Halliburton Co. v. Erica P. John Fund was finally decided this summer (for background on this case, including the issues, see my first two articles on the case here and here) and the presumption of reliance on the integrity of the stock price that was created in Basic v. Levinson was upheld. The fraud-on-the-market theory is alive and well. Halliburton (the petitioners to the Court and the defendants in the class action) also lost on their request to require that plaintiffs in securities class actions prove “price impact” at the class certification stage. They won a small victory by granting defendants in securities class actions the ability to rebut the presumption of an efficient market at the class certification stage so they will no longer have to wait until arguments are made on the merits of the case in order to address it.
Those who read my first fraud-on-the-market article may have noticed that I only discussed the two options for the Supreme Court to take regarding the use of the fraud-on-the-market theory as a way to show commonality and predominance at class certification. Those two options were keep it or toss it. There may be a middle ground, however. While the two sides in the case have remained on opposite ends of the dichotomy, some third parties have weighed in suggesting a option that would act as a compromise between the two extremes.
Imagine that you bought 1000 shares of stock in Jimmy Co., a large publicly traded pharmaceutical company at $50 per share. Before you bought your stock, Jimmy Co.’s officers had been claiming that a new drug that was being developed would greatly enhance the ability to treat the plague. They predict that the drug will sail through the FDA testing because the drug is perfectly safe and the manufacturing process is up to code. They will get approval and be on the market in two years. Their stock price has been rising ever since that announcement and is now where you bought it, at $50. Continue reading