Have you ever heard of Eugene Fama? Me neither. That was until he recently won the Nobel Prize for economics. Mr. Fama, a student of the late (and great) Milton Friedman, is an advocate of the efficient market theory, which basically says that stock prices at any one point in time have incorporated all relevant publicly available information. Why should you care? Because the U.S. Supreme Court is going to hear a Halliburton securities case that may call this theory into question, and make it harder for you to sue for securities fraud when it happens.
In Halliburton Co. v. Erica P. John Fund , the Court has agreed to review: (i) whether the “fraud on the market” presumption of reliance adopted in Basic Inc. v. Levinson, 485 U.S. 224 (1988) should be overruled or substantially modified; and (ii) whether, in a class action, a defendant may rebut the presumption and defeat class certification by introducing evidence that the alleged corporate misrepresentations did not distort the market price of the defendant’s stock.
Before Levinson, a securities plaintiff had to show that he or she relied on a statement made by a defendant in deciding to buy or sell the stock. Assume Bristol Myers said in a press release that they had obtained a fancy patent — when in fact they had not. A stock purchaser who bought Bristol Myers stock without relying on the false statement wouldn’t have a securities case under SEC Rule 10b5 even if the purchaser’s stock fell when the truth got out about the patent. Levinson changed that outcome. Because our capital markets are efficient, the Court in Levinson said, the false statement was incorporated into the price of the stock, which the purchaser relied on. In so doing, Levinson did away with the reliance requirement.
Now Halliburton wants to bring it back — or at least be able to rebut the presumption. But even under Levinson, Halliburton would be able to rebut the presumption by showing that a statement wasn’t public or traded on, and so it couldn’t have affected the stock price. Halliburton wants to go further. It wants to attack the very notion that our markets are efficient. This seems to be an odd time to do that, given the recent Nobel for Mr. Fama, and the proliferation of technologies that spread news within a second throughout the world — and into the minds of buyers and sellers of Halliburton stock.
If the Court overturns Levinson completely, injured securities consumers won’t be able to sue if they didn’t rely on a corporate fraudster’s statements — but merely on the price of the stock the corporate fraudster was selling. Regardless if the efficient market hypothesis is true — or a Chicago School fiction — that seems to be an unfair get out of jail for free card outcome for would-be fraudsters.