Perhaps the most important recent decision in the world of securities class actions coming from the U.S. Supreme Court — Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014) — played out on remand to the district court. Erica P. John Fund, Inc. v. Halliburton Co., No. 3:02-CV-1152-M, slip op. (N. D. Tex. July 25, 2015).
Starting with the basics, recall that a plaintiff in a securities class action must show, among other things, that she relied on an alleged misrepresentation when buying or selling her stock. Also recall that under basic (yes, I know I keep using this word) tenets of class action law, if reliance is individualized (i.e., varying among members of the putative class), the class cannot be certified. The issue of individualized reliance was bound to stymie the bringing of securities class actions. This led the Supreme Court to hold in Basic v. Levinson, 485 U.S. 224 (1988), that plaintiffs in a securities class action could rely on a presumption of reliance. Reliance would be presumed on a class-wide basis on a “fraud-on-the market” theory if the alleged misrepresentation were public and material, and the stock was traded in an efficient market and traded between the time of the alleged misrepresentation and the time the truth was revealed. That said, the Basic Court also held that a defendant in a securities class action could try to rebut the presumption that the class relied on a misrepresentation as manifest in the price of a stock by “severing the link” between the alleged misrepresentation and the price of the stock.
In the Supreme Court’s Halliburton decision last year, the Court held that defendant companies could try to rebut the Basic presumption of reliance at the class certification stage of a case. The Defendant would not have to wait for the merits stage of the case, allowing a defendant company to narrow or defeat a class action closer to the onset of the case. (See my June 23, 2014 blog post.)
After that landmark (and long-awaited) ruling, the question was how the decision would play out in practice. As predicted, the issue of price impact has become a battleground of the experts. And here, on remand, after weighing the competing expert reports, Halliburton succeeded in narrowing the class to just one of five alleged misstatements (relating to a December 7, 2001 statement concerning the company’s asbestos liability).
Equally important, the district court needed to decide which side had the burdens of production and persuasion on the price impact issue at the class certification stage. The district court held that defendant had to shoulder those burdens: “the Court finds that both the burden of production and the burden of persuasion are properly placed on Halliburton. In other words, 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.” In reaching this conclusion, the district court relied on, among other things, Justice Ginsburg’s concurring opinion in Halliburton, that the Supreme Court’s decision “should impose no heavy toll on securities fraud plaintiffs with tenable claims [and] it is incumbent upon the defendant to show the absence of price impact.”
Finally, the district court grappled with the fine line between the Supreme Court’s 2013 holding in Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, that a defendant may not dispute the materiality of an alleged statement at the class certification stage, and its holding in Halliburton that a defendant may rebut the presumption of class-wide reliance by severing the link between the alleged misstatement and the price of the stock. In this case, the district court reasoned that Halliburton had made a “veiled attempt” to argue materiality with respect to corrective disclosures, and held that class certification was not the time to make such a merits argument. Rebuttal could only be about one thing — price impact.
While the Halliburton remand played out much as expected in terms of the battle of the experts, it remains to be seen what other courts will do on the issue of the burdens of persuasion and production and the question of where to draw the line between materiality versus price impact.