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.
As an alternative to reversing Basic, the petition urges the court to force plaintiffs to prove that alleged misrepresentations affected a company’s stock price in order to use the fraud-on-the-market presumption. In this case, they state, “There is no evidence that Halliburton’s alleged misrepresentations moved the market price.”
The plaintiffs claim that Halliburton misled them about its asbestos liability, among other things. The case was filed in 2002 after the company’s stock dropped the previous December by 43 percent following a $30 million asbestos verdict against a subsidiary.
Baker Botts partner Aaron Streett, one of the authors of Haliburton’s brief, said it would be challenging for large classes of plaintiffs to establish reliance if Basic is overturned. He noted that it would be easier for large institutional investors to show reliance than small investors.
The plaintiffs are represented by Boies, Schiller & Flexner and Kahn Swick & Foti. (David Boies took over the case from his daughter Caryl Boies, who died in 2010.) In their brief opposing cert, the plaintiffs argue that the Supreme Court shouldn’t take the case for both procedural and substantive reasons. First, the court already reviewed the Halliburton case in 2011, when it reversed the U.S. Court of Appeals for the Fifth Circuit and ruled 9-0 that plaintiffs don’t have to prove loss causation at class certification to invoke the fraud-on-the-market presumption. The defendant did not preserve the current issue for another appeal, they maintain.
On substantive grounds, Boies urged the court not to eliminate a “basic cornerstone for modern private securities litigation,” noting that Congress could have done away with the fraud-on-the-market presumption but has not.
Several amicus briefs were filed in support of Halliburton’s petition, including one by a group of former law professors and commissioners of the U.S. Securities and Exchange Commission. That brief, filed by John Savarese and George Conway III of Wachtell, Lipton, Rosen & Katz, quotes frequently from the Basic dissent of Justice Byron White, who objected that the fraud-on-the-market presumption created an “investor insurance scheme” that should be created by Congress, not the courts.
Professor John Coffee Jr. of Columbia Law School told the Litigation Daily that he’s skeptical that the court will take up this issue now. He notes that four of the justices expressed concern about the fraud-on-the-market theory last year in Amgen v. Connecticut Retirement Plans and Trust Funds, in which the court said the materiality of a misrepresentation does not have to be proved at the class certification stage.
“I am skeptical that they will take this issue this year, having approached it and then backed away last year in Amgen,” Coffee said. “Still, it only takes four votes to grant cert and there may be four votes for it.”