By Yin Wilczek
June 26 — The U.S. Supreme Court's June 23 Halliburton decision maintaining the presumption of reliance on the market underlying the “fraud on the market” legal theory has set the stage for securities litigation battles that will rage in the federal courts for the next several years, panelists at a legal conference said June 24.
The potential key litigation areas include how plaintiffs may discharge their burden of showing that their stocks traded in an efficient market and the level of price impact defendants must show to defeat class certification, they said.
The teleconference was hosted by Stanford Law School's Rock Center for Corporate Governance and Cornerstone Research.
In Halliburton Co. v. Erica P. John Fund Inc., the high court declined to overrule Basic Inc. v. Levinson, 485 U.S. 224 (1988), the 25-year-old decision that established the fraud-on-the-market class-wide presumption of reliance. However, the court majority held that defendants may introduce evidence of price impact at the class certification stage to counter the plaintiffs' showing of market efficiency.
Max Berger, a New York-based partner at plaintiffs' firm Bernstein Litowitz Berger & Grossmann LLP, suggested that Chief Justice John G. Roberts Jr.'s majority opinion “was very helpful” to plaintiff investors in future securities cases. The chief justice “repeatedly emphasized” that plaintiffs need only show that their stocks traded in a “generally efficient market,” and that it would be enough if the market price reflected the “material information eventually, within a reasonable period,” he said.
The remarks “are very supportive of an expansive” view of the fraud-on-the-market doctrine, Berger said.
Agreeing, New York-based Bernstein Litowitz partner Salvatore Graziano said that Roberts articulated a “pretty low” standard for an efficient market.
“It is not this hyper market efficient test that an economist might apply and that some experts on the defense side were pushing,” Graziano told the panel. “I think those experts are going to have a much harder time trying to convince the courts that the markets have to be fundamentally efficient after this decision.”
However, Bruce Angiolillo—a partner in Simpson Thacher & Bartlett LLP, New York, who spoke from the defense perspective—questioned whether the lower courts would allow plaintiffs to enjoy “the presumption of the efficient market theory” where the alleged misrepresentations or corrective disclosures resulted in no discernible price movements in the stock. “My view is that at the end of the day, this decision is probably going to impact us really at the margins.”
Joseph Grundfest, a Stanford law professor and former Securities and Exchange Commissioner, argued that if he were a defense attorney, he would “go to war” over the “reinterpretation” of “what it means to demonstrate” an efficient market. “I would argue that there is no basis in the economics and finance literature that I'm aware of that would allow you to argue that a market is efficient unless it responds relatively promptly and in a consistent manner to the disclosure of material information, because as soon as you leave that, you're entirely rudderless and there is no basis for the explanation,” he said.
The panel also discussed the decision's shifting of the “disaggregation burden”—the showing that the stock price losses resulted from factors other than the defendants' alleged fraud—from plaintiffs to the defendants at the class certification phase. Before Halliburton, most courts had ruled that the burden belonged to the plaintiffs.
The shifting of the burden “is a very interesting change and potentially has drastic consequences for when these corrective disclosures are muddled by a number of adverse things unrelated to the fraud,” Graziano said.
Angiolillo, for his part, suggested that the disaggregation burden would be another point of contention for parties.
As to price impact, Berger suggested that based on the majority opinion, if defendants fail to meet their burden that the alleged misrepresentation had “zero impact” on stock price, then “they can't defeat class certification.” If there is any impact at all, “then the class gets certified,” he said.
Angiolillo called that an “overstatement” of the opinion. “If I carry the burden” and show no price impact, “have I won the case on the merits?” he asked. If “I have shown as a matter of law” that there is no price impact, “haven't I also resolved that there is no material statement in the case?”
The panelists agreed that the decision will impact litigation costs and settlement values.
Halliburton will increase litigation costs if defendants challenge price impact at the class certification phase, Berger said. “That's going to move up discovery from the merits stage,” and “we're going to have now a new battleground.” Should the defendants lose their price impact challenge, “the cost of settlement is going to go up markedly,” he added.
Angiolillo also suggested that while Halliburton gave securities defendants a tool—the ability to produce evidence of price impact at the class certification stage—they may want to use that tool sparingly. There are many cases in which defendants could “crystallize the problem you have with loss causation” by introducing price impact evidence during class certification, he said. However, there may be some cases where defendants, even if they lose at class certification, will be able to pare down the alleged market losses and narrow the plaintiffs' claims.
Grundfest agreed that the number of situations in which defendants may want to mount “Halliburton-style price impact arguments” is “really quite low.” The battleground is going to be market efficiency rather than the defendants' burden to rebut, he said.
To contact the reporter on this story: Yin Wilczek in Washington at firstname.lastname@example.org
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