Archdiocese of Milwaukee v. Halliburton Co.
| Decision Date | 12 February 2010 |
| Docket Number | No. 08-11195.,08-11195. |
| Citation | 597 F.3d 330 |
| Parties | The ARCHDIOCESE OF MILWAUKEE SUPPORTING FUND, INC., On Behalf of Itself and All Others Similarly Situated, Plaintiff-Appellant, v. HALLIBURTON CO.; David J. Lesar, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Caryl L. Boies, Sashi Bach Boruchow, Carl E. Goldfarb, Boies, Schiller & Flexner, Fort Lauderdale, FL, David Boies (argued), Boies, Schiller & Flexner, L.L.P., Armonk, NY, for Plaintiff-Appellant.
Robb L. Voyles, Jessica B. Pulliam, Baker Botts, L.L.P., Dallas, TX, Scott Daniel Powers, Baker Botts, L.L.P., Austin, TX, David D. Sterling (argued), Baker Botts, L.L.P., Houston, TX, for Halliburton Co.
Robert Alan York, Donald E. Godwin, Jenny LaNell Martinez, Godwin Ronquillo, PC, Dallas, TX, for Lesar.
Appeal from the United States District Court for the Northern District of Texas.
Before REAVLEY, CLEMENT and SOUTHWICK, Circuit Judges.
The Archdiocese of Milwaukee Supporting Fund, Inc. filed this putative securities fraud class action as lead plaintiff against Halliburton Company and David Lesar, the Chief Operating Officer and then CEO during the class period, alleging violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Securities Exchange Commission Rule 10(b)-5. The district court denied the Plaintiff's motion for class certification under FED.R.CIV.P. 23, and Plaintiff appeals that order. Finding no abuse of discretion by the district court, we AFFIRM the denial of class certification.
This is a private securities fraud-on-the-market case. Under the fraud-on-the-market theory, it is assumed that in an efficient, well-developed market all public information about a company is known to the market and is reflected in the stock price. When a company has publicly made material misrepresentations about its business, we may presume that a person who buys the company's stock has relied on the false information. The stockholder then suffers losses if the falsity becomes known and the stock price declines. See Basic Inc. v. Levinson.1 It is the response of the market to the correction that proves the effect of the false information and measures the plaintiff stockholder's loss.
Plaintiff here claims that Halliburton made false statements about three areas of its business: (1) Halliburton's potential liability in asbestos litigation, (2) Halliburton's accounting of revenue in its engineering and construction business, and (3) the benefits to Halliburton of a merger with Dresser Industries. It contends that investors lost money when Halliburton issued subsequent disclosures correcting the false statements and the market declined following the negative news. In order to obtain class certification on its claims, Plaintiff was required to prove loss causation, i.e., that the corrected truth of the former falsehoods actually caused the stock price to fall and resulted in the losses.2
The district court denied class certification because it found that Plaintiff failed to prove this causal relationship. We review the district court's certification decision for an abuse of discretion, but we review de novo the legal standards employed by the district court. Fener v. Operating Eng'rs Constr. Indus. & Miscellaneous Pension Fund (Local 66).3 Plaintiff contends that the district court applied an erroneous standard for loss causation and required it to prove more than is required under law. Our review of the district court's order and the evidence leads us to conclude, however, that the district court fully understood loss causation under our precedent and correctly applied the legal standard. As we explain, the district court's decision was well supported and was not an abuse of discretion.
Before discussing the Plaintiff's specific allegations against Halliburton, we first set forth the appropriate framework for a private securities fraud case and consider the district court's application of that framework. A securities fraud claim under § 10(b) of the Securities Exchange Act and Rule 10b-5 requires a plaintiff to show (1) a material misrepresentation (or omission); (2) scienter; (3) a connection with the purchase or sale of a security; (4) reliance; (5) economic loss; and (6) loss causation. Dura Pharms., Inc. v. Broudo.4 In the case of a putative class, a plaintiff may create a rebuttable presumption of reliance under the fraud-on-the-market theory by showing "that (1) the defendant made public material misrepresentations, (2) the defendant's shares were traded in an efficient market, and (3) the plaintiffs traded shares between the time the misrepresentations were made and the time the truth was revealed." Greenberg v. Crossroads Sys., Inc.5 A defendant may rebut the presumption "by `[a]ny showing that severs the link between the alleged misrepresentation and either the price received (or paid) by the plaintiff, or his decision to trade at fair market price[.]'"6
Here, the parties contest only the alleged misrepresentations and do not dispute the efficiency of the market or Plaintiff's trading activity. In order to take advantage of the fraud-on-the-market presumption of reliance, Plaintiff must prove that the complained-of misrepresentation or omission "materially affected the market price of the security." Alaska Elec. Pension Fund v. Flowserve Corp.7 In other words, Plaintiff must show that an alleged misstatement "actually moved the market."8 Thus, "we require plaintiffs to establish loss causation in order to trigger the fraud-on-the-market presumption."9 And we require this showing "at the class certification stage by a preponderance of all admissible evidence."10
The district court explicitly recognized the need for Plaintiff to establish a causal link between the alleged falsehoods and its losses in order to invoke the fraud-on-the market presumption. See Nathenson v. Zonagen, Inc.11 The court also correctly recognized that the causal connection between an allegedly false statement and the price of a stock may be proved either by an increase in stock price immediately following the release of positive information, or by showing negative movement in the stock price after release of the alleged "truth" of the earlier falsehood.12 Plaintiff here relies only on stock price decreases following allegedly corrective disclosures by Halliburton.
That being the case, the district court correctly noted that Plaintiff has an added burden because it is not enough merely to show that the market declined after a statement reporting negative news.13 We must bear in mind that the main concern when addressing the fraud-on-the-market presumption of reliance is whether allegedly false statements actually inflated the company's stock price.14 By relying on a decline in price following a corrective disclosure as proof of causation, a plaintiff need prove that its loss resulted directly because of the correction to a prior misleading statement; otherwise there would be no inference raised that the original, allegedly false statement caused an inflation in the price to begin with.15 In other words, the decline in price following a corrective disclosure must raise an inference that the price was actually affected by earlier alleged misrepresentations.16 We therefore require plaintiffs to show that a loss occurred from the decline in stock price because the truth "`ma[de] its way into the marketplace,'" rather than for some other reason, such as "a result of `changed economic circumstances, changed investor expectations, new industry-specific or firm-specific facts, conditions,' or other factors independent of the fraud."17 Similarly, if a company releases multiple items of negative information on the same day, the plaintiff must establish a reasonable likelihood that a subsequent decline in stock price is due to the revelation of the truth of the earlier misstatement rather than to the release of the unrelated negative information.18 In this way, the plaintiff must satisfy the court that its loss likely resulted from the specific correction of the fraud and not because of some independent reason. A subsequent disclosure that does not correct and reveal the truth of the previously misleading statement is insufficient to establish loss causation.19
Causation therefore requires the Plaintiff to demonstrate the joinder between an earlier false or deceptive statement, for which the defendant was responsible, and a subsequent corrective disclosure that reveals the truth of the matter, and that the subsequent loss could not otherwise be explained by some additional factors revealed then to the market.20 This requirement that the corrective disclosure reveal something about the deceptive nature of the original false statement is consistent with liability in a securities fraud action, where it is those who affirmatively misrepresent a material fact affecting the stock price that are held responsible for losses.21
It is also necessary "that the earlier positive misrepresentation not be confirmatory."22 Confirmatory information is already known to the market and, having been previously digested by the market, will not affect the stock price.23
After surveying our precedent, the district court correctly summed up Plaintiff's burden in this case by stating that because Plaintiff presented no evidence that a false, non-confirmatory positive statement caused a positive effect on the stock price, Plaintiff would have to show "(1) that an alleged corrective disclosure causing the decrease in price is related to the false, non-confirmatory positive statement made earlier, and (2) that it is more probable than not that it was this related corrective disclosure, and not any other unrelated negative statement, that caused the stock price decline."24 This was the correct standard.25
Plaintiff argues that the district court misapplied our precedent, however, because it incorrectly required Plaintiff...
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