Supreme Court grants review to reconsider “fraud-on-the-market” theory of reliance in class-action securities litigation

The Supreme Court has granted review in yet another class action, and this one has large implications for the future of securities-fraud litigation. In Haliburton v. Erica P. John Fund, the Court will decide whether to overrule or substantially modify the rule in Basic, Inc. v. Levinson (1988), which adopted the "fraud-on-the-market" theory of reliance in securities-fraud litigation.

Put simply, that theory says that stock prices of a publicly-traded company go up and down based on all the known relevant information about the company. So, in an open securities market, people can assume (and have a right to assume) that all material information is available to current and potential investors. The idea, then, is that when the company makes material misstatements about the company''s financial situation or expected course of conduct, it defrauds the entire market, and the company's stock price is affected for all shareholders. Basic therefore held that an individual shareholder was entitled to a presumption of reliance on the company's material mistatements, even if he or she did not knowingly rely on them. Among other things, that presumption greatly simplifies class certification in a securities-fraud case. On the other hand, imagine the difficulty if the law required a showing of individual actual reliance on material mistatements.

Only six justices participated in Basic. (The vote was 4 to 2.)  Of the three justices who did not participate, two (Justices Scalia and Kennedy) remain on the Court.

Here are the questions presented in Haliburton:

1. Whether this Court should overrule or substantially modify the holding of Basic Inc. v. Levinson, 485 U.S. 224 (1988), to the extent that it recognizes a presumption of classwide reliance derived from the fraud-on-the market theory.

2. Whether, in a case where the plaintiff invokes the presumption of reliance to seek class certification, the defendant may rebut the presumption and prevent class certification by introducing evidence that the alleged misrepresentations did not distort the market price of its stock.

The cert-stage Supreme Court briefs in Haliburton are here.

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