Section 10(b)

Halliburton Co. v. Erica P. John Fund, Inc.

Issues

Should the fraud-on-the-market theory of reliance be overruled or substantially modified to allow defendants to challenge a class certification by introducing evidence that the alleged fraud did not impact the price of its stock?

In 2002, the Erica P. John Fund, which supports the Archdiocese of Milwaukee, sued Halliburton, an oil-services company, for securities fraud.  The lawsuit accused Halliburton of lying about its asbestos liabilities, overstating its revenues, and building up hype about the company’s merger with Dresser Industries. The lawsuit was brought on behalf of a class consisting of all shareholders of Halliburton. Contesting this class action, Halliburton argues that the lawsuit could not be brought by all shareholders unless individual shareholders actually relied on Halliburton’s alleged fraudulent acts to make their investment decisions. However, the Fund contends that reliance by the individual shareholders is presumed due to the fraud-on-the market theory established by Basic v. Levinson. The theory assumes that all public information provided by a company is incorporated into its stock price. Thus, Halliburton’s fraudulent information harmed all of its shareholders even if not every one of them personally read and relied on the information. The Supreme Court’s decision in this case will determine whether the fraud-on-the-market theory remains valid. If the Court rejects the theory, then plaintiffs would have a harder time initiating lawsuits for securities fraud, and companies that allegedly commit the fraud would likely pay less in damages.

Questions as Framed for the Court by the Parties

  1. Whether this Court should overrule or substantially modify the holding of Basic Inc. v. Levinson, 485 U.S. 224 (1988), to the extent that it recognizes a presumption of classwide reliance derived from the fraud-on-the-market theory.
  2. Whether, in a case where the plaintiff invokes the presumption of reliance to seek class certification, the defendant may rebut the presumption and prevent class certification by introducing evidence that the alleged misrepresentations did not distort the market price of its stock.

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Facts

The Erica P. John Fund, Inc. (“The Fund”) alleges that between June 3, 1999, and December 7, 2001, the Halliburton Company (“Halliburton”) and its top executives misrepresented significant aspects of its operations. See Erica P. John Fund, Inc. v. Halliburton Co. (“Erica v. Halliburton”), 718 F.3d 423, 426 (5th Cir. 2013).

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Merck & Co., Inc. v. Reynolds

Issues

Whether the two-year limitations period to bring a suit under the Securities Exchange Act begins when the plaintiff has obtained knowledge that the defendant acted with the intent to defraud, or simply when the plaintiff obtained general knowledge of facts pointing to potential fraud?

 

Under 28 U.S.C. § 1658(b), a plaintiff must file a claim alleging violation of the Securities Exchange Act of 1934 no later than two years after the plaintiff discovers the facts constituting the violation.  The Courts of Appeals are in general agreement that the two-year period of limitations begins when the plaintiff had, or should have had knowledge of the facts constituting the violation.  What is at issue in this case is whether knowledge that defendant acted with the intent to deceive is a fact constituting the violation for purposes of triggering the two-year period of limitation.  The Supreme Court’s decision will resolve this question of statutory interpretation and, in so doing, will determine the delicate balance between allowing plaintiffs with meritorious claims access to the federal courts and providing certainty and repose to potential securities fraud defendants.

Questions as Framed for the Court by the Parties

Did the Third Circuit err in holding, in accord with the Ninth Circuit but in contrast to nine other Courts of Appeals, that under the "inquiry notice" standard applicable to federal securities fraud claims, the statute of limitations does not begin to run until an investor receives evidence of scienter without the benefit of any investigation?

Under 28 U.S.C. § 1658, claims of “fraud, deceit, manipulation or contrivance” concerning the Securities Exchange Act of 1934 can be made either “[two] years after the discovery of the facts constituting the violation,” or “[five] years after such violation,” whichever is earlier. See 28 U.S.C. § 1658(b). Respondents, Reynolds, et.

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