A petition for a writ of certiorari filed last month in the U.S. Supreme Court in connection with the long-running Halliburton securities class action lawsuit – which has been up to the Supreme Court once already – takes aim at one of the critical components in the securities plaintiffs’ tool kit: the “fraud on the market” presumption.
Since the U.S. Supreme Court’s 1988 decision in Basic, Inc. v. Levinson [an enhanced version of this opinion is available to lexis.com subscribers], securities plaintiffs seeking class certification have been able to dispense with the need to prove that each of the individual class members relied on the alleged misrepresentation, based on the presumption that in an efficient marketplace, a company’s share price reflects all publicly available information about a company, including the alleged misrepresentation, and that the plaintiff class members relied on the market price.
The “fraud on the market” presumption has many critics. And in connection with the U.S. Supreme Court’s 2013 decision in the Amgen case (about which refer here), at least four justices (Alito, Scalia, Thomas and Kennedy) appeared to question the continuing validity of the presumption. In his concurring opinion, Justice Alito asserted that the presumption “may rest on a faulty economic premise,” and specifically stated that “reconsideration” of the Basic presumption “may be appropriate.”
In recognition that the time may be ripe to take on the continuing validity of the presumption, and to take advantage of the apparent opening to do so now that at least four justices seemed to indicate interest in taking up the question, Halliburton has now filed with the U.S. Supreme court a petition for a writ of certiorari which expressly seeks to have the Court consider whether the Court should “overturn or significantly modify” the Basic presumption of “class wide reliance derived from the fraud on the market theory.”
Halliburton filed its petition in connection with a securities class action lawsuit that has been pending against the company and certain of its directors and officers since 2002. In their complaint, the plaintiffs allege that the company and certain of its directors and offices unstated the company’s exposure to asbestos liability and overestimated the benefits of the company’s merger with Dresser Industries. The plaintiffs also alleged that the defendants overstated the company’s ability to realize the full revenue benefit of certain cost-plus contracts.
For several years now, the parties in the case have been engaged in full-scale combat on the issue of whether or not a class should be certified in the case. Indeed, the certification issue in the case has already been before the U.S. Supreme Court; in 2011, the Court unanimously rejected the company’s argument (and the Fifth Circuit’s holding) that in order for a plaintiff to obtain class certification, the plaintiff must first establish loss causation. Following the Supreme Court’s ruling, the case was remanded back to the lower courts and in in June the Fifth Circuit certified a class in the case.
Now the company is back seeking to have the Supreme Court take up the case again and consider again what issues may appropriately be considered at the class certification stage. In its petition, the company argues that the Basic presumption is based on outdated economic theory and that the special considerations given putative class plaintiffs in securities suits are out of keeping with the Court’s more recent class action case law, particularly the Wal-Mart case and the Comcast case. Among other things, the company argues that the stock market just isn’t as efficient as the Basic decision assumed.
Halliburton’s petition has garnered some noteworthy support. On October 10, 2013, the U.S. Chamber of Commerce of the United States and the National Association of Manufacturers filed an amicus brief in support of the company’s petition. Among other things, these business groups argue that the Court should take up the case “to address the scourge of securities class action lawsuits that siphon productive capital out of the manufacturing economy while enriching a narrow group of trial lawyers.” These business groups argue that the fraud on the market theory has “greatly facilitated securities class actions” and contributed to their exponential growth since the 80’s.
In addition, a group of leading academics and former SEC Commissioners has also come out in support of Halliburton’s petition. According to an October 15, 2013 New York Times column by Ohio State University Professor Steven Davidoff entitled “A Push to End Securities Fraud Lawsuits Gains Momentum” (here), the academics and former regulators have also submitted an amicus brief in support of the company’s petition, arguing that in practice the Basic presumption has essentially eliminated the reliance requirement intended by statute. They rely on academic research by Stanford Law Professor Joseph Grundfest that in the Exchange Act Congress meant to refer to actual reliance.
The fact that in the Amgen decision at least four justices evinced concern about the fraud on the market theory and potential interest in reconsidering the Basic presumption might seem to suggest that Halliburton’s petition might have a good chance of attracting the four votes necessary for the Court to take up the case.
Just the same, even if there are four justices who want to have the Court reconsider Basic, that does not necessarily mean that the Halliburton case is the case that those justices, or any others, necessarily want to take up for that purpose
First, in their Brief in Opposition to Halilburton’s petition, filed on Friday, the plaintiffs argue that the case is not a “proper vehicle” for the Court to re-consider the Basic presumption because Halliburton has not preserved the issue sufficiently in order now to be able to present it to the Supreme Court. The plaintiffs argue that early in the case, the company conceded that its shares traded in an efficient market, and that, until recently, the company did not argue that the Basic presumption did not apply or should be overturned or set aside. The plaintiffs argue that this procedural history creates insurmountable barriers to the Court considering the issues that Halliburton now wants to raise. In any event, the Supreme Court may not want to take up and reconsider one of its well-established precedents where the issue was not procedurally preserved or fully ventilated in the lower courts.
Second, there is the fact that the Court has already fully analyzed the appropriate class certification considerations in this very case, in connection with its 2011 decision. The Court may well question whether it is worth the Court’s time to yet again take up issues surrounding a procedural ruling in a case that it has already considered.
In that regard, the plaintiff argues that the company’s petition represents “little more than a thin repackaging of arguments previously presented to and rejected by the Court two years ago.” The second question that the company has presented in its petition [“whether the defendants may rebut the presumption and prevent class certification by presenting evidence that the alleged misrepresentations did not distort the market price of the stock“] does start to sound an awful lot like the issues that were previously argued in the case. While there may be interest at the court at taking up a case that will allow the Court to reconsider the Basic presumption, the Supreme Court may not want to take up a case that might wind up with the Court rehashing a host of arguments it already heard just two years ago.
The plaintiffs also argue in the Opposition Brief that the court should not disturb a well-established precedent given that Congress has revised the federal securities laws numerous times since the Basic case was decided. They specifically argue that Congress refused to undue Basic when it revised the securities laws in 1995, and therefore that the Court should defer to Congress and leave things as they are – just as Congress did.
If the Court were to take up the case, the potential stakes are enormous. Professor Davidoff said in his column that the case could “put a stake through the heart of securities fraud cases.” Alison Frankel, in an October 14, 2013 post on her On the Case blog (here) commented that this is “a hugely consequential cert petition.” If the Court were to do away with the fraud on the market theory, “it will fundamentally remake securities litigation.”
While the potential stakes are enormous, the outcome is not pre-ordained, even if the cert petition is granted. There may be the requisite four votes for the Court to take up the case, but that does not necessarily mean that there would be five votes to overturn a long-standing Supreme Court precedent. In that regard, it is worth noting that in the Amgen case, Chief Justice John Roberts joined a majority opinion written by Justice Ginsberg where she specifically noted that Congress had amended the securities laws in 1995 without altering the Basic presumption.
For now, the most immediate question is whether the Court will take up the case. All else aside, it is a fact that for several years the Court has been keen to take up securities cases, for whatever reason. If the Court follows its recent pattern and takes up this case again as well, the case could be one of the most interesting and important securities cases before the Supreme Court in a generation.
Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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