On March 5, 2014, the Supreme Court heard oral argument in the case Halliburton Co. v. Erica P. John Fund, Inc., Case No. 13-317, and we are certain our blog readers are eagerly awaiting the Court’s ruling. The case has potentially far-ranging implications for the survival of the Court’s landmark ruling in Basic, Inc. v. Levinson, 485 U.S. 224 (1988), which relied on the efficient market hypothesis to create the fraud-on-the-market presumption of reliance on misrepresentations. This post provides background on the history of the Halliburton litigation and is the first in a series of posts that will analyze the arguments by the parties and amici, the Court’s ruling, and the potential implications for future litigation.
Plaintiff-Respondent Erica P. John Fund, Inc. is a not-for-profit group that supports the outreach work of the Archdiocese of Milwaukee. The Fund purchased stock in Halliburton Company and lost money when Halliburton’s stock price dropped following negative news regarding Halliburton’s (1) potential liability in asbestos litigation, (2) revenue accounting on fixed-price construction contracts, and (3) merger with Dresser Industries. The Fund sued Halliburton and its CEO David Lesar alleging that they had previously made fraudulent misrepresentations concerning those topics in violation of §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. Read More
The Ninth Circuit recently reversed a ruling by the U.S. District Court of Nevada granting summary judgment in favor of the SEC in a case alleging violations of Section 5 of the Securities Act of 1933 in connection with the sale of unregistered securities. The SEC’s complaint alleged that 1st Global Stock Transfer LLC (“Global”), a transfer agent, and Global’s owner, Helen Bagley (collectively “Defendants”), assisted in the sale of unregistered securities for CMKM Diamonds, Inc. (“CMKM”), a purported diamond and gold mining company. The SEC’s complaint further alleged that CMKM had no legitimate business operations but instead the Company concocted false press releases and distributed fake maps and videos of mineral operations to its investors. While CMKM was one of several defendants in the action, the SEC only moved for summary judgment against Global, Bagley, and CMKM’s attorney. The District Court granted the SEC’s motion for summary judgment against the three defendants, but only Global and Bagley appealed that ruling.
In perpetrating the scheme, CMKM’s attorney was alleged to have provided hundreds of false opinion letters supporting the issuance of unregistered stock without restrictive legends to indicate that the stock was unregistered. Relying on these opinion letters, Global and Bagley issued additional CMKM stock without restrictive legends, believing that the issuance was legal. After a year and a half of this practice, Bagley became suspicious and asked a second law firm to confirm the opinion letters. The second law firm, however, relied on the first attorney’s opinion letters and also issued an opinion letter stating that the issuance of additional CMKM stock was valid. Based on the additional opinion letter, Global and Bagley continued to issue CMKM shares without restrictive legends. Read More