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Continuing a Discussion of the Supreme Court Term

Halliburton v. Erica P. John Fund -- discontented stockholders allege that at the turn of the century (from June 1999 to December 2001) Halliburton misrepresented significant facts about the company's financial health. Significantly, the execs undervalued an asbestos liability claim.


The Erica P. John Fund is an investment fund created to support the Archdiocese of Milwaukee. It bought stock in Halliburton during the period of the alleged deception.

 In September 2007, EPJ moved to certify as a class all investors who bought the common stock of Halliburton during the period of the alleged deception,  a period that came to a screeching end with a stunning write-off of $4 billion. In support of this motion EPJ invoked the notion of a "fraud on the market," and presented an expert report by Jane Nettesheim of the Stanford Consulting Group.
Netteshein contended that the market in Halliburton stock is efficient, and accordingly the falsehoods told by executives were incorporated into the price of that stock, setting up the owners for a sudden loss when the truth did become known.

This is the second time that the issue of class certification framed in that way has reached the U.S. Supreme Court. In 2011, the court ruled unanimously that the fraud-on-the-market presumption does not require that plaintiffs prove “loss causation” in support of their motion for class certification. This didn’t really affect existing securities-fraud doctrine in most of the country – it struck down a theory that had been unique to the Fifth Circuit.

But now the court was asked to make a decision that would abolish the whole basis of class certification as it has operated in securities fraud cases since the BASIC v. LEVINSON decision of 1988.

The old common law notion of a fraud requires that a plaintiff in a lawsuit alleging fraud show reliance. It is not enough in a common law fraud lawsuit for me as aggrieved party to allege that you, the real estate broker selling swampland, told me “this Everglades land is a wonderful place to build a house.” In a typical lawsuit over that fraudulent claim I would have to show that I believed you, that I relied to my detriment upon your statement as to the firmness of Everglades land, that I accordingly built a house there and glub glub glub down it went.

If the notion of a "fraud on the market" were abolished, then EPJ would have to prove as part of its case in this matter that it had heard or read some of the pertinent misstatements by Halliburton executives, and that those statements had contributed to its decision to buy the stock. But on those issues, every possible plaintiff has its own story to tell, so there would be no class actions on such a matter at all.

According to Basic v. Levinson, misstatements defraud the market, and so inflate the price. Anybody who buys the stock at that inflated price is presumably a victim of the misstatements, without further specific proofs of reliance.
There has been a good deal of criticism of that presumption over the last quarter century. The critics have maintained that this makes it too easy for plaintiffs' lawyers to define a convenient class and go after deep pockets, and that in the aggregate such actions (often in the view of these critics frivolous) impose significant costs on the Main Street economy. So there was hope in some quarters, fear in others, that SCOTUS would use this case to cut way back on private securities fraud litigation.
It didn't happen. The court re-affirmed BASIC in all important respects.
I say "in all important respects" because there is a caveat. The court did acknowledge -- explicitly for the first time, I believe -- that in class certification proceedings the presumption that the lies of executives have affected the price of a stock may be rebutted. Defendants don't have to wait until an actual trial to contest the issue of loss causation, they can contest it earlier, at the certification stage.
It isn't clear to me how defendants will go about doing that. They could show that there was no movement upward in the price after the lies., But that leaves open the possibility that there would have been a sharp movement down otherwise, and that the lies maintained the equilibrium. In that case it would still be true that the lies caused members of the class (defined by date of purchase) to buy at a higher price than the stock was really worth.
How will defendants establish the absence of loss for purpose of defeating class cert? I don't know -- but they'll be allowed to try.
On the whole, it seems to me the decision was a sensible one. Securities fraud should remain recognizably tied to common-law notions of fraud, yet I understand that courts make adaptations. Where the shoe doesn't fit, the subjects of the law's operations should not be required to wear it.

Hobby Lobby

In the United States, in certain specific and narrow areas, it is sometimes possible, with a statutory or constitutional basis or a combination of the two, for a person to plead conscience or religious conviction against otherwise applicable obligations. For example, the draft law that was enacted in 1948 and that remained in place through the period of the Korean and Vietnamese Wars exempted from conscription for combat service those who conscientiously opposed all warfare by virtue of "religious training and belief," and further defined religious belief as belief in a Supreme Being. The question arose whether this was an unconstitutional slant at the expense of people with equally firm and sincere pacifist convictions who did not ground those convictions on belief in a Supreme Being, and over time the notion of "religious objection" broadened into "conscientious objection."

Another context: the schooling of minors within compulsory educational systems and in ways to which the families of those minors strongly object, again on religious grounds.

The U.S. Supreme Court has said that the states do have the power, and indeed they have the  responsibility, to "impose reasonable regulations for the control and duration of basic education," which may be satisfied through a public system. However, it has also said that this has to be balanced against the "right of parents to provide an equivalent education in a privately operated system" or at home, as their conscience dictates.
Another context, mandatory child immunizations.

But the current controversy involves employers who claim that their religious views forbid them from insuring their employees in a manner that will pay for the employees' use of birth control. Does it matter that these employers are corporations? Closely held for-profit corporations?
This was the issue in Burwell v. Hobby Lobby.
In response, and by a narrow majority (with some important hedging) SCOTUS held that a statute-- not the first amendment itself -- requires the government to provide both non-profits and closely held for-profit corporations with an accommodation, i.e. they can opt out of insuring the birth control of their employees.
The opinion mentions but does not decide other areas of medical coverage, the ones that instantly come to mind. What about a closely held corporation run by people with a religious objection to blood transfusions? We'll decide that when it comes before us, is all the court says.
It seems the court is trying to obfuscate a dilemma into which it has placed itself. Either the courts are going to be selective (in which case it looks like our government has its favorites among religions, i.e. it has ESTABLISHED some in preference to others, ) or they aren't going to be selective, in which case there will be a good deal of mission creep here.

A brief discussion two other cases among this year's highlights, tomorrow.


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