In a lengthy ruling containing a detailed analysis of dueling economic expert reports, a federal court in Texas held on July 25, 2015 that defendant Halliburton Company demonstrated a lack of price impact at the class-certification stage on nearly all of the plaintiffs’ claims, thus rebutting the presumption of reliance.  This action has twice been to the Supreme Court, most recently in Halliburton, Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014) (“Halliburton II”), which held that the fraud-on-the-market presumption of reliance may be rebutted by showing a lack of price impact from the alleged misrepresentation.  The district court’s recent decision is significant because it is one of the first to consider the issue of price impact post-Halliburton II, and because the decision suggests that lower courts may be willing to wade deep into the complications of event studies and economic analysis in order to determine price impact at the class-certification stage.

As we explained in this space last year, the Supreme Court’s decision in Halliburton II was a mixed bag for the securities litigation defense bar.  The Court did not overrule Basic v. Levinson and thus continued to allow plaintiffs to invoke class-wide reliance using a fraud-on-the-market theory.  But, the Court did hold that, prior to class certification, defendants must be given the opportunity to demonstrate a lack of price impact in order to rebut the Basic presumption.  In the wake of the split-decision in Halliburton II, we suggested that defense experts’ event studies could become relevant earlier in the proceedings, before plaintiffs have the settlement leverage that comes post class-certification.  Now, in the district court proceedings in Halliburton itself, the Supreme Court’s ruling appears to be bearing fruit for the defense bar.

Before delving into the substantial amount of expert testimony before the court, Judge Barbara M. G. Lynn resolved two threshold legal issues:  (1) which party has the burden of production and persuasion; and (2) whether, during the price-impact inquiry, the court should rule as a matter of law that particular disclosures were corrective or not corrective.

As to the first question, the court concluded that the defendant bears both the burdens of production and persuasion.  In so holding, the court rejected Halliburton’s reliance on Federal Rule of Evidence 301, which on its face does indeed suggest that parties seeking to rebut a presumption have the burden of producing that rebuttal evidence, but not the burden of persuasion.  The court explained that by requiring plaintiffs to carry the burden of persuasion to show price impact at the class-certification stage, the court would effectively be requiring the plaintiff to prove price impact directly, which the Supreme Court rejected in Halliburton II when it declined to overrule Basic.

With respect to the second question, the court held that class-certification is not the proper stage in the litigation to decide as a matter of law whether or not a specific disclosure was corrective. Noting that Basic presupposes that a misrepresentation is reflected in the stock price at the time of the transition, the court held that it must presume at class-certification that the asserted misrepresentations were, in fact, misrepresentations, and thus would also assume that disclosures were corrective of the alleged misrepresentations.

Having resolved these two threshold legal questions, the court devoted well over half of its fifty-three page opinion to dueling experts and event studies.  The court reviewed in some detail the opinions of Halliburton’s expert, Lucy Allen, and the plaintiff’s expert, Chad Coffman, and considered, event-by-event, the question of whether Halliburton’s corrective disclosures had a price impact.

As it did in the Supreme Court, Halliburton won some points and lost others.  On five of six alleged corrective disclosures, the court held that Halliburton’s expert ruled the day, finding that Halliburton had met its burden of showing an absence of price impact following one disclosure relating to construction contracts and four disclosures relating to asbestos.  It was only as to a December 7, 2001 disclosure concerning an adverse judgement in an asbestos-related suit that the court held that Halliburton had failed to demonstrate a lack of price impact.  The court certified a class only in regard to this last disclosure, and Halliburton still faces significant liability if plaintiffs prevail.

Ultimately, the significance of the district court’s decision in Halliburton is not that it determined that Halliburton demonstrated a lack of price impact—the Supreme Court allowed this in Halliburton II.  What is important is the court’s willingness to wrestle so thoroughly with the technical details of price impact.  A question that this blog and others posed after Halliburton II was whether allowing defendants to establish the absence of price impact at the class certification stage would mean much; on Halliburton’s return trip to the district court, the answer seems to be yes.