Halliburton Co. suffered a legal setback Monday when the U.S. Supreme Court refused to make it harder for shareholders to proceed with some class-action securities-fraud lawsuits against publicly traded companies.
The justices unanimously ruled that a U.S. appeals court erred in rejecting class certification in a securities fraud lawsuit filed in 2002 on behalf of all buyers of Halliburton stock between June 1999 and December 2001.
The high court reinstated a lawsuit by a group of mutual and pension fund investors who claimed the oilfield services company understated its asbestos liabilities while overstating revenues in its engineering and construction business and the benefits of its merger with Dresser Industries.
The alleged misstatements artificially pumped up Halliburton’s stock price, the lawsuit said, adding that the Houston-based company eventually made corrective disclosures that caused its stock price to fall.
A federal judge in Texas threw out the lawsuit, ruling that the investors had failed to prove their losses were tied to a particular statement made by the company or its officers — a concept known as loss causation.
The appeals court agreed and ruled that, for the lawsuit to proceed as a class action, the plaintiffs would have to first prove at the outset, by a preponderance of the evidence, that the alleged misrepresentations caused the stock price to fall, resulting in investor losses.
The appeals court agreed with Halliburton’s arguments that the evidence failed to show the alleged misrepresentations had any impact on the stock price and ruled the lawsuit could not proceed as a class action.
The Supreme Court, in a 10-page opinion written by Chief Justice John Roberts, disagreed and reinstated the lawsuit.
“The question presented in this case is whether securities fraud plaintiffs must also prove loss causation in order to obtain class certification. We hold that they need not,” he concluded.
The Supreme Court only ruled that the lawsuit can proceed as a class action, not on the merits of the lawsuit.
To prevail on the merits in a private securities fraud lawsuit, investors must prove that the defendant’s deceptive conduct caused their claimed economic loss, Roberts said.
The ruling was a victory not only for the investors, but also for the U.S. Justice Department. Attorneys for the investors and the government said the appeals court erred in requiring the plaintiffs prove a significant part of their case at such an early stage of the litigation.
The Supreme Court’s decision resolved a conflict among the appeals courts created by the Halliburton ruling. At least three other appeals courts had taken the same position as the one adopted by the justices.
Roberts sent the case back to the appeals court for further proceedings, including to address any further arguments by Halliburton against class certification.
An array of industry trade groups, including the Securities Industry and Financial Markets Association and U.S. Chamber of Commerce, supported Halliburton, while groups representing public pension funds and investors supported the plaintiffs.
The Supreme Court case is Erica P. John Fund v. Halliburton, No. 09-1403.
(Reporting by James Vicini; Editing by Gerald E. McCormick, Dave Zimmerman)