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Halliburton: Supreme Court Issues Landmark Ruling Reaffirming the Applicability of Fraud-on-the-Market Doctrine

September 1, 2014

On June 23, 2014, the Supreme Court of the United States issued its opinion in Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. ___ (2014) (“Halliburton”) refusing to overrule or otherwise significantly modify its holding in Basic, Inc. v. Levinson, 485 U.S. 224 (1988) (“Basic”), which established one of the essential features of federal securities class action litigation: the presumption of reliance under the “fraud-on-the-market” doctrine. A reversal of Basic would have drastically limited investors’ ability to pursue class action litigation under Section 10(b) of the Securities Exchange Act of 1934 — the federal anti-fraud statute.

In Basic, the Supreme Court created a rebuttable presumption that investors rely on all material information (including a company’s statements and misstatements) when purchasing shares of stock traded in an efficient market. This rebuttable presumption, which is known as the “fraud-on-the-market” doctrine, is premised on the theory that stock traded on an efficient market incorporates all material information into its price. The fraud-on-the-market doctrine is a necessary feature of securities class actions under Section 10(b). The doctrine allows plaintiffs to establish the requisite reliance element of a securities fraud claim without showing that they personally reviewed the alleged misrepresentations when making investment decisions. The presumption of reliance therefore eliminates individualized questions of reliance that would prevent class certification.

In the underlying action in Halliburton, Halliburton Co. opposed class certification by attempting to rebut the fraud-on-the-market presumption of reliance through evidence that the alleged misstatements at issue in that case had no impact on the price of the company’s stock. The district court, however, declined to consider this evidence, and found that the requirements for class certification under the Federal Rules of Civil Procedure — including the requirement that common issues predominate over individualized questions — had been satisfied. The Fifth Circuit affirmed the district court’s decision, finding that it was premature at the class certification stage to consider evidence offered to show that the price of the company’s stock was not affected by the alleged misstatements. Halliburton appealed that decision to the Supreme Court.

Halliburton’s petition to the Supreme Court presented the Court with the question of whether it should “overrule or substantially modify the holding of Basic, to the extent that it recognizes a presumption of classwide reliance derived from the fraud-on-the-market theory.” Halliburton urged the Supreme Court to overturn or substantially revise Basic because, as Halliburton asserted, the theory on which the fraud-on-the-market presumption rests (the efficient market hypothesis) had been “roundly rejected” by economists and had proven difficult for courts to apply. Halliburton argued in the alternative that defendants should be permitted to demonstrate at the class certification stage that the alleged misrepresentations did not have an impact on the price of the company’s stock, and thus, were not incorporated in such a way that investors could be presumed to have relied upon the misleading information (thereby defeating class certification).

Plaintiffs’ response argued that Basic is a seminal decision that has been reaffirmed by [the Supreme] Court and repeatedly endorsed by Congress,” and that the economic theory that underpins Basic remains sound. Not surprisingly, the United States Chamber of Commerce and other corporate-defense-oriented entities submitted amicus curiae (or “friend of the court”) briefs in support of Halliburton’s argument that the Court should overturn Basic. Several institutional investors conversely submitted amicus briefs arguing that Basic should not be overturned.

The Supreme Court issued its ruling in Halliburton on June 23, 2014, holding that the Basic presumption of reliance should remain intact.1 Central to the Court’s holding was the determination that Halliburton had failed to provide any “special justification” for overruling Basic’s “long-settled” precedent. The Court observed that the debate among economists over the efficient market hypothesis was already ongoing at the time Basic was decided, but that “[e]ven the foremost critics of the efficient-capital-markets hypothesis acknowledge that public information generally affects stock prices.” Moreover, the Court explained that the Basic presumption of reliance was based on the “fairly modest” premise that “market professionals generally consider most publicly announced material statements.” Thus, although the Court recognized the criticism that the efficient market hypothesis had garnered since Basic, there had been no “fundamental shift in economic theory that could justify overruling a precedent on the ground that it misunderstood, or has since been overtaken by, economic realities.”

Nevertheless, the Court revised certification procedures in Halliburton, holding that defendants should be permitted at the class certification stage to rebut the presumption of reliance using evidence that the misrepresentation at issue did not affect the stock price. While this result provides defendants with an opportunity to undermine investors’ 

efforts to obtain relief on a classwide basis, it is unlikely that Halliburton will have a substantial effect on securities class action litigation. Additionally, much of the evidence likely relevant to decide the existence of a price impact will already be before the court. Recognizing this, Justice Ginsberg noted in her concurring opinion that the Court’s judgment “should impose no heavy toll on securities-fraud plaintiffs with tenable claims.” In fact, allowing defendants the opportunity to present evidence of the absence of a price impact is already occurring within the Second Circuit, which is home to more securities class action litigation than any other jurisdiction in the nation.2

The Supreme Court’s ruling in Halliburton largely maintains the status quo of securities class action litigation. By reaffirming Basic while providing only a minor concession to defendants, the Halliburton opinion is by and large a victory for investors.


1While all nine Justices concurred in the judgment of the Court reversing class certification, Justices Thomas, Scalia, and Alito issued a separate concurring opinion arguing that Basic was wrongly decided and should be overruled.

2 See In re Salomon Analyst Metromedia Litig., 544 F.3d 474 (2d Cir. 2008) (allowing defendants to offer evidence rebutting the presumption of reliance at the class certification stage).

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