Securities Lawsuit Could Affect Future Securities Fraud Claims

Washington, DCA securities lawsuit working its way through the courts could have implications for future securities fraud claims. The lawsuit, which was originally filed in 2002, could be used to test the basis for all future claims of securities fraud litigation, according to reports.

The lawsuit is Erica P. John Fund v. Halliburton and is reported on in the New York Times (10/15/13). At its core, the Erica P. John Fund lawsuit is a typical securities lawsuit. The plaintiffs allege that the Halliburton Company and its CEO made misrepresentations that resulted in shareholders suffering material losses. Among the claims made by the plaintiffs, in court documents, are that Halliburton made misrepresentations, including understating liability for asbestos claims, overstating revenues and exaggerating cost savings derived from a merger with Dresser Industries.

As a result of those losses, the plaintiffs allege, shareholders lost money and the plaintiffs sought class-action status on behalf of all people who purchased Halliburton’s common stock during the class period. Both the district court and the appeals court refused class certification because the plaintiff “failed to meet [the court’s] requirements for proving loss causation at the class certification stage.” In other words, because they could not show that the misstatements resulted in shareholder losses, class certification was denied.

The Supreme Court sent the lawsuit back to the lower courts, finding that proof of loss causation was not required for class certification and class-action status should be granted.

But Halliburton has taken the case back to the Supreme Court, arguing that a basic tenet of securities lawsuits is incorrect. In its filing (case no. 13-317), Halliburton notes the courts assume that stock prices are based on all publicly available information about that stock, regardless of whether an individual person has actually read and relied on that information. Basically, a class member did not need to show that he or she relied on inaccurate information provided about the stock in making decisions, because that information factored into the stock price. The person’s decision to buy or sell a stock is based on the stock’s price, which would be artificial if it was based on inaccurate information.

Halliburton argues that by allowing this tenet to govern class-action certification in securities lawsuits, it is easier to obtain class-action status. “And once the class is certified, the sheer aggregation of claims exerts so much settlement pressure that most cases are settled without regard to the merits; they are settled because the defendants simply cannot risk the consequences of an adverse result…” the claim notes.

If the Supreme Court agrees with Halliburton, it could make obtaining class-action status in a securities lawsuit more difficult to achieve, because that would require each class member to show that he or she read all information about a stock and relied on that specific information - rather than the stock price - in making decisions about that stock.

The Supreme Court has not yet decided if it will hear Halliburton’s case.