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.
The Fund sought to certify a class of plaintiffs under Federal Rule of Civil Procedure 23(b)(3), which requires that “the questions of law or fact common to class members predominate over any questions affecting only individual members.” 2008 WL 4791492 (N.D. Tex. Nov. 4, 2008). The Fund relied on the Basic presumption of class-wide reliance to satisfy its showing that the question of reliance was predominantly common. In opposing class certification, Defendants did not challenge the Basic presumption. Instead, they argued that the Fund failed to show loss causation under the Fifth Circuit’s requirement that a plaintiff prove a misstatement actually moved the market. The District Court agreed and denied class certification because the Fund did not show the alleged misrepresentations caused any stock price increase.
The Fifth Circuit affirmed, finding that the Fund made no attempt to prove that Halliburton’s stock price moved in response to the alleged misrepresentations. 597 F.3d 330 (5th Cir. 2010). The court held that a plaintiff who relies solely on price declines must raise an inference that the price was actually affected by earlier misrepresentations. Without showing that the alleged misrepresentation affected the stock price, the fraud-on-the-market presumption was unavailable.
The Supreme Court reversed the Fifth Circuit, holding that plaintiffs do not need to show loss causation at the class certification stage to invoke the Basic presumption. 131 S.Ct. 2179 (2011). “Loss causation has no logical connection to the facts necessary to establish the efficient market predicate to the fraud-on-the-market theory.” The Court held that invoking Basic requires only that plaintiffs demonstrate the alleged misrepresentations were publicly known, the stock traded in an efficient market, and the relevant transaction took place between the time of the alleged misrepresentations and the time the truth was revealed.
On remand, the District Court certified the class and held, without analysis, that “[t]he fraud-on-the-market theory applies to this case, so proof of each individual class member’s reliance is not required.” 2012 WL 545997 (N.D. Tex. Jan. 27, 2012). This time, the Fifth Circuit affirmed class certification and rejected Defendants’ argument that the absence of “price impact”—an effect of a misrepresentation on stock price—could rebut the fraud-on-the-market presumption. 718 F.3d 423 (5th Cir. 2013). The Fifth Circuit relied on the Supreme Court’s decision in Amgen Inc. v. Connecticut Retirement Plans & Trust Funds, 133 S. Ct. 1184 (2013), which held that since (1) the element of materiality was established by evidence common to all plaintiffs and (2) failure to prove materiality would cause all individual claims to fail, materiality was not necessary to the question of commonality at the class certification stage. The Fifth Circuit similarly found that price impact was an objective inquiry that applied to everyone in the class and would be based on common evidence. And if Halliburton could prove the absence of price impact, all individual claims would fail because plaintiffs would be unable to establish loss causation. “[T]he focus of the 23(b)(3) class certification inquiry—predominance—is not whether the plaintiffs will fail or succeed, but whether they will fail or succeed together.” Since price impact evidence did not bear on the question of whether common questions predominated, the Fifth Circuit affirmed class certification.
The Supreme Court granted certiorari on November 15, 2013 and heard oral argument on March 5, 2014.