On Nov. 15, the U.S. Supreme Court granted Halliburton Co.’s second petition for writ of certiorari in the Erica P. John Fund v. Halliburton, No. 13-317, securities litigation, this time to consider whether to “overrule or substantially modify the holding of Basic v. Levinson, 485 U.S. 224 (1988), to the extent it allows a presumption of classwide reliance under the fraud-on-the-market theory,” and, if the court does not overrule Basic, to decide whether a defendant “may rebut the presumption and prevent class certification by introducing evidence that the alleged misrepresentations did not distort the market price of its stock.” The petition is available at http://goo.gl/ZWkXlW. If the court eliminates Basic‘s fraud-on-the-market presumption altogether, then each member of a proposed class will be required to prove that he or she actually relied on a defendant’s alleged misrepresentations and common issues will no longer predominate. In short, courts will stop certifying classes in securities actions where reliance is an essential element of the claim.
Fraud-On-The-Market Presumption Of Reliance
To establish securities fraud under Section 10(b) of the Securities Exchange Act of 1934 and the U.S. Securities and Exchange Commission’s Rule 10b-5, a private plaintiff must prove that the defendant (a) made a misstatement or omission (b) of material fact (c) with scienter (fraudulent intent) (d) in connection with the purchase or sale of a security (e) upon which the plaintiff reasonably relied and (f) the plaintiff’s reliance was the proximate cause of his or her injury (loss causation). In order for a private plaintiff to prosecute a Rule 10b-5 claim as a class action under Federal Rule of Civil Procedure Rule 23(b)(3), common questions must “predominate” over questions affecting individual class members.
