If the court rules in favor of Halliburton and against a group of
shareholders, then the oilfield services company won't be the only
business to gain. A handful of other major companies would also
likely reap immediate benefit.
Those companies, including drug makers Merck & Co Inc and Pfizer
Inc, banks HSBC Holdings Plc and Regions Financial Corp, and casino
company Las Vegas Sands Corp, are defendants in shareholder lawsuits
that have been granted class action status.
A decision setting a higher bar for class actions would not end the
lawsuits, but it would allow these defendants to file briefs
demanding that shareholders have to again seek court approval for
the status - and this time under a new, tougher standard. If they
fail to get that approval, the cases would effectively end.
In 2013, settlements were reached in 67 cases totaling $4.8 billion,
according to Cornerstone Research. A ruling in the oil company's
favor in Halliburton v. Erica P. John Fund could save other
businesses facing pending class actions hundreds of millions of
Around 200 shareholder class actions are filed every year alleging
that misleading statements and material omissions made by companies
and their executives caused a stock’s share price to drop. Nearly
400 shareholder securities class actions are pending in various
stages of litigation, according to data gathered by the Stanford Law
School Securities Class Action Clearinghouse.
But only a relatively small number of the pending cases have been
granted class action status. In each instance, a judge must
determine at a certification hearing whether the status is
appropriate. One consideration is whether the people in the class
have common issues or merely related ones. To be a class, they must
have common issues.
'FRAUD ON THE MARKET'
Class certification is a critical stage in shareholder class actions
because it puts pressure on defendants to settle by increasing the
liability they face.
Generally, the larger the class size, the more damages a company
faces and the more that plaintiffs' lawyers can make. Law firms can
receive as much as a third of the settlement in attorneys' fees.
In the case before the Supreme Court, Halliburton is seeking to
overturn a 1988 decision, Basic v. Levinson, which adopted the
“fraud on the market theory.” Under the theory, a defendant's
material misrepresentation that affects the price of publicly traded
securities is presumed to have been relied on by a purchaser who
suffered a loss.
That theory assumes public information about a company is known to
the market and plaintiffs do not have to show that they relied on a
specific misrepresentation, only that they purchased shares before
the truth came out.
In the case against Halliburton, shareholders alleged it understated
asbestos liabilities while overstating both revenues in its
engineering and construction business and the benefits of its merger
with Dresser Industries.
The court has several options, including leaving intact Basic v.
Levinson to maintain the status quo. At the other extreme, it could
overturn Basic v. Levinson - and so doom securities class actions by
requiring plaintiffs to show they relied on misinformation when they
A third option would be to find a middle ground that would require
plaintiffs to show that the misrepresentation had a significant
effect on the stock price but that would not overturn Basic. During
oral arguments, some of the justices appeared to signal that the
middle option would be their preference.
The middle option would still be a win for the defendant
corporations by creating more hurdles for shareholders to clear
before being allowed to sue as a group.
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Merck is facing one of the largest pending shareholder cases that
already has class action status.
The lawsuit, filed in 2005, alleges that the company made misleading
statements about its painkiller drug Vioxx, which the company
withdrew from the market in 2004 over concerns that it increased the
risk of heart attacks and strokes. The plaintiffs alleged that after
Merck disclosed the problems with Vioxx, its market capitalization
shrunk by billions of dollars.
In January 2013, U.S. District Judge Stanley Chesler of New Jersey
certified a class of individuals and entities who purchased Merck
securities from May 21, 1999, to Sept. 29, 2004.
HALT IN THE PROCEEDINGS
Foreshadowing the potential impact of the Halliburton decision, a
lawyer for Merck in November asked a federal judge in New Jersey to
put a halt to proceedings in the case pending the outcome of the
Supreme Court decision in Halliburton. The lawyer said the
plaintiffs’ case rested squarely on the fraud on the market theory
and that part of the case would likely have to be re-litigated
following the Halliburton decision.
The court denied the request.
Merck and an attorney for the plaintiffs had no comment on the
potential impact of Halliburton on the case.
HSBC could also benefit from the Supreme Court’s ruling. The bank is
appealing a $2.46 billion judgment against one of the company’s
units, formerly known as Household International Inc. The plaintiffs
alleged that Household was engaged in systemic predatory lending and
that it misrepresented the credit quality of its loan portfolio.
The judgment, entered by a federal judge in Chicago last year, was
the largest ever following a securities fraud class action trial,
according to the plaintiffs’ law firm.
On appeal to the 7th U.S. Circuit Court of Appeals, lawyers for HSBC
are seeking an order vacating the judgment and sending the case back
to the district court. In a brief filed in February, HSBC said that
if the Supreme Court jettisons Basic’s presumption of reliance on a
misrepresentation, a class status review "will be beyond question.”
Pfizer is facing a trial later this year over allegations made by
shareholders that it fraudulently misrepresented the safety of its
Celebrex and Bextra pain-relieving drugs. The lawsuit covers
investors who bought Pfizer stock between Oct. 31, 2000, and Oct.
19, 2005, a period in which the company's share price fell by
roughly half and its market value tumbled by well over $100 billion.
Pfizer and the plaintiffs agreed to delay the trial until after the
Halliburton decision. In a letter to the court, Pfizer said it
believed that after the Halliburton decision, it “may be necessary
to revisit class certification or other pre-trial motion practice.”
(Reporting by Andrew Longstreth; Editing by Howard Goller, Amy
Stevens and Martin Howell)
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