Causation: Will the Fraud on the Market Theory survive in the United States?
The US Supreme Court will today hear oral arguments in the case of Halliburton Co. V Erica P. John Fund as to whether to overrule or substantially modify the fraud on the market theory adopted in the 1988 US case of Basic Inc v Levinson. Central to the argument will be whether the defendant company may rebut the presumption of reliance by shareholders on the integrity of the market price when making investment decisions in open market transactions by introducing evidence that the alleged misrepresentations did not distort the market price of its stock.
The Court in Halliburton has the opportunity to reject the fraud on the market theory and return to the more palatable position, at least for defendant companies, of actual reliance (direct causation). In doing so it will limit the number and size of class actions claiming fraud by publicly listed companies that are certified to proceed.
Whatever the outcome, the US Courts’ findings in Halliburton will be closely analysed by Australian Plaintiff law firms and litigation funders alike. The issue of causation in shareholder class actions has not been authoritatively determined in the context of the Australian Corporations Act. Plaintiff shareholders have sought to borrow from the fraud on the market theory, or argued a hybrid theory of ‘mere inflation’. Any erosion of the current US position would be favourable to Australian companies who are increasingly the target of shareholder class actions.
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