Justices Seem Disinclined to Overturn Basic Fraud on the Market Presumption for Securities Class Actions
In its last argument of the March calendar, the Supreme Court appeared disinclined to overturn the 1988 landmark decision in Basic Inc. v. Levinson
. But certain Justices appeared open to additional requirements on plaintiffs to demonstrate reliance to obtain class certification.
, Justice Blackmun, writing for a four-Justice Court, held that a Rule 10b-5 securities class action can proceed based on a misrepresentation alleged to have affected the price of a stock without an individual showing of reliance. Instead, it is presumed that a misrepresentation affected the stock price in an efficient market.
In defense to a securities class action, Halliburton argued that Basic
should be overruled. Halliburton’s argument was premised upon economic studies demonstrating that Basic
was incorrect as a matter of economic theory. If Halliburton’s position were accepted, private securities class actions would be exceedingly difficult to bring, as individual questions of reliance would generally predominate over common issues.
But the Justices appeared opposed to overturning Basic
. Individual Justices asserted that Basic
was as much about common sense and practicality as economic theory. Certain Justices added that Congress had every opportunity to overrule Basic
but chose not to. As Justice Scalia asserted, Congress passed legislation such as the Private Securities Litigation Reform Act (“PSLRA”) that increased other requirements upon plaintiffs seeking to bring a securities class action but explicitly presumed Basic’s
continued existence as a matter of law.
But certain Justices, particularly Justice Kennedy, appeared open to modifying Basic
to require event studies to demonstrate reliance at the class certification stage, a position recommended in an amicus
brief from two law professors. Justice Kennedy seemed particularly interested in the practical consequences this change would have upon current securities class action practice. Some observers said such a result would be a minor victory for corporate defendants but a tolerable burden for class-action plaintiffs.
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