By James Hamilton, J.D., LL.M.
A recent panel decision involving fraud claims against Halliburton again demonstrates the difficulties class action plaintiffs face in the 5th Circuit (Archdiocese of Milwaukee Supporting Fund, Inc. v. Halliburton Company). While all fraud plaintiffs must plead loss causation under the Supreme Court's Dura decision, they must prove loss causation in the 5th Circuit at the class certification stage. As Senior Circuit Judge Reavley wrote in his Halliburton opinion, in order to obtain certification, potential class action plaintiffs must prove "that the corrected truth of the former falsehoods actually caused the stock price to fall and resulted in the losses." This requires a showing by a preponderance of the evidence that "a loss occurred from the decline in stock price because the truth made 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."
The 5th Circuit panel initially rejected the plaintiffs' argument that its 2007 Oscar Private Equity Investments v. Allegiance Telecom, Inc. decision was wrongly decided because a panel of the court could not overrule a precedential decision by a previous panel absent an intervening contrary or superseding decision by the court en banc or the Supreme Court. The court then concluded that the plaintiffs failed to show a specific stock price drop that was necessarily related to the alleged misstatements and any corrective disclosures. As described by the court, the negative information available in the marketplace involved "non-culpable changes in market conditions and the competitive environment that Halliburton faced," and the plaintiffs failed to differentiate this information from any allegedly culpable statements.
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