The U.S. Supreme Court could have wreaked devastation to securities class actions in Monday’s opinion in Erica P. John Fund v. Halliburton. If the Justices had upheld a ruling by the U.S. Court of Appeals for the Fifth Circuit, shareholders across the land would have borne the very heavy burden of proving loss causation in order to litigate as a class. Instead, in a unanimous 13-page ruling written by Chief Justice John Roberts Jr., the Court held that loss causation—a showing that the defendant’s fraud caused shareholders’ alleged economic damages--isn’t a requirement for class certification.
The Fifth Circuit’s holding (first in the 2007 decision Oscar Private Equity v. Allegiance Telecom and then in Halliburton) that shareholders can’t invoke the class-wide “fraud-on-the-market” theory of reliance on the defendants’ fraudulent statements without proving loss causation had put a serious damper on securities class actions. After those two decisions, it was virtually impossible, according to EPJ Fund special counsel Neil Rothstein of Kahn Swick & Foti, to get a securities class certified in the Fifth Circuit.
And even though both the Second and Seventh Circuits have rejected the Fifth Circuit’s loss causation reasoning, securities defendants have nevertheless raised loss causation as a defense against securities class certification in district courts all over the country, said plaintiffs lawyer Steven Singer of Bernstein Litowitz Berger & Grossmann. The Court’s ruling in EPJ Fund, he said, cuts those arguments off.
This is a complete victory for plaintiffs, and a complete repudiation of a strategy we’ve been seeing from defendants in every case,” Singer said. “It’s not just in the Fifth Circuit. They make it repeatedly.”
Halliburton counsel David Sterling of Baker Botts said, however, that the Supreme Court’s ruling is very narrow and won’t preclude Halliburton from defeating class certification when the case goes back to the Fifth Circuit on remand. Sterling tried to convince the Justices that the Fifth Circuit was actually using the phrase “loss causation” as shorthand for the absence of proof that Halliburton’s share price fell when the company made disclosures to correct previous statements; three federal circuits, according to Sterling, have held that when shareholders can’t prove such disclosures led to a drop in share price, a class shouldn’t be certified. In Monday’s ruling, the Court called Sterling’s argument a “wishful interpretation” of the Fifth Circuit’s opinion.
Nevertheless, because the Court declined to address the “absence of proof” issue in its ruling—sticking instead to a narrow interpretation of the Fifth Circuit’s decision--Halliburton will argue at the Fifth Circuit that the shareholder class shouldn’t be certified because shareholders can’t prove the company’s share price fell after its corrective disclosures, according to Sterling.
Securities defense counsel Matthew Matuleof Skadden, Arps, Slate, Meagher & Flom agreed with Sterling that the Court’s decision preserves the status quo in all circuits but the Fifth, which Matule called “an outlier.”
“The ruling basically says that the way everyone but the Fifth Circuit was doing things is the right way,” Matule said. Added securities defense lawyer George Conway III of Wachtell, Lipton, Rosen & Katz: “It's a very narrow opinion that decides only what the defendants conceded, and leaves all the hard questions for another day.”
David Boies of Boies, Schiller & Flexner made the winning argument for the EPJ Fund at the Supreme Court. He issued a statement on Monday’s ruling: “It is important to weed out weak or abusive securities class actions, but it is equally important that valid class actions be permitted to proceed,” the statement says. “This is a victory for effective enforcement of public securities laws, and for individuals and institutions that are injured by securities fraud.” Boies noted that his recently-deceased daughter Caryl had worked on the case; the EPJ Fund team also included Boies partner Carl Goldfarb and Rothstein of Kahn Swick. “This is a big day,” Rothstein told OTC. “It’s a victory for plaintiffs bringing securities class actions and it’s a victory for the Erica P. John fund.”
The Halliburton case comes with quite a strange backstory. The class action, which accuses Halliburton of hiding the magnitude of its asbestos liability from shareholders, was first filed in 2002. In 2004, three of the four court-appointed lead plaintiffs agreed to settle the case for $6 million. The EPJ Fund objected, arguing that the case was being settled on the cheap. Dallas federal district court judge Barbara Lynn eventually rejected the proposed settlement and appointed the EPJ Fund sole lead plaintiff. In 2006 the fund split with its first set of lawyers from Scott & Scott and Lerach, Coughlin, Stoia, Geller, Rudman & Robbins. Boies Schiller then came into the case to work alongside Rothstein of Kahn Swift.
(Reporting by Alison Frankel)