The Supreme Court will hear oral arguments in Erica P. John Fund v. Halliburton on Monday. At stake is the ability of investors to hold corporations accountable for deceptive practices designed to inflate stock prices. The Court must decide whether a plaintiff in a securities fraud action will only obtain certification of a class action if the plaintiff establishes by a preponderance of the evidence that a corporate defendant’s correction of its false statements caused its stock price to drop. The Erica P. John Fund claims that Halliburton made false statements that harmed investors in violation of securities law.
Specifically, they claim that Halliburton deceived investors and tried to inflate stock prices by underestimating the company’s liability in an asbestos lawsuit and overprojecting both the cost-saving benefits of a merger and the revenue from construction contracts. Halliburton’s stock price dropped when it corrected these misstatements. The Erica P. John Fund filed a class action lawsuit to recover financial losses suffered by the Fund and similarly situated investors that they claim occurred because of Halliburton’s misrepresentations.
The Supreme Court previously held that plaintiffs in a securities fraud action enjoy a rebuttable presumption of reliance on false statements. This is essential in a securities fraud case because requiring each class member to prove individual reliance on the misrepresentations would often be impossible and prevent plaintiff shareholders from banding together as a class.
The Fifth Circuit upheld the district court’s denial of class certification, holding that the plaintiff was required to demonstrate by a preponderance of the evidence at the class certification stage that Halliburton’s corrective announcement caused the stock price to drop. The plaintiff argues that adding a causation requirement creates an impossible standard to meet at the class certification stage during which there is minimal discovery.
If the Supreme Court sides with Halliburton, it will raise the standard for bringing a securities fraud class action and make it easier for corporations to deceive the public and inflate their stock prices.
