In Big guns roll out to defend securities class actions as SCOTUS amici, Alison Frankel comments on the pending SCOTUS case Halliburton v. Erica P. John Fund, in which the fraud on the market theory announced in Basic Inc. v. Levinson is up for grabs:
Erica P. John – and, by extension, the securities class action industry – has received powerful support in amicus briefs from (among many others) the Justice Department; two former chairmen of the Securities and Exchange Commission (one Republican, one Democrat); 11 current and former members of Congress; andscholars of the doctrine of stare decisis, whose filing was authored by Harvard Law professor Charles Fried – the onetime U.S. solicitor general who wrote the Justice Department brief supporting investors in the original Basic case at the Supreme Court.
As a group, these briefs provide compelling legal and policy justifications for leaving Basic alone, arguing, in essence, that this Supreme Court would be overstepping its judicial bounds if it reversed its own precedent, defied Congress, and undermined the regulation and enforcement of the securities laws.
Well, yes, but let's not forget that there are some pretty damn big guns on Halliburton's side, as Wachtell Lipton noted in the CLS Blue Sky Blog:
As we have described in our prior memos (here and here), in Halliburton Co. v. Erica P. John Fund, Inc., No. 13-317, the Supreme Court will decide whether or not to abandon the “fraud on the market” presumption of reliance that has facilitated class-action treatment of claims brought under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b–5. The case will be argued before the Court on March 5, and a decision will likely come by the end of June. As our earlier memos explained, Halliburton is potentially the most important securities case that the Court has heard in a long time.
Last week, various amici curiae supporting the overturning of the fraud-on-the-market presumption filed briefs in the Supreme Court. Our Firm and Stanford law professor Joseph Grundfest filed a brief (available here; printed copies available on request) on behalf of a distinguished group of law professors and former commissioners and officials of the SEC, arguing that, under settled principles of statutory interpretation, the Exchange Act should not be read to permit a presumption of reliance. Our brief argues that the judicially created right of action under Section 10(b) should be construed similarly to the comparable, express right of action established in Section 18(a) of the Exchange Act. Because Section 18(a) requires proof of actual reliance, we argue that Section 10(b) should likewise require it. Our brief also rebuts the argument that the fraud-on-the-market presumption deserves stare decisis effect, as well as the argument that Congress, by failing to overturn the presumption, has acquiesced in it.
Yours truly is one of the amici who signed the brief:
- The Honorable Paul S. Atkins served as a Commissioner of the SEC from 2002 to 2008.
- Professor Stephen M. Bainbridge is the William D. Warren Distinguished Professor of Law at the University of California, Los Angeles School of Law.
- Brian G. Cartwright served as General Counsel of the SEC from 2006 to 2009.
- Elizabeth Cosenza is Associate Professor of Law and Ethics, Fordham University.
- Richard A. Epstein is the Peter and Kirsten Bedford Senior Fellow at the Hoover Institution.
- Professor Allen Ferrell is the Greenfield Professor of Securities Law at Harvard Law School.
- The Honorable Edward H. Fleischman served as a Commissioner of the SEC from 1986 to 1992.
- The Honorable Joseph A. Grundfest is the William A. Franke Professor of Law and Business at Stanford Law School and served as a Commissioner of the SEC from 1985 to 1990.
- Professor M. Todd Henderson is a Professor of Law at the University of Chicago Law School.
- Professor Richard W. Painter is the S. Walter Richey Professor of Corporate Law at the University of Minnesota Law School.
- Professor Kenneth E. Scott is the Ralph M. Parsons Professor of Law and Business, Emeritus, at Stanford Law School.
- The Honorable Steven Wallman served as a Commissioner of the SEC from 1994 to 1997.
As John Elwood summarized our argument:
[The brief] argues that the Court “need not wade into the complex and highly technical debate over the efficient markets hypothesis to answer the question presented here. Instead, the Court can, and should, decide this case by applying well-established principles of statutory construction.” It argues that, to infer how the 1934 Congress would have addressed the issues had the 10b–5 action been included as an express provision in the 1934 Act, the Court should consult the express causes of action in the securities laws, and borrow from the most analogous one. The brief argues that
that “most analogous” provision is Section 18(a) of the Securities Exchange Act of 1934. Section 18(a) is the only express right of action in existence in 1934 that authorizes damages actions for misrepresentations or omissions that affect secondary, aftermarket trading. It is the only express right that provides a cause of action for damages in favor of openmarket purchasers and sellers against those (such as issuers or their executives) who allegedly made false or misleading statements, but did not transact with the plaintiffs—the quintessential Section 10(b) class claim today.
Section 18(a) explicitly states that plaintiffs must demonstrate that they transacted “in reliance upon such [false or misleading] statement[s].” 15 U.S.C. § 78r(a). They must, in other words, demonstrate actual, “eyeball” reliance.14 Section 18(a)’s legislative history, moreover, underscores the need for plaintiffs to demonstrate actual reliance for aftermarket fraud. As originally drafted, Section 18(a) contained no reliance requirement, but Congress rejected that no reliance version in the face of a torrent of criticism. As enacted, Section 18(a) thus prohibits recovery “unless the buyer bought the security with knowledge of the [false or misleading] statement and relied upon the statement.” 78 CONG. REC. 7701 (1934) (statement of Rep. Sam Rayburn), cited in Basic, 485 U.S. at 258 (White, J., dissenting). The Court should construe the Section 10(b) right accordingly.
