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WASHINGTON, D.C. — (Mealey’s) The U.S. Supreme Court today found that Halliburton Co. has not shown a “special justification” for overruling the reliance presumption of Basic v. Levinson, 485 US. 224 (1988) in securities fraud cases (Halliburton Co., et al. v. Erica F. John Fund Inc., No. 13-317, U.S. Sup.; 2014 U.S. LEXIS 4305; See April 2014, Page 37) [lexis.com subscribers may access Supreme Court briefs and the opinion for this case].
“Halliburton’s criticisms fail to take Basic on its own terms,” Justice John G. Roberts Jr. wrote for the majority. “Halliburton focuses on the debate among economists about the degree to which the market price of a company’s stock reflects public information about the company—and thus the degree to which an investor can earn an abnormal, above-market return by trading on such information. That debate is not new. Indeed, the Basic Court acknowledged it and declined to enter the fray, declaring that ‘[w]e need not determine by adjudication what economists and social scientists have debated through the use of sophisticated statistical analysis and the application of economic theory.’ 485 U.S., at 246–247, n. 24. To recognize the presumption of reliance, the Court explained, was not ‘conclusively to adopt any particular theory of how quickly and completely publicly available information is reflected in market price.’ Id., at 248, n. 28. The Court instead based the presumption on the fairly modest premise that ‘market professionals generally consider most publicly announced material statements about companies, thereby affecting stock market prices.’ Id., at 247, n. 24. Basic’s presumption of reliance thus does not rest on a ‘binary’ view of market efficiency. Indeed, in making the presumption rebuttable, Basic recognized that market efficiency is a matter of degree and accordingly made it a matter of proof.
“The academic debates discussed by Halliburton have not refuted the modest premise underlying the presumption of reliance. Even the foremost critics of the efficient-capital markets hypothesis acknowledge that public information generally affects stock prices.”
Class Action Filed
Investor Eric P. John Fund Inc., formerly known as Archdiocese of Milwaukee Supporting (AMS) Fund Inc., filed a putative securities class action in the U.S. District Court for the Northern District of Texas on behalf of all purchasers of Halliburton common stock from June 3, 1999, to Dec. 7, 2001. The fund alleged that Halliburton and former Chief Operating Officer and CEO David Lesar violated Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5 by making false and misleading statements about Halliburton’s asbestos litigation liability, accounting of revenue in its engineering and construction business and the benefits of a merger with Dresser Industries.
The District Court denied the plaintiffs’ motion for class certification, holding that they did not prove loss causation. The plaintiffs appealed to the Fifth Circuit, which affirmed, and the plaintiffs filed a petition for certiorari on May 13, 2010. The Supreme Court granted certiorari on Jan. 7, 2011, and in a June 6, 2011, unanimous opinion, In re Erica P. John Fund Inc. v. Halliburton Co. (131 S. Ct. 2179, 2184 ) (EPJ Fund), reversed and remanded to the Fifth Circuit, which remanded to the District Court.
The District Court declined to consider the defendants’ evidence on the issue of whether the alleged fraud affected the market price of Halliburton’s stock and ruled that the price impact evidence did not bear on the critical inquiry of whether common issues predominated under Federal Rule of Civil Procedure 23(b)(3). The District Court then certified the class, and the defendants appealed to the Fifth Circuit, which affirmed.
The defendants again appealed to the Supreme Court and filed a petition for writ of certiorari on Sept. 9, 2013. On Oct. 11, the fund filed an opposition to the petition. On Nov. 15, the Supreme Court agreed to hear the appeal.
Burden Not Relieved
Justices Anthony Kennedy, Ruth Bader Ginsburg, Stephen Breyer, Sonia Sotomayor and Elena Kagan joined in Justice Roberts’ opinion. Justice Ginsburg filed a concurring opinion, in which Justices Breyer and Sotomayor joined. Justice Clarence Thomas also filed a concurring opinion, in which Justices Antonin Scalia and Samuel Alito joined.
Halliburton also had argued that Basic relieves SEC Rule 10b-5 plaintiffs of the burden to prove, not simply plead, that their proposed class satisfies each requirement of Federal Rule of Civil Procedure 23, allowing courts to presume that common issues of reliance predominate over individual ones.
“That is not the effect of the Basic presumption. In securities class action cases, the crucial requirement for class certification will usually be the predominance requirement of Rule 23(b)(3),” the majority held. “The Basic presumption does not relieve plaintiffs of the burden of proving—before class certification—that this requirement is met. Basic instead establishes that a plaintiff satisfies that burden by proving the prerequisites for invoking the presumption—namely, publicity, materiality, market efficiency, and market timing. The burden of proving those prerequisites still rests with plaintiffs and (with the exception of materiality) must be satisfied before class certification.”
John Fund is represented by Lewis Kahn and Neil Rothstein of Kahn Swick & Foti in Madisonville, La.; Kim Miller of Kahn Swick in New York; E. Lawrence Vincent of the Law Office of Joe H. Staley Jr. in Dallas; David Boies of Boies, Schiller & Flexner in Armonk, N.Y.; and Carl E. Goldfarb and Andrew L. Adler of Boise Schiller in Fort Lauderdale, Fla.
Halliburton and Lesar are represented by Aaron M. Street of Baker Botts in Houston.
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