Professors and Former SEC Commissioners’ Brief in Halliburton

As promised, here is the brief submitted by a second group of professors, together with former SEC Commissioners, in Halliburton Inc. v. Erica P. John Fund, Inc.

It argues that the Court “need not wade into the complex and highly technical debate over the efficient markets hypothesis to answer the question presented here.  Instead, the Court can, and should, decide this case by applying well-established principles of statutory construction.”  It argues that, to infer how the 1934 Congress would have addressed the issues had the 10b–5 action been included as an express provision in the 1934 Act, the Court should consult the express causes of action in the securities laws, and borrow from the most analogous one.  The brief argues that

that “most analogous” provision is Section 18(a) of the Securities Exchange Act of 1934. Section 18(a) is the only express right of action in existence in 1934 that authorizes damages actions for misrepresentations or omissions that affect secondary, aftermarket trading. It is the only express right that provides a cause of action for damages in favor of openmarket purchasers and sellers against those (such as issuers or their executives) who allegedly made false or misleading statements, but did not transact with the plaintiffs—the quintessential Section 10(b) class claim today.

Section 18(a) explicitly states that plaintiffs must demonstrate that they transacted “in reliance upon such [false or misleading] statement[s].” 15 U.S.C. § 78r(a). They must, in other words, demonstrate actual, “eyeball” reliance.14 Section 18(a)’s legislative history, moreover, underscores the need for plaintiffs to demonstrate actual reliance for aftermarket fraud. As originally drafted, Section 18(a) contained no reliance requirement, but Congress rejected that no reliance version in the face of a torrent of criticism. As enacted, Section 18(a) thus prohibits recovery “unless the buyer bought the security with knowledge of the [false or misleading] statement and relied upon the statement.” 78 CONG. REC. 7701 (1934) (statement of Rep. Sam Rayburn), cited in Basic, 485 U.S. at 258 (White, J., dissenting). The Court should construe the Section 10(b) right accordingly.

The brief, which was filed by Wachtell’s George Conway of Morrison v. National Australia Bank fame, is also signed by Joseph A. Grundfest, who is both a professor and former SEC Commissioner. He is joined by professors Stephen M. Bainbridge, Elizabeth Cosenza, Richard A. Epstein, my former co-clerk Allen Ferrell, Todd Henderson (yes, that Todd Henderson), Richard W. Painter, and Kenneth E. Scott.  He is also joined by former Commissioners Paul S. Atkins, Edward H. Fleischman, Steven Wallman, and former SEC General Counsel Brian G. Cartwright.