Last week, the United States Supreme Court accepted review (certiorari) of the Fifth Circuit’s decision in Halliburton Co. v. Erica P. John Fund, Inc. The Supreme Court will consider whether to overrule or limit its prior holding in Basic Inc. v. Levinson, 485 U.S. 224 (1987).
In Basic, the Supreme Court held that a plaintiff asserting a federal securities fraud claim under SEC Rule 10b-5 does not have to prove individual reliance on a particular misrepresentation to recover. Instead, investors are presumed to rely on the market price of an actively traded security because the price reflects the material public information known about the company. The presumption is rebuttable under certain circumstances.
This is known as the “fraud-on-the-market” doctrine. Essentially, the market, including Wall Street analysts and other professional investors, reviews the material public information about the company and set the price for the security based on that information.
Basic has been established precedent for over twenty-five years. The Supreme Court has cited and relied upon Basic in a number of subsequent securities fraud cases. Just this year, a majority of the Supreme Court reaffirmed its commitment to Basic in Amgen, Inc. v. Connecticut Retirement Plans and Trust Funds, 113 S. Ct 1184, 1192-93 (2013).
Halliburton will test the Supreme Court’s adherence to precedent and the principle of stare decisis. The case is significant because, without a presumption of reliance, it will be more difficult to certify federal securities 10b-5 class cases and hold companies accountable for fraud. Without the fraud-on-the-market doctrine, companies could, with relative impunity, provide fraudulent financial statements to the market – and thus increase their stock price – with almost no risk of being held fully accountable for the cost of that fraud.
Interestingly, the Oregon Supreme Court recently held that the Oregon Securities Law, ORS 59.137, also incorporates the fraud-on-the-market doctrine as a matter of state securities law. Oregon v. Marsh & McLennan Co’s, Inc, 353 Or. 1 (2012).* The United States Supreme Court’s decision in Halliburton, which interprets federal law, can have no impact on the Oregon Supreme Court’s decision in Marsh, which interprets what the Oregon legislature intended with respect to state law when it enacted ORS 59.137 in 2003. Marsh is based on state statutory interpretation and not principles of federal law.
* Along with the Oregon Department of Justice, Stoll Berne represents the State of Oregon in this matter.