In Halliburton Co. v. Erica P. John Fund, Inc. , the Supreme Court held that defendants in a Section 10(b) class action may use the class-certification process to rebut the “fraud on the market” presumption that their misstatements impacted the price of the relevant security. In so doing, the Court struggled to explain why the class-certification process—rather than trial on the merits—was the proper venue for such disputes, and avoided the most obvious justification, namely, that in the absence of price impact, plaintiffs would still be able to bring individual claims. The Court’s unwillingness to hold that plaintiffs may bring “eyeball” reliance claims even without demonstrating price impact suggests that the Court has doubts that such claims are viable.
If so, the Court misinterpreted the fraud on the market theory and the distinction between claims based on individual evaluation of corporate-specific information and claims based on reliance on the market price. The Court’s holding could therefore unfairly impact future claims based on individual reliance. Moreover, the Court’s willingness to front-load disputes into the class-certification stage—without offering a clear justification for doing so—demonstrates that Halliburton was ultimately an exercise in line drawing, representing a compromise position likely motivated by a desire to protect defendants from litigation risks.
In its recent Halliburton decision, the Supreme Court focused on the role of price distortion in meeting the requirements for class certification in private securities fraud litigation. Accepting the argument that the fraud-on-the-market theory requires fraudulent information to have an effect on stock price, the Court reasoned that defendants should therefore be allowed to introduce evidence of lack of price impact in an effort to defeat class certification. Specifically, the Court suggested that defendants might introduce event studies as direct evidence that could sever the link between the misrepresentation and stock price.
This conclusion, however, misapprehends the event study methodology. Specifically, the emphasis on event studies is misguided because the event studies proffered by defendants do not conclusively establish that the fraud did not distort stock price. More broadly, the limitations of existing quantitative methods suggest that they should not be the exclusive way of analyzing price distortion for purposes of class certification. Instead, the importance of price distortion suggests the need for greater consideration of materiality because a finding of materiality is an implicit determination that the information has the capacity to affect stock price.