A recent petition for certiorari filed in the United States Supreme Court asks the Court to clarify what an aggrieved investor must plead to state a claim for securities fraud under the Securities and Exchange Act of 1934 (the “Exchange Act”). The petition focuses on the “loss causation” element, which requires plaintiffs to prove a direct causal link between the alleged fraud and the loss in value for which they seek to recover. In a typical fraud in-the-market case, plaintiffs allege loss causation by showing that they bought the defendant’s securities at prices artificially inflated by fraud, and then had those securities lose value after a “corrective disclosure” revealed the fraud to the public. If the Supreme Court decides to grant certiorari, it will have the opportunity to lift certain barriers to pleading loss causation in some jurisdictions.
Petitioners, three New England funds (“Funds”) that own stock in Health Management Associates, Inc. (“HMA”), seek to reverse the Eleventh Circuit’s decision that they failed to establish loss causation as a matter of law. The Funds alleged that HMA’s stock price fell precipitously following two disclosures to the market: (1) an announcement that the government had begun an investigation into HMA for fraud, and (2) an analyst report publicizing a whistleblower case filed by a former employee against HMA three months earlier. A panel for the Eleventh Circuit upheld the lower court’s decision that neither event could form the basis of a securities fraud claim. First, the panel held that the announcement of a government investigation could not raise an inference of loss causation at the pleading stage because there had been no finding of “actual wrongdoing.” Second, the panel held that the analyst report was not a “corrective disclosure” because it reported on a publicly-filed case that, although it hadn’t been reported on until then, was already disclosed to the market. READ MORE
In what is now the third interlocutory appeal in the course of class certification proceedings spanning more than a decade, the case of Erica P. John Fund, Inc. v. Halliburton Co. will head back to the United States Court of Appeals for the Fifth Circuit, with perhaps another trip to the Supreme Court to follow. The Fifth Circuit’s eventual decision on this latest interlocutory appeal could clarify—at least in the Fifth Circuit—just how far a defendant in a securities class-action can go in presenting indirect evidence of (a lack of) price impact to defeat class certification.
Today the Supreme Court rejected calls from lawyers, economists and corporate associations to overrule the “fraud-on-the-market” theory that makes it possible to litigate federal securities fraud claims as class actions, instead handing defendants a modest procedural victory. In Halliburton Co. v. Erica P. John Fund, Inc., the Court declined to overrule a decision that for more than twenty-five years has been used by securities plaintiffs to certify thousands of federal class actions, but also recognized that defendants can rebut class certification by showing that allegedly misleading statements did not affect the price of a company’s securities. Halliburton kills what had been a growing movement to eliminate federal securities fraud class actions for all intents and purposes.
Plaintiff-respondent Erica P. John Fund, Inc. (the “Fund”) purchased stock in Halliburton and lost money when Halliburton’s stock price dropped upon the release of certain negative news regarding the company. The Fund filed suit against Halliburton and its CEO David Lesar (collectively, “Halliburton”), alleging that Halliburton had made knowing or severely reckless misrepresentations concerning those topics, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. READ MORE
On March 5, the Supreme Court heard oral arguments in Halliburton v. The Erica P. John Fund. As discussed in previous blog posts, the United States Supreme Court agreed to consider Petitioner Halliburton’s argument to modify or overturn the fraud-on-the market presumption that the Court first articulated more than a quarter century ago in Basic v. Levinson, 485 U.S. 224, 243-50 (1988). As our readers know, the fraud-on-the market theory allows investors to bring securities class action suits under Section 10(b) of the 1934 Securities Exchange Act by using a rebuttable presumption that public information about a company is reflected in its stock price because of the efficient markets hypothesis. Basic significantly relaxes the burden on securities class action plaintiffs because they do not need to show actual reliance on a purported misstatement when deciding to buy or sell stock. Overturning or modifying Basic would significantly dampen shareholder litigation by making it more difficult to obtain class certification or to survive a motion to dismiss. READ MORE
As discussed in a previous December 3, 2013 post, the U.S. Supreme Court has agreed to hear Halliburton’s pitch to overrule or modify the decades old fraud-on-the-market presumption established in Basic Inc. v. Levinson, 485 U.S. 224, 243-50 (1988). This theory effectively allows shareholders to bring class action suits under Section 10 of the 1934 Act by presuming that plaintiffs, in purchasing stock in an efficient market, relied on alleged material misstatements made by defendants because such public statements were reflected in the company’s stock prices.
Urging the reversal of Basic, Halliburton filed its opening brief on December 30, 2013, in Halliburton Co. v. Erica P. John Fund, No. 13-317. Halliburton makes several arguments in its brief in support of overturning Basic, including many familiar legal arguments relating to statutory interpretation, congressional intent and public policy objectives. Perhaps most interesting, however, is the brief’s focus on the academic literature regarding the economic assumptions underlying Basic that may not be as familiar to practitioners. Specifically, Halliburton argues that academics have discredited and rejected Basic’s key premise that the market price of shares traded on well-developed markets reflects all publicly available information. In particular, Halliburton argues that: READ MORE
The Supreme Court will hear Amgen’s appeal in Amgen v. Connecticut Retirement Plans in the upcoming October term, the Court announced on Monday June 11. The lawsuit against Amgen alleges that the biotech company made misrepresentations about the safety of two anti-anemia drugs for US FDA-approved uses. In certifying the class, the Ninth Circuit held that plaintiff only needed to plausibly allege that Amgen’s misrepresentations were material based on a fraud-on-the-market theory for the class to be certified. Amgen’s appeal claims the district court must both require proof of materiality and allow Amgen to present evidence rebutting the fraud-on-the-market theory before certifying the class.