Sarah S. Gold and Richard Spinogatti
Sarah S. Gold and Richard Spinogatti ()

In our October 2013 column, “Class Certification: Back to Basic,” we discussed the need for guidance from the Supreme Court regarding the fraud-on-the-market presumption of reliance recognized by the four-justice majority in Basic v. Levinson, 485 U.S. 224 (1988) and pointed to the then-pending petition for a writ for certiorari by Halliburton in Erica P. John Fund v. Halliburton, 718 F.3d 423 (5th Cir. 2013) as providing an opportunity for the court to reconsider Basic. Relying upon the premise that, in an efficient market, the price of a security reflects all material publicly-available information relating to its issuer, the Supreme Court held in Basic that, under such circumstances, class plaintiffs were entitled to a rebuttable presumption of reliance at the class certification stage.

Halliburton held that price impact should not be considered at class-certification because it is determinative of loss causation, a class issue common to all members. We noted the extensive scholarly and empirical evidence undermining the efficient capital market theory, the inconsistency among district courts in determining market efficiency, and the split among the circuits with respect to consideration of price impact at the class certification stage.

On Nov. 15, 2013, Halliburton’s petition was granted, briefing followed, and oral arguments were heard on March 5, 2014. Amici curiae, including the United States, filed 23 briefs expressing a range of views regarding various aspects of the questions presented. Of these, the Law Professors’ brief received repeated mention during oral argument as presenting a “midway position,” rejecting market efficiency, but preserving the fraud-on-the-market theory and the presumption of reliance based on a determination of market distortion: “a direct analysis of the market impact of a specific alleged misstatement, rather than examination of general market efficiency, is a more straightforward and reliable test for whether the fraud on the market theory should be involved.”1

Briefs of the Parties

Petitioners, the Halliburton Company and several of its executives, argued that Basic was wrongly decided, does not merit stare decisis protection, and should be overruled. Alternatively, Basic should be modified to require plaintiffs to prove that alleged misrepresentations affected the market price to establish a reliance presumption and rebuttal of any reliance presumption should be permitted at the class-certification stage. Petitioners explained that “as with publicity and market efficiency, the absence of price impact would mean that ‘a plaintiff cannot invoke the fraud-on-the-market presumption.’”2

Respondent, a Halliburton shareholder and the class representative, argued that Basic was correctly decided, should be preserved under stare decisis and overturning Basic would have drastic consequences including the “[d]emise of [p]rivate [s]ecurities [a]ctions,” thus eliminating the deterrent and compensating role they serve.3 Importantly, respondent argued that permitting rebuttal at the class-certification stage would be improper because price impact is a merits issue and its adjudication at the class-certification stage would be inconsistent with the Supreme Court’s holdings in Amgen v. Connecticut Retirement Plans and Trust Funds, 133 S. Ct. 1184 (2013) (materiality, as a merits issue common to the class, should not be determined at the class certification stage) and Erica P. John Fund v. Halliburton, 131 S. Ct. 2179 (2011) (loss causation, as a merits issue common to the class, should not be determined at the class certification stage).

In reply, petitioners point out that “efficiency and publicity are also ‘classwide’ questions” and under Amgen, they must be considered at the class-certification stage to determine whether the reliance presumption arises.4 Price impact, according to petitioners, is the fundamental element of the presumption and should be treated in the same manner.

In its amicus brief, the United States argued Basic should not be overruled, the fraud-on-the-market presumption is an appropriate way to demonstrate reliance because it rests on the common sense premise that public, material information about a publicly traded company affects the price of the company’s stock, and plaintiffs should not be required to prove, and defendants should not be permitted to rebut price impact at the class-certification stage.

With respect to the latter point, the United States argued (1) price impact can be proved through evidence common to the class and the answer will necessarily be the same for all class members and (2) there is no risk that a failure to prove price impact will result in individual questions predominating because all plaintiffs will lose on the merits as they will be unable to prove loss causation.

Oral Arguments

Counsel for petitioners and respondent and the deputy solicitor general made oral arguments. As a prelude to our discussion of the questions by the justices, a summary of certain of the points each counsel presented will provide necessary context.

Petitioners argued Basic was wrongly decided because the court substituted economic theory for the “bedrock common law requirement of actual reliance.” To overcome stare decisis, they argued that “certain things have changed” since Basic, providing an independent basis for its reversal. With respect to the latter point, counsel pointed to (1) a change in the court’s approach to interpreting Section 10(b), construing it more narrowly, from which Basic “stands out like a sore thumb,” (2) the court’s holdings in Comcast v. Behrend, 133 S. Ct. 1426 (2013) and Wal-Mart Stores v. Dukes, 131 S. Ct. 2541 (2011) that “there cannot be presumptions of classwide issues; instead, classwide issues must be proved in fact,” and (3) the economic premise that “investors rely in common on the integrity of the market price” is no longer true.

Petitioners’ counsel noted that if the court were to keep the presumption, “it should at least place the burden on the plaintiff to establish that the misrepresentation actually distorted the market price, or…give the defendants the full right of rebuttal at the class certification stage to establish the price was not impacted.” Pointing to the law of the U.S. Court of Appeals for the Second Circuit as an example, counsel explained price impact must be proven at class-certification because “[it] is the glue that holds common reliance together.” Counsel noted “we are not aware of a single instance in which this Court allowed a presumption to be invoked…, but held that the defendant’s right to rebut must be delayed to a later stage.”

Urging retention of the presumption as “embedded in the law,” respondent argued that permitting rebuttal at class-certification would cause delay “because now you would have to have…discovery on issues that are ordinarily considered to be merits issues. Further, an event study to demonstrate price impact at class-certification would be more difficult because separating “confounding factors” to determine price impact is complicated, would take a lot of time, require expert testimony and be very expensive. In comparison, “when you are trying to prove market efficiency, all you have to do is demonstrate the basic premise that generally…well-developed markets take into account publicly available news, and you can do that relatively simply.”

The United States argued that circumstances cited by petitioners as having changed had not affected the fundamental notion that investors rely on the integrity of the market price. Although investors have devised an array of strategies “to beat the market… it’s hard to imagine one that would render irrelevant evidence that the market price had been distorted by fraud.” Counsel distinguished the requirement that publicity be shown at class-certification from Amgen’s holding that materiality determinations should not be made at that point by explaining that, despite an adverse ruling on publicity, some plaintiffs “might still have good claims because they would have heard and relied upon the information even though it was not communicated to the public.” Therefore, “the effect of disproof of publicity would not be to cause all class members to lose, it would be to cause the class to splinter.”

The same would not be true for an adverse materiality ruling; all class members would lose. Asked about the consequences of overruling Basic, counsel could only describe them as “potentially dramatic,” but conceded that since the Securities and Exchange Commission need not prove reliance to establish a section 10(b) violation, it would not affect the SEC’s enforcement efforts. Interestingly, counsel for the United States stated that the consequences of a shift from market efficiency to price impact would not be “nearly so dramatic,” and added, “In fact if anything, that would be a net gain to plaintiffs, because plaintiffs already have to prove price impact at the end of the day.

Questions of the Justices

Although reaching conclusions from questions of individual justices is not a prudent exercise, the justices’ questions often reveal their interests. A review of their comments is illuminating.

Several justices focused on the timing, under Basic, for rebutting the reliance presumption. Justice Ruth Bader Ginsburg remarked to petitioners’ counsel, “[I]t’s not a question of is it rebuttable. I thought…that’s already claimed from Basic. It’s a question of when. You’re arguing it should be rebuttable at the class certification stage. The other side is arguing, yeah, of course it’s rebuttable, but that comes in at the merits determination.”

Justice Stephen Breyer, after commenting that price impact is “a common issue,” asked petitioners: “Why is that an appropriate issue at the certification stage?” He also challenged petitioners to explain what was wrong with waiting until trial to resolve that common issue. Ginsburg asked respondent: “What difference does it make at what stage the rebuttal is allowed? What practical difference does it make if the inquiry is made at the certification stage rather than the merits stage?”

Justice Antonin Scalia focused on the practical: “once the class is certified, the case is over, right?” and elicited that less than one third of 1 percent of such cases go to verdict. Petitioners, citing Amgen, argued that since efficiency and publication must be determined at class-certification to raise the presumption, so too must price impact.

Several justices questioned whether price impact should be treated the same as efficiency and publicity, or should be considered analogous to materiality which, under Amgen, is a merits issue. Justice Elena Kagan remarked that “there’s a real difference with respect to those issues” and explained that when you rule on efficiency and publicity, “it essentially splits up the class so that different members of the class are left in very different positions; but that when you rule on a question like materiality, which leaves all members of the class in the exact same position, either with a viable claim or with no claim, and it doesn’t split the class in the way that the efficient markets theory do[es], that’s the difference.” Kagan observed: “I just don’t see how this splits the class at all, because if you can’t prove price impact, you can’t prove loss causation and everybody’s claims dies.”

Justice Sonia Sotomayor asked: “[H]ow do you prove loss causation without proving price impact?” And: “[I]f you’re going to require proof of price impact [at class-certification], why not do away with market efficiency? The whole premise of the other economic theory you rely on is that the market efficiency is irrelevant. Some information impacts the market, whether efficient or not, and some doesn’t, whether efficient or not.” Petitioners argued since price impact was the foundation for the presumption of reliance, “it only makes sense to focus like a laser on the only relevant question, whether the misrepresentation distorted the market price.”

Justice Anthony Kennedy asked both counsel to address the position presented in the Law Professors’ brief, described as “midway,” which calls for the use of event studies at class-certification to determine price impact. He asked petitioners: “And so then the question would be since you’re going to have to have it anyway, why not have it at the class certification stage,” and respondent: “[W]hy couldn’t the same showing [price impact] be made under the law professors’ theory of an event study at the certification stage? Kennedy also asked counsel for the United States: “[W]hat is your view of the…consequences if we adopt the law professors’ views?” Both Kagan and Scalia also asked counsel about the impact of adoption of the law professors’ views.

The Future

Yogi Berra said “[t]he future ain’t what it used to be.” That much will be true regardless of the outcome. An affirmance would change the law in the Second and Third Circuits where defendants currently are permitted to rebut the presumption with evidence of price impact at certification. Respondent had no good answer to why, if they have to prove price impact at the end of the day, they are so adverse to doing so at certification or allowing defendants to do so in rebuttal. The only real answer is the practical one provided by Scalia—class certification is the end of the case 99 percent of the time.

Sarah S. Gold is a partner and Richard L. Spinogatti is a senior counsel at Proskauer Rose.


1. Brief of Law Professors as Amici Curiae in Support of Petitioners, 2014 WL 60721 (U.S.) at *24.

2. Brief for Petitioners, 2013 WL 6907610 (U.S.) at *51 (citing Amgen v. Conn. Ret. Plans & Trust Funds, 133 S. Ct. 1184, 1199 (2013)).

3. Brief for Respondent, 2014 WL 356636 (U.S.) at *24.

4. Reply for Petitioners, 2014 WL 689557 (U.S.) at *19.