After initially falling flat, the U.S. Supreme Court's June 2014 Halliburton ruling finally flexed some muscle Monday, forming the basis of a Texas district judge’s decision to limit class certification in the same case that twice wound its way to the high court.
In a lengthy and highly technical memorandum, District Judge Barbara G. Lynn denied the plaintiffs’ request for certification on five out of six alleged corrective disclosures, ruling they could move forward only on claims relating to Halliburton’s Dec. 7, 2001, announcement that a Baltimore jury found one of its subsidiaries liable for $30 million following a trial in an asbestos lawsuit, which sent the company’s shares tumbling 40 percent.
The ruling may have been a loss for Halliburton, but it was a win for defendants and defense attorneys who have been waiting for clear answers following the Supreme Court’s 2014 ruling that securities class action defendants may rebut the fraud-on-the-market presumption of reliance at the class certification stage by showing a lack of price impact from an alleged misrepresentation. Established by the high court’s 1988 ruling in Basic Inc. v. Levinson, the presumption rests on the principle that public, material information about a publicly traded company affects the price of the company's stock and that investors thereby rely on that information when they purchase securities.
The Halliburton II ruling was a split victory for plaintiffs and defendants, but it left many defense attorneys wondering if the ability to rebut the presumption of reliance could ever be put to practical use. On Monday, they got their answer.
“This shows that the Supreme Court opinion is going to have some teeth,” Michael Celio, a partner at Keker & Van Nest LLP, said. “That wasn’t 100 percent clear. Supreme Court decisions in our field are often at a very high level and speak, at times, almost philosophically about the way these go forward.”
Judge Lynn’s decision, he said, spells out a “rigorous” and “clear” standard for defense attorneys looking to rebut the presumption of reliance and will likely be cited heavily by defense attorneys in future litigation.
“We haven’t had a ton of information about how this is going to work,” Celio said. “This is one of the very first and it's going to be very influential in terms of how other district courts look at this.”
George Borden, a partner at Williams & Connolly LLP, also said the amount of economic analysis in Judge Lynn’s ruling was significant, taking it as a good sign for defendants going forward. Since the Supreme Court ruled in Halliburton II, many defense attorneys have doubted whether district court judges would wade into expert economic analyses enough to let defendants prove a lack of price impact.
“Judge Lynn has really gotten down in the nitty-gritty details of the expert reports,” Borden said.
Given this new standard, it’s likely plaintiffs and defendants will increase their use of the economic analyses known as event studies in future cases, according to Adam Pritchard, a University of Michigan Law School professor who teaches corporate and securities law.
But it remains unclear to what extent defendants will push those studies in district court.
“If I’m a plaintiff, we’re going to hire an expert anyway, and you throw it up against the wall and see what sticks,” Pritchard said. “Halliburton was committed to litigating this very vigorously and was willing to spend a lot of money on this. Other defendants may be less resistant, or more willing to settle.”
In addition, not all of Judge Lynn’s opinion was crystal clear, according to Borden, who said he found fault with her decision not to address whether Halliburton’s corrective disclosures were in fact corrective disclosures at all. The company has argued that its supposed revelations didn’t reveal the truth it was allegedly hiding, but Judge Lynn ruled Monday that she couldn’t make that call because it is a loss causation issue, which the Supreme Court’s ruling in Halliburton I said would have to wait until after class certification.
“I think that’s wrong,” Borden said. “It’s true that the same evidence in this kind of case goes to loss causation and price impact, but I don’t think that that means that you can’t consider that evidence with respect to price impact.”
Judge Lynn has also already ruled on loss causation in the suit. Before the case went up before the Supreme Court the first time, she rejected the plaintiffs’ motion for class certification, finding that they failed to show Halliburton’s alleged misstatements actually caused them economic harm.
“The interesting question now that’s raised by this opinion is, has she changed her mind about the loss causation issue based on the new state of the evidence that was presented to her this time, or is she going to stick with her view from the first time that the plaintiffs can’t show loss causation for the Dec. 7 announcement?” Borden asked.
But he said the language in Monday’s opinion indicated Judge Lynn wasn’t likely to simply toss the case in the next stage of litigation.
In any case, Halliburton still has an uphill battle to face. By losing on the Dec. 7, 2001, corrective statement, it will likely still face the largest possible class, according to Celio. And the 40 percent price dip will be a high hurdle, even though the company’s stock rebounded quickly after it dropped.
“It’s going to be a challenge to say that there’s no price impact, because at least at first blush it seems to be doing something,” Celio said. “At minimum it’s a coincidence.”
That said, for defense lawyers more broadly, there’s “a ton to celebrate,” according to Celio.
“[Judge Lynn] put the burden on Halliburton to prove a lack of price impact,” he said. “That’s plaintiff friendly. But in the end, even with that, and even with the procedural handicap that was assigned to them, they came very close. They won almost everything.”