On July 27, 2015, the U.S. District Court for the Northern District of Texas issued its opinion on remand of Halliburton, Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014) (Halliburton II), providing a glimpse into how the U.S. Supreme Court’s holding in this case will be applied by district courts going forward. Erica P. John Fund, Inc. v. Halliburton Co., No. 3:02-CV-1152-M, slip op. at 1 (N.D. Tex. July 25, 2015). As discussed in our June 2014 alert, in Halliburton II the Supreme Court held that a defendant in a securities fraud class action can introduce evidence of a lack of price impact at the class certification stage to rebut the “fraud on the market” presumption of reliance.
The opinion by U.S. District Judge Barbara Lynn showed that the Supreme Court’s holding in Halliburton II may have teeth going forward. Judge Lynn thoroughly applied the Supreme Court’s holding in Halliburton II, carefully analyzing the economic arguments proposed by the defendants in her 53-page opinion. Judge Lynn spent the majority of her opinion comparing the methodologies and findings of the economists hired by Halliburton and the Erica P. John Fund, suggesting that the class certification stage of proceedings may become a “battle of the experts” going forward. While Judge Lynn was convinced by Halliburton’s experts that five of the purported corrective disclosures at issue did not have a statistically significant impact on Halliburton’s share price, she found that Defendants had not met their burden of showing that disclosure of a $30 million jury verdict against a subsidiary did not impact Halliburton’s share price (which had plunged 40 percent), justifying certification with regard to that single disclosure. The opinion is significant because it demonstrates that, depending on the right set of underlying facts, Halliburton II can be used by securities class action defendants to ward off, or at least narrow, class certification, provided they are willing to spend the time and money to hire economics experts and conduct price impact studies.
Judge Lynn also dedicated a substantial portion of her opinion to the issue of burden-shifting. Judge Lynn joined other district court judges in holding that defendants bear the burden of proving that alleged corrective disclosures did not affect the company’s share price. Judge Lynn also rejected Halliburton’s argument that investors must prove at the class certification that supposed corrective disclosures were, in fact, corrective of alleged misrepresentations, referring to this argument as “a veiled attempt to assert the ‘truth on the market’ defense,” which the Court found was not properly an issue at this stage of the litigation.