A number of important decisions on issues related to class certification in securities class actions are expected in 2017. These decisions will address the application of the Supreme Court’s 2014 guidance in Halliburton II relating to issues of market efficiency. A circuit split could provide the Supreme Court with the opportunity to clarify Halliburton II and to revisit the fraud-on-the-market presumption in light of the shifting academic thinking in this area.

Basic’s fraud-on-the-market presumption

The fraud-on-the-market presumption was first endorsed by the Supreme Court in Basic v. Levinson over 25 years ago. The premise of the presumption is that the price of a security traded in an efficient market will reflect all publicly available information and therefore an investor can be presumed to have relied upon that information. The presumption plays a pivotal role in securities class actions as it allows class-wide proof of the Securities & Exchange Act Section 10(b) element of reliance and avoids the individualised inquiry into the information that each investor relied on which would make class certification effectively impossible in 10(b) cases. Following Basic, courts in many circuits did not provide any meaningful opportunity to defendants to rebut the fraud-on-the-market presumption of reliance and therefore the presumption was rarely overcome. The tide now appears to be turning.

Challenges to the efficient market theory

In light of recent market crashes and increased empirical data showing a lack of market efficiency, challenges to the efficient market theory are becoming mainstream in the academic world. In 2013, Robert J. Shiller co-won the Nobel Memorial Prize in Economic Science for his criticism of the efficient market theory based on evidence of irrational, inefficient behaviour.

Apr-Jun 2017 issue

Arnold & Porter Kaye Scholer LLP