On Wednesday March 5, 2014, the U.S. Supreme Court heard oral argument in the closely watched Halliburton case, which, as discussed at length here, potentially could change the face of securities litigation. At issue is whether or not the Court will set aside the “fraud on the market” presumption of reliance at the class certification stage in Section 10 misrepresentation cases that the Court first recognized in its 1988 decision in Basic v. Levinson.
Unfortunately, I was not able to attend the oral argument. Fortunately, Alison Frankel was able to attend, and she has a detailed rundown of the argument on her On the Case blog, here. In addition the transcript of the oral argument in the case can be found here. A Bloomberg summary of the argument can be found here.
To the extent that the outcome of a Supreme Court case can be discerned from the oral argument, it does not appear that the Court will be setting aside the fraud on the market theory. Of course, the oral argument may not be a true indicator of the ultimate outcome. But at least at oral argument it appears that the Justices were drawn more to the second of the two questions on which the Court granted cert: that is, whether or not the defendants ought to be able to rebut the fraud on the market presumption at the class certification stage.
Justice Kennedy, looking for a “midpoint” between dumping the fraud on the market theory and simply keeping it unchanged, wanted to discuss the position advocated in the amicus brief submitted on behalf of two law professors – U. Chicago Law Professor Todd Henderson and Michigan Law Professor Adam Pritchard – contending that there should be an event study to establish that the allegedly misleading statement distorted the company’s share price, in order for there to be a presumption of reliance at the class certification stage.
Under this “price impact” approach, the plaintiff’s entitlement to a presumption of reliance based on the fraud on the market theory would depend on the question of whether an event study showed that the misrepresentation had distorted the share price. Several Justices, including Justice Breyer asked questions about the costs and value of an event study at the class certification stage, while Justice Sotomayor questioned whether there would be any need to perpetuate the efficient market hypothesis with the fraud on the market theory if an event study were to be required.
Counsel for Halliburton showed a clear willingness to accept an outcome for a requirement of an event study at the class certification stage to show that the misrepresentation had distorted the share price and argued that it would be a proper burden to place on the plaintiffs that sought to rely on the presumption of reliance.
When asked about the possibility of looking at price impact, counsel for the plaintiffs sought to argue that the price impact ought to be a merits question that would be very difficult and expensive to discern, because there are “confounding factors” that may complicate the question of what affected the share price.
Even though much of the argument was given over to the “price impact” discussion and even though there was a lot of discussion of the possibility of requiring an event study, there is nothing that says that either of those features ultimately will be reflected in the court’s decision.
The one thing that is interesting is that none of the Justices – even those that had in the Amgen case shown an interest in revisiting the Basic presumption and the fraud on the market theory – seemed particularly primed during oral argument to try to completely overturn Basic. Counsel for Halliburton didn’t seem to get support on that point from any of the Justices you would have expected to be supporting him there. In addition, several of the Justices – particularly Chief Justice Roberts – seemed very reluctant to wade into the economic debate surrounding the question of whether or not the markets are efficient.
As I said above, it remains to be seen how this case ultimately will turn out. The Court’s decision is due before the end of the Court’s current term in June.