WASHINGTON (CN) - Halliburton deserves the chance to rebut certain presumptions in a class action by investors who say the oil giant lied about asbestos liability, the Supreme Court ruled Monday.
Though the Erica P. John fund's case is still in the class-certification stage, Monday's decision marks the second time that the Supreme Court has vacated a finding by the 4th Circuit.
The investors had originally moved in September 2007 to certify all persons who purchased common stock between June 3, 1999, and December 7, 2001. They claim that Halliburton had understated its projected liability for asbestos claims, overstated revenues by including billings that were unlikely to be collected, and exaggerated the cost savings and efficiencies from a merger in 1998 with Dresser Industries.
The U.S. Supreme Court concluded
in 2011 that the appeals court "erred by requiring EPJ Fund to show loss causation as a condition of obtaining class certification."
It is a prerequisite of class certification for the plaintiffs to show that a company's untrue statements created a presumption of reliance. The fraud-on-the-market presumption involves misrepresentation publicity, misrepresentation materiality, market efficiency, and evidence that the plaintiff traded shares between the time the misrepresentations were made and when the truth was revealed.
Unlike the other prerequisites, however, a failure to prove materiality will likewise kill the individual claims of all plaintiffs, the Supreme Court found.
Halliburton had wanted to show that the lack of price impact rebuts the presumption of material misstatements, but the 5th Circuit last year found
that showing premature at the class-certification stage.
The Supreme Court was essentially unanimous in vacating that decision Monday.
Precedent from the 1988 case Basic Inc. v. Levinson
is at issue, according to the ruling.
"Even if plaintiffs need not directly prove price impact to invoke the Basic
presumption, Halliburton contends that defendants should at least be allowed to defeat the presumption at the class certification stage through evidence that the misrepresentation did not in fact affect the stock price," Chief Justice John Roberts wrote for the court. "We agree."
The plaintiffs themselves have already presented evidence at this stage "of the existence
of price impact in connection with 'event studies' - regression analyses that seek to show that the market price of the defendant's stock tends to respond to pertinent publicly reported events," the 23-page ruling states.
"Defendants - like plaintiffs - may accordingly submit price impact evidence prior to class certification," Roberts added.
The chief justice said it "makes no sense, and can readily lead to bizarre results" to bar the defendants from relying on that same evidence prior to class certification for the particular purpose of rebutting the presumption altogether.
Justices Stephen Breyer and Sonia Sotomayor joined a brief concurring opinion by Justice Ruth Bader Ginsburg.
The concurring opinion by Justice Clarence Thomas, which Justices Antonin Scalia and Samuel Alito joined, stretches for 18 pages.
took an implied cause of action and grafted on a policy-driven presumption of reliance based on nascent economic theory and personal intuitions about investment behavior," Thomas wrote. "The result was an unrecognizably broad cause of action ready made for class certification. Time and experience have pointed up the error of that decision, making it all too clear that the Court's attempt to revise securities law to fit the alleged 'new realities of financial markets' should have been left to Congress."