Leave Basic Alone - Goldberg & Zipursky

The Supreme Court will hear argument on Wednesday on whether Basic v. Levinson's "fraud on the market" presumptions should be modified or reversed.  Ben Zipursky and John Goldberg have teased out the issues in an illuminating way. - GWC
Goldberg & Zipursky on Halliburton - Mass Tort Litigation Blog

Parsing Reliance in Securities Fraud

John C.P. Goldberg, Harvard Law School
Benjamin C. Zipursky, Fordham Law School

         In Halliburton v. Erica P. John Fund, Inc., to be argued before the Supreme Court on March 5, the Justices could drastically curtail federal-court class-action lawsuits for securities fraud.  At issue in Halliburton is the Supreme Court’s 1988 decision in Basic v. Levinson.  Basic held that it is not necessary for investors such as the Erica P. John Fund to prove that they actually read and relied upon the particular fraudulent statements alleged to have caused the their losses.  Public misstatements by a company like Halliburton have the capacity to defraud the market as a whole and distort the prices for all investors.  Basic’s “fraud-on-the-market” theory, as it is called, affords investors who can prove that the defendant made misrepresentations about important matters a presumption that the misrepresentations negatively affected the stock’s value.    It is widely agreed that, without Basic’s presumption, securities fraud suits could rarely proceed as class actions.                                                                                                                                          

 For a variety of reasons – the fact that Congress has weighed in extensively on securities fraud and left Basic untouched, the substantial pro-defendant changes that the Court and Congress have already made to securities fraud law, the expressed wishes of the S.E.C. to retain Basic because of the indirect regulatory force private actions supply, and the value of stare decisis – we think the Court would do best to leave Basic intact.    It appears, however, that while some of the Justices may be similarly inclined, others are leaning toward overruling Basic, and others may be looking for a middle ground.   With the fate of Basic in play, it is worth getting clear on some aspects of fraud-on-the-market doctrine that have typically been confused, and were in fact confused in Justice Blackmun’s Basicopinion itself.

The first and most important point to make about Basic’s so-called “presumption of reliance” is that it is not one presumption (as we have explained in a recent article offering a detailed analysis comparing securities fraud to common law fraud, see John C.P. Goldberg & Benjamin C. Zipursky, The Fraud-on-the-Market Tort, 66 Vanderbilt L. Rev. 1756 (2013)); Basic’s “presumption” is actually two presumptions (both favoring plaintiffs) and one affirmative defense (favoring defendants).   Thus, if the Court decides to rethink “the presumption of reliance,” it will actually be rethinking two or three ideas, not one.