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Market Efficiency and Fraud on the Market: The Promise and Peril of Halliburton

This spring, the Supreme Court will hear Halliburton v. Erica P. John Fund, the most important securities law case in a quarter century. The Court will reconsider Basic v. Levinson and the fraud-on-the-market doctrine, the doctrine that has made the modern securities fraud class action possible. I argue that — contrary to the claims of the parties and of several of the Justices — the Court need not pass judgment on the efficient capital markets hypothesis in order to pass judgment on the fraud-on-the-market doctrine. It is possible to accept the efficient capital markets hypothesis and reject the fraud-on-the-market doctrine, or to reject the efficient capital markets hypothesis and accept the fraud-on-the-market doctrine. I further demonstrate that it is not only unnecessary, but would also be profoundly unwise for the Justices to wade into the debate over market efficiency. While market efficiency is of little relevance to the debate over the fraud-on-the-market doctrine, it is central to numerous other contemporary legal debates, many of which are of far more fundamental importance than the fraud-on-the-market doctrine. Any Supreme Court pronouncements on market efficiency would be certain to resurface in these debates in ways the authors would not intend.