Kessler Topaz – Halliburton Supreme Court Case Decision Could Affect Institutional Investors

stepsThis article is sponsored by Kessler Topaz Meltzer & Check, LLP.

In our previous article concerning legal developments affecting shareholder litigation, we mentioned the Halliburton v. Erica P. John Fund, a case which could potentially upend 25 years of jurisprudence and make it much more difficult for shareholders to recover investment losses that occur as a result of corporate fraud and abuse. The Supreme Court heard oral arguments on March 5, 2014 and the Supreme Court Justices are currently deliberating the issues. A decision is anticipated by early June of 2014.

The Erica P. John Fund (“the Fund”), seeking to represent a class of Halliburton shareholders, brought suit against Halliburton alleging that the company falsified its financial records and misled investors about potential liabilities. The case is still at the class certification stage but has now been presented to the Supreme Court twice. In its second round at the Supreme Court, the Court is tasked with deciding whether to overturn or modify the “fraud-on-the-market” presumption of reliance (the “presumption”) established in Basic v. Levinson. The presumption allows shareholders to proceed in a securities fraud class action lawsuit without proving they actually relied on a particular fraudulent or misleading statement made by a corporation when purchasing a given security. Instead, shareholders’reliance can be presumed if the shares were trading on an efficient market and the statements and corrective disclosures result in a change in the particular security’s price.

Prior to oral argument in Halliburton, there was significant concern among institutional investors that the Supreme Court would completely eliminate the presumption. Four of the nine Supreme Court Justices (Thomas, Scalia, Kennedy, and Alito) indicated in 2013 that they were willing to consider overturning the presumption, and even though four other Justices (Kagan, Sotomayor, Ginsburg, and Breyer) had all indicated they were not interested in overturning the presumption, the vote appeared to be in the hands of Chief Justice John Roberts, who had given no earlier indication as to his opinion.

At oral argument, Halliburton argued that the presumption should be overturned and plaintiffs should be required to show actual reliance or that, in the alternative, defendants should be allowed to present evidence at the class certification stage to rebut the presumption. Halliburton contended that the presumption is based on flawed economic theory. The Fund argued that the presumption should remain available because it is a substantive part of U.S. securities law, Congress has legislated assuming the existence of the presumption, and the presumption was not based on economic theory but instead on the premise that markets react reasonable and promptly to news and events regarding particular companies. The U.S. Securities and Exchange Commission (“SEC”) lent further credence to the Fund’s arguments by explaining that if the presumption was overruled and “people were told, if you buy without doing this sort of research into primary sources, you will have no potential recovery at the end of the day…certainly the consequences are potentially dramatic.”

Based on the questions asked by the Justices at oral argument, it does not appear likely that the presumption will be completely abolished. Only a small portion of oral argument focused on the idea of overturning the presumption and, by and large, the Justices’ questions and comments did not seem receptive to the idea. Instead, some of the Justices seemed interested in modifying the presumption and requiring plaintiffs to provide an event study that demonstrates price impact at the class certification stage. However, there appeared to be substantial disagreement among the Justices as to whether that would be appropriate. Justice Kennedy referred to the idea of an event study as the “midway position” while Justice Sotomayor made clear that she did not “see how this is a midpoint.” Ultimately, Justices Alito, Scalia, and Kennedy expressed some enthusiasm for modifying the presumption while Justices Kagan, Ginsburg, Sotomayor, and Breyer did not appear to be as convinced. As Justice Breyer summarized, “what reason is there for purposes of certification to go beyond the efficient market? …They all bought on the exchange. It’s not an irrelevancy. Everybody would have to say it’s certainly relevant to the case and they all have the issue in common.”

Ultimately, Chief Justice Roberts may be the deciding vote and his questions at oral argument provided little insight into his views. Chief Justice Roberts noted that it would not be that difficult to demonstrate that markets were efficient (suggesting he might agree with the Fund that an event study should not be required) but he also made comments suggesting he may have concerns that cases rarely reach the merits stage after a class is certified (suggesting he might want to make it more difficult for a class to be certified).

The Justices are now in deliberations and they likely have three options before them: (1) leaving the presumption intact and allowing securities fraud class actions to proceed as before; (2) overturning the presumption and requiring plaintiffs to prove actual reliance; (3) requiring evidence of price impact to be presented by plaintiffs at the class certification stage; or (4) allowing defendants to rebut the presumption with evidence showing no price impact at the class certification stage.

If the Court overturns the presumption or modifies the evidence required or allowed at the class certification stage, the impact could potentially be, in the words of the SEC, “dramatic.” Shareholders would need to reevaluate their litigation strategies. While the overturning of the presumption seems less of a likelihood based on the tenor of oral arguments,the absence of the presumption may force shareholders to routinely document the material they rely upon when purchasing or selling shares in a particular company. If the Supreme Court instead modifies the presumption,shareholders can expect it to likely be more difficult, costly, and time consuming to recover investment losses. Whatever the outcome may be, Kessler Topaz is monitoring the legal developments and working with institutional investors of all sizes to ensure their continued ability to recover investment losses.

Since 1987, Kessler Topaz has specialized in the prosecution of securities class actions and has grown into one of the most successful shareholder litigation firms in the field. Kessler Topaz is committed to not only serving as legal counsel to its clients, but also to being an educator on all issues related to shareholder activism and asset protection and recovery. To learn more about our Firm, our services, and the investor education opportunities we offer, please visit

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