Early in May, we reported on the Supreme Court’s review of the Basic v. Levinson presumption of reliance in securities fraud cases. In an opinion today by Justice Roberts, the Court declined the invitation to overrule Basic’s presumption of reliance in an efficiently traded market. Three justices (Thomas, Scalia and Alito) were prepared to overrule Basic. The majority held that there was no “special justification” to overrule Basic, noting the absence of “the kind of fundamental shift in economic theory that could justify overruling a precedent on the ground that it misunderstood or has since been overtaken by economic realities.” The Court did, however, continue to emphasize that “plaintiffs wishing to proceed through a class action must actually prove—not simply plead—that their proposed class satisfies each requirement of Rule 23.” The Court emphasized that “the Basic presumption does not relieve plaintiffs of the burden of proving—before class certification—that this requirement is met.” But the Court also emphasized that defendants’ ability to rebut reliance did not mean that individual questions will necessarily overwhelm common ones and render class certification inappropriate under Rule 23(b)(3). As to abuses attendant to securities class actions, Justice Roberts said—in effect—“write your Congressional representative”—observing that Congress had enacted the Private Securities Litigation Reform Act (PSLRA) to combat some of those perceived abuses.
Critically, the Court held that defendants must be allowed to defeat the reliance presumption of Basic at the class certification stage. The “price impact” of an alleged misrepresentation is crucial to the operation of the Basic presumption, Justice Roberts observed, and “thus has everything to do with the issue of predominance at the class certification stage.” And if the Basic presumption is rebutted, “class certification [is] inappropriate.” Look for a plethora of event studies at the class certification stage.
