SCOTUS Halliburton ruling could backfire for securities defendants
Let’s state the obvious: Big Business did not get what it wanted Monday from the U.S. Supreme Court, which refused in Halliburton v. Erica P. John Fund to overturn Basic v. Levinson, the 25-year-old precedent that permits shareholders to bring classwide claims of securities fraud.
The justices didn’t even adopt the alternate approach — suggested by some Halliburton supporters in friend-of-the-court briefs — of requiring plaintiffs who want to sue as a class to show that supposed corporate misstatements had an impact on share prices. Instead, the court ruled only that defendants may argue against class certification with evidence that share prices didn’t drop as a result of the alleged fraud.
Halliburton’s lawyer, Aaron Streett of Baker Botts, told me that’s still a “significant win,” especially considering that the justices might have upheld the 5th U.S. Circuit Court of Appeals and barred defendants from using such price-impact evidence to keep shareholders from banding together.
Streett said that the decision will give defendants a chance to fend off class certification with arguments that their share price didn’t drop at all, or that the drop was attributable to something other than the disclosure of their alleged fraud.
But the cost of this small victory for defendants may turn out to be higher than they realize. According to David Boies of Boies, Schiller & Flexner who argued the Supreme Court case for investors — and shareholder lawyers Max Berger of Bernstein Litowitz Berger & Grossmann and Lawrence Sucharow of Labaton Sucharow, the Halliburton ruling not only won’t curb securities class action filings but could actually improve plaintiffs’ position after class certification.
Here’s why. The Supreme Court’s decision does not give securities defendants a new right: They’ve always been able to argue at various turning points in these cases that their supposed fraud didn’t affect share prices. The Halliburton opinion just clarifies that defendants can use those arguments to oppose class certification.
Realistically, said plaintiffs’ lawyer Berger, shareholders in almost all cases will be able to offer their own evidence that corporate misstatements led to drops in stock prices. Even if other factors contributed to the stock drop, Berger said, his side will be able to win class certification if alleged fraud had anything to do with the decline.
“This ruling is not going to make our job more difficult,” he told me. “The decision says price impact can be considered at any time. Yeah, so what?”
Securities fraud plaintiffs, in other words, are already equipped to counter price impact arguments opposing class certification with evidence from their own economics experts, who will say that share prices fell because of the alleged fraud. (And if investors can’t find experts to support their price impact theories, they should not have brought their cases in the first place.)
It’s true, said plaintiffs’ lawyer Sucharow, that if price impact battles take place at the class certification stage rather than in summary judgment briefing, plaintiffs’ lawyers will have to spend more time and money on experts earlier than they’re used to. But the reward for defeating price impact defenses at the class certification stage, he said, will be a better position in post-certification settlement talks: Defendants won’t be able to argue that shareholders can’t prove price impact.
There will no longer be uncertainty that defendants might succeed in getting the case tossed on a summary judgment motion based on price impact, Sucharow said, so shareholders will have better leverage in mediation or negotiations.
“This decision could mean that the club defendants say I get when I win class certification has become an even bigger club,” Sucharow said.
Moreover, Boies pointed out, defendants who decide to raise price impact arguments to oppose class certification will have to face shareholders’ discovery demands on the merits of their defenses. That’s going to expose defendants to depositions and documents requests they won’t welcome, he said. “Plaintiffs are going to get a whole lot more information at the class certification stage,” Boies said.
Boies predicted that when securities class action defendants weigh the costs and benefits of price impact arguments against class certification, few will end up asserting them. “This could turn out to be a ‘be careful what you ask for’ decision,” he said.
Of course, as Halliburton lawyer Streett told me, we’ll have to wait to assess the impact of the new price impact test for class certification until the lower courts have had a chance to apply it; courts in the 2nd Circuit have been using a version of the test since 2008, Streett said, and have denied “a decent number” of class certifications because shareholders couldn’t show price impact.
One early test of the new ruling will come when the 5th Circuit considers the Halliburton case yet again, on its second remand from the Supreme Court. On Monday, both Streett and Boies said they expect to win at the appeals court.
Meanwhile, the ever-resourceful securities class action bar is enjoying its new prognosis, after a near-death experience. “Believe me, if this is the sacrifice we make for keeping Basic, we made a great trade,” said Sucharow.
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