As the U.S. Supreme Court winds down its current term, it issued a ruling in one of the year’s big-ticket cases: Halliburton v. Erica P. John Fund. Also known as Halliburton II, the decision was released Monday and gave companies trying to protect themselves from securities fraud class actions something to smile about.
Were attorneys who defend corporate clients happy about the outcome? Yes. Were they surprised? Probably not. “I think the decision kind of came down as many people expected, and as I would’ve expected,” Dan Gold, a partner in Haynes and Boone’s class action and securities and shareholder litigation practices, told CorpCounsel.com.
The court ruled unanimously in favor of Halliburton, but chose a more middle-of-the-road approach to its opinion than it could have. The ruling boosts the ability of defendants to protect themselves from securities fraud class actions by allowing them to refute claims earlier in the litigation process. However, it did not get rid of plaintiffs’ ability to use a “fraud on the market” theory in their claims.
The securities fraud case against Halliburton was originally brought by the Erica P. John Fund, which provides financial support to the Catholic Archdiocese of Milwaukee. The shareholder plaintiffs claimed that Halliburton had underemphasized the company’s legal problems with asbestos claims and other business issues it was facing. The U.S. Court of Appeals for the Fifth Circuit allowed certification of the class of plaintiffs, using a “fraud on the market” presumption.
The presumption, which was endorsed by the Supreme Court in 1988 in Basic Inc. v. Levinson, asserts that efficient markets reflect the statements made by public companies about their well-being—so a class of investors can claim to have been defrauded, even if not all of the members read the actual allegedly false statements. According to a Halliburton II amicus brief submitted by a group of law professors and former U.S. Securities and Exchange Commission officials, more than 3,050 private class actions securities fraud lawsuits were filed in the U.S. between 1997 and 2012—likely reflective of a lower bar for these types of actions post-Basic.
While this week’s decision doesn’t get rid of the “fraud on the market” presumption as a tool for plaintiffs, it changes the process to allow defendants to rebut the presumption that misstatements impacted stock prices before a class is certified.
Aaron Streett, a partner at Baker Botts and chairman of the firm’s Supreme Court and constitutional law practice, argued Halliburton’s case before the court in March. He told CorpCounsel.com that although Monday’s ruling was “certainly not the home run that overruling Basic would have been,” it was still “definitely a significant win.”
“Now there’s a class of cases that would have been certified under the lower court’s approach that will not be certified,” said Streett “and we think Halliburton is one of those cases, because we had a significant amount of evidence that missteps alleged didn’t have any effect on the market price.”
Being able to prevent class certification would strengthen the defendants’ position, perhaps preventing them from having to settle with the plaintiffs, which is what Mark Haddad, a partner at Sidley Austin and cochair of the firm’s global appellate practice, told CorpCounsel.com happens in many of these cases.
“If the company is sued over a statement that the company does not think had any impact on the share price, then the company doesn’t have to just go through class certification and then settle,” he said. “The company can fight back at the class certification stage and defeat class certification by having an expert prepare an event study that shows that the challenged statements or omissions did not affect the share price.”
Even though Halliburton II has given companies more leverage, some are still clamoring for tougher action—like Lisa Rickard, president of the U.S. Chamber Institute for Legal Reform, who called Monday’s decision a “small first step” in a statement. “We are disappointed, however, that the court missed an important opportunity to correct the mistake that Basic has turned out to be for investors,” she said. “Meritless securities class actions benefit only a few plaintiffs’ lawyers and ultimately cost investors billions. Congress must now finish this important journey toward shareholder justice by acting to cut back on litigation driven solely by a few plaintiffs’ lawyers.”
Haddad believes it’s unlikely there will be further movement on the issue anytime soon. “I don’t foresee the court revisiting the presumption, and I think the ideas of private securities class actions are now so embedded in the legal system that I don’t see Congress changing it either,” he said.
The outcome of Halliburton II seems to be a solid net positive for in-house counsel. In the wake of the decision, according to Gold, general counsel and their legal partners who face a securities fraud class action may have at least one new responsibility—but one that is likely welcome. They may need to bring in an economic expert earlier in the process to conduct an event study that would show alleged misstatements did not impact the price of company stock.
“The plaintiff will likely have their own expert with their own competing event study,” said Gold. “In that respect, there will be some added cost at the class certification stage that might not have been incurred if this argument were unavailable.” However, he called it a “worthwhile investment,” and when it’s a choice between hiring an economist or possibly paying out a massive class action settlement, many would probably be inclined to agree.