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1388Supreme Court May Reconsider Fraud-on-the-Market

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  • Baker, John
    Nov 18 4:49 PM
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      As widely reported, the Supreme Court has agreed to review a case questioning the viability of the fraud-on-the-market doctrine.  Halliburton Co. v. Erica P. John Fund, No. 13-317.  In a private cause of action for securities fraud under Rule 10b-5, a plaintiff must show that it relied on the defendant’s misrepresentation or omission.  The fraud-on-the-market doctrine allows a rebuttable presumption of class-wide reliance on public, material misrepresentations when securities are traded in an efficient market.  In the absence of the fraud-on-the-market doctrine, plaintiffs typically would be unable to proceed with a class action and would be forced to make only individual claims for misrepresentations, because individual reliance issues would overwhelm questions common to the class.  The possibility of a reconsideration of the doctrine was presaged earlier this year in Amgen Inc. v. Connecticut Retirement Plans & Trust Funds, when four Justices expressed their view that reconsideration of the fraud-on-the-market presumption may be appropriate in a future case and the remaining five Justices noted only that the Amgen case was a poor vehicle for exploring the issue.


      It takes five Justices, not four, to change Supreme Court precedent, and it is by no means clear how this case will be resolved.  Indeed, the Court is also considering a question as to the application of the fraud-on-the-market doctrine to class certification, which would be unnecessary if the doctrine’s reversal were already a foregone conclusion.  It seems as likely that the Court will rewrite the fraud-on-the-market doctrine as that it will overturn it, and a continuation of existing precedent is also a possibility.


      If the fraud-on-the-market doctrine is overruled, the change will have relatively little effect on the litigation risk for mutual funds.  Because mutual funds continuously offer their shares, they face exposure primarily for claims made under Sections 11 and 12 of the Securities Act of 1933.  In most cases, plaintiffs bringing claims under these provisions do not have to show reliance.


      Filings in the new Halliburton case are available online at




      For my post on the Amgen case, see





      John M. Baker, Esquire

      Stradley Ronon Stevens & Young, LLP

      1250 Connecticut Avenue, N.W., Suite 500

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