Should the U.S. Supreme Court revisit one of the bedrock doctrines of securities class action litigation? That’s a question the court is set to ponder Friday, when the justices weigh whether to grant certiorari in Erica P. John Fund v. Halliburton.
Halliburton’s lawyers at Baker Botts have taken aim at the fraud-on-the-market theory that establishes the necessary element of reliance at the class certification stage in securities cases. If the court decides to abandon this 25-year-old doctrine, it would restore a huge obstacle for the securities plaintiffs bar and throw the future of large investor class actions into serious question.
The court could announce its cert decision as early as Monday. Four justices must approve a cert petition.
In Halliburton’s cert petition, the company argues that the court should overturn its 1988 ruling in Basic v. Levinson, which establishes the fraud-on-the-market presumption at the class certification stage. Under Basic, courts can presume that all investors relied on an alleged misrepresentation when they bought or sold their securities. The court concluded that efficient markets reflect all available information, including public false statements. Without this presumption, plaintiffs seeking class cert would have to show that they all relied on the allegedly misleading information and that common issues predominate in the nature of that reliance. That would be a high hurdle under Dukes v. Wal-Mart.
Baker Botts argues that the economic theory that the court relied on in Basic has been discredited.
“Basic’s naïve understanding of market efficiency and its simplistic view that market prices rationally convey information are at war with economic reality,” Halliburton’s petition states.
