Last week, NERA Economic Consulting released its annual report, “Recent Trends in Securities Class Action Litigation: 2013 Full-Year Review.” The report showed that in 2013, there were increases in both the number of federal securities class actions filed and the average settlement amount. However, these trends might not be on the rise for long. Despite the blow dealt to class action defendants last year in Amgen, Inc. v. Connecticut Retirement Plans and Trust Funds, the Supreme Court’s second granting of certiorari in Halliburton Erica P. John Fund, Inc. v. Halliburton Co. might just move next year’s numbers in defendants’ favor.
To recover damages in a private securities-fraud action under §10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, a plaintiff must prove: 1) a material misrepresentation or omission by the defendant; 2) scienter; 3) a connection between the misrepresentation or omission and the purchase or sale of a security; 4) reliance upon the misrepresentation or omission; 5) economic loss; and 6) causation. Erica P. John Fund, Inc. v. Halliburton Co., 131 S.Ct. 2179 (2011). “Reliance” is satisfied by “fraud-on-the-market,” a theory endorsed by the Supreme Court in Basic v. Levinson. The fraud-on-the-market theory says that if a market is shown to be efficient, courts may presume that investors who traded securities in that market relied on public, material misrepresentations regarding those securities. This theory “facilitates class certification by recognizing a rebuttable presumption of classwide reliance on public, material misrepresentations when shares are traded in an efficient market.” Amgen at 1193.
The Amgen Court held that a 10b-5 class action plaintiff is not required to prove materiality as a prerequisite to certification. First, materiality is judged according to an objective standard, so it can be proved through evidence common to the class. Thus, it is a common question for Rule 23(b)(3) purposes. Second, a failure of proof on the common question of materiality would not result in individual questions predominating: because materiality is an essential element of a securities fraud claim a failure of proof would simply end the case. SCOTUSblog called this decision “unsurprising.” NERA noted an increase in monthly filings post-Amgen, but was unable to judge how much, if any, the uptick in filing activity was attributable to Amgen.
However, NERA noted (and the Wall Street Journal recently reported, that the Court’s second granting of certiorari in Halliburton has the potential to reverse the upward trend in class action filings. In Halliburton II, the Court will decide: 1) whether the Court should overrule or substantially modify the holding of Basic Inc. v. Levinson, to the extent that it recognizes a presumption of classwide reliance derived from the fraud-on-the-market theory; and 2) whether, in a case where the plaintiff invokes the presumption of reliance to seek class certification, the defendant may rebut the presumption and prevent class certification by introducing evidence that the alleged misrepresentations did not distort the market price of its stock. NERA reported a slight downward trend in monthly 10b-5 class action filings since the Halliburton II petition was filed in September 2013, although it is unclear whether this decrease in filings is attributable to Halliburton II. But, if the Court decides in Halliburton’s favor, then the hurdle for class certification could dramatically increase. Class action plaintiffs could be forced to prove actual reliance, or at the very least that the alleged misrepresentations actually distorted the market price. The Supreme Court is expected to decide this case in June 2014.