The fraud-on-the-market theory that the Court embraced in Basic presumes that investors rely on an efficient market in purchasing stock. The investor plaintiffs want the Court to uphold the fraud-on-the-market theory from Basic, arguing that the presumption of reliance on an efficient market—which reflects all available public information, including fraud, in the price of a stock—at the class certification stage is a critical tool in allowing investors to band together and bring class action suits against corporate wrongdoers. Halliburton wants the Court to overrule Basic outright, and to instead require each individual plaintiff to prove reliance on the misinformation.
During oral arguments, Justice Kennedy proposed what he termed a potential middle ground: requiring event studies, which are analyses of the price impact on a stock of a given event (or, in this case, misrepresentation), rather than assuming the existence of an efficient market that incorporates all such events. Justice Kennedy refers to this compromise as “the position taken by the law professors,” which is in reference to one of the several friend-of-the-court briefs written by law professors. Justice Kennedy proposes that these event studies could be required at class certification. The implication would be that plaintiffs at the class certification stage would only be able to invoke reliance—and thus continue as a class—if they could present an event study showing that the company’s misrepresentation actually distorted the market price.