Applying the Supreme Court’s landmark decision in Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014) (“Halliburton II”), which allowed companies facing securities fraud class actions to defeat certification by presenting evidence that their alleged false statements did not impact the company’s stock price, the district court on remand held that Halliburton defeated class certification as to all but one of its alleged misstatements. The district court considered expert testimony from both parties before determining that only one of the statements at issue ultimately impacted the price of Halliburton’s stock.
The July 25, 2015 decision by Judge Barbara M. G. Lynn for the Northern District of Texas is the latest chapter in a “long and winding” case that has visited the Supreme Court twice. The Erica P. John Fund, Inc. v. Halliburton Co., No. 2:02-CV-1152-M (N.D. Tex. July 25, 2015). The Erica P. John Fund, Inc. (the “Fund”), is the lead plaintiff in a putative class action against Halliburton alleging violations of the federal securities laws— specifically, that Halliburton made various representations as to the company’s financial status that later turned out to be false, precipitating a massive stock drop.
In 2008, the district court denied class certification after finding that, per binding Fifth Circuit precedent, the plaintiff had not proven that Halliburton’s alleged misstatements had caused the plaintiff’s loss. The Supreme Court later reversed and remanded, holding that so-called loss causation need not be proven at the class certification stage, but rather should be dealt with on the merits. Erica P. John Fund, Inc. v. Halliburton Co., 131 S. Ct. 2179, 2185-86 (2011) (“Halliburton I”).
On remand to the district court, Halliburton argued that the evidence it submitted the first time around—to show lack of loss causation—also established that the alleged misstatements did not impact the company’s stock price, and therefore the plaintiffs could not show on a collective basis that they relied on the misstatements. Recall that the Supreme Court in Basic v. Levinsonannounced a presumption that all class members relied on alleged misstatements when purchasing or selling stock, where the misrepresentations were public and material, and where the market was efficient. Basic held, however, that defendants could rebut the presumption with any evidence that “severs the link between the alleged misrepresentation and either the price received (or paid) by the plaintiff, or his decision to trade at a fair market price.” But the district court in Halliburton found that Halliburton’s attempts to sever that link were inappropriate at the certification stage. It held that the issue of price impact, like that of loss causation, was properly reserved for the merits phase of the litigation and did not relate to the central question on certification—whether common issues of law or fact “predominate” over individualized issues, making class action treatment appropriate.
But the Supreme Court reversed again, holding in a landmark decision that defendants in securities fraud class actions may defeat the Basic presumption of reliance at the certification stage through direct proof that the alleged misstatements had no impact on the company’s stock price. The Supreme Court remanded the case to the district court to evaluate the parties’ arguments as to price impact or lack thereof.
With the battle back before the district court, the parties filed opposing expert reports and briefing, and an evidentiary hearing was held. As a threshold matter, the court determined that it was Halliburton’s—not the plaintiff’s—burden not only to rebut the Basic presumption of reliance, but todisprove price impact altogether. Seizing on language from the Halliburton II concurrence that “it is incumbent upon the defendant to show the absence of price impact,” the court held that placing the burden of proof on defendants was the right choice. Otherwise, plaintiffs would face an insurmountable burden to certification because defendants would simply need to have an expert opine that price impact was absent. With the Basic presumption then unavailable, individual plaintiffs and class members would have to come forward with direct evidence of reliance, which is a difficult burden to meet. The district court determined that such a sea change in securities class actions was unwarranted.
Turning to the merits, the district court waded through the parties’ competing expert reports, which included event studies to show that the alleged misrepresentations impacted or did not impact Halliburton’s stock price. There were two key questions: (1) How much did the stock price in fact change when the truth was revealed to the market? (2) How likely was it that the misstatement was responsible for the price change?
The Fund’s expert, Chad Coffman, found price impact as to six events: Halliburton’s December 21, 2000, press release announcing a $120 million tax bill relating to its engineering and construction businesses, and five separate disclosures regarding the company’s exposure to asbestos litigation liability. Halliburton’s expert, Lucy Allen, concluded that none of the alleged misstatements impacted the price of Halliburton’s stock. Even after adjusting her methodology based on criticism from Coffman, Allen found a statistically significant price drop following only two disclosures, on August 9, 2001, and December 7, 2001, regarding Halliburton’s asbestos-related liability. The issue, therefore, was whether the price drop could confidently be attributed to the disclosures.
On August 9, 2001, Halliburton disclosed to investors that it had “experienced an upward trend in the rate of new asbestos claims” being filed, and that its gross asbestos liability had grown to almost $700 million—far greater than the $60 million figure it had previously announced. The district court held that Halliburton successfully proved these disclosures had no stock price impact because that information had already been assimilated into the market. The $60 million figure was net of insurance, and because Halliburton’s rate of insurance was “well known to the market,” comparing the $60 million figure with the $700 million figure was like “comparing apples and oranges.”
Halliburton failed, however, to prove no price impact as to its December 7, 2001, press release announcing a $30 million asbestos verdict against one of its subsidiaries, which had been followed by a 40 percent stock decline. The company argued that the press release could not have impacted the stock price because it rebounded the very next day. But the court refused to analyze a “two-day window,” focusing instead on the single day on which the press release was made. While acknowledging that at least some of Halliburton’s stock decline on that day was probably attributable to general uncertainty in the asbestos environment, it held that Halliburton failed to prove the uncertainty “caused the entirety of Halliburton’s substantial price decline.”
The court therefore granted the plaintiff’s motion for certification, but only as to the December 7, 2001, press release. The case now moves forward to the merits, albeit with a significantly narrower factual scope.
It remains to be seen whether Halliburton will make another trip to the Supreme Court, perhaps on the issues of the burdens of proof and persuasion. What is clear is that, as predicted1, expert analyses will be the driving force at the class certification stage in securities class actions.