Basic Inc. v. Levinson

Halliburton Oral Argument: The Fraud-on-the-Market Theory is “Basic”ally a Sore Thumb

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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 →

Halliburton’s Brief Asks The U.S. Supreme Court To Overturn The Not So Brief 25-Year-Old Fraud-On-The-Market Presumption

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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 →

Beyond Basic: Shareholder Litigation Without Fraud-On-The-Market

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Will shareholder litigation survive the abandonment of the fraud-on-the-market presumption of reliance?  After the Supreme Court’s announcement that it will be considering the presumption in Halliburton Co. v. Erica P. John Fund,  No. 13-317, there is much discussion of whether a rejection of fraud-on-the-market could mean the end of securities litigation.  The fraud-on-the-market doctrine, set forth in Basic Inc. v. Levinson, 485 U.S. 224, 243-50 (1988), allows a plaintiff seeking class certification to use a rebuttable presumption to establish reliance.  The presumption is that public information is reflected in the price of a stock traded on a well-developed market, and that investors rely on the integrity of the market price when deciding whether to buy or sell a security.  Under the doctrine, investors do not need to show they actually relied on a misstatement in order to satisfy the “reliance” element of their claim for class certification.  Though overturning the presumption would have a significant impact on shareholder class actions under Section 10(b) of the Securities Exchange Act of 1934, it would not spell the end of shareholder litigation. READ MORE →