knock out the class.
The net gain appears to favor the defense. However, it is worth considering that failure at the certification stage to show no price impact could have a significant effect on the settlement value of the case.
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