The Supreme Court granted certiorari earlier this week in Halliburton Co. v. Erica P. John Fund, 13-317, a second trip to the high Court for the same case. At issue is whether the Court should overrule holding of Basic Inc. v. Levinson, which recognized the “fraud-on-the-market” theory of class wide reliance in securities fraud cases. The Court foreshadowed its willingness to consider this issue last term when it decided Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, 132 S. Ct. 2742 (2012). Both Amgen and the Court’s earlier decision in Erica P. John Fund v. Halliburton Co., 131 S. Ct. 2179 (2011) were victories for plaintiffs, with the Court holding in both cases that plaintiffs were not required to prove questions on the merits as a prerequisite to class certification. However, in Amgen, Justice Alito’s concurrence as well as dissenting opinions by Justices Scalia and Thomas (joined by Justice Kennedy) all raised questions about the continued viability of the Basic decision.
At the risk of oversimplification, the “fraud-on-the market” theory is that a material misrepresentation made in connection with the sale of a publicly traded security can have an effect on the entire market, so that investors may be harmed (or benefitted) by the misrepresentation even if they did not directly rely on it, because enough investors in the market did rely on it to the point where the price was affected. A decision by the Court that this presumption is no longer viable could seriously limit or eliminate securities fraud class actions, because without the “fraud-on-the-market” presumption, a required element of a securities fraud claim, reliance, becomes an individualized question of fact. As a result, Halliburton becomes the first case on the Court’s 2013-14 docket that has a potential for a truly significant impact on class actions.