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Wednesday, September 18, 2019

Supreme Court rules defendants can rebut presumption of reliance in securities claims

By Kyla Asbury | Jun 25, 2014

WASHINGTON (Legal Newsline) - The U.S. Supreme Court has ruled that defendants can rebut the presumption of reliance it adopted 25 years ago before class certification is granted in securities class action claims.

The case, known as Halliburton Co. v. Erica P. John Fund Inc., involved a request that the Supreme Court overrule a landmark precedent from 1989 that enabled federal securities claims to be pursued as class actions.

In its decision, the Supreme Court rejected calls to do away with the presumption of reliance adopted in its Basic v. Levinson decision that made it easier to pursue securities claims as class actions, however, the court also confirmed that defendants have the opportunity to rebut that presumption before class certification is granted.

Halliburton asked the court to overrule Basic's legal "fiction" that permitted courts to presume class-wide reliance on alleged public material misrepresentations, thereby enabling lawsuits alleging fraud under the federal securities laws to be certified as class actions, despite individualized reliance issues that would otherwise render such cases unfit for class treatment.

Chief Justice John Roberts delivered the opinion of the court, in which Justices Anthony Kennedy, Ruth Bader Ginsburg, Stephen Breyer, Sonia Sotomayor, and Elena Kagan joined. Ginsburg filed a concurring opinion, in which Breyer and Sotomayor joined. Justice Clarence Thomas filed an opinion concurring in the judgment, in which Justices Antonin Scalia and Samuel A. Alito joined.

"Investors can recover damages in a private securities fraud action only if they prove that they relied on the defendant's misrepresentation in deciding to buy or sell a company's stock," the June 23 opinion states. "In Basic Inc. v. Levinson...we held that investors could satisfy this reliance requirement by invoking a presumption that the price of stock traded in an efficient market reflects all public, material information-including material misstatements."

In such a case, according to the opinion, the court concluded anyone who buys or sells the stock at the market price may be considered to have relied on those misstatements.

"We also held, however, that a defendant could rebut this presumption in a number of ways, including by showing that the alleged misrepresentation did not actually affect the stock's price-that is, that the misrepresentation had no 'price impact,'" the opinion states. "The questions presented are whether we should overrule or modify Basic's presumption of reliance and, if not, whether defendants should nonetheless be afforded an opportunity in securities class action cases to rebut the presumption at the class certification stage, by showing a lack of price impact."

Erica P. John Fund is the lead plaintiff in the putative class action against Halliburton and one of its executives, alleging violations of section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5.

EPJ claimed between June 3, 1999, and Dec. 7, 2001, Halliburton made a series of misrepresentations regarding its potential liability in asbestos litigation, its expected revenue from certain construction contracts and the anticipated benefits of its merger with another company-all in an attempt to inflate the price of its stock.

Halliburton subsequently made a number of corrective disclosures, which EPJ claims caused the company's stock price to drop and investors to lose money.

EPJ moved to certify a class comprising all investors who purchased Halliburton common stock during the class period and the district court found that the proposed class satisfied all the threshold requirements of Federal Rule of Civil Procedure 23(a).

The court would have also concluded that the class satisfied the requirement of Rule23(b)(3) that "the questions of law or fact common to class members predominate over any questions affecting only individual members" if it were not for one difficulty, according to the ruling.

"The difficulty was that circuit precedent required securities fraud plaintiffs to prove 'loss causation'-a causal connection between the defendants' alleged misrepresentations and the plaintiffs' economic losses-in order to invoke Basic's presumption of reliance and obtain class certification," the ruling states.

Because EPJ had not demonstrated such a connection for any of Halliburton's alleged misrepresentations, the district court refused to certify the proposed class. The United States Court of Appeals for the Fifth Circuit affirmed the denial of class certification on the same ground.

"We granted certiorari and vacated the judgment, finding nothing in 'Basic or its logic' to justify the Fifth Circuit's requirement that securities fraud plaintiffs prove loss causation at the class certification stage in order to invoke Basic's presumption of reliance," the ruling stated of its 2011 decision. "'Loss causation,' we explained, 'addresses a matter different from whether an investor relied on a misrepresentation, presumptively or otherwise, when buying or selling a stock.'"

The Supreme Court then remanded the case for the lower courts to consider "any further arguments against class certification" that Halliburton had preserved.

On remand, Halliburton argued that class certification was inappropriate because the evidence it had earlier introduced to disprove loss causation also showed that none of its alleged misrepresentations had actually affected its stock price.

By demonstrating the absence of any "price impact," Halliburton contended, it had rebutted Basic's presumption that the members of the proposed class had relied on its alleged misrepresentations simply by buying or selling its stock at the market price.

Without the benefit of the Basic presumption, investors would have to prove reliance on an individual basis, meaning that individual issues would predominate over common ones, according to the ruling. The district court declined to consider Halliburton's argument, holding that the Basic presumption applied and certifying the class under Rule 23(b)(3). The Fifth Circuit affirmed.

The court found that Halliburton had preserved its price impact argument, but to no avail.

While acknowledging that "Halliburton's price impact evidence could be used at the trial on the merits to refute the presumption of reliance," the court held that Halliburton could not use such evidence for that purpose at the class certification stage.

"We once again granted certiorari...this time to resolve a conflict among the circuits over whether securities fraud defendants may attempt to rebut the Basic presumption at the class certification stage with evidence of a lack of price impact," the ruling states. "We also accepted Halliburton's invitation to reconsider the presumption of reliance for securities fraud claims that we adopted in Basic."

"More than 25 years ago, we held that plaintiffs could satisfy the reliance element of the Rule 10b-5 cause of action by invoking a presumption that a public, material misrepresentation will distort the price of stock traded in an efficient market, and that anyone who purchases the stock at the market price may be considered to have done so in reliance on the misrepresentation," the ruling states. "We adhere to that decision and decline to modify the prerequisites for invoking the presumption of reliance. But to maintain the consistency of the presumption with the class certification requirements of Federal Rule of Civil Procedure 23, defendants must be afforded an opportunity before class certification to defeat the presumption through evidence that an alleged misrepresentation did not actually affect the market price of the stock."

In Ginsburg's concurring opinion, she states advancing price impact consideration from the merits stage to the certification stage may broaden the scope of discovery available at certification.

"But the court recognizes that it is incumbent upon the defendant to show the absence of price impact," Ginsburg's concurring opinion states. "The court's judgment, therefore, should impose no heavy toll on securities-fraud plaintiffs with tenable claims. On that understanding, I join the court's opinion."

In Thomas' concurring in the judgment, he states that the Supreme Court was asked to determine whether Basic was correctly decided.

"The Court suggests that it was, and that stare decisis demands that we preserve it," his opinion states. "I disagree. Logic, economic realities and our subsequent jurisprudence have undermined the foundations of the Basic presumption, and stare decisis cannot prop up the façade that remains. Basic should be overruled."

Basic, Thomas states, "should be overruled in favor of the straightforward rule that '[r]eliance by the plaintiff upon the defendant's deceptive acts'-actual reliance, not the fictional 'fraud-on-the-market' version-'is an essential element of the §10(b) private cause of action.'"

"Congress' failure to overturn Basic does not permit us to 'place on the shoulders of Congress the burden of the Court's own error,'" Thomas' opinion states.

U.S. Supreme Court case number: 13-317

From Legal Newsline: Kyla Asbury can be reached at classactions@legalnewsline.com.

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