Halliburton Co. suffered a legal setback last month 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 was wrong when it refused class certification in a securities fraud lawsuit filed in 2002 on behalf of all buyers of Halliburton stock between June 1999 and December 2001. A group of mutual and pension fund investors claimed in the lawsuit that Halliburton understated its asbestos liabilities while overstating revenues in its engineering and construction business and also the benefits of its merger with Dresser Industries.
It was alleged in the lawsuit that those misstatements artificially pumped up Halliburton’s stock price, and that the company eventually made corrective disclosures that caused its stock price to fall. A federal judge in Texas dismissed the lawsuit, ruling that the investors 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 federal appeals court agreed and ruled that, for the lawsuit to proceed as a class action, the Plaintiffs must 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 bought Halliburton’s arguments that the evidence failed to show the alleged misrepresentations had any impact on the stock price, ruling that the lawsuit could not proceed as a class action. But the Supreme Court in an opinion written by Chief Justice John Roberts, disagreed and reinstated the lawsuit. The opinion reads:
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.
This ruling is very important for a number of reasons. Discovery wouldn’t be complete at the class certification stage of a case, which would make the Plaintiff’s burden unduly harsh. Causation would be an issue in the case, but not on the certification issue.
Source: Insurance Journal
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