The Supreme Court Allows Defendants to Rebut Fraud-on-the-Market Presumption at Class Certification Stage


“Investors can recover damages in a private securities fraud action only if they prove that they relied on the defendant’s misrepresentation in deciding to buy or sell a company’s stock.” Halliburton Co. v. Erica John Fund, Inc., 573 U.S. ___, slip. op. at 1 (June 23, 2014) (“Halliburton II”). Basic v. Levinson, 485 U.S. 224 (1988), held that investors could satisfy this requirement by invoking the presumption that the price of stock traded in an efficient market reflects all public material information—including material misstatements—and that anyone who buys or sells the stock at market price may be considered to have relied on those misstatements.1 On June 23, 2014, the Court confirmed that defendants in a private securities class action can rebut this presumption at the class certification stage by, among other things, showing that the alleged misrepresentation did not actually affect the stock’s price, that is, that the misrepresentation had no price impact. Halliburton II, slip. op at 1-2, 18.

In many ways, the Court’s ruling merely confirmed what Basic had already said, including the standards, such as materiality, necessary to invoke the presumption. However, the Court’s 4-3 split in Basic, its reluctance to consider these issues in Halliburton I,2 the Court’s intervening opinion in Amgen Inc. v. Connecticut Retirement Plans and Trust Funds (which held that materiality need not be shown to obtain class certification),3 left the outcome substantially in doubt. Significantly, however, a hypothetical in the Court’s opinion calls into question whether or not “no price impact” can be established based solely on evidence that the misrepresentation did not prompt an aberrational stock price change on the date that the misrepresentation was first published. If so, the showing required to rebut the Basic presumption (and thus defeat class certification) has been substantially lessened in jurisdictions, such as the Fifth Circuit, which have previously required that the defendant demonstrate “both that the stock price did not increase when the misrepresentation was announced, and that the price did not decrease when the truth was revealed.”4 Efforts should be made to preserve that argument in future cases.

For a more detailed explanation, see the full version of this article attached below. For additional information regarding the content of this alert, please contact Gardere Litigation Partner Orin H. Lewis ( or 713.276.5764).

1  Id.

2  Erica P. John Fund, Inc. v. Halliburton Co., 131 S.Ct. 2179 (U.S. 2011).

3  568 U.S. ___,133 S.Ct. 1184.

4  Erica P. John Fund, Inc. v. Halliburton Co., 718 F.3d 423, 434 (5th Cir. 2013).


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