U.S. Supreme Court Releases Two Major Securities Opinions
Earlier this week, the U.S. Supreme Court released its decision in Halliburton Co. v. Erica B. John Fund, Inc., (U.S., No. 13-317)( Halliburton II), and for a second time vacated a decision by the Fifth Circuit on whether the case should proceed as a class action. The plaintiff in the Halliburton case alleges that defendants made misrepresentations that were designed to inflate Halliburton's stock price in violation of § 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5. In Halliburton II, in seeking reverse the lower court's certification of the class, defendants challenged a core securities law concept referred to as the "fraud on the market theory," which is based on the notion that "the price of stock traded in an efficient market reflects all public, material information --including any material misstatements." Halliburton, supra (citing Basic, Inc. v. Levinson, 485 U.S. 224 (1988). The fraud on the market theory provides a plaintiff with a rebuttable presumption of reliance so that a plaintiff does not have to prove direct reliance on a misrepresentation which would be very difficult in the impersonal world of investing in public corporations. See id. Thus, "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.'" Id. The defendant in Halliburton directly challenged the Basic precedent and asked the Court to overrule it. In what would appear to be a victory for securities class action plaintiffs generally, the high Court refused to overturn Basic; however, the Court threw defendants a significant bone by vacating the class certification and holding that "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." Id. The Court reasoned that the rebuttable presumption is merely an indirect manner of proof for plaintiffs to show reliance while proof of price impact is direct evidence and this kind of direct evidence rebuts the presumption as it "'severs the link between the alleged misrepresentation'" and the price plaintiff paid for the stock because "'the basis for finding the fraud had been transmitted through market price would be gone.'" Id. (quotation omitted). Also earlier this week, in Fifth Third Bancorp v. Dudenhoeffer, (U.S., No. 12-751), the Court issued a significant decision relating to the fiduciary duties of Employee Stock Ownership Plans ("ESOP's") which invests retirement funds primarily in company stock. The high Court dispelled the notion that ESOP fiduciaries are entitled to a "presumption of prudence that does not apply to other ERISA Plan fiduciaries." Instead, the Court held that ESOP fiduciaries are just like any other ERISA Plan fiduciaries with regard to the duty of prudence. As noted by the Court, however, under ERISA, ESOP fiduciaries are exempted from the provisions of ERISA regarding diversification of investment funds. The Court emphasized, however, that ESOP fiduciaries are not expected to utilize insider information in making their decisions on investments in company stock. Plainly speaking, fiduciaries are not obligated to break the law in order to manage investments by ESOP plans.