SCOTUS Halliburton ruling finally helps a defendant – Halliburton!

July 28, 2015

(Reuters) – Thirteen months after the U.S. Supreme Court decided not to do away with securities fraud class actions in Halliburton v. Erica P. John Fund, U.S. District Judge Barbara Lynn of Dallas has given the most intensive analysis yet to the high court’s ruling that defendants can try to ward off class certification by rebutting the presumption of marketwide fraud. Her 53-page opinion shows the Supreme Court’s Halliburton decision, which has so far been of little help to securities class action defendants, can benefit corporations willing to spend the time and money to hire economics experts and conduct price impact studies.

The defendant in the case before Judge Lynn is none other than Halliburton itself, which has traveled twice to the Supreme Court in the 13-year course of a class action accusing the company of misrepresenting its exposure to asbestos liability. In her July 25 opinion, the judge knocked out claims based on five of the six disclosures at issue in the case, finding that Halliburton’s expert showed the supposed revelation of fraud didn’t impact Halliburton’s share price.

Judge Lynn did certify a class of investors to proceed with claims stemming from the disclosure of a $30 million jury verdict against a Halliburton subsidiary. The company’s share price fell by about 40 percent after word of the verdict, so Halliburton still faces significant exposure in the case.

More broadly, Lynn joined three other district court judges in holding that defendants bear the burden of proving that so-called corrective disclosures revealing alleged corporate fraud did not affect the company’s share price. (The previous rulings, all from 2014, were Wallace v. Intralinks, McIntire v. China MediaExpress Holdings and Aranaz v. Catalyst Pharmaceutical.) Halliburton made an interesting argument about why the Federal Rules of Civil Procedure place the burden on shareholders to prove price impact, but Judge Lynn concluded, “Halliburton must ultimately persuade the court that its expert’s event studies are more probative of price impact than the fund’s expert’s event studies.”

Given that she devoted much more analysis to the burden-shifting issue than previous judges, her conclusion is good news for shareholders facing class certification challenges. So is Judge Lynn’s rejection of Halliburton’s argument that investors must prove at the class certification stage that supposed corrective disclosures actually corrected alleged misrepresentations. The judge called Halliburton’s theory “a veiled attempt to assert the ‘truth on the market’ defense,” and said it’s not properly at issue during class certification.

Much of Lynn’s opinion is devoted to comparing the specific methodologies and findings of the economists hired by Halliburton and the Erica P. John Fund, which is tough going for those of us who don’t make a living as economics consultants. She did, however, make at least one finding that could be important in future price impact challenges to class certification. The judge said shareholders couldn’t use a two-day window to show that corrective disclosures impacted the market. The whole premise of market efficiency, she said, is that investors digest news quickly so if a disclosure truly affects an efficient market, the share price will reflect the disclosure within a day. “The use of a two-day window is inconsistent with an efficient market,” Lynn wrote.

The one-day window worked for Halliburton with respect to some corrective disclosures but cut against the company when it came to the one disclosure for which Judge Lynn certified a class. Halliburton argued that a quick rebound from the 40-percent price drop after the announcement of an adverse asbestos verdict was evidence that investors weren’t deceived by its representations about asbestos liability. The judge said, however, that the rebound doesn’t rebut the price impact of the jury verdict because it came the next day.

Baker Botts, which represents Halliburton, did not respond to my email request for comment on Judge Lynn’s decision. Class counsel David Boies of Boies Schiller & Flexner sent an email statement through a firm representative: “We are pleased that the court has certified a class,” it said. “We look forward to completing discovery and proceeding to a trial on the merits.”  I assume that Halliburton won’t even think about settling this case unless it loses a summary judgment motion, which will certainly argue that the adverse jury verdict wasn’t a corrective disclosure – a question Judge Lynn said she didn’t have to answer at the class certification stage.

The judge’s ruling did, however, answer the big question of whether the Supreme Court’s Halliburton decision would benefit any securities class action defendants. The answer is yes, even if the only defendant it has helped so far is Halliburton.

(This post has been updated to include comment from class counsel Boies Schiller.)

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