The U.S. Supreme Court made it easier for some investors to press securities fraud suits, ruling for shareholders who accuse Halliburton Co. of misrepresenting its financial condition while under Dick Cheney’s leadership.
The justices today unanimously said the shareholders can sue as a group without first establishing that they lost money as a result of the alleged fraud. The decision set aside a federal appeals court ruling.
The shareholders, led by the Erica P. John Fund, contend that Halliburton from 1999 to 2001 falsified earnings reports, played down estimated asbestos liability and overstated the benefits of a merger. Cheney, later the U.S. vice president, served as chairman and chief executive officer of the oilfield services provider during part of the disputed period.
The high court case concerned the standard that applies at the so-called class certification stage, not at final judgment. The Supreme Court previously said that, to get class-action status, shareholders must show they made investment decisions in reliance on a company’s alleged misstatements. Shareholders can meet that test by showing the company perpetrated a so-called fraud on the market.
Chief Justice John Roberts today said that requirement doesn’t mean that investors seeking class-action status must show that they lost money as a result of the alleged fraud.
“The fact that a subsequent loss may have been caused by factors other than the revelation of a misrepresentation has nothing to do with whether an investor relied on the misrepresentation in the first place,” Roberts wrote in his opinion for the court.
The Supreme Court ruled in 2005 that, to recover damages, shareholders ultimately must show a direct connection between a misrepresentation and a decline in stock prices.
Lower courts had been divided on the issue. In the Halliburton case, the New
Orleans-based 5th U.S. Circuit Court of Appeals had ruled that the investors couldn’t sue. That ruling applied in Texas, Louisiana and Mississippi.
The shareholders’ lawyer, David Boies, contended that shareholders shouldn’t have to show that direct connection at the class certification stage, when they haven’t yet had a chance to marshal their evidence. The Obama administration backed the shareholders in the case.
The 5th Circuit had imposed “an unusually high procedural barrier” on shareholders, said David Webber, a securities regulation expert who teaches at Boston University School of Law.
Houston-based Halliburton said in a statement that it will make other arguments against class-action status when the case returns to the appeals court. The company said it hasn’t set aside any money to cover potential damages “because it does not believe that loss is probable.”
Halliburton fell $2.24, or 4.5 percent, to $48.04 at 4:15 p.m. in trading on the New York Stock Exchange. Halliburton in 2004 agreed to pay $7.5 million to resolve a Securities and Exchange Commission investigation of the company’s financial statements.
Boies called the ruling “a victory for effective enforcement of public securities laws and for individuals and institutions that are injured by securities fraud.”
The case is Erica P. John Fund v. Halliburton, 09-1403.