Lawyers Weigh In On High Court's Halliburton Ruling

Portfolio Media. Inc. 860 Broadway, 6th Floor New York, NY 10003 www.law360.com Phone: +1 646 783 7100 Fax: +1 646 783 7161 customerservice@law360.com Lawyers Weigh In On High Court's Halliburton Ruling Law360, New York (June 23, 2014, 6:12 PM ET) -- The U.S. Supreme Court refused on Monday to overturn its Basic v. Levinson decision but ruled that securities defendants may rebut the fraud-on-themarket presumption of reliance before class certification. Here, attorneys tell Law360 why the decision in Halliburton Co. et al. v. Erica P. John Fund is significant. George W. Arnett III, McCarter & English LLP The ultimate effect of splitting this baby is that securities class action plaintiffs and defendants will both face steep discovery and motion practice costs in cases where, had the court ruled otherwise, we would have seen earlier resolution. The decision allows a defendant corporation to upend complaints before class certification by showing that the alleged false statements had no effect on its stock price. But by keeping alive the notion of fraud on the market, it relieves plaintiffs of the normal burdens of showing they relied on corporations alleged false statements, assuming those statements were baked into the price of the stock. Tammy Bieber, Thompson Hine LLP Consistent with the Supreme Court s recent securities class action decisions, Halliburton shifts the litigation emphasis to class certification generally and expert discovery in particular. By placing the direct impact determination at the district court s doorstep on class certification, the court casts the district court as fact finder of the alleged misstatement s impact on share price. As a result and given the significant overlap between the evidence of direct impact that rebuts the presumption and that which counters loss causation, the class certification phase becomes central not only [to] rebutting the presumption, but likely to countering loss causation at least before trial. Joseph M. Callow Jr., Keating Muething & Klekamp PLL

The big winners in the court s Halliburton decision are economic consulting firms. The court s decision requires that district courts consider direct as well as indirect price impact evidence to rebut the Basic presumption at the class certification stage every defendant will now submit an expert s event study or economic impact analysis as standard practice in defending cases. As the concurring opinion notes, the scope of discovery available, and now expected, at the class certification stage has expanded significantly. The Halliburton decision means more battles of economic experts, more Daubert challenges and motion practice, and longer hearings on class certification motions. Michael Celio, Keker & Van Nest LLP If the court had overturned Basic, securities litigation as we have known it for 20 years would have passed into the history books. If investors had to show that they actually relied on particular statements in making purchases, virtually no cases would ever be brought. What the court did instead is more modest, but it does gives companies facing these suits an important arrow in the defensive quiver by allowing defendants to show a lack of price impact before class certification. This will make many companies more reluctant to settle or at least delay many of those settlements. Keith Dutill, Stradley Ronon Stevens & Young LLP This gives defendants an additional arrow at the class certification stage, and it may keep the weakest of cases from being certified. But it is not close to a game changer. If plaintiffs have real problems showing price impact, their case probably has real problems. Tenable claims are not likely to be affected by this ruling. Halliburton ensures that mutual funds and other institutional investors will continue to have two options when they suffer substantial losses because of fraud: participate passively in a class action or file a direct, opt out suit. Bruce Ericson, Pillsbury Winthrop Shaw Pittman LLP Unlike yesterday s World Cup match between the United States and Portugal, there was no sudden surprise ending today in Halliburton. Rather, the court did what most commentators expected: it declined to overrule Basic but held that a defendant may, at the class certification stage, offer evidence to rebut Basic s presumption that defendant s alleged misstatement affected the price of the stock in question. Halliburton will make class certification motions in 10b-5 cases more expert-driven and more costly. Whether it will change the result in many cases remains to be seen. It may have some effect on marginal cases, where the evidence of price impact is weak, but little effect otherwise, except on litigation budgets. The real winners may be the economists who prepare event studies; for them, the opinion is unambiguously good news. Halliburton also may cause plaintiffs counsel, when drafting complaints, to rely more on alleged omissions and less on alleged misstatements, in hopes of avoiding Basic altogether in favor of the different presumption created by Affiliated Ute Citizens of Utah v. U.S. a case not mentioned today in either the court s opinion or the concurring opinions.

Michael Gass, Choate Hall & Stewart LLP In today s Halliburton decision, the court declined to overrule the fraud-on-the-market theory of reliance established in 1988 in Basic, which concludes that in an efficient market all investors rely on the price of a stock reflecting available information. This has been the cornerstone of shareholder securities fraud litigation for over 25 years and without it, each investor allegedly harmed by misstatements would have to show that he/she personally relied on the alleged misstatements in making investment decisions severely limiting, if not eliminating, class actions as a vehicle for bringing fraud claims. The court also held that a defendant can attempt to defeat class certification with evidence that the alleged misrepresentations had no effect on price. This means that defendants will now make the event studies they have long looked to in order to show the market for the stock at issue was not efficient, and take on the added task of demonstrating that alleged misrepresentations did not impact price. Larry Gresser, Cohen & Gresser LLP "It s an important decision. The Supreme Court chose the least dramatic of three potential modifications to Basic: eliminating the Basic fraud-on-the-market presumption entirely, imposing a new burden on plaintiffs by requiring them to prove price impact at the class certification stage, or the option that the court selected, allowing defendants to present price impact evidence to rebut the Basic presumption at the class certification stage. But don t be fooled. This decision will change the landscape of securities class actions by making it significantly easier for defendants to knock out purported class actions at the certification stage." Jeff Hammel, Latham & Watkins LLP The Supreme Court declined the opportunity to reject the presumption of reliance that enables many private securities cases to proceed as class actions rather than as individual cases. While those typically on the plaintiffs side of securities class actions may breathe a sigh of relief, the Halliburton decision should make litigating such cases more difficult for plaintiffs. Defendants have an absolute right to try to rebut the presumption of reliance before a class is certified giving defendants an important tool to defend securities cases and minimize their exposure to them. Susan Hurd, Alston & Bird LLP The decision should be considered a victory for defendants who have for years argued that Basic gives defendants the right to rebut the presumption of reliance at class certification. Halliburton conclusively settles any lingering doubt that the defendants must be given the opportunity before any class is certified to rebut the presumption of reliance and thereby defeat certification. The tougher stock price reaction issues that in the past might have been punted until later in the case must now be squarely addressed at an early stage of the case and have the power to essentially end the case.

H. David Kotz, Berkeley Research Group I believe the Supreme Court decision is a significant one. While it did not overturn Basic, as many companies hoped it would, the decision was at least a partial victory for companies who have been looking to stem the tide of securities class action complaints. The decision provides defendants with an important opportunity to rebut the plaintiff s presumption of reliance prior to class certification and depending on how it is interpreted, may end up being very successful in getting these class actions dismissed in the relatively early stages of litigation. I believe that this decision will lead, at least initially, to fewer settlements of securities class actions cases as defendants attempt to successfully rebut the presumption. It will likely result in a tougher road for plaintiffs to bring these kinds of claims. Daniel Laguardia, Shearman & Sterling LLP Halliburton s headline is a win for securities class action defendants. The decision upholds Basic but clearly establishes that defendants can defeat a motion for class certification in a Rule 10b-5 case by showing that an alleged misrepresentation had no effect on the price of a security at the time of investment. How the decision plays out in practice may be more nuanced. The court s recognition that efficiency should be addressed on a situational basis, its lack of detail as to what price impact means, and the ramifications of those issues on the elements of materiality, loss causation and damage as well as, of course, reliance will all engender hard-fought battles in the coming years. Britt Latham, Bass Berry & Sims PLC Those lawyers who make their living off of filing securities fraud class actions can finally stop holding their collective breath today. With the fraud-on-the-market presumption of reliance at risk, the entire foundation of securities fraud class actions was also at risk. The court s decision today, however, did provide defendants with another weapon in their defense arsenal by providing an opportunity to rebut this presumption by introducing evidence of a lack of price impact. One of the more interesting things to watch will be whether this decision has any impact on the value plaintiffs put on these high-dollar cases. How defendants use this new sword and how courts receive it is obviously still to be determined, but I would predict that it will not dramatically change the landscape of securities class actions. David J. Lavan, Dinsmore & Shohl LLP In Halliburton, the Supreme Court declined to dramatically rework its approach to securities class action litigation by getting rid of the fraud-on-the-market-presumption. Instead, the court will permit a defendant to offer evidence at the class certification stage to rebut the presumption that the

misrepresentation in question was connected to the market price of its securities. As a result, defendants in class action securities cases are presented with an opportunity to defeat securities class actions at an earlier and less expensive stage. In addition, by rebutting the presumption, defendants will cause each shareholder in the class to prove that they had relied on the misstatement in question undermining the class action nature of the claim. J Robert MacAneney, Kaufman Dolowich & Voluck LLP The U.S. Supreme Court left intact the 25-year-old legal precedent that provides the foundation for most securities-fraud class actions but, in doing so, it gave corporations a potentially powerful weapon to end class actions before they start. While the court refused to overturn Basic, it held that defendants can offer evidence that their allegedly fraudulent behavior did not influence their stock to rebut the presumption of reliance at the key class-certification stage. It appears that the court may have been concerned about the potential impact such a ruling may have had on our securities exchanges if it adopted Halliburton s argument that investors do not rely on the integrity of the price because the markets do not efficiently incorporate all public information into the stock price. Christopher M. Mason, Nixon Peabody LLP Despite three Justices who would have overturned the presumption of reliance announced in Basic, the Supreme Court today probably did little more than tweak existing securities class action law. Whether defendants will, as a practical matter, be able to take full advantage of the holding in Chief Justice Roberts opinion that defendants should at least be allowed to defeat the presumption [of reliance] at the class certification stage through evidence that the misrepresentation did not in fact affect the stock price will only become clear in future cases. Brian Miller, Akerman LLP This compromise decision has something for everyone, but on balance the plaintiffs are the winners. To the delight of the plaintiffs' bar, it turns out the possibility of eliminating securities class actions was overblown and they do not need to retool their litigation strategies. Only three Justices voted to overrule Basic, which is now precedent that is set in stone. For corporate defendants, there is now more hope that class certification can be defeated. Any case that survives dismissal will become a battle between economic experts regarding whether an alleged misstatement actually affected the stock price. Kevin P. Muck, Fenwick & West LLP The Halliburton decision wasn t the home run that many in the defense bar had hoped for,

but it s certainly a solid double. The decision gives defendants a potent weapon to dispose of shareholder class actions before costly merits discovery begins, by introducing evidence that the alleged misstatements did not affect the company s stock price. At a more fundamental level, the Supreme Court also provided a much-needed reminder that the fraud-on-the-market presumption is rebuttable. Over the years, plaintiffs lawyers and even some courts seem to have lost sight of that principle. Adrienne Ferraro Mueller, Jones Day In Halliburton the court declined to overrule Basic. Basic's central premise, that investors in securities fraud actions may be presumed to have relied on alleged misrepresentations about a company whose stock trades in an efficient market, therefore remains unchanged. The Halliburton court did hold, however, that defendants in securities fraud class actions may introduce direct evidence at the class certification stage that the alleged misrepresentations did not affect the stock price to rebut the presumption of reliance afforded by Basic. David Onorato, Freshfields Bruckhaus Deringer LLP While the Supreme Court refused to strike down the fraud-on-the-market presumption of Basic, its holdings that defendants can rebut the presumption at the class certification stage provides defendants with a powerful weapon to marshal against securities plaintiffs. If defendants are able to rebut the fraud-on-themarket presumption at a class stage they will be able to establish that reliance cannot be determined on a class basis, resulting in a securities class action not being certified. As many settlements occur only after a class has been certified, this is likely to result in fewer and lower settlements of these actions. Moreover, the threat of losing the presumption of reliance at the class certification stage may prompt the plaintiffs to settle earlier. As a practical matter, the Supreme Court s ruling is likely to result in the parties having to have a mini-trial at the class certification stage to determine whether a price impact exists. While this will be more expensive for the parties in the short term, it would also deter strike suits and reduce overall litigation costs because it would be harder to certify a class and obtain a settlement from defendants. An additional benefit is that, under the new regime, if a class is certified, defendants will have a more accurate assessment of their litigation risk going forward. Ira Press, Kirby McInerney LLP This is hardly a seismic change in securities class action jurisprudence. Importantly, the court not only reaffirmed the longstanding fraud-on-the-market presumption, but it also expressly rejected the defendants' argument that class action plaintiffs should be required to prove market price impact as a prerequisite to invoking the presumption. As such, the standard that the court articulated today imposes, if anything, less of a burden on plaintiffs than the standards that some courts had articulated prior to the Supreme Court's 2013 Amgen ruling. Kenneth L. Racowski, Wilson Elser Moskowitz Edelman & Dicker LLP The Supreme Court declined to overturn Basic and the fraud-on-the-market theory, which

would have required plaintiffs to prove individualized reliance and dealt a crippling blow to securities class action litigation. Instead, the court opted to raise the bar for plaintiffs to obtain class certification by allowing defendants the opportunity to rebut the presumption of reliance at the class certification stage with direct evidence of a lack of price impact. As a result, direct evidence on the price impact of a misrepresentation such as event studies and expert testimony, which were typically conducted during the merits stage, will now likely occur prior to class certification. Lyle Roberts, Cooley LLP The key takeaway from the Halliburton decision is that the plaintiffs bar won the battle, but suffered a setback in the war. The prospect of overturning the fraud-on-the-market presumption always seemed like a longshot, but the entire court ended up in favor of giving defendants an opportunity to rebut the presumption at class certification by showing a lack of stock price impact. A recent study found that only around 25 percent of securities class actions ever reach the class certification stage because of dismissals or early settlements. Will Halliburton increase that percentage? Only time will tell. Stephen Rosenthal, Podhurst Orseck LLP The Halliburton decision may be a wolf in sheep s clothing for the securities plaintiffs bar. Though the court s rebuff of the defendants frontal assault on the fraud-on-the-market theory will rightly be heralded as a plaintiff s victory, the case s true and lasting identity is buried further in the opinion. The court overturned the Fifth Circuit s ruling that a securities fraud defendant must wait until the merits stage of the case to mount a price impact defense, thereby authorizing the front-loading of that substantial and expensive-to-litigate issue at class certification. That defense victory may reveal what long teeth the opinion really has. Robert Schwinger, Chadbourne & Parke LLP Halliburton continues the court's recent trend of allowing defendants greater latitude to inject merits-like issues into the class certification stage. While opinions may differ about whether Amgen which did not allow materiality issues to be raised at that stage is entirely consistent with this trend, the court in Halliburton suggested that Amgen should be viewed at most as an exception tied to a specific issue and should not be read so broadly as to mean that issues that are common to both class certification and merits can never be raised against certification. The court thus continues to leave the scope of class certification battles open to further expansion as particular contexts may require. Daniel S. Sommers, Cohen Milstein Sellers & Toll PLLC "In rejecting Halliburton s attempt to radically restrict the rights of investors, the Supreme Court today affirmed the principles it announced over a quarter century ago in Basic, a decision that ensured that investors can have the chance to prove their claims and those of other investors as class actions. Affirming the continued vitality of Basic and the efficient market theory that underpins Basic is a significant victory for investors. The procedural guidelines imposed by the court today place the burden on

defendants to rebut the presumption of reliance through the use of evidence that the alleged misrepresentation did not impact the price of the defendant s stock. This means that defendants may attempt to prove that their statements did not cause the stock price to be higher than it otherwise would have been. This procedure, however, has always been available to defendants. Accordingly, today s ruling should not unduly restrict the rights of investors and the conduct of securities class actions should not substantially change in the wake of this decision. Indeed, in her concurrence, Justice Ginsburg made it clear that because the burden for demonstrating the lack of price impact rests solely on defendants, the court s ruling 'should impose no heavy toll on securities-fraud plaintiffs with tenable claims.' The decision is also significant because the court squarely rejected Halliburton s policy arguments contending that Basic should be overturned because of so-called 'harmful consequences' of securities class actions. The court dismissed these arguments, noting that the forum for addressing these concerns is Congress, not the courts. This portion of today s ruling will hopefully put an end to repeated anti-investor policy arguments raised by defendants with the courts in an attempt to curtail investor rights." Gary Stein, Schulte Roth & Zabel LLP "Where Halliburton may have its greatest impact is in narrowing the misrepresentations at issue in a securities class action. Most class actions allege a variety of misrepresentations. Even where the plaintiff is able to demonstrate the requisite cause-and-effect relationship in general between corporate news and stock price movements, Halliburton would appear to allow courts to winnow out from the class certification decision any particular alleged misstatements that the defendant is able to show did not have an impact on the stock price." Matthew L. Tuccillo, Pomerantz LLP "Justice Roberts and the majority today correctly put to bed the notion that the decades-old core premise of Basic, the fraud-on-the-market theory underpinning securities class actions, had been wrongly decided or had been proven, with the passage of years, infirm. Instead, what remains to be seen is what quantum of proof will be sufficient for defendants to rebut that presumption at the class certification stage, through demonstration that alleged frauds failed to impact the price of securities." Glenn K. Vanzura, Irell & Manella LLP The Supreme Court correctly recognized that Basic s presumption of reliance should not just be rebuttable in theory, but also in practice. Today s decision establishes the opportunity for defendants, relatively early in shareholder litigation, to show that not every alleged misstatement distorted the share price. When there is no distortion, investors presumed reliance on the price does not translate to an implicit reliance on the alleged misstatement, and the class should not be certified. Defendants may further have an opportunity to at least narrow the class based only on statements that arguably did distort the price on which investors presumably relied.