In Section 10(b) securities-fraud cases based on affirmative misrepresentations, a class action cannot be certified unless investor reliance is presumed under the fraud-on-the-market theory of Basic, Inc. v. Levinson, 485 U.S. 224 (1988). In Erica P. John Fund, Inc. v. Halliburton Co., 131 S. Ct. 2179 (2011), the Supreme Court ruled that a plaintiff does not need to establish loss causation at the class-certification stage in order to invoke the fraud-on-the-market presumption. On remand from that ruling, Halliburton argued that it should be permitted to rebut that presumption and defeat the request for class certification with evidence that the alleged misrepresentations had no impact on Halliburton’s stock price. Based largely on the Supreme Court’s intervening decision in Amgen Inc. v. Connecticut Retirement Plans & Trust Funds, 133 S. Ct. 1184 (2013), the Fifth Circuit rejected Halliburton’s argument, holding that price impact is not properly considered at the class-certification stage. Erica P. John Fund, Inc. v. Halliburton Co. (pdf), — F.3d —-, 2013 WL 1809760 (5th Cir. Apr. 30, 2013).
The Fifth Circuit acknowledged that when the Supreme Court adopted the fraud-on-the-market presumption of reliance in Basic, it made the presumption rebuttable. The Fifth Circuit likewise recognized that establishing that a misrepresentation had no price impact would rebut the presumption of reliance by severing the link between the alleged misrepresentation and the price paid by the plaintiffs. The Fifth Circuit further noted that, even though Halliburton offered its price-impact evidence only for rebuttal purposes, such evidence also could be probative on the market-efficiency, public-statement, and materiality elements of the fraud-on-the-market presumption.
Despite this settled law, the Fifth Circuit understood Amgen to make questions about price impact off limits at the class-certification stage. The Supreme Court held in Amgen that immateriality is not a proper ground for refusing to presume reliance at the class-certification stage because it turns on objective evidence common to the class and is an element of securities fraud. As a result, the Court reasoned, a lack of materiality would lead to judgment for the defendant rather than individual inquiries that would defeat class certification.
The Fifth Circuit concluded that price impact should be treated like materiality. Proof of price impact is common class-wide evidence, in the court’s view. And, even though price impact itself is not an element of a securities-fraud claim, the court ruled that proof that there was no price impact would mean that a plaintiff could not establish loss causation—which is an element of securities fraud. Thus, a victory for Halliburton on price impact, the court explained, “will not result in the possibility of individual claims continuing.” As the Fifth Circuit understood Amgen, those conclusions meant that “Halliburton’s price impact evidence does not bear on the question of common issue predominance, and is thus appropriately considered only on the merits after the class has been certified.”
The Fifth Circuit’s ruling represents an unfortunate misreading of the Supreme Court’s troubling Amgen decision. Under these decisions, the limited fraud-on-the-market inquiry at the class-certification stage is a slender reed on which to presume reliance for class certification purposes and thereby allow sprawling and coercive securities-fraud class actions. From my perspective, this is all the more reason to reconsider whether the economic and other premises of the fraud-on-the-market presumption of reliance are faulty, as four Justices suggested in Amgen.