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SUPREME COURT OF THE UNITED STATES
_________________
No. 13–317
_________________
HALLIBURTON CO., et al., PETITIONERS v.
ERICA P. JOHN FUND, INC., fka ARCHDIOCESE OF MILWAUKEE SUPPORTING
FUND, INC.
on writ of certiorari to the united states
court of appeals for the fifth circuit
[June 23, 2014]
Chief Justice Roberts
delivered the opinion of the Court.
Investors can recover
damages in a private securities fraud action only if they prove
that they relied on the defendant’s misrepresentation in
deciding to buy or sell a company’s stock. In Basic Inc. v.
Levinson, 485 U. S. 224 (1988) , we held that investors could
satisfy this reliance requirement by invoking a presumption that
the price of stock traded in an efficient market reflects all
public, material information—including material
misstatements. In such a case, we concluded, anyone who buys or
sells the stock at the market price may be considered to have
relied on those misstatements.
We also held, however,
that a defendant could rebut this presumption in a number of ways,
including by showing that the alleged misrepresentation did not
actually affect the stock’s price—that is, that the
misrepresentation had no “price impact.” The questions
presented are whether we should overrule or modify Basic’s
presumption of reliance and, if not, whether defendants should
nonetheless be afforded an opportunity in securities class action
cases to rebut the presumption at the class certification stage, by
showing a lack of price impact.
I
Respondent Erica P.
John Fund, Inc. (EPJ Fund), is the lead plaintiff in a putative
class action against Halliburton and one of its executives
(collectively Halliburton) alleging violations of section 10(b) of
the Securities Exchange Act of 1934, 48Stat. 891, 15
U. S. C. §78j(b), and Securities and Exchange
Commission Rule 10b–5, 17 CFR §240.10b–5 (2013).
According to EPJ Fund, between June 3, 1999, and December 7, 2001,
Halliburton made a series of misrepresentations regarding its
potential liability in asbestos litigation, its expected revenue
from certain construction contracts, and the anticipated benefits
of its merger with another company—all in an attempt to
inflate the price of its stock. Halliburton subsequently made a
number of corrective disclosures, which, EPJ Fund contends, caused
the company’s stock price to drop and investors to lose
money.
EPJ Fund moved to
certify a class comprising all investors who purchased Halliburton
common stock during the class period. The District Court found that
the proposed class satisfied all the threshold requirements of
Federal Rule of Civil Procedure 23(a): It was sufficiently
numerous, there were common questions of law or fact, the
representative parties’ claims were typical of the class
claims, and the representatives could fairly and adequately protect
the interests of the class. App. to Pet. for Cert. 54a. And except
for one difficulty, the court would have also concluded that the
class satisfied the requirement of Rule 23(b)(3) that “the
questions of law or fact common to class members predominate over
any questions affecting only individual members.” See id., at
55a, 98a. The difficulty was that Circuit precedent required
securities fraud plaintiffs to prove “loss
causation”—a causal connection between the
defendants’ alleged misrepresentations and the
plaintiffs’ economic losses—in order to invoke
Basic’s presumption of reliance and obtain class
certification. App. to Pet. for Cert. 55a, and n. 2. Because
EPJ Fund had not demonstrated such a connection for any of
Halliburton’s alleged misrepresentations, the District Court
refused to certify the proposed class. Id., at 55a, 98a. The United
States Court of Appeals for the Fifth Circuit affirmed the denial
of class certification on the same ground. Archdiocese of Milwaukee
Supporting Fund, Inc. v. Halliburton Co., 597 F. 3d 330
(2010).
We granted certiorari
and vacated the judgment, finding nothing in “Basic or its
logic” to justify the Fifth Circuit’s requirement that
securities fraud plaintiffs prove loss causation at the class
certification stage in order to invoke Basic’s presumption of
reliance. Erica P. John Fund, Inc. v. Halliburton Co., 563
U. S. ___, ___ (2011) (Halliburton I ) (slip op., at 6).
“Loss causation,” we explained, “addresses a
matter different from whether an investor relied on a
misrepresentation, presumptively or otherwise, when buying or
selling a stock.” Ibid. We remanded the case for the lower
courts to consider “any further arguments against class
certification” that Halliburton had preserved. Id., at ___
(slip op., at 9).
On remand, Halliburton
argued that class certification was inappropriate because the
evidence it had earlier introduced to disprove loss causation also
showed that none of its alleged misrepresentations had actually
af-fected its stock price. By demonstrating the absence of any
“price impact,” Halliburton contended, it had rebutted
Basic’s presumption that the members of the proposed class
had relied on its alleged misrepresentations simply by buying or
selling its stock at the market price. And without the benefit of
the Basic presumption, investors would have to prove reliance on an
individual basis, meaning that individual issues would predominate
over common ones. The District Court declined to consider
Halliburton’s argument, holding that the Basic presumption
applied and certifying the class under Rule 23(b)(3). App. to Pet.
for Cert. 30a.
The Fifth Circuit
affirmed. 718 F. 3d 423 (2013). The court found that
Halliburton had preserved its price impact argument, but to no
avail. Id., at 435–436. While acknowledging that
“Halliburton’s price impact evidence could be used at
the trial on the merits to refute the presumption of
reliance,” id., at 433, the court held that Halliburton could
not use such evidence for that purpose at the class certification
stage, id., at 435. “[P]rice impact evidence,” the
court explained, “does not bear on the question of common
question predominance [under Rule 23(b)(3)], and is thus
appropriately considered only on the merits after the class has
been certified.” Ibid.
We once again granted
certiorari, 571 U. S. ___ (2013), this time 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. We
also accepted Halliburton’s invitation to reconsider the
presumption of reliance for securities fraud claims that we adopted
in Basic.
II
Halliburton urges us
to overrule Basic’s presumption of reliance and to instead
require every securities fraud plaintiff to prove that he actually
relied on the defendant’s misrepresentation in deciding to
buy or sell a company’s stock. Before overturning a
long-settled precedent, however, we require “special
justification,” not just an argument that the precedent was
wrongly decided. Dickerson v. United States, 530 U. S. 428,
443 (2000) (internal quotation marks omitted). Halliburton has
failed to make that showing.
A
Section 10(b) of the
Securities Exchange Act of 1934 and the Securities and Exchange
Commission’s Rule 10b–5 prohibit making any material
misstatement or omission in connection with the purchase or sale of
any security. Although section 10(b) does not create an express
private cause of action, we have long recognized an implied private
cause of action to enforce the provision and its implementing
regulation. See Blue Chip Stamps v. Manor Drug Stores, 421
U. S. 723, 730 (1975) . To recover damages for violations of
section 10(b) and Rule 10b–5, a plaintiff must prove
“ ‘(1) a material misrepresentation or omission by
the defendant; (2) scienter; (3) a connection between the
misrepresentation or omission and the purchase or sale of a
security; (4) reliance upon the misrepresentation or omission; (5)
economic loss; and (6) loss causation.’ ” Amgen
Inc. v. Connecticut Retirement Plans and Trust Funds, 568
U. S. ___, ___ (2013) (slip op., at 3–4) (quoting
Matrixx Initiatives, Inc. v. Siracusano, 563 U. S. ___, ___
(2011) (slip op., at 9)).
The reliance element
“ ‘ensures that there is a proper connection
between a defendant’s misrepresentation and a
plaintiff’s injury.’ ” 568 U. S., at
___ (slip op., at 4) (quoting Halliburton I, 563 U. S., at ___
(slip op., at 4)). “The traditional (and most direct) way a
plaintiff can demonstrate reliance is by showing that he was aware
of a company’s statement and engaged in a relevant
transaction—e.g., purchasing common stock—based on that
specific misrepresentation.” Id., at ___ (slip op., at
4).
In Basic, however, we
recognized that requiring such direct proof of reliance
“would place an unnecessarily unrealistic evidentiary burden
on the Rule 10b–5 plaintiff who has traded on an impersonal
market.” 485 U. S., at 245. That is because, even
assuming an investor could prove that he was aware of the
misrepresentation, he would still have to “show a speculative
state of facts, i.e., how he would have acted . . . if
the misrepresentation had not been made.” Ibid.
We also noted that
“[r]equiring proof of individualized reliance” from
every securities fraud plaintiff “effectively would
. . . prevent[ ] [plaintiffs] from proceeding with a
class action” in Rule 10b–5 suits. Id., at 242. If
every plaintiff had to prove direct reliance on the
defendant’s misrepresentation, “individual issues then
would . . . overwhelm[ ] the common ones,” making
certification under Rule 23(b)(3) inappropriate. Ibid.
To address these
concerns, Basic held that securities fraud plaintiffs can in
certain circumstances satisfy the reliance element of a Rule
10b–5 action by invoking a rebuttable presumption of
reliance, rather than proving direct reliance on a
misrepresentation. The Court based that presumption on what is
known as the “fraud-on-the-market” theory, which holds
that “the market price of shares traded on well-developed
markets reflects all publicly available information, and, hence,
any material misrepresentations.” Id., at 246. The Court also
noted that, rather than scrutinize every piece of public
information about a company for himself, the typical
“investor who buys or sells stock at the price set by the
market does so in reliance on the integrity of that
price”—the belief that it reflects all public, material
information. Id., at 247. As a result, whenever the investor buys
or sells stock at the market price, his “reliance on any
public material misrepresentations . . . may be presumed
for purposes of a Rule 10b–5 action.” Ibid.
Based on this theory, a
plaintiff must make the following showings to demonstrate that the
presumption of reliance applies in a given case: (1) that the
alleged misrepresentations were publicly known, (2) that they were
material, (3) that the stock traded in an efficient market, and (4)
that the plaintiff traded the stock between the time the
misrepresentations were made and when the truth was revealed. See
id., at 248, n. 27; Halliburton I, supra, at ___ (slip op., at
5–6).
At the same time, Basic
emphasized that the presumption of reliance was rebuttable rather
than conclusive. Specifically, “[a]ny showing that severs the
link between the alleged misrepresentation and either the price
received (or paid) by the plaintiff, or his decision to trade at a
fair market price, will be sufficient to rebut the presumption of
reliance.” 485 U. S., at 248. So for example, if a
defendant could show that the alleged misrepresentation did not,
for whatever reason, actually affect the market price, or that a
plaintiff would have bought or sold the stock even had he been
aware that the stock’s price was tainted by fraud, then the
presumption of reliance would not apply. Id., at 248–249. In
either of those cases, a plaintiff would have to prove that he
directly relied on the defendant’s misrepresentation in
buying or selling the stock.
B
Halliburton contends
that securities fraud plaintiffs should always have to prove direct
reliance and that the Basic Court erred in allowing them to invoke
a presumption of reliance instead. According to Halliburton, the
Basic presumption contravenes congressional intent and has been
undermined by subsequent developments in economic theory. Neither
argument, however, so discredits Basic as to constitute
“special justification” for overruling the
decision.
1
Halliburton first
argues that the Basic presumption is inconsistent with
Congress’s intent in passing the 1934 Exchange Act. Because
“[t]he Section 10(b) action is a ‘judicial construct
that Congress did not enact,’ ” this Court,
Halliburton insists, “must identify—and borrow
from—the express provision that is ‘most analogous to
the private 10b–5 right of action.’ ” Brief
for Petitioners 12 (quoting Stoneridge Investment Partners, LLC v.
Scientific-Atlanta, Inc., 552 U. S. 148, 164 (2008) ; Musick,
Peeler& Garrett v. Employers Ins. of Wausau, 508 U. S.
286, 294 (1993) ). According to Halliburton, the closest analogueto
section 10(b) is section 18(a) of the Act, which cre-ates an
express private cause of action allowing inves-tors to recover
damages based on misrepresentations made in certain regulatory
filings. 15 U. S. C. §78r(a). That provision
requires an investor to prove that he bought or sold stock
“in reliance upon” the defendant’s
misrepresentation. Ibid. In ignoring this direct reliance
requirement, the argument goes, the Basic Court relieved Rule
10b–5 plaintiffs of a burden that Congress would have imposed
had it created the cause of action.
EPJ Fund contests both
premises of Halliburton’s argument, arguing that Congress has
affirmed Basic’s construction of section 10(b) and that, in
any event, the closest analogue to section 10(b) is not section
18(a) but section 9, 15 U. S. C. §78i—a
provision that does not require actual reliance.
We need not settle this
dispute. In Basic, the dissenting Justices made the same argument
based on section 18(a) that Halliburton presses here. See 485
U. S., at 257–258 (White, J., concurring in part and
dissenting in part). The Basic majority did not find that argument
persuasive then, and Halliburton has given us no new reason to
endorse it now.
2
Halliburton’s
primary argument for overruling Basic is that the decision rested
on two premises that can no longer withstand scrutiny. The first
premise concerns what is known as the “efficient capital
markets hypothesis.” Basic stated that “the market
price of shares traded on well-developed markets reflects all
publicly available information, and, hence, any material
misrepresentations.” Id., at 246. From that statement,
Halliburton concludes that the Basic Court espoused “a robust
view of market efficiency” that is no longer tenable, for
“ ‘overwhelming empirical evidence’ now
‘suggests that capital markets are not fundamentally
efficient.’ ” Brief for Petitioners 14–16
(quoting Lev & de Villiers, Stock Price Crashes and 10b–5
Damages: A Legal, Economic, and Policy Analysis, 47 Stan.
L. Rev 7, 20 (1994)). To support this contention, Halliburton
cites studies purporting to show that “public information is
often not incorporated immediately (much less rationally) into
market prices.” Brief for Petitioners 17; see id., at
16–20. See also Brief for Law Professors as Amici Curiae
15–18.
Halliburton does not,
of course, maintain that capital markets are always inefficient.
Rather, in its view, Basic’s fundamental error was to ignore
the fact that “ ‘efficiency is not a binary, yes
or no question.’ ” Brief for Petitioners 20
(quoting Langevoort, Basic at Twenty: Rethinking Fraud on the
Market, 2009 Wis. L. Rev. 151, 167)). The markets for some
securities are more efficient than the markets for others, and even
a single market can process different kinds of information more or
less efficiently, depending on how widely the information is
disseminated and how easily it is understood. Brief for Petitioners
at 20–21. Yet Basic, Halliburton asserts, glossed over these
nuances, assuming a false dichotomy that renders the presumption of
reliance both underinclusive and overinclusive: A misrepresentation
can distort a stock’s market price even in a generally
inefficient market, and a misrepresentation can leave a
stock’s market price unaffected even in a generally efficient
one. Brief for Petitioners at 21.
Halliburton’s
criticisms fail to take Basic on its own terms. Halliburton focuses
on the debate among economists about the degree to which the market
price of a company’s stock reflects public information about
the company—and thus the degree to which an investor can earn
an abnormal, above-market return by trading on such information.
See Brief for Financial Economists as Amici Curiae 4–10
(describing the debate). That debate is not new. Indeed, the Basic
Court acknowledged it and declined to enter the fray, declaring
that “[w]e need not determine by adjudication what economists
and social scientists have debated through the use of sophisticated
statistical analysis and the application of economic
the-ory.” 485 U. S., at 246–247, n. 24. To
recognize the presumption of reliance, the Court explained, was not
“conclusively to adopt any particular theory of how quickly
and completely publicly available information is reflected in
market price.” Id., at 248, n. 28. The Court instead
based the presumption on the fairly modest premise that
“market professionals generally consider most publicly
announced material statements about companies, thereby affecting
stock market prices.” Id., at 247, n. 24. Basic’s
presumption of reliance thus does not rest on a
“binary” view of market efficiency. Indeed, in making
the presumption rebuttable, Basic recognized that market efficiency
is a matter of degree and accordingly made it a matter of
proof.
The academic debates
discussed by Halliburton have not refuted the modest premise
underlying the presumption of reliance. Even the foremost critics
of the efficient-capital-markets hypothesis acknowledge that public
information generally affects stock prices. See, e.g., Shiller,
We’ll Share the Honors, and Agree to Disagree, N. Y.
Times, Oct. 27, 2013, p. BU6 (“Of course, prices reflect
available information”). Halliburton also conceded as much in
its reply brief and at oral argument. See Reply Brief 13
(“market prices generally respond to new, material
information”); Tr. of Oral Arg. 7. Debates about the precise
degree to which stock prices accurately reflect public information
are thus largely beside the point. “That the . . .
price [of a stock] may be inaccurate does not detract from the fact
that false statements affect it, and cause loss,” which is
“all that Basic requires.” Schleicher v. Wendt, 618
F. 3d 679, 685 (CA7 2010) (Easterbrook, C. J.). Even though
the efficient capital markets hypothesis may have “garnered
substantial criticism since Basic,” post, at 6 (Thomas, J.,
concurring in judgment), Halliburton has not identified the kind of
fundamental shift in economic the-ory that could justify overruling
a precedent on the ground that it misunderstood, or has since been
overtaken by, economic realities. Contrast State Oil Co. v. Khan,
522 U. S. 3 (1997) , unanimously overruling Albrecht v. Herald
Co., 390 U. S. 145 (1968) .
Halliburton also
contests a second premise underlying the Basic presumption: the
notion that investors “invest ‘in reliance on the
integrity of [the market] price.’ ” Reply Brief 14
(quoting 485 U. S., at 247; alteration in original).
Halliburton identifies a number of classes of investors for whom
“price integrity” is supposedly “marginal or
irrelevant.” Reply Brief 14. The primary example is the value
investor, who believes that certain stocks are undervalued or
overvalued and attempts to “beat the market” by buying
the undervalued stocks and selling the overvalued ones. Brief for
Petitioners 15–16 (internal quotation marks omitted). See
also Brief for Vivendi S. A. as Amicus Curiae 3–10
(describing the investment strategies of day trad-ers, volatility
arbitragers, and value investors). If many investors “are
indifferent to prices,” Halliburton contends, then courts
should not presume that investors rely on the integrity of those
prices and any misrepresentations incorporated into them. Reply
Brief 14.
But Basic never denied
the existence of such investors. As we recently explained, Basic
concluded only that “it is reasonable to presume that most
investors—knowing that they have little hope of outperforming
the market in the long run based solely on their analysis of
publicly available information—will rely on the
security’s market price as an unbiased assessment of the
security’s value in light of all public information.”
Amgen, 568 U. S., at ___ (slip op., at 5) (emphasis
added).
In any event, there is
no reason to suppose that even Halliburton’s main
counterexample—the value investor—is as indifferent to
the integrity of market prices as Halliburton suggests. Such an
investor implicitly relies on the fact that a stock’s market
price will eventually reflect material information—how else
could the market correction on which his profit depends occur? To
be sure, the value investor “does not believe that the market
price accurately reflects public information at the time he
transacts.” Post, at 11. But to indirectly rely on a
misstatement in the sense relevant for the Basic presumption, he
need only trade stock based on the belief that the market price
will incorporate public information within a reasonable period. The
value investor also presumably tries to estimate how undervalued or
overvalued a particular stock is, and such estimates can be skewed
by a market price tainted by fraud.
C
The principle of
stare decisis has “ ‘special
force’ ” “in respect to statutory
interpretation” because “ ‘Congress remains
free to alter what we have done.’ ” John R. Sand
& Gravel Co. v. United States, 552 U. S. 130, 139 (2008)
(quoting Patterson v. McLean Credit Union, 491 U. S. 164
–173 (1989)). So too with Basic’s presumption of
reliance. Although the presumption is a judicially created doctrine
designed to implement a judicially created cause of action, we have
described the presumption as “a substantive doctrine of
federal securities-fraud law.” Amgen, supra, at ___ (slip
op., at 5). That is because it provides a way of satisfying the
reliance element of the Rule 10b–5 cause of action. See,
e.g., Dura Pharmaceuticals, Inc. v. Broudo, 544 U. S. 336
–342 (2005). As with any other element of that cause of
action, Congress may overturnor modify any aspect of our
interpretations of the reli-ance requirement, including the Basic
presumption it-self. Given that possibility, we see no reason to
exempt the Basic presumption from ordinary principles of stare
decisis.
To buttress its case
for overruling Basic, Halliburton contends that, in addition to
being wrongly decided, the decision is inconsistent with our more
recent decisions construing the Rule 10b–5 cause of action.
As Halliburton notes, we have held that “we must give
‘narrow dimensions . . . to a right of action
Congress did not authorize when it first enacted the statute and
did not expand when it revisited the law.’ ” Janus
Capital Group, Inc. v. First Derivative Traders, 564 U. S.
___, ___ (2011) (slip op., at 6) (quoting Stoneridge, 552
U. S., at 167); see, e.g., Central Bank of Denver, N. A.
v. First Interstate Bank of Denver, N. A., 511 U. S. 164
(1994) (refusing to recognize aiding-and-abetting liability under
the Rule 10b–5 cause of action); Stoneridge, supra (refusing
to extend Rule 10b–5 liability to certain secondary actors
who did not themselves make material misstatements). Yet the Basic
presumption, Halliburton asserts, does just the opposite, expanding
the Rule 10b–5 cause of action. Brief for Petitioners
27–29.
Not so. In Central Bank
and Stoneridge, we declined to extend Rule 10b–5 liability to
entirely new categories of defendants who themselves had not made
any material, public misrepresentation. Such an extension, we
explained, would have eviscerated the requirement that a plaintiff
prove that he relied on a misrepresentation made by the defendant.
See Central Bank, supra, at 180; Stone-ridge, supra, at 157, 159.
The Basic presumption doesnot eliminate that requirement but rather
provides an alternative means of satisfying it. While the
presumption makes it easier for plaintiffs to prove reliance, it
does not alter the elements of the Rule 10b–5 cause of action
and thus maintains the action’s original legal scope.
Halliburton also argues
that the Basic presumption cannot be reconciled with our recent
decisions governing class action certification under Federal Rule
of Civil Procedure 23. Those decisions have made clear that
plaintiffs wishing to proceed through a class action must actually
prove—not simply plead—that their proposed class
satisfies each requirement of Rule 23, including (if applicable)
the predominance requirement of Rule 23(b)(3). See Wal-Mart Stores,
Inc. v. Dukes, 564 U. S. ___, ___ (2011) (slip op., at 10);
Comcast Corp. v. Behrend, 569 U. S. ___, ___ (2013) (slip op.,
at 5–6). According to Halliburton, Basic relieves Rule
10b–5 plaintiffs of that burden, allowing courts to presume
that common issues of reliance predominate over individual
ones.
That is not the effect
of the Basic presumption. In securities class action cases, the
crucial requirement for class certification will usually be the
predominance requirement of Rule 23(b)(3). The Basic presumption
does not relieve plaintiffs of the burden of proving—before
class certification—that this requirement is met. Basic
instead establishes that a plaintiff satisfies that burden by
proving the prerequisites for invoking the
presumption—namely, publicity, materiality, market
efficiency, and market timing. The burden of proving those
prerequisites still rests with plaintiffs and (with the exception
of materiality) must be satisfied before class certification. Basic
does not, in other words, allow plaintiffs simply to plead that
common questions of reliance predominate over individual ones, but
rather sets forth what they must prove to demonstrate such
predominance.
Basic does afford
defendants an opportunity to rebut the presumption of reliance with
respect to an individual plaintiff by showing that he did not rely
on the integrity of the market price in trading stock. While this
has the effect of “leav[ing] individualized questions of
reliance in the case,” post, at 12, there is no reason to
think that these questions will overwhelm common ones and render
class certification inappropriate under Rule 23(b)(3). That the
defendant might attempt to pick off the occasional class member
here or there through individualized rebuttal does not cause
individual questions to predominate.
Finally, Halliburton
and its amici contend that, by facilitating securities class
actions, the Basic presumption produces a number of serious and
harmful consequences. Such class actions, they say, allow
plaintiffs to extort large settlements from defendants for
meritless claims; punish innocent shareholders, who end up having
to pay settlements and judgments; impose excessive costs on
businesses; and consume a disproportionately large share of
judicial resources. Brief for Petitioners 39–45.
These concerns are more
appropriately addressed to Congress, which has in fact responded,
to some extent, to many of the issues raised by Halliburton and its
amici. Congress has, for example, enacted the Private Securities
Litigation Reform Act of 1995 (PSLRA), 109Stat. 737, which sought
to combat perceived abuses in securities litigation with heightened
pleading requirements, limits on damages and attorney’s fees,
a “safe harbor” for certain kinds of statements,
restrictions on the selection of lead plaintiffs in securities
class actions, sanctions for frivolous litigation, and stays of
discovery pending motions to dismiss. See Amgen, 568 U. S., at
___ (slip op., at 19–20). And to prevent plaintiffs from
circumventing these restrictions by bringing securities class
actions under state law in state court, Congress also enacted the
Securities Litigation Uniform Standards Act of 1998, 112Stat. 3227,
which precludes many state law class actions alleging securities
fraud. See Amgen, supra, at ___ (slip op., at 20). Such legislation
demonstrates Congress’s willingness to consider policy
concerns of the sort that Halliburton says should lead us to
overrule Basic.
III
Halliburton proposes
two alternatives to overruling Basic that would alleviate what it
regards as the decision’s most serious flaws. The first
alternative would require plaintiffs to prove that a
defendant’s misrepresentation actually affected the stock
price—so-called “price impact”—in order to
invoke the Basic presumption. It should not be enough, Halliburton
contends, for plaintiffs to demonstrate the general efficiency of
the market in which the stock traded. Halliburton’s second
proposed alternative would allow defendants to rebut the
presumption of reliance with evidence of a lack of price impact,
not only at the merits stage—which all agree defendants may
already do—but also before class certification.
A
As noted, to invoke
the Basic presumption, a plaintiff must prove that: (1) the alleged
misrepresentations were publicly known, (2) they were material, (3)
the stock traded in an efficient market, and (4) the plaintiff
traded the stock between when the misrepresentations were made and
when the truth was revealed. See Basic, 485 U. S., at 248, n.
27; Amgen, supra, at ___ (slip op., at 15). Each of these
requirements follows from the fraud-on-the-market theory underlying
the presumption. If the misrepresentation was not publicly known,
then it could not have distorted the stock’s market price. So
too if the misrepresentation was immaterial—that is, if it
would not have “ ‘been viewed by the reasonable
investor as having significantly altered the “total
mix” of information made available,’ ”
Basic, supra, at 231–232 (quoting TSC Industries, Inc. v.
Northway, Inc., 426 U. S. 438, 449 (1976) )—or if the
market in which the stock traded was inefficient. And if the
plaintiff did not buy or sell the stock after the misrepresentation
was made but before the truth was revealed, then he could not be
said to have acted in reliance on a fraud-tainted price.
The first three
prerequisites are directed at price impact—“whether the
alleged misrepresentations affected the market price in the first
place.” Halliburton I, 563 U. S., at ___ (slip op., at
8). In the absence of price impact, Basic’s
fraud-on-the-market theory and presumption of reliance collapse.
The “fundamental premise” underlying the presumption is
“that an investor presumptively relies on a misrepresentation
so long as it was reflected in the market price at the time of his
transaction.” 563 U. S., at ___ (slip op., at 7). If it
was not, then there is “no grounding for any contention that
[the] investor[ ] indirectly relied on th[at] misrepresentation[ ]
through [his] reliance on the integrity of the market price.”
Amgen, supra, at ___ (slip op., at 17).
Halliburton argues that
since the Basic presumption hinges on price impact, plaintiffs
should be required to prove it directly in order to invoke the
presumption. Proving the presumption’s prerequisites, which
are at best an imperfect proxy for price impact, should not
suffice.
Far from a modest
refinement of the Basic presumption, this proposal would radically
alter the required showing for the reliance element of the Rule
10b–5 cause of action. What is called the Basic presumption
actually incorporates two constituent presumptions: First, if a
plaintiff shows that the defendant’s misrepresentation was
public and material and that the stock traded in a generally
efficient market, he is entitled to a presumption that the
misrepresentation affected the stock price. Second, if the
plaintiff also shows that he purchased the stock at the market
price during the relevant period, he is entitled to a further
presumption that he purchased the stock in reliance on the
defendant’s misrepresentation.
By requiring plaintiffs
to prove price impact directly, Halliburton’s proposal would
take away the first constituent presumption. Halliburton’s
argument for doing so is the same as its primary argument for
overruling the Basic presumption altogether: Because market
efficiency is not a yes-or-no proposition, a public, material
misrepresentation might not affect a stock’s price even in a
generally efficient market. But as explained, Basic never suggested
otherwise; that is why it affords defendants an opportunity to
rebut the presumption by showing, among other things, that the
particular misrepresentation at issue did not affect the
stock’s market price. For the same reasons we declined to
completely jettison the Basic presumption, we decline to
effectively jettison half of it by revising the prerequisites for
invoking it.
B
Even if plaintiffs
need not directly prove price impact to invoke the Basic
presumption, Halliburton contends that defendants should at least
be allowed to defeat the presumption at the class certification
stage through evidence that the misrepresentation did not in fact
affect the stock price. We agree.
1
There is no dispute
that defendants may introduce such evidence at the merits stage to
rebut the Basic presumption. Basic itself “made clear that
the presumption was just that, and could be rebutted by appropriate
evidence,” including evidence that the asserted
misrepresentation (or its correction) did not affect the market
price of the defendant’s stock. Halliburton I, supra, at ___
(slip op., at 5); see Basic, supra, at 248.
Nor is there any
dispute that defendants may introduce price impact evidence at the
class certification stage, so long as it is for the purpose of
countering a plaintiff ’s showing of market efficiency,
rather than directly rebutting the presumption. As EPJ Fund
acknowledges, “[o]f course . . . defendants can
introduce evidence at class certification of lack of price impact
as some evidence that the market is not efficient.” Brief for
Respondent 53. See also Brief for United States as Amicus Curiae
26.
After all, plaintiffs
themselves can and do introduce evidence of the existence of price
impact in connection with “event
studies”—regression analyses that seek to show that the
market price of the defendant’s stock tends to respond to
pertinent publicly reported events. See Brief for Law Professors as
Amici Curiae 25–28. In this case, for example, EPJ Fund
submitted an event study of various episodes that might have been
expected to affect the price of Halliburton’s stock, in order
to demonstrate that the market for that stock takes account of
material, public information about the company. See App.
217–230 (describing the results of the study). The episodes
examined by EPJ Fund’s event study included one of the
alleged misrepresentations that form the basis of the Fund’s
suit. See id., at 230, 343–344. See also In re
Xcelera.com Securities Litigation, 430 F. 3d 503, 513 (CA1
2005) (event study included effect of misrepresentation challenged
in the case).
Defendants—like
plaintiffs—may accordingly submit price impact evidence prior
to class certification. What defendants may not do, EPJ Fund
insists and the Court of Appeals held, is rely on that same
evidence prior to class certification for the particular purpose of
rebutting the presumption altogether.
This restriction makes
no sense, and can readily lead to bizarre results. Suppose a
defendant at the certification stage submits an event study looking
at the impact on the price of its stock from six discrete events,
in an effort to refute the plaintiffs’ claim of general
market efficiency. All agree the defendant may do this. Suppose one
of the six events is the specific misrepresentation asserted by the
plaintiffs. All agree that this too is perfectly acceptable. Now
suppose the district court determines that, despite the
defendant’s study, the plaintiff has carried its burden to
prove market efficiency, but that the evidence shows no price
impact with respect to the specific misrepresentation challenged in
the suit. The evidence at the certification stage thus shows an
efficient market, on which the alleged misrepresentation had no
price impact. And yet under EPJ Fund’s view, the
plaintiffs’ action should be certified and proceed as a class
action (with all that entails), even though the fraud-on-the-market
theory does not apply and common reliance thus cannot be
presumed.
Such a result is
inconsistent with Basic’s own logic. Under Basic’s
fraud-on-the-market theory, market efficiency and the other
prerequisites for invoking the presumption constitute an indirect
way of showing price impact. As explained, it is appropriate to
allow plaintiffs to rely on this indirect proxy for price impact,
rather than requiring them to prove price impact directly, given
Basic’s rationales for recognizing a presumption of reliance
in the first place. See supra, at 6–7, 16–17.
But an indirect proxy
should not preclude direct evidence when such evidence is
available. As we explained in Basic, “[a]ny showing that
severs the link between the alleged misrepresentation and
. . . the price received (or paid) by the plaintiff
. . . will be sufficient to rebut the presumption of
reliance” because “the basis for finding that the fraud
had been transmitted through market price would be gone.” 485
U. S., at 248. And without the presumption of reliance, a Rule
10b–5 suit cannot proceed as a class action: Each plaintiff
would have to prove reliance individually, so common issues would
not “predominate” over individual ones, as required by
Rule 23(b)(3). Id., at 242. Price impact is thus an essential
precondition for any Rule 10b–5 class action. While Basic
allows plaintiffs to establish that precondition indirectly, it
does not require courts to ignore a defendant’s direct, more
salient evidence showing that the alleged misrepresentation did not
actually affect the stock’s market price and, consequently,
thatthe Basic presumption does not apply.
2
The Court of Appeals
relied on our decision in Amgen in holding that Halliburton could
not introduce evidence of lack of price impact at the class
certification stage. The question in Amgen was whether plaintiffs
could be required to prove (or defendants be permitted to disprove)
materiality before class certification. Even though materiality is
a prerequisite for invoking the Basic presumption, we held that it
should be left to the merits stage, because it does not bear on the
predominance requirement of Rule 23(b)(3). We reasoned that
materiality is an objective issue susceptible to common, classwide
proof. 568 U. S., at ___ (slip op., at 11). We also noted that
a failure to prove materiality would necessarily defeat every
plaintiff’s claim on the merits; it would not simply preclude
invocation of the presumption and thereby cause individual
questions of reliance to predominate over common ones. Ibid. See
also id., at ___ (slip op., at 17–18). In this latter
respect, we explained, materiality differs from the publicity and
market efficiency prerequisites, neither of which is necessary to
prove a Rule 10b–5 claim on the merits. Id., at ___–___
(slip op., at 16–18).
EPJ Fund argues that
much of the foregoing could be said of price impact as well. Fair
enough. But price impact differs from materiality in a crucial
respect. Given that the other Basic prerequisites must still be
proved at the class certification stage, the common issue of
materiality can be left to the merits stage without risking the
certification of classes in which individual issues will end up
overwhelming common ones. And because materiality is a discrete
issue that can be resolved in isolation from the other
prerequisites, it can be wholly confined to the merits stage.
Price impact is
different. The fact that a misrepresentation “was reflected
in the market price at the time of [the]
transaction”—that it had price impact—is
“Basic’s fundamental premise.” Halliburton I, 563
U. S., at ___ (slip op., at 7). It thus has everything to do
with the issue of predominance at the class certification stage.
That is why, if reliance is to be shown through the Basic
presumption, the publicity and market efficiency prerequisites must
be proved before class certification. Without proof of those
prerequisites, the fraud-on-the-market theory underlying the
presumption completely collapses, rendering class certification
inappropriate.
But as explained,
publicity and market efficiency are nothing more than prerequisites
for an indirect showing of price impact. There is no dispute that
at least such indirect proof of price impact “is needed to
ensure that the questions of law or fact common to the class will
‘predominate.’ ” Amgen, 568 U. S., at
___ (slip op., at 10) (emphasis deleted); see id., at ___ (slip
op., at 16–17). That is so even though such proof is also
highly relevant at the merits stage.
Our choice in this
case, then, is not between allowing price impact evidence at the
class certification stage or relegating it to the merits. Evidence
of price impact will be before the court at the certification stage
in any event. The choice, rather, is between limiting the price
impact inquiry before class certification to indirect evidence, or
allowing consideration of direct evidence as well. As explained, we
see no reason to artificially limit the inquiry at the
certification stage to indirect evidence of price impact.
Defendants may seek to defeat the Basic presumption at that stage
through direct as well as indirect price impact evidence.
* * *
More than 25 years ago,
we held that plaintiffs could satisfy the reliance element of the
Rule 10b–5 cause of action by invoking a presumption that a
public, material misrepresentation will distort the price of stock
traded in an efficient market, and that anyone who purchases the
stock at the market price may be considered to have done so in
reliance on the misrepresentation. We adhere to that decision and
decline to modify the prerequisites for invoking the presumption of
reliance. But to maintain the consistency of the presumption with
the class certification requirements of Federal Rule of Civil
Procedure 23, defendants must be afforded an opportunity before
class certification to defeat the presumption through evidence that
an alleged misrepresentation did not actually affect the market
price of the stock.
Because the courts
below denied Halliburton that opportunity, we vacate the judgment
of the Court of Appeals for the Fifth Circuit and remand the case
for further proceedings consistent with this opinion.
It is so ordered.