The United States Supreme Court yesterday heard oral argument in Halliburton Co. v. Erica P. John Fund, Inc. In that much-watched case, Halliburton asks the Court to overrule the fraud-on-the-market theory of reliance in securities fraud cases established by the Court’s decision in Basic v. Levinson, or, at least, to adopt a modification that would permit defendants in securities class actions to rebut the presumption at the class certification stage. Halliburton contends, among other arguments, that the efficient market hypothesis, which forms the core of the fraud-on-the-market theory, has been widely discredited by academics in the years since Basic, and that the fraud-on-the-market theory is itself inconsistent with the Court’s more recent pronouncements concerning the proofs necessary to obtain class certification. For its part, the Fund argues that the economic principles underpinning the reliance presumption remain valid; defendants are already given the opportunity to rebut the presumption; and, other evidentiary hurdles in place are entirely consistent with the Court’s more recent class action decisions. The case has garnered much interest, as evidenced by the nearly two dozen amicus briefs submitted to the Court, including submissions from current and former members of Congress, former SEC commissioners, industry and advocacy groups, legal scholars, law processors, and the Solicitor General.
It is always a perilous undertaking to “read the tea leaves” of oral argument. That said, a common theme throughout the argument seemed to be the “midway” position (as coined by Justice Kennedy, referring to the position advocated by law professors as amici) — essentially, accepting the continuing validity of the fraud-on-the-market presumption, but requiring plaintiffs to present evidence, at the class certification stage, to demonstrate whether the misrepresentation distorted the market price. Chief Justice Roberts and Justice Kennedy explored the burden of such a requirement on plaintiffs — a concern echoed by the Fund — while Justice Scalia probed the frequency of settlements after class certification as opposed to proceeding to verdict — a seeming nod to the massive pressures placed on defendants as a result of certification. And Justice Ginsburg prodded the Fund on the practical effects of rebutting the presumption at the certification stage versus putting it off to the merits stage. Finally, both Justices Scalia and Kagan expressed interest in congressional action since the Court decided Basic, with Justice Scalia expressing skepticism that Congress’ enactment of the PSLRA and SLUSA was a ratification of the fraud-on-the-market theory, as opposed to an assumption that the courts would continue to adhere to the theory.
Although several Justices — Scalia, Kennedy, Thomas, and Alito — have each previously signaled a willingness to reexamine Basic, whether the Court will adhere to, modify, or altogether overturn Basic remains to be seen. Based on the argument yesterday, as the commentators predicted, it may all come down to Justice Roberts. A decision is expected by early summer. Watch this space . . .