Class Action Complaint Against Halliburton Alleging Violations of Securities Laws did not Apply Wrong Legal Standard in Ruling on Class Action Certification Motion and Properly Denied Class Action Treatment because Plaintiff Failed to Establish Causation Seventh Circuit Holds
Plaintiff filed a putative class action against Halliburton and David Lesar (its COO and then CEO during the class period alleging violations of various federal securities laws; specifically, the class action complaint alleged that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as well as Rule 10(b)-5. The Archdiocese of Milwaukee Supporting Fund, Inc. v. Halliburton Co., ___ F.3d ___, 2010 WL 481407, *1 (5th Cir. February 12, 2010). According to the allegations underlying the class action complaint, defendant was liable for securities fraud violations under a “fraud-on-the-market” theory, alleging that false statements had been made concerning “(1) Halliburton’s potential liability in asbestos litigation, (2) Halliburton’s accounting of revenue in its engineering and construction business, and (3) the benefits to Halliburton of a merger with Dresser Industries.” Id. Plaintiff moved the district court to certify the litigation as a class action; defense attorneys opposed class action treatment. Id. The district court denied the motion, holding that the Rule 23’s requirements for certification of a class action had not been met. Id. Specifically, in order to obtain class certification “Plaintiff was required to prove loss causation, i.e., that the corrected truth of the former falsehoods actually caused the stock price to fall and resulted in the losses.” Id. The district court denied certification because it found that plaintiff had failed to establish the necessary “causal relationship,” id. The Fifth Circuit affirmed.
Plaintiff argued on appeal “that the district court applied an erroneous standard for loss causation and required it to prove more than is required under law.” Halliburton, at *1. The Circuit Court disagreed. The Court explained,
In the case of a putative class, a plaintiff may create a rebuttable presumption of reliance under the fraud-on-the-market theory by showing “that (1) the defendant made public material misrepresentations, (2) the defendant’s shares were traded in an efficient market, and (3) the plaintiffs traded shares between the time the misrepresentations were made and the time the truth was revealed.”… A defendant may rebut the presumption “by ‘[a]ny showing that severs the link between the alleged misrepresentation and either the price received (or paid) by the plaintiff, or his decision to trade at fair market price[.]’”
Halliburton, at *2 (citation and footnotes omitted). Plaintiff was required to “prove that the complained-of misrepresentation or omission ‘materially affected the market price of the security’” – that is, “‘that an alleged misstatement “actually moved the market.’” Id. (citations omitted). The district court properly recognized that this was the test plaintiff had to satisfy, and that it was “not enough merely to show that the market declined after a statement reporting negative news.” Id.
The Fifth Circuit concluded, “the district court correctly summed up Plaintiff’s burden in this case by stating that because Plaintiff presented no evidence that a false, non-confirmatory positive statement caused a positive effect on the stock price, Plaintiff would have to show ‘(1) that an alleged corrective disclosure causing the decrease in price is related to the false, non-confirmatory positive statement made earlier, and (2) that it is more probable than not that it was this related corrective disclosure, and not any other unrelated negative statement, that caused the stock price decline.’ This was the correct standard.” Halliburton, at *3 (footnotes omitted). Thus, the district court did not apply the wrong standard, id., at *4, and it did not err in denying class certification, id., at *4-*9. Accordingly, the Court affirmed the denial of class certification, id., at *9.
NOTE: The Fifth Circuit explained, “Under the fraud-on-the-market theory, it is assumed that in an efficient, well-developed market all public information about a company is known to the market and is reflected in the stock price. When a company has publicly made material misrepresentations about its business, we may presume that a person who buys the company’s stock has relied on the false information. The stockholder then suffers losses if the falsity becomes known and the stock price declines…. It is the response of the market to the correction that proves the effect of the false information and measures the plaintiff stockholder’s loss.” Halliburton, at *1.