Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Tuesday, April 26, 2011

Still Thinking About Halliburton

I'm still mulling over yesterday's oral argument; Erik Gerding's insightful posts over at The Conglomerate have helped me to work through some issues.  Perhaps it's rash, but I'm going to suggest the framework for the Court's opinion, one that I think there is a reasonable chance of getting at least a majority of the Justices to agree to.

First, it will reverse the 5th Circuit and find that loss causation is not an appropriate issue at the class certification stage.  There was no support for the 5th Circuit's opinion, not even from the Halliburton attorney.  Loss causation is the ultimate merits determination, as Dura makes clear.  The plaintiff will have to establish that there was both a misrepresentation that caused an artificially inflated price and a corrective disclosure that removed that artificial inflation.  Moreover, under Rule 23(b)(3), loss causation is a common issue. 

Second, it will reaffirm Basic and state that in order to obtain the rebuttable presumption of reliance (thus making reliance a common issue), plaintiff must, at the class certification stage, establish an efficient market for the stock.  This can be done by plaintiff's showing that the stock prices generally react promptly to material information.  Courts have required plaintiffs to do this since Basic, and, as Erik noted, there are any number of ways that this can be done, such as event studies and expert testimony.

What else, if anything, should the Court say about reliance and loss causation, beyond emphasizing that they are separate elements?  

As Erik identified, the problem is when can the defendants rebut the presumption of reliance and should the Supreme Court address this?  Suppose that, at the class certification stage, plaintiffs introduce evidence that stock prices generally respond to new information, and defendant wants to introduce evidence that the price did not react to the  particular corrective disclosure at issue.  So, he argues, this proves that the market was inefficient as to this particular type of information!  Should the court allow this?  Plaintiff's attorney argued that Basic requires rebuttal of reliance (other than general disproving market efficiency) at the merits stage, but Justice Alito, at least, was skeptical of this.  If defendants can introduce this evidence at the class certification stage, it would allow the 5th Circuit on remand to reach the loss causation issue via the reliance route.  Justice Scalia made this point explicitly. 

If defendants have an event study that demonstrates that the price did not react to this particular corrective disclosure, why not allow it at the class certification stage?  Wouldn't that save time and expense of going forward with a claim that will ultimately lose on the merits?  Erik sets forth the reasons why it may appear that the stock price did not move in response to the corrective disclosure because the defendant can bundle good news and bad news to mask the effect of the corrective disclosure.  Unfortunately, the plaintiff's attorney and the government attorney did not make this point as persuasively as Erik does. 

 So this may be, after all, a Pyrrhic victory for plaintiffs.

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The confusion seems to stem from the fact that this was a case that involved CONCEALMENT of adverse information by Halliburton. There was obviously no price impact that resulted from Halliburton failing to upwardly adjust the amount of reported asbestos claims or increase in the level of reserves for asbestos liability. Indeed, the precise purpose of the misrepresentations (the failure to report new negative information) was to preserve the status quo, to hide grave new risks to the company from ballooning new liabilities.

The price change came when the truth actually came out. The fifth circuit said, oh, that was just bad news for everyone, company and investors; of course the market had a negative reaction; how can you say that wasn't just the market reacting to the increase in asbestos liabilities.

The plaintiffs are saying, no, Halliburton knew all about this many months earlier and deliberately and assiduously kept everyone in the dark, causing the stock price to remain artificially high during the class period leading up to Halliburton finally being forced to come clean on the real situation.

Sterling plays upon how the fact that this is a concealment case is confusing to the Justices when he says:

MR. STERLING: We conceded efficiency below because, candidly, their own proof showed that none of the misrepresentations moved the market. And what we have here is not circumstantial proof of general market efficiency or materiality or whether the statement was public; here there was direct proof that none of these misrepresentations moved the market.

As Boies points out in his rebuttal, Sterling was essentially lying. The stock dropped 42% when Halliburton was finally forced to tell the truth.

It seems that the fact that this case is about concealment as opposed to affirmative misrepresentation is confusing everyone and has allowed the Fifth circuit, Halliburton and Sterling to bend over backwards to find shifting bizarre and obscure arguments for not certifying one of the most valid and important class actions post-Enron.

Posted by: James | Apr 27, 2011 2:03:50 AM

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