Jurisdiction - Australia
Australia – Back To Basic(s): US Supreme Court Clarifies Role Of “Fraud On The Market”.

27 June, 2014


Legal News & Analysis – Asia Pacific – Australia – Dispute Resolution


Halliburton Co. et al v Erica P. John Fund, Inc.

What You Need To Know


  • In Halliburton Co. et al v Erica P. John Fund, Inc., the Supreme Court of the United States affirmed the role of the “fraud on the market” doctrine, which creates a presumption of reliance in United States shareholder class actions.
  • The “fraud on the market” doctrine has not been the subject of judicial decision in Australia, but forms the basis of almost all shareholder class actions. It is used in an attempt to avoid the need to prove that each individual shareholder relied on information in making trading decisions. Without the potential to rely on “fraud on the market”, shareholder class actions would be considerably more complicated for plaintiffs and in some cases might not be viable at all.
  • The decision will be persuasive in Australia if the issue is ever determined – although the Supreme Court in part based its decision on the importance of precedent, rather than economic arguments, and Thomas J delivered a stinging dissent, so the legal and economic debate will continue.


In the case, lead plaintiff Erica P. John Fund (Fundsought to bring a securities class action against Halliburton Co. and its CEO (together, Halliburtonfor allegedly misleading statements designed to inflate Halliburton Co.’s stock price.

In the United States, a class action can only commence once it has been “certified” as fit to proceed as a class action. This stage is often hotly contested. The Fund sought to certify the class of claimants for the purposes of the class action by relying on the “fraud on the market” presumption of reliance recognised by the Supreme Court of the United States in Basic Inc. v Levinson, 485 US 224 (1988) (Basic).

The Basic presumption means that plaintiffs are not required to show that each individual shareholder made a trading decision in reliance on particular misleading statements. Instead, it is sufficient to show that the information was material and the market was efficient, such that material information could be expected to be reflected in the share price – in trading at a particular price, shareholders are taken to rely on the price incorporating all material public information. This is known as the “fraud on the market” doctrine. The presumption can be rebutted by evidence negating it in any particular case.

The Supreme Court was invited to reconsider the rebuttable presumption of reliance. The Court also ruled that the presumption was able to be rebutted at the certification stage, but this is not relevant in Australia.

The majority of the Supreme Court held that Halliburton had not shown “special justification” for overruling Basic. As part of its reasoning, the Court considered the economic basis for the “fraud of the market” doctrine.

“Fraud On The Market” Doctrine

The “fraud on the market” doctrine has been subject to judicial and academic criticism. Halliburton sought to discredit it on the basis that:


  • It is simplistic to suggest that efficient markets always incorporate material public information. In practice, the degree to which such information is taken into account varies such that it cannot be assumed that material public information affects price.
  • “Value” investors trade on the basis that the shares do not reflect the company’s underlying value and so do not rely on the price incorporating public information.

Roberts CJ, for the majority, considered that the doctrine remained sound despite these criticisms. In his view, the presumption was based on a “fairly modest premise” that “market professionals generally consider most publicly announced material statements about companies, thereby affecting stock market prices”. His Honour emphasised that the presumption does not depend on the market being perfectly efficient. Rather, because the presumption is rebuttable, defendants could argue in particular cases that information was not incorporated into price. Further, even “value” investors assumed that the stock price would eventually reflect publicly available information.

The minority (Thomas J, with Scalia and Alito JJ concurring) considered that the economic arguments showed that the “fraud on the market” doctrine was out of step with actual market behaviour, and could not be relied upon to found a presumption of reliance. They would have overturned Basic.

Implications For Shareholder Litigation In Australia

Almost all shareholder class actions in Australia rely on the “fraud on the market” doctrine to prove that class members relied on a company’s breach of continuous disclosure obligations and/or misleading or deceptive conduct. However, the doctrine is not yet the subject of any judicial decision in Australia as no shareholder class action has yet been determined by the court in Australia (to date, they have all resolved before judgment).

Given the economic arguments against the “fraud on the market doctrine”, it is uncertain whether it forms part of Australian law. If it is determined that it does not apply in Australia, it would be more difficult to establish as a common issue in class action proceedings that class members relied on a breach of continuous disclosure obligations/misleading or deceptive conduct. There are a number of nuances here, but depending on the precise approach taken in Australia, shareholder class actions might become more difficult for plaintiffs or even non-viable in many cases.

The US Supreme Court’s confirmation of the Basic presumption may be persuasive if the matter is ever determined by an Australian court. Having said that, the majority in the Supreme Court gave some weight to the doctrine of precedent in upholding the decision (ie that it was not so plainly wrong as to justifying overruling an earlier decision) and Thomas J’s dissent shows that there is room for different views.


Prior to the decision, it was thought that Halliburton might lead to a fundamental change in US class actions law which might have implications for the law in Australia.

The US Supreme Court has, however, affirmed Basic and the existing “fraud on the market” doctrine in the US. That may be persuasive if the issue is ever determined in Australia.

However, this is far from the last word. The debate will continue in Australia.


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For further information, please contact:


Ashley Wharton, Partner, Ashurst
[email protected]

Adrian Chai, Partner, Ashurst
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