Tom Ramstack – AHN News Legal Correspondent
Washington, DC, United States (AHN) – The Supreme Court is set to hear arguments Monday in a case that could make it easier for corporations to get rid of lawsuits by shareholders angered when their stocks lose money.
The business community is intensely interested in the outcome, as evidenced by a large number of amicus, or friend-of-the-court, briefs filed in the case of Erica P. John Fund Inc. v. Halliburton Co.
It involves a lawsuit by shareholders of construction giant Halliburton. They accuse the company of securities fraud by misrepresenting its assets and liabilities in financial statements.
When the truth was disclosed later, Halliburton’s stock value dropped, making shareholders lose investment value.
Afterward, the shareholders got together to ask a federal court in the Northern District of Texas for class action status to sue Halliburton. Class action refers to a single lawsuit that represents the interests of many people.
They say Halliburton violated the Securities Exchange Act of 1934 and Securities Exchange Commission Rule 10-b5.
The shareholders reasoned it would be easier for them to prove they suffered damages in a joint lawsuit than as individuals.
The proof of damages has become the key issue in the lawsuit before the Supreme Court.
The Court must decide whether shareholders must prove misguided actions of the corporate directors caused their losses before they can sue in a class action.
Under current law, a jury decides at trial whether corporate bungling made shareholders lose money.
If the Supreme Court rules damages must be proved before shareholders get authorization for a class action, the number of lawsuits proceeding to trial is likely to plummet, according to securities lawyers.
Legal experts say fewer shareholders would try to sue if they know their chances of reaching trial are small.
Halliburton comes to the Supreme Court with a history of recent controversy.
Oil giant BP accuses Halliburton of shoddy work in construction of the Deepwater Horizon oil rig that exploded in the Gulf of Mexico last year, leaking millions of barrels of oil into the water.
Former Vice President Dick Cheney was the company’s president until 2000.
Suspicions followed him into the White House about whether he used his political influence to improperly steer defense contracts to the company. Halliburton has played a big support role for troops in Iraq and Afghanistan.
Shareholders are alleging similar behind-the-scenes moves in the financial statements that led to their lawsuit.
They say the company’s directors downplayed their liability for asbestos claims. They also say the directors misrepresented Halliburton’s likelihood of collecting revenue from construction contracts and exaggerated the benefits from a merger with Dresser Industries.
Later audits revealed what the shareholders say were misrepresentations. Wall Street responded immediately with a sharp drop in the company’s stock value.
Halliburton argues in its Supreme Court briefs there is no benefit to leaving decisions on evidence for a class action lawsuit to a jury.
Instead, a judge should resolve any class action authorization issues before trial, thereby eliminating costly, drawn-out and often frivolous lawsuits, Halliburton says.
The company’s brief also argued shareholders should not be granted a class action lawsuit because the evidence was too weak they lost money from the company’s incorrect financial statements, thereby “sever[ing] the link between Halliburton’s alleged misrepresentations and that market price.”
So far, Halliburton has won at the lower court level.
The Fifth Circuit U.S. Court of Appeals ruled that before the shareholders can sue for securities fraud, they must prove a stock price decline “resulted directly because of the correction to a prior misleading statement.”
The Erica P. John Fund has not proved Halliburton’s “misleading” statements made shareholders lose money, the court said.
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