RESPONDENT: Erica P. John Fund, Inc.
LOCATION: Halliburton Headquarters
DOCKET NO.: 13-317
DECIDED BY: Roberts Court (2010-2016)
CITATION: 573 US (2014)
GRANTED: Nov 15, 2013
ARGUED: Mar 05, 2014
DECIDED: Jun 23, 2014
David Boies - for the respondent
Malcolm L. Stewart - Deputy Solicitor General, Department of Justice, for the United States as amicus curiae supporting the respondent
Aaron M. Streett - for the petitioners
Facts of the case
Former shareholders of Halliburton Company (Halliburton) filed a class action lawsuit against the company and argued that Halliburton falsified its financial statements and misrepresented projected earnings between 1999 and 2001. In their petition for class certification, the shareholders invoked the "fraud on the market" presumption to demonstrate their class-wide reliance on Halliburton's statements. The "fraud on the market" theory assumes that, in an efficient market, the price of a security reflects any material, public representation affecting that security. Therefore, under this theory, the law presumes that investors have relied on a material misstatement when they purchase a security at an artificially high or low price. The federal district court certified the shareholders as a class and prevented Halliburton from introducing evidence that the statements did not impact its stock prices at all. The U.S. Court of Appeals for the Fifth Circuit affirmed and held that Halliburton could not rebut the presumption that the plaintiffs relied on the statements until a trial on the merits of the plaintiffs' claims.
May Halliburton challenge the class certification of its former shareholders by introducing evidence that the alleged fraud did not impact the price of the stock?
Media for Halliburton Co. v. Erica P. John Fund, Inc.Audio Transcription for Oral Argument - March 05, 2014 in Halliburton Co. v. Erica P. John Fund, Inc.
Audio Transcription for Opinion Announcement - June 23, 2014 in Halliburton Co. v. Erica P. John Fund, Inc.
I have our opinion this morning in Case 13-317 Halliburton versus Erica P. John Fund, Incorporated.
Under federal law, investors can sue anyone who knowingly makes a material misstatement or omission in connection with the purchase or sale of stock or any other security.
To recover damages for such fraud, an investor must prove among other things that he relied on the defendant's misstatement in deciding to buy or sell stock, that is that he would not have bought or sold, had the misstatement never been made.
Well, that's very hard to do.
For one thing, many investors who buy or sell stock on exchanges like the New York Stock Exchange will be unaware of misstatements made regarding a particular stock.
And even if they were aware of such misstatements, they would still have to prove something very speculative that they would've acted differently, let's say sold rather than bought or held rather than sold, had the misstatement never been made.
Recognizing these difficulties, we held in our 1988 decision in a case called Basic Incorporated versus Levinson, that the investors could satisfy the reliance requirement by invoking a presumption that the price of stock traded in an efficient market reflects all public material information.
The theory was that if stock prices do reflect public material information, then, they will also reflect public material misstatements and when an investor decides to buy or sell a particular stock, he can be said to have relied indirectly on any misstatements reflected in the stock's price.
We also held in the Basic case however that the presumption of reliance was rebuttable.
One way a defendant can rebut the presumption is by showing that his alleged misrepresentation did not actually affect the stock's price.
In other words, that the misrepresentation had no price impact.
The theory was that if there were no price impact then an investor could not be said to have indirectly relied on a defendant's misstatement simply by buying or selling stock at the market price.
Now, the Basic presumption proves crucial in securities class actions.
For a class action to be certified under federal rules, the plaintiffs must show that and this is a “questions of law or fact common to class members predominate over any questions affecting only individual members."
Securities fraud plaintiffs would never be able to satisfy this requirement if they had to prove directly that each individually relied on a defendant's misstatement.
The Basic presumption allows them to satisfy the reliance requirement on a classwide basis.
Because there generally cannot be a securities fraud class action without the Basic presumption and because the certification of a class action puts tremendous pressure on a defendant to settle the case much turns on when defendants may attempt to rebut the presumption.
Basic itself made clear that defendants could at least do so a trial after a class is certified.
But if a defendant may not also attempt to rebut the Basic presumption before class certification then the availability of rebuttal at trial will as a practical matter be of little use, the case will almost never make it that far.
Respondent Erica P. John Fund, Incorporated, EPJ Fund is the lead plaintiff in a putative class action against Halliburton and one of its executives.
The fund alleges that Halliburton attempted to artificially inflate the price of its stock by making a series of misrepresentations regarding its potential liability in asbestos litigation, its expected revenue from certain construction contracts and the anticipated benefits of its merger with another company.
When the truth was finally revealed, EPJ Fund contends Halliburton's stock price dropped causing investors to lose money.
The fund moved to certify a class comprising all investors who purchased Halliburton's stock during the period in question.
Halliburton argued that class certification was inappropriate because none of its alleged misrepresentations had actually affected its stock price.
By showing the absence of any price impact, Halliburton contented, it had rebutted the Basic presumption with the result that the plaintiffs would have to prove reliance on an individual basis and therefore could not proceed through a class action.
The courts below rejected this argument holding that Halliburton could use price impact evidence to rebut the Basic presumption but only at trial, not before class certification.
Halliburton now asked us to overrule Basic's presumption of reliance and to instead require every securities fraud plaintiff to prove that he actually was aware of and relied on the defendant's misrepresentation when he decided to buy or sell a company stock.
Now, Halliburton's main argument for doing so is that Basic rested on two premises that no longer hold water.
The first premise is that a company's stock price generally reflects public material information about the company.
Halliburton cites economic studies purporting the show that stock prices do not incorporate such information as quickly or completely as ones thought.