Following the U.S. Supreme Court’s ruling earlier this week in the Halliburton case, questions have continued to swirl about the implications of the court’s decision. In the following guest post, Jennifer Spaziano of the Skadden law firm, takes a look at the impact the Halliburton decision will have on securities class action procedures, outcomes and filings. This article follows an earlier guest post Jen posted on this site (which can be found here) following oral argument in the Halliburton case but before the Supreme Court ruled. My own take on the Halliburton decision can be found here.
I would like to thank Jen for her willingness to publish her guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to readers of this blog. If you are interested in publishing a guest post, please contact me directly. Here is Jen’s guest post:
During oral argument in Halliburton v. Erica P. John Fund, No. 13-317, much of the discussion focused on the practical realities of securities litigation, including (i) the procedures available to defendants to rebut the presumption of classwide reliance established in Basic Inc. v. Levinson, 485 U.S. 224 (1988) and (ii) the percentage of cases that make it to summary judgment and trial. The upshot of this discussion—at least to some—was that if Basic’s presumption of classwide reliance survived, something needed to be done to ensure that its equally strong mandate regarding the presumption’s rebuttability is given effect.
On June 23, 2014, the Supreme Court issued its ruling in Halliburton. The ruling was consistent with the expectations of many commentators following oral argument:
First, despite recognition that the “efficient capital markets hypothesis” underlying Basic is not perfect, the Court did not overrule or modify Basic, finding no “special justification” to do so. (Slip op. at 7; see also slip op. at 8-12.)
Second, the Court held that “defendants must be afforded an opportunity before class certification to defeat the presumption through evidence that an alleged misrepresentation did not actually affect the market price of the stock.” (Slip op. at 23.)
The Court thus adopted a middle ground approach that left Basic’s presumption of classwide reliance intact but gave practical meaning to Basic’s plain recognition that the presumption is rebuttable. See Basic, 485 U.S. at 248 (“Any showing that severs the link between the alleged misrepresentation and either the price received (or paid) by the plaintiff, or his decision to trade at a fair market price, will be sufficient to rebut the presumption of reliance.”).
The Court’s ruling answers several important questions:
Can a plaintiff still rely on Basic’s presumption of reliance?
Yes. A plaintiff can “satisfy the reliance element of the Rule 10b-5 cause of action by invoking a presumption that a public, material misrepresentation will distort the price of stock traded in an efficient market, and that anyone who purchases the stock at the market price may be considered to have done so in reliance on the misrepresentation.” (Slip op. at 23.)
What must a plaintiff prove to invoke the presumption of reliance?
To invoke the presumption, a plaintiff must make the following showings: “(1) that the alleged misrepresentations were publicly known, (2) that they were material, (3) that the stock traded in an efficient market, and (4) that the plaintiff traded the stock between the time the misrepresentations were made and when the truth was revealed.” (Slip op. at 6-7.)
Is the presumption of reliance rebuttable?
Yes. “[T]he presumption of reliance [is] rebuttable rather than conclusive.” (Slip op. at 7.) “[A] defendant [can] rebut this presumption in a number of ways, including by showing that the alleged misrepresentation did not actually affect the stock’s price—that is, that the misrepresentation had no ‘price impact.’” (Slip op. at 1.)
Can a defendant attempt to rebut the presumption before class certification?
Yes. “[T]o maintain the consistency of the presumption of reliance with the class certification requirements of Federal Rule of Civil Procedure 23, defendants must be afforded an opportunity before class certification to defeat the presumption through evidence that an alleged misrepresentation did not actually affect the market price of the stock.” (Slip op. at 23.)
If a defendant rebuts the presumption of reliance by showing that the alleged misrepresentation did not actually affect the stock’s price, can the plaintiff still rely on the presumption?
No. “If a defendant could show that the alleged misrepresentation did not, for whatever reason, actually affect the market price . . . a plaintiff would have to prove that he directly relied on the defendant’s misrepresentation in buying or selling the stock.” (Slip op. at 7.)
Although the Court’s ruling provides some clarity with respect to the prerequisites for invoking the presumption of reliance and the procedural point at which a defendant can attempt to rebut the presumption, the public reaction to the Court’s ruling to date suggests that it leaves open a number of questions that will only be answered as pending and future cases play out. These questions include:
What percentage of defendants will seek to rebut the presumption of reliance at the class certification stage?
The Court’s ruling permits, but does not require, a defendant to attempt to defeat the presumption at the class certification stage. Numerous considerations—including the jurisdiction in which the case is proceeding, the weakness of plaintiffs’ required showings and the strength of other defenses—might lead a defendant to refrain from raising the lack of price impact at the class certification stage.
Will class certification decisions be made at a later point in the life cycle of a case?
Federal Rule of Civil Procedure 23(c)(1)(A) states: “[a]t an early practicable time after a person sues or is sued as a class representative, the court must determine by order whether to certify the action as a class action.” Justice Ginsburg noted in her concurring opinion in Halliburton that “[a]dvancing price impact consideration from the merits stage to the certification stage may broaden the scope of discovery available at certification.” It remains to be seen how courts will balance their obligation to consider class certification at “an early practicable time” with the need to conduct appropriate discovery in assessing the applicability of the presumption at class certification.
Will the percentage of class certification motions that are granted decrease?
According to Halliburton’s counsel, “[t]he most recent studies by NERA and Stanford show that 75 percent of class certification motions are granted in securities cases; and that number is much, much higher with respect to New York Stock Exchange companies that essentially have no way to dispute market efficiency.” (03/05/2014 Hearing Tr. (“Tr.”) at 50:17-22.) Allowing defendants to challenge the presumption of reliance at class certification should result in a decrease in the percentage of classes that are certified. The magnitude of that decrease, however, remains unknown.
Will the percentage of cases that settle following class certification increase?
As Halliburton’s counsel noted at oral argument “only 7 percent” of securities fraud class actions make it to the summary judgment stage, “because once the case gets past class certification . . . there is an in terrorem effect that requires defendants to settle even meritless claims.” (Tr. at 51:5-9.) The rate is even lower with respect to trial: “less than one third of one percent actually go to a verdict.” (Tr. at 23:8-9.) These numbers are already very low and it is hard to imagine them getting any lower.
Will there be a decrease in the number of securities fraud class actions that are filed?
The Court’s ruling places an additional hurdle before a plaintiff seeking to pursue a securities fraud class action. In addition to satisfying the requirements of the Private Securities Litigation Reform Act and establishing the prerequisites for invoking the presumption of classwide reliance, a plaintiff also may face a price impact challenge from the defendant before a class is certified. This additional hurdle likely will be considered by plaintiffs and their counsel in deciding whether to file an action.
To sum up:
- · The Court’s ruling leaves intact Basic’s presumption of classwide reliance but gives effect to Basic’s directives regarding ways in which the presumption can be rebutted.
- · Now, a defendant will have the opportunity to test Basic’s presumption prior to class certification with evidence of a lack of price impact.
- · What this means as a practical matter remains to be seen.
Halliburton does not appear to represent the sea change some had anticipated. That said, it may lead to fewer certified classes and, ultimately, fewer filed cases. Time will tell. At a minimum, the Court’s ruling addresses the practical realities of securities litigation that were a focus of oral argument by providing defendants a meaningful opportunity—one they previously did not have in many jurisdictions—to rebut the presumption of classwide reliance.
—By Jen Spaziano, Skadden, Arps, Slate, Meagher & Flom LLP
Jen Spaziano is a partner at Skadden, Arps, Slate Meagher & Flom LLP’s Washington, DC office.
The opinions expressed are those of the author and do not necessarily reflect the views of the firm, its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.