Investors in Halliburton Suit Keep Class Status

     DALLAS (CN) – Halliburton must face a class action from investors who say it defrauded them by lying about possible asbestos liability, the 5th Circuit ruled.
     The oil giant had hoped to avert class certification in the Northern District of Texas with evidence that would purportedly show its alleged fraud did not affect the market price of the stock – that is, its alleged misrepresentation did not cause “price impact” or “price distortion.”
     Heeding direction from the Supreme Court, however, a federal judge in Dallas said such evidence was immaterial to the issue of commonality and certified the class.
     A three-judge panel with the New Orleans-based appeals court affirmed last week.
     The investors had moved for certification in September 2007 for all persons who purchased common stock between June 3, 1999, and December 7, 2001.
     Led by the Erica P. John Fund Inc., the investors claimed that Halliburton had understated its projected liability for asbestos claims, overstated revenues by including billings that were unlikely to be collected, and exaggerated the cost savings and efficiencies from a merger in 1998 with Dresser Industries.
     After their first attempt at class certification failed, the U.S. Supreme Court concluded in 2011 that appeals court “erred by requiring EPJ Fund to show loss causation as a condition of obtaining class certification.”
     It is a prerequisite of class certification for the plaintiffs to show that a company’s untrue statements created a presumption of reliance. The fraud-on-the-market presumption involves misrepresentation publicity, misrepresentation materiality, market efficiency, and evidence that the plaintiff traded shares between the time the misrepresentations were made and when the truth was revealed.
     Unlike the other prerequisites, however, a failure to prove materiality will likewise kill the individual claims of all plaintiffs, the Supreme Court found.
     “A plaintiff can fail to establish publicity, market efficiency, or trade timing, and therefore lose the class-wide presumption of reliance, but still establish individual reliance and prove fraud,” the Supreme Court stated. “Thus, only those issues which bear directly on the pivotal inquiry of common question predominance and the propriety of class resolution should be addressed at class certification.”
     On remand, the 5th Circuit said Halliburton had failed to show that the investors could still pursue fraud claims without proving price impact.
     “Although the 10b-5 fraud action does not expressly require proof of price impact as an element of the claim, a plaintiff must nevertheless prevail on this fact in order to establish another element on which the plaintiff does bear the burden of proof: loss causation,” Judge W. Eugene Davis wrote for the panel. “Price impact can be shown either by an increase in price following a fraudulent public statement or a decrease in price following a revelation of the fraud. To successfully prove a lack of price impact, Halliburton would thus be required to demonstrate both that the stock price did not increase when the misrepresentation was announced, and that the price did not decrease when the truth was revealed. If Halliburton were to successfully show that the price did not drop when the truth was revealed, then no plaintiff could establish loss causation.”
     If Halliburton successfully rebutted the fraud-on-the-market presumption by proving no price impact, the individual plaintiff claims would fail as well because they could not establish an essential element of their fraud claim.
     Therefore, price impact evidence should not be addressed at class certification.

%d bloggers like this: