On June 23, 2014, the US Supreme Court in Halliburton Co. v. Erica P. John Fund, Inc. ruled that securities fraud defendants should be allowed the opportunity to present evidence at the class certification stage to defeat the presumption that an alleged misrepresentation impacted the market price of the stock (No. 13-317, (S. Ct. June 23, 2014)).

In a private securities fraud action, investors can recover damages only if they prove they relied on the defendant's misrepresentation in deciding to buy or sell a company's stock. The Supreme Court previously held in Basic Inc. v. Levinson that investors could satisfy this reliance requirement by invoking a presumption that the price of market-traded stock reflects all public, material information, including material misstatements (108 S. Ct. 978 (1988)). Anyone who buys or sells the stock at market price is considered to have relied on those misstatements. However, defendants can rebut this presumption by showing that the alleged misrepresentations did not actually impact the stock's price.

Erica P. John Fund, Inc. alleged that Halliburton and one of its executives violated section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. §78j(b)) and Securities and Exchange Commission Rule 10b-5 (17 CFR § 240.10b–5) through a series of misrepresentations made between 1999 and 2001 designed to inflate Halliburton's stock price. EPJ sought to certify a class comprising all investors who purchased Halliburton common stock during the class period.

The district court initially denied class certification and the Fifth Circuit affirmed. The Supreme Court vacated the judgment, stating that securities fraud plaintiffs need not prove a causal link between the misrepresentations and economic losses at the class certification stage to invoke Basic's presumption of reliance (131 S. Ct. 2179 (2011)). The Court remanded for the lower courts to consider any further arguments against class certification that Halliburton had preserved.

On remand, Halliburton argued that evidence it had already introduced showed that its alleged misrepresentations had no “price impact” on its stock, which would rebut Basic's reliance presumption. The district court rejected the argument and certified the class, and the Fifth Circuit affirmed, concluding that Halliburton's price impact evidence could be used at trial on the merits, but not at the class certification stage. The Supreme Court again granted certiorari to resolve a conflict among the circuits over whether securities fraud defendants may attempt to rebut the Basic presumption at the class certification stage with evidence of a lack of price impact.

While the Court rejected Halliburton's arguments that the Basic precedent should be overruled, and that every securities fraud plaintiff should be required to prove actual reliance on a defendant's misrepresentations, the Court did agree with Halliburton's alternative argument that defendants should be allowed to rebut the presumption of reliance with evidence of a lack of price impact at the class certification stage. The Court found that price impact was essential here for determining FRCP 23(b)(3)'s predominance requirement for securities fraud class members, and thus, direct evidence of price impact should be allowed at the certification stage. The Court vacated the Fifth Circuit's judgment and remanded so that the lower courts could consider this evidence.