As has been widely reported, the U.S. Supreme Court has issued its much-anticipated opinion in Halliburton Co. v. Erica P. John Fund, No. 13-317 (Jun. 23, 2014). While predictably – at least after the oral argument in March – the Court left Basic, Inc. v. Levinson and its “fraud of the market” presumption of reliance intact, the decision struck a middle course that permits defendants to rebut the presumption at the class certification stage by demonstrating that the alleged misrepresentations at issue had no impact on the company’s stock price.
What does this decision mean for D&O insurers? Here are a few observations:
- The decision affirms that class certification is a real signal event for settlement that allows securities defendants and their insurers another opportunity to challenge the plaintiff’s case before incurring the staggering costs of merits discovery.
- Questions exist, however, regarding how many cases will really present an opportunity to challenge price impact at the class certification stage. After all, the typical strike suit involves a stock drop following the announcement of some negative news, and the questions raised are (1) whether there actually was some misrepresentation (2) made with scienter that (3) actually led to an inflated stock price during the putative class period. To what extent the Halliburton decision truly reduces the in terrorem effect of securities cases remains to be seen.
- Defense costs undoubtedly will increase – at least in the short run – as parties litigate the exact contours of rebutting the Basic presumption at the class certification stage and defendants and their insurers press cases that would have otherwise been settled following a motion to dismiss ruling