The Significance of Halliburton

The Supreme Court in Halliburton, by a 6-3 majority, reaffirmed the presumption of fraud on the market. Halliburton, like Matrixx, was more significant for what it didn't do rather than what it did. The case held out the possibility that the reliance requirement would be radically changed. The Court could conceivably have adopted an actual reliance requirement that would have largely put an end to class actions in the area of securities fraud.  

The decision was disappointing to some. The folks at Wachtell noted that "[t]he case had the potential to revolutionize securities litigation, but, as decided, it will work no such change." The case did, however, impose additional burdens on plaintiffs by allowing defendants, at the class certification stage, to challenge reliance, primarily by showing the absence of "price impact." As Professor Coffee suggested, rather than plaintiffs entirely dodging a bullet, "The bullet hit, but inflicted a non-fatal wound."  

In truth, the case is not likely to have a significant impact on class actions alleging violations of the antifraud provisions. Costs will go up. Defendants will hire economists to conduct event studies in an effort to show that the alleged misrepresentations had no price impact. Plaintiffs will have to present evidence to the contrary. But these cases are already expensive and the firms on the plaintiffs side that bring them must have deep pockets. The pockets will now need to be just a little bit deeper.

On the other hand, the decision may have unintended consequences. To the extent that a class action suit survives this type of challenge, the settlement amount will likely go up. By quantifying the extent of the market impact, plaintiffs will have better evidence of alleged damages and will be in a position to insist on larger settlement amounts.   

What this case demonstrates, however, is that the limits on class actions are unrelated to the merits. The standard for scienter (the strong inference standard) doesn't really separate the wheat from the chaffe as much as it separates those where the evidence of scienter is publicly available and those where it is not. Likewise, there is no reason to believe that Halliburton will actually result in the dismissal of meritless cases. Instead, cases will be dismissed based upon the imprecise ability to show the market impact of a false statement.