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July 28 — Fresh from representing Halliburton Co. before the U.S. Supreme Court in a dispute over class certification, Houston attorney Aaron Streett, Baker Botts LLP, July 24 called the controversy “emblematic of the problems with class securities litigation.”
In an interview, Streett noted that the case is more than a dozen years old and class certification still hasn't been decided.
He said the Securities and Exchange Commission should take the lead in enforcing securities cases, because the private system “is just massively inefficient.”
In the lawsuit, the plaintiff alleged that between June 1999 and December 2001, Halliburton made material misstatements about its financial condition. However, the district court declined to grant class certification based on the plaintiff's failure to allege loss causation and the U.S. Court of Appeals for Fifth Circuit affirmed.
Then, in 2011, the Supreme Court reinstated the action, concluding that loss causation need not be shown to obtain class certification.
On remand, Halliburton renewed its opposition to class certification, arguing that the class should not be certified because the alleged fraud did not affect the market price of its securities. This time, the district court concluded that price-impact evidence had no bearing on whether common issues predominated under Fed. R. Civ. P. 23(b)(3) and the Fifth Circuit upheld the decision.
Late last year, for the second time, the Justices granted Halliburton's certiorari petition. In March, arguing for Halliburton, Streett urged the justices to abandon the fraud-on-the market presumption of reliance set out in Basic Inc. v. Levinson 485 U.S. 224 (1988).
The theory creates a rebuttable presumption of reliance for investors who bought or sold securities in an efficient market. Without the presumption, each individual investor would have to show that he or she relied on the alleged misrepresentation, essentially precluding class certification.
Despite dire warnings that Halliburton could sound the death knell for class securities fraud actions, the Justices adopted a middle ground. Declining to jettison the theory in its entirety, the high court nonetheless concluded that defendants may seek to rebut the presumption at the class certification stage.
The move left both defense lawyers and plaintiffs' lawyers claiming at least partial victory. However, according to Streett, the victory was all one-sided.
“There's something for plaintiffs in terms of avoiding disaster that would have befallen them if Basic had been overruled,” he commented. “I don't really see anything for plaintiffs beyond that.”
Streett told Bloomberg BNA that the defense has argued for the ability to rebut the presumption with price impact evidence since the case went up to the Court the first time in 2010. “To us, that was always the main issue in our case.”
“We always thought that our price impact argument was so clearly at the heart of what Basic was all about that we thought we could get a majority of the court to agree with that,” Streett related. The fact that the opinion was unanimous “was a very pleasant surprise.”
“We also thought that to say price impact is completely off limits at the class certification stage would just be a bridge too far for the court,” he amplified. “Basically, it would make the presumption a pleading matter. We didn't think that's what the court meant when it decided Basic.”
“When it came to the argument of overruling Basic,” Streett added, “we knew that that would not be unanimous either way.”
In the wake of Halliburton, Streett continued, defendants will need to assess whether they want to make a price impact argument in opposing securities class certification.
In this case, he noted, the plaintiffs did not dispute that none of the alleged misrepresentations immediately caused any movement in the price of Halliburton stock; rather, they relied on the price declining at the time of the purported corrective disclosures.
“If that's how you're showing price impact, you're going to have to show a very tight relationship between the corrective disclosure and the misrepresentation in order to raise the inference that there was price impact at the time of the misrepresentation.”
How does the defendant ascertain that the corrective disclosure has, in fact, permeated the market? “Some cases are more complicated than others.” Streett acknowledged.
In some cases, “it's pretty obvious.” For example, he posited, the company states that a drug will be approved by the Food and Drug Administration and the drug is not approved. “That happens a fair amount of the time.”
In other cases, however, the corrective disclosure occurs over time. In those cases, “you'll need a pretty sophisticated economic analysis to look at that.”
In fact, Streett said, “I think that's going to be the biggest effect of this opinion. While it's initially the defendants' burden to put on evidence, the plaintiffs will not just sit idly by and see whether the defendants have satisfied their rebuttal burden.”
‘Halliburton' is going to decrease the settlement value of a lot of cases where there is questionable price impact.
Rather, he said both sides will put on event studies and econometric studies to determine whether the price was distorted by the misrepresentation and whether the corrective disclosure reflects that or not. “It's going to be challenging for both sides, but I think that's consistent with the trend of the courts in class certification cases, to get more and more expert testimony up front.”
The likelihood of getting a class certified and how easily a class is certified also affects the settlement value of the case, Streett added. He predicted that Halliburton “is going to decrease the settlement value of a lot of cases where there is questionable price impact.”
Where is the next battleground in securities litigation? According to Streett, Halliburton itself will give rise to some new issues, such as how to determine whether a corrective disclosure has resulted in price impact.
Another issue, Streett said, stems from the defendants' right to rebut the presumption with evidence of no price impact. “What does that mean? The defendant has to prove a negative? Or does it mean the defendant just has to put on enough evidence that a reasonable factfinder could have doubts about price impact?”
Streett said that in his view, all rebuttable presumptions are governed by Fed. R. Evid. 301, which provides that in a civil case, unless a federal statute or the rules of evidence provide otherwise, the party against whom a presumption is directed has the burden of producing evidence to rebut the presumption.
“That just means the defendant has to produce enough evidence to create a fact issue,” Streett related. “And then the plaintiff has the burden to prove by a preponderance of the evidence that there is in fact price impact. To me that's very clear.”
Meanwhile, Streett commented, in making disclosures, public companies have to consider the not insubstantial likelihood of a class securities fraud action. In the wake of Halliburton, he said, “if it's not as easy to bring securities claims based on a price drop, companies may be more forthcoming in making disclosures.”
Saying Halliburton is good for investors, Streett also noted that when a securities fraud case settles or goes to judgment, “it's typically the company that's liable, not really the officers and directors. So investors are on both sides of the lawsuit.
In addition, Streett posited, “investors have a general interest in a rational system. To us, requiring proof of price impact or allowing it to be considered at class certification is a rational way to ensure that only claims that have a prayer get certified.”
“It's the shareholders who pay for the defense of a securities class action—often for very little gain,” Streett reiterated. “Even in cases where the plaintiffs prevail, a lot of times it's pennies on the dollar in settlement or at judgment.” By that time, any recovery has been dwarfed by what the shareholders have paid in defense costs and legal fees for both plaintiffs and defendants.
In fact, Streett said, that was one of the concerns his firm raised in seeking to overturn Basic—“that we ought to let the SEC take the lead role in enforcing securities cases,” because the private system “is just massively inefficient.”
“We were pleased that the court restored a little bit of rationality to the system,” Streett stated. “They could have done more, but we're thankful that at least cases with no price impact will probably not be certified.”
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Aaron Streett is chairman of Baker Botts LLP's Supreme Court and Constitutional Law Practice. Author of numerous articles, he has argued before state and federal appeals courts and the U.S. Supreme Court—most recently in Halliburton.
Streett graduated from the University of Texas School of Law and Hillsdale College. After graduating from law school, he clerked for Judge David B. Sentelle of the U.S. Court of Appeals for the District of Columbia and for Supreme Court Chief Justice William H. Rehnquist.
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