Halliburton Case Would “Eviscerate” Shareholder Lawsuits
WASHINGTON — The U.S. Supreme Court this week heard oral arguments in a case that could overturn a quarter-century of precedent, severely weakening the ability of shareholders to band together to sue corporations over fraud.
The case brought against oil giant Halliburton by a group of investors could have broad ramifications for individual investors saving for college or retirement. Yet, a decision in Halliburton’s favor would also further exacerbate what consumer protection groups say is a marked trend on the part of the current Supreme Court of cutting off individuals’ access to the justice system.
“A ruling in Halliburton’s favor would eviscerate the ability of shareholders to use class action lawsuits to challenge fraudulent conduct,” the Alliance for Justice, a watchdog group here, said in a report released Tuesday.
“[The case] deserves attention not just for the specific questions of law it presents, but also for the broader implications it has for access to justice in our courts, and whether justice will be dispensed equally to all or reserved only for the privileged few,” according to the report.
The case revolves around events that began in 1998 but weren’t disclosed to the public until 2001. In 1998, when the company was run by future Vice President Dick Cheney, Halliburton purchased a company called Dresser Industries (now the subsidiary DII), which had a history of manufacturing asbestos products known to cause lung cancer.
Victims who claimed they got cancer from Dresser products alleged that the company had continued to sell those products after company executives knew of the health risks. By the time Halliburton took over the company, which it saw as a competitor, Dresser had amassed about 300,000 lawsuits over these allegations.
Shareholders saw this as a significant danger for Halliburton, but the company assured investors that it was not overexposed and that its insurance would be able to mitigate the liability. It also hyped the value of the company’s merger with Dresser.
Both of those contentions would later turn out to be lies. But no one would know until that information became public in December 2001, leaving investors with nearly three years’ worth of over-inflated data about Halliburton.
When the information finally surfaced, Halliburton’s stock plummeted.
Get out of jail free
Subsequently, a coalition of the company’s investors banded together under a suit brought by the Erica P. John Fund, a group that supports the Archdiocese of Milwaukee in programming for poor youths and the mentally ill and that had lost money from its Halliburton investments. The investors contend that the company defrauded them by withholding key information. The current case is Halliburton Co. v. Erica P. John Fund.
“Halliburton repeatedly said to analysts that their insurance and other reserves were adequate to cover any asbestos exposure. Those assertions proved not to be accurate,” David Boies, the plaintiffs’ lead attorney, told the Supreme Court on Wednesday.
“The day that it was clear that they were not accurate, December 7, 2001, the stock price dropped 42 percent … [The company] said it was unexpected. They were caught unaware. We said they knew it all the time and we’ve got some documents that indicate that.”
It is not these past allegations that are at issue in the current case, but rather a 1988 Supreme Court ruling in the case of Basic Inc v. Levinson. Plaintiffs claiming securities fraud had previously been forced to prove that they personally had relied on corporate misrepresentation in order to prove their case. While this is already a high bar, it becomes particularly onerous for class action lawsuits, in which each participant must prove this reliance.
In the 1988 case, the Supreme Court recognized the obstacle this posed to defrauded investors, particularly in class actions. Instead, the justices used an economics theory known as “fraud on the market,” which automatically assumes that a stock’s price takes into account all information in the public domain.
Over the past quarter-century, the Basic decision has offered a key tool facilitating class actions against corporate wrongdoing in securities cases. Importantly, during that time, the U.S. Congress has also revisited securities legislation several times and decided that the precedent remains good law.
Halliburton is now asking the justices to overturn that precedent.
“Think of some of the most egregious examples of lying to the public and shareholders – Enron, now Halliburton. The question is whether Wall Street is going to be held accountable when it commits fraud,” Michelle Schwartz, director of justice programs at the Alliance for Justice, told MintPress News.
“This [case] not only affects the ability of people who’ve been wronged to get back the money that’s been stolen from them, but it also has significant implications for the overall health of the securities market. If people are going to invest in those markets, they’re investing on the assumption that they’re being told the truth.”
Some worry that a decision in favor of Halliburton would also have the perverse effect of emboldening corporate executives in withholding or bending the truth. According to the AFJ report, a favorable ruling for the company would give large corporations a “‘get out of jail free’ card to defraud their own shareholders without consequence.”
Generalized skepticism of class actions
The Halliburton case is also emblematic of – and, potentially, an additional potential step in – a broader trend around U.S. citizens’ access to the American justice system. The case is the latest in a series of high-profile decisions that arguably began in 2011 with a Supreme Court ruling in favor of Wal-Mart, dismissing a huge class action suit alleging discrimination on behalf of 1.5 million female workers.
In that case and in several others since, the Supreme Court has appeared to purposefully weaken the ability of consumers to band together under class actions. It has also upheld onerous non-judicial remedies known as forced arbitration, under which consumers often unwittingly relinquish their right to have their complaints heard in court.
“The court in recent years has issued a number of decisions that have made it harder for everyday Americans who are wronged to get into court and, once there, to vindicate their rights,” AFJ’s Schwartz said. “And once again, the court could now further limit access to the courts.”
This trend has led many consumer advocates to suggest that the current Supreme Court, under Chief Justice John Roberts, is among the most corporate-friendly courts on record. Such a tendency appears to be leading at least the conservative justices to internalize and act on a narrative long pushed by the business community: corporations are unfairly subjected to an endless barrage of frivolous class actions.
“From Wednesday’s testimony, it’s evident that a lot of the justices are thinking about this case in the context of broader concerns about class actions – especially Justice [Antonin] Scalia, whose questions reflected the view that once a class is certified, that imposes this coercive pressure on companies to settle meritless cases,” Scott Nelson, an attorney with Public Citizen’s Litigation Group, the litigation arm of the consumer advocacy organization, told MintPress.
“Where some members of the court seem to be coming from is a generalized suspicion of class actions. But the facts don’t necessarily bear out that concern, especially in the securities area,” he said.
Nelson said that there’s a pervasive “mythology” around meritless class actions forcing companies to settle. But he also noted that, in his experience, a case that is truly without merit tends to wash out early on in the judicial process. Or, he added, those that are weaker tend not to result in the gigantic settlements that particularly frighten corporate executives.
Public Citizen’s Litigation Group tends to be involved particularly in assessing the end result of big class actions. Nelson said the trend following the Supreme Court’s decisions over the past three years has been clear.
“We’re certainly seeing class actions increasingly under threat, as the lower courts take a look at what the Supreme Court is doing and apply it,” he said.
“Another result is that settlements sometimes aren’t as strong, precisely because there are such big risks with trying to proceed with these cases. Firms invest a lot of money in pursuing these cases, so if they’re worried the rug is going to get pulled out from under them, that will get reflected in the value of the settlement. We’re definitely seeing the court’s decision having impacts.”
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