On July 25, 2015, Federal Judge Barbara G. Lynn of the United States District Court for the Northern District of Texas granted in part, and denied in part, class certification in Erica P. John Fund Inc. et al. v. Halliburton Co. et al., No. 3:02-cv-01152 (N.D. Tex. July 25. 2015), a case that has twice been heard by the Supreme Court of the United States and stands to clarify certification requirements in securities class actions. Plaintiffs allege that Defendant, Halliburton Company, misrepresented certain financial liabilities related to asbestos claims in order to inflate its stock price (a violation of SEC Rule 10b-5) and, accordingly, seek relief for a putative class of shareholders.
Class certification in securities litigation is largely guided by two principles: first, the fraud-on-the-market presumption of reliance, and second, price impact theory. The fraud-on-the-market presumption, first articulated by the Supreme Court in Basic v. Levinson, 485 U.S. 224 (1988), holds that the market price of a security is a function of all publicly-known material information related to the security and its issuer and investors rely on the same when making purchasing decisions. In such a way, a causal link is established between a material misrepresentation and the purchaser of a security. However, this presumption of reliance may be rebutted if defendants can show that alleged misrepresentations had no bearing on the price of securities, invoking the price impact theory.
In this installment of Halliburton, Judge Lynn granted Plaintiffs' Motion for Class Certification with respect to one of Halliburton's disclosures (the vehicle of the alleged misrepresentation) and denied class certification with respect to five other disclosures. In denying class certification, Judge Lynn turned to price impact studies and expert testimony introduced by Halliburton. Before this decision, no defendant had successfully defeated class certification by rebutting the presumption of reliance according to the Supreme Court's Halliburton prescription.
The implications of Halliburton are significant; the holding offers a method by which plaintiffs and defendants may approach the class certification stage of securities litigation. Judge Lynn additionally advised that the burden for proving lack of price impact in efforts to rebut the fraud-on-the-market presumption remains with defendants and that certain factual considerations, including the veracity of alleged misrepresentations, are still to be dealt with at later stages of litigation. Investors and securities issuers alike would be prudent to follow Halliburton for continuing insight into the future of securities class actions.
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