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It is difficult to understate the effect on class actions of Basic Inc. v. Levinson, 485 U.S. 224 (1988), which the Supreme Court decided in 1988. It is virtually impossible to demonstrate “reliance” – a key element of most securities’ fraud claims – on a class-wide basis. Indeed, if reliance is a part of the substantive proof required for the class claims, that usually presents a ticket for dismissal of those claims and a denial of class certification. But in Basic, the Supreme Court bridged that gap, reasoning that the stock market was “efficient,” and therefore would reflect information about any security. Ergo, it reasoned, reliance should be “presumed” when public markets are implicated. So, for 25 years, securities lawyers have dealt with the “fraud-on-the-market” presumption.
In Halliburton Co. v. Erica P. John Fund, Inc., the Supreme Court granted cert to reexamine that issue (Halliburton got sued when its stock price plummeted after a disclosure relating to asbestos reserves). On March 5, the court held oral argument in the case. Halliburton’s counsel pulled no punches, arguing at the outset that “Basic’s judicially created presumption preserves an unjustified exemption from Rule 23 that benefits only securities plaintiffs.” And Justice Scalia made clear his view about the outcome-determinative nature of class proceedings: “Once you get the class certified, the case is over, right?” Hard to read the tea leaves on this one, but a majority of the court seems to favor at least requiring “event studies” at the class certification stage, which should make class certification more difficult and expensive for securities’ plaintiffs.
