Escaping Price Impact Purgatory
Leading up to the Supreme Court's decision in Halliburton Co. v. Erica P. John Fund, the securities bar waited in great suspense to see whether the Court would overrule the "fraud-on-the-market" presumption of reliance established many years earlier in Basic v. Levinson. District courts have, however, struggled applying Halliburton.
June 27, 2019 at 05:41 PM
5 minute read
Leading up to the Supreme Court's decision in Halliburton Co. v. Erica P. John Fund, the securities bar waited in great suspense to see whether the Court would overrule the "fraud-on-the-market" presumption of reliance established many years earlier in Basic v. Levinson. Under that presumption, shareholders pursuing federal securities law claims do not have to show reliance on each alleged misstatement if the shares at issue traded in an efficient market. In an efficient market, it is presumed that all material, publicly available information about a company is reflected in its stock price and therefore shareholders need only rely on the trading price when deciding to purchase.
Ultimately, the Court declined to overturn Basic, but held that defendants can rebut the presumption at class certification by showing the alleged misrepresentations had no impact on the stock's price. District courts have, however, struggled applying Halliburton. Significant questions linger regarding the process of rebutting the presumption such as what evidence is sufficient to rebut the presumption and, most importantly, what effect should Halliburton have on the plaintiffs' so-called "price maintenance" theory?
According to the price maintenance theory, a misrepresentation can "impact" the trading price, even if it does not change that price at all, either because it confirms market expectations or prevents the price from falling. It is frequently the case that plaintiffs seek to recover for statements that result in no price change or a downward movement in price. When a court is willing to entertain the price maintenance theory without requiring plaintiffs to come forward with empirical evidence justifying its application, it makes it hard for defendants to successfully rebut the presumption. The Court's silence in Halliburton on what specific type of evidence rebuts the presumption has created an uncertain path for district courts to navigate, and too often defendants are left trying to disprove price maintenance—a legal fiction for which plaintiffs offer no concrete proof. In reality, all defendants should have to do is come forward with any evidence that severs the link between the alleged misstatement and the stock price. Evidence that the statement literally had no impact on the trading price of the stock or had a negative impact should suffice.
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