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
Will shareholder litigation survive the abandonment of the fraud-on-the-market presumption of reliance? After the Supreme Court’s announcement that it will be considering the presumption in Halliburton Co. v. Erica P. John Fund, No. 13-317, there is much discussion of whether a rejection of fraud-on-the-market could mean the end of securities litigation. The fraud-on-the-market doctrine, set forth in Basic Inc. v. Levinson, 485 U.S. 224, 243-50 (1988), allows a plaintiff seeking class certification to use a rebuttable presumption to establish reliance. The presumption is that public information is reflected in the price of a stock traded on a well-developed market, and that investors rely on the integrity of the market price when deciding whether to buy or sell a security. Under the doctrine, investors do not need to show they actually relied on a misstatement in order to satisfy the “reliance” element of their claim for class certification. Though overturning the presumption would have a significant impact on shareholder class actions under Section 10(b) of the Securities Exchange Act of 1934, it would not spell the end of shareholder litigation. Read More
A pair of investment firms recently filed suit against Twitter in the Southern District of New York, alleging that Twitter had fraudulently refused to allow them to sell its private stock in advance of its much-anticipated IPO. If that sentence looks somewhat bizarre, it is because the allegations themselves are bizarre, at best.
In short, the plaintiff investment firms allege that a managing partner of GSV Asset Management, who was a Twitter shareholder, engaged them to market a fund that would purchase and hold nearly $300 million in private Twitter shares from the Company’s early-stage shareholders. Plaintiffs then embarked on an “international roadshow” to line up investors in the fund. Plaintiffs allege that, on the roadshow, “there was substantial interest in purchasing [the private] Twitter shares at $19 per share.” Read More
Can shareholders of a government-sponsored enterprise successfully challenge the constitutionality of a government takeover of the entity? Shareholders of Fannie Mae and Freddie Mac will try to do so in a $41 billion class action filed against the United States in the Court of Federal Claims on June 10, 2013. Plaintiffs allege that even though the Federal Housing Finance Authority’s 2008 takeover of the mortgage giants benefited the nation as a whole, it harmed the companies’ shareholders and violated their constitutionally protected private ownership rights.
Congress established Fannie Mae and Freddie Mac to expand the nation’s secondary mortgage market by increasing the availability of funds to finance mortgages and home ownership. The government operated Fannie and Freddie until 1968 and 1989, respectively, when the companies were reorganized as “government-sponsored enterprises,” or federally chartered private corporations. Since then, both companies have operated as shareholder-owned, publicly traded corporations. But in 2008, in the midst of the financial crisis, both companies were placed under the conservatorship of FHFA, pursuant to the Housing and Economic Recovery Act (HERA).
Plaintiffs allege that prior to the 2008 takeover, the government adjusted the companies’ lending standards and capital restraints to encourage the companies to purchase a greater number of risky subprime securities. While this ultimately led to significant weaknesses in the companies’ portfolios, Plaintiffs contend that the companies nonetheless remained adequately capitalized and financially sound, and did not need the conservatorships. According to Plaintiffs, the government improperly bullied the companies’ boards into acquiescing in the takeover. Read More
Putting an end to shareholder derivative litigation arising from News Corp.’s phone-hacking scandal, the company’s directors agreed last week to a record-breaking $139 million cash settlement. According to the plaintiffs’ lawyers, the deal is the “largest cash derivative settlement on record.” The settlement will be funded by directors’ and officers’ insurance proceeds.
Plaintiffs initially filed suit in the Delaware Court of Chancery in March 2011, asserting claims based on the company’s proposed acquisition (since completed) of Shine Group Ltd., a television and movie production company owned by the daughter of News Corp. Chairman Rupert Murdoch. According to plaintiffs, the News Corp. directors breached their fiduciary duties by permitting the purchase of Shine at an excessive price. The court later consolidated various related cases, and plaintiffs’ allegations expanded to include claims that the company’s directors failed to properly investigate the UK phone-hacking allegations that led to the demise of News Corp.’s News of the World. Read More
In a recent decision, the Delaware Supreme Court reversed the Court of Chancery in Pyott, et al. v. Louisiana Mun. Police Emp. Ret. Sys., et al., holding that a derivative suit against Botox-maker Allergan, Inc. should be dismissed because Allergan had already secured a judgment in its favor in a nearly identical suit in California. The decision will make it more difficult for plaintiffs’ lawyers to pursue duplicative derivative litigation in multiple jurisdictions.
Shortly after Allergan entered into a $600 million settlement with the U.S. Department of Justice over alleged off-labeling marketing of Botox, separate groups of shareholders brought suit in Delaware and California. Before motions to dismiss in the Delaware derivative litigation were heard, a California Federal Court dismissed the California derivative suit, finding that plaintiffs could not support the inference that the Allergan directors conspired to violate the law, which prevented plaintiffs from showing that making a demand on the Board to investigate the matter would be futile. The Delaware Court of Chancery held that the California Judgment did not bar the Delaware action and denied Allergan’s motion to dismiss. The Court of Chancery’s decision that it was not required to give preclusive effect to the California judgment was based on two principles: first, under Delaware law, the shareholder plaintiffs in two jurisdictions were not in privity with each other, and second, the California shareholders were not adequate representatives of the corporation. Read More
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