At a practical level, there will be a lot of issues for the lower courts to sort out. There undoubtedly will be significant disputes regarding the type of evidence that is permitted to address the issue of price impact. There will be disputes about the quantum of evidence the defendants must provide in order to rebut the presumption. There undoubtedly will be issues surrounding the type and scope of discovery permitted as the parties wage a battle of experts on the price impact issue. The lower courts could be wrestling with these issues for years. Because the price impact dispute will require the parties to present expert analyses on the question of whether or not the alleged misrepresentation affected the share price, the dispute could prove costly, particularly as the parties and the courts sort out the issues noted in the preceding paragraph. …
In omissions cases, the plaintiffs rely on a different presumption, the Affiliated Ute presumption, which arguably is unaffected by the Court’s holding in this case. In addition, the Basic presumption does not apply to cases in which the plaintiffs allege violations of Sections 11 and 12 of the ’33 Act. In order to try to avoid the procedural hurdles that the Court’s opinion in Halliburton introduces, plaintiffs may seek to cast their cases as omissions cases or may prefer to pursue ’33 Act claims rather than claims under the ’34 Act and Rule 10b-5.
Missing from the fray is Justice Kennedy, who joined Justice Thomas’ dissent in the recent Amgen decision. In that dissent, Justice Thomas expressed skepticism about the continued vitality of the fraud-on-the-market presumption. A number of commentators therefore assumed that Justice Kennedy was interested in overturning the Basic decision. Apparently not.
The real import of Halliburton II lies in its articulation of the price impact standard. The Court endorsed the view that price impact must be evaluated on a misrepresentation-by-misrepresentation basis. As the Court explained, the Basic presumption “does not require courts to ignore a defendant’s direct . . . evidence showing that the alleged misrepresentation did not actually affect the stock’s market price.” Slip op. 21. The defendant may introduce event studies or other direct evidence regarding the effect on market prices of each “discrete event,” as the Court termed them. Id. at 19. If price impact is lacking as to that event then the presumption lacks an essential predicate and the plaintiffs must prove actual reliance. This is a significant shift from the way many plaintiffs currently invoke the presumption at the certification stage: They often present an expert report attesting to the overall efficiency of the market during the proposed class period, and little else. Halliburton II now makes clear that even if (or, perhaps, especially if) the market was efficient, then the absence of price impact for any or all of the challenged misrepresentations will disentitle the plaintiff to the presumption of reliance and therefore common proof of reliance. This is a very important new tool for securities defendants to use.
By specifically endorsing event studies, moreover, the Court has recognized that district courts will have to resolve the “battle of the experts” at the certification stage. This necessarily follows from the Court’s recent Rule 23 cases–including Dukes and Comcast–which hold that a plaintiff must prove the prerequisites to certification and that the district court must make findings. As the Supreme Court has explained, “the ‘class determination generally involves considerations that are enmeshed in the factual and legal issues comprising the plaintiff’s cause of action.'” Comcast, 133 S. Ct. at 1432 (quoting Dukes, 131 S. Ct. at 2551). Halliburton II makes clear that the same principle extends to securities class actions. Thus, while defendants may have the initial burden of producing price impact evidence, the ultimate burden of persuasion rests with plaintiffs as the proponents of class certification.
Justice Ginsburg’s brief concurrence tries to minimize the significance of the Court’s opinion, arguing that that decision “should impose no heavy toll on securities-fraud plaintiffs with tenable claims.” Slip op. 1 (Ginsburg, J., concurring). But future cases will show whether that prediction is wishful thinking or whether Halliburton II ushers in a new era for defendants seeking to rebut Basic’s presumption of reliance and defeat class certification in securities actions.
While Justice Ginsburg correctly notes that permitting the introduction of that evidence at certification will increase discovery, it remains to be seen if her statement suggesting this will not significantly increase the burden for plaintiffs is correct. To be sure, evidence of price impact is being considered now at certification to some extent. At the same time Halliburton II will undoubtedly expand that practice and the related discovery. Certification may become a mini-trial centered on a battle of experts. Whether this will facilitate or impede class actions remains to be seen. The true impact of Halliburton II is thus a chapter in class action history yet to be written.
via Stephen M. Bainbridge, Eric C. Chaffee, Bloomberg/Businessweek, AP, WSJ, BloombergView, N.Y.Times, D&O Diary, SEC Actions, Orrick, Lyle Roberts, Gibson Dunn, Sidley Austin, Sullivan & Cromwell, Skadden, Mintz Levin, Wilson Sonsini, Fraud-on-the-Market, Corporate & Securities Law Blog, Weil, Business Law Prof Blog, D&O Diary, Professor Bainbridge, James Hamilton, Cadwalder, Business Law Prof Blog, John C. Coffee, Jr., James D. Cox, Merritt B. Fox, Richard W. Painter, Shearman & Sterling