With the close of the United States Supreme Court’s 2013-14 term, we offer this wrap-up of the Court’s term, focusing on the Court’s most important business and commercial cases (excluding intellectual property opinions):
Halliburton Co. v. Erica P. John Fund: The Court upheld the fraud-on-the-market theory first set forth in Basic Inc. v. Levinson, which allows investors to satisfy the reliance element of a section 10b-5 securities fraud claim by invoking a presumption that the price at which stock is purchased in an efficient market reflects all public, material information — including material misstatements. Basic’s presumption of reliance facilitates the certification of class actions by absolving investors of establishing individual reliance on alleged misstatements. In Halliburton, however, the Court threw defendants a bone in holding that the presumption can be rebutted at the class-certification stage by direct evidence that the alleged misrepresentation did not in fact affect the stock price. While such evidence has always been admissible during the merits stage to rebut the Basic presumption, the Court’s decision to allow it at the threshold class-certification stage is notable. The decision is not the game-changer it would have been had Basic been overturned, but it does give defendants another potential “out” — and will almost certainly drive up the cost of litigating securities class actions by virtue of the additional price impact work that economic consultants will be retained to furnish prior to class certification.
Fifth Third Bancorp v. Dudenhoeffer: The Court unanimously threw out the defense-friendly presumption of prudence that ERISA fiduciaries of employee stock ownership plans, or ESOPs, have used to avoid liability when the price of company stock in which they are invested drops. In finding that ESOP fiduciaries owe no lesser duty of prudence than any other ERISA fiduciary (except that they need not diversify the fund’s assets), the Court rolled back almost twenty years of precedents from the circuit courts, the bulk of which, beginning with the Third Circuit’s 1995 decision in Moench v. Robertson, conferred on ESOP fiduciaries a presumption that they acted consistently with ERISA by investing fund assets in employer stock. The practical impact of the opinion is likely to be far less radical, however, as the Court went on to observe that a fiduciary’s reliance on publicly available stock-price information is not typically imprudent. Nor is the allegation that an ESOP fiduciary failed to act on non-public information likely to survive a motion to dismiss since the duty of prudence neither requires a fiduciary to violate insider trading laws nor to sabotage the value of the stock it already holds by disclosing negative information that isn’t mandated by the securities laws. Fifth Third Bancorp’s bark, in other words, may well prove worse than its bite.