High Court Hears Oral Argument In Securities Fraud Class Action

High Court Hears Oral Argument In Securities Fraud Class Action

WASHINGTON, D.C. — (Mealey’s) The U.S. Supreme Court on March 5 heard oral arguments in a securities class action lawsuit seeking a determination as to whether the Supreme Court should overturn or limit its holding in Basic Inc. v. Levinson (485 U.S. 224 [1988] [enhanced opinion available to lexis.com subscribers]) [(Halliburton Co., et al. v. Erica F. John Fund Inc., No. 13-317 U.S. Sup. [lexis.com subscribers may access Supreme Court briefs for this case].).

Arguing for petitioners Halliburton Co. and David Lesar, attorney Aaron M. Streett of Baker Botts in Houston stated that the ruling in Basic should be overturned because “it was wrong when it was decided and it is even more clearly erroneous today.” 

Basic substituted economic theory for the bedrock common law requirement of actual reliance that Congress embraced in the most analogous express cause of action,” Streett said. 


Basic’s judicially created presumption preserves an unjustified exemption from [Federal Rule of Civil Procedure] Rule 23 that benefits only securities plaintiffs.  Basic has proven unworkable, has been undermined by later developments, and has proven to have harmful consequences for investors and companies alike,” Streett stated. 

“The most direct course is to overrule Basic altogether and require a showing of actual reliance.” 

Most of the justices challenged Streett’s claims, with Justice Anthony M. Kennedy even citing the position of law professors who filed a brief as amici curiae, calling for what Justice Kennedy termed a “midway position.” 

Not Economic Theory 

Arguing for investor Eric P. John Fund Inc., formerly known as Archdiocese of Milwaukee Supporting (AMS) Fund Inc., attorney David Boies of Boies, Schiller & Flexner in Armonk, N.Y., told the court that overturning the ruling in Basic is not necessary because “the premise of the Basic decision was not economic theory; it was commerce.” 

“This Court said the premise was Congress’s premise.  And I think that when this Court decided the Amgen [Amgen Inc. v. Connecticut Retirement Plans and Trust Funds (133 S. Ct. 1184 [2013]; See March 2013, Page 5)] case, it said that the fraud on the market presumption was a substantive doctrine of Federal securities law.  This is something that has been embedded in the law.  It has been ratified by Congress in the PSLRA [Private Securities Litigation Reform Act] and in SLUSA [Securities Litigation Uniform Standards Act].  It is something that Congress has legislated assuming that this was the law,” Boies explained. 

Justice Kennedy again asked why the midway position could not be used, and Justice Antonin Scalia seemed to agree that a compromise might work, calling the law professors’ plan “Basic writ small.” 

Deputy U.S. Solicitor General Malcolm L. Stewart appeared on behalf of the U.S. government as amicus curiae on behalf of the fund. 

Questions Presented 

The questions presented for review are:  “[w]hether this Court should overrule or substantially modify the holding of Basic Inc. v. Levinson, 485 U.S. 224 (1988), to the extent that it recognizes a presumption of classwide reliance derived from the fraud-on-the-market theory” and “[w]hether, in a case where the plaintiff invokes the presumption of reliance to seek class certification, the defendant may rebut the presumption and prevent class certification by introducing evidence that the alleged misrepresentations did not distort the market price of its stock.” 

The fund 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 Lesar, Halliburton’s former chief operating officer, 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. 

No Loss Causation 

The District Court denied the plaintiffs’ motion for class certification, holding that the plaintiffs did not prove loss causation.  The plaintiffs appealed to the Fifth Circuit U.S. Court of Appeals, 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 [2011]) (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. 

In particular, the panel held that under the Supreme Court’s ruling in Amgen, “price impact is ordinarily established by expert evaluation of a stock’s market price following a specific event and is inherently applied to everyone in the class.” 

Petition Filed 

The defendants again appealed to the Supreme Court and filed a petition for writ of certiorari on Sept. 9, 2013.  

Halliburton and Lesar are represented by Street.  

The fund is represented by Boies; Lewis Kahn and Neil Rothstein of Kahn Swick & Foti in Madisonville, La.; Kim Miller of Kahn Swick in New York; Carl E. Goldfarb of Boies Schiller in Fort Lauderdale, Fla.; and E. Lawrence Vincent of Plano, Texas.  

Amici former SEC officials and commissioner and law professors Paul S. Atkins, Stephen M. Bainbridge, Brian G. Cartwright, Elizabeth Cosenza, Richard A. Epstein, Allen Ferrell, Edward H. Fleischman, Joseph A. Grundfest, M. Todd Henderson, Richard W. Painter, Kenneth E. Scott and Steven Wallman are represented by Grundfest in Stanford, Calif., and John F. Savarese, George T. Conway III and Charles D. Cording of Wachtell, Lipton, Rosen & Katz in New York.

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