Halliburton Watch: Let’s Start With The Basics

On March 5, 2014, the Supreme Court heard oral argument in the case Halliburton Co. v. Erica P. John Fund, Inc., Case No. 13-317, and we are certain our blog readers are eagerly awaiting the Court's ruling. The case has potentially far-ranging implications for the survival of the Court's landmark ruling in Basic, Inc. v. Levinson, 485 U.S. 224 (1988), which relied on the efficient market hypothesis to create the fraud-on-the-market presumption of reliance on misrepresentations. This post provides background on the history of the Halliburton litigation and is the first in a series of posts that will analyze the arguments by the parties and amici, the Court's ruling, and the potential implications for future litigation.

Plaintiff-Respondent Erica P. John Fund, Inc. is a not-for-profit group that supports the outreach work of the Archdiocese of Milwaukee. The Fund purchased stock in Halliburton Company and lost money when Halliburton's stock price dropped following negative news regarding Halliburton's (1) potential liability in asbestos litigation, (2) revenue accounting on fixed-price construction contracts, and (3) merger with Dresser Industries. The Fund sued Halliburton and its CEO David Lesar alleging that they had previously made fraudulent misrepresentations concerning those topics in violation of §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5.

The Fund sought to certify a class of plaintiffs under Federal Rule of Civil Procedure 23(b)(3), which requires that "the questions of law or fact common to class members predominate over any questions affecting only individual members." 2008 WL 4791492 (N.D. Tex. Nov. 4, 2008). The Fund relied on the Basic presumption of class-wide reliance to satisfy its showing that the question of reliance was predominantly common. In opposing class certification, Defendants did not challenge the Basic presumption. Instead, they argued that the Fund failed to show loss causation under the Fifth Circuit's requirement that a plaintiff prove a misstatement actually moved the market. The District Court agreed and denied class certification because the Fund did not show the alleged misrepresentations caused any stock price increase.

The Fifth Circuit affirmed, finding that the Fund made no attempt to prove that Halliburton's stock price moved in response to the alleged misrepresentations. 597 F.3d 330 (5th Cir. 2010). The court held that a plaintiff who relies solely on price...