A US Supreme Court ruling last Monday gives defendants in
securities litigation a new tool to challenge class
certification. But failure to prevent that certification could
lead to a stronger case against them.
|Its ruling in
Halliburton is a double-edged sword for
The double-edge sword was handed down in
Halliburton v Erica P John Fund. The bench unanimously
fraud-on-the-market theory – the presumption that
all public information about a company is reflected in its
share price – should remain. But they also agreed that
defendants could contend class certification by arguing against
the theory and the idea of price impact for all plaintiffs.
could help limit the number of class certifications, leading to
smaller defendant payouts and possibly fewer suits.
"The Supreme Court has invited defendants to attack the
underlying premise of efficient market theory – that
all public information in efficiently embedded in a
share’s trading price," said William McGuinness,
partner at Fried Frank Harris, Shriver & Jacobson. "The
decision is a bit of a mixed bag. It certainly gave defendants
an important tool to use in the right cases, but because there
is price attached you need to be careful when thinking about
when you want to use it."
class is certified, settlements are likely to be higher.
The prospect of preventing this could not only keep payouts
down, but also lead to more rulings in favour of
The flip side of the coin is that if a judge grants
certification after a challenge, the defence effectively lines
up the case against itself since market manipulation has
already been proven. In that situation, the defence is also
likely looking at much higher costs, having both a class
certification and a clear case for the plaintiffs.
- The US Supreme Court has ruled that defendants in
securities litigation can challenge class
- The challenge will allow defendants to argue
against the long standing principle of fraud on the
- But losing this challenge could increase the
likelihood of losing the case entirely.
The Basic presumption
This case was being closed watched to see if the
fraud-on-the-market theory and the so-called
Basic presumption would be over turned.
The Basic presumption stems from the Supreme
Court’s 1988 ruling in
Basic Inc v Levinson that the class could be formed based
of the presumption that efficient markets take into account all
public information. Plaintiffs could therefore form a class on
the presumptions that they all had the same information, as it
would be based on the price. Any manipulation to that
information would have affected all of them.
Forming a class meant little more than proving there was an
efficient and liquid market in those shares. Halliburton
Basic presumption, asserting that if all public information
was taken into account in the price, the value of stock would
change little and few people would invest.
Justices Antonin Scalia, John Roberts and Samuel Alito have
all stated that they are willing to reconsider the role of the
Basic presumption and the fraud-on-the-market theory. But in
the end, the court stressed the importance of stare decisis and
precedent (unless there is an incredibly strong reason to
"The case was being closely watched to see if the Basic
presumption would survive, but I thought it was interesting
that while the court may have been sceptical about the economic
theory underpinning Basic, it went out of its way to affirm on
stare decisis – prior precedent," said
"The Court said we don’t overturn our prior
statutory interpretations lightly, even when we suspect they
might be wrong. There is a judicial and social value to saying
once a statutory interpretation is made, that is it. bsent
special circumstances it is for Congress to correct."
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