SCOTUS, On Cheney's Halliburton-Era Federal Securities Fraud Class Action: "Fraud On The Market" Still Robustly Viable

This is a decision of note for all public companies, but especially so for companies with high "binary event" potentials: new drug/bio-science product approvals (or large clinical trial study failures); new phone-model adoptions (or flops), and/or new U.S. Defense Department contracts (or debarments) -- to name just a few. These sorts of companies may see wild price swings, based on one single piece of news -- good or bad. So PhRMA was watching this closely, as was Merck. It comes out as a limited loss for the pharma/biotech industry -- truth told. But only a limited loss.

Over the past 16 months, it was feared by some that the conservative wing would require every securities plaintiff to prove they relied on misstatements -- before a class could be certified. Instead, the Supremes have held only that defendants like Halliburton, Pfizer, Amgen, Baxter and yes Merck, may make a showing that the alleged misstatements did not materially affect stock prices -- in order to defeat the claims, prior to class certification. As ever, more soon -- but this is a wise majority opinion (a 47 page PDF file) from the Supremes:

. . . .For the same reasons the Court declines to overrule Basic’s presumption of reliance, it also declines to modify the prerequisites for invoking the presumption by requiring plaintiffs to prove “price im- pact” directly at the class certification stage. The Basic presumption incorporates two constituent presumptions: First, if a plaintiff shows that the defendant’s misrepresentation was public and material and that the stock traded in a generally efficient market, he is entitled to a presumption that the misrepresentation affected the stock price. Second, if the plaintiff also shows that he purchased the stock at the market price during the relevant period, he is entitled to a further presumption that he purchased the stock in reliance on the defend- ant’s misrepresentation. Requiring plaintiffs to prove price impact directly would take away the first constituent presumption. Halliburton’s argument for doing so is the same as its argument for overruling the Basic presumption altogether, and it meets the same fate. . . .

. . . .The Court agrees with Halliburton, however, that defendants must be afforded an opportunity to rebut the presumption of reliance before class certification with evidence of a lack of price impact. Defendants may already introduce such evidence at the merits stage to rebut the Basic presumption, as well as at the class certification stage to counter a plaintiff’s showing of market efficiency. Forbidding defendants to rely on the same evidence prior to class certification for the particular purpose of rebutting the presumption altogether makes no sense, and can readily lead to results that are inconsistent with Basic’s own logic. . . .

In my view, it must be said: Mr Cheney was -- and is -- a morally corrupt man. And, in the same set of emperors' robes -- Mr. Fred Hassan did cost the combined old Merck and legacy Schering-Plough over two-thirds of a billion dollars -- by "gilding the lilly" about the ENHANCE study. Now you know why this is here -- and, squarely on-topic for a life-science industry blog.