April 25, 2011
Halliburton Roundtable: Class Certification v. Motion to Dismiss
Posted by Christine Hurt

My post may be a bit late in the day, but to me this case is also a few years late.  The parties, counsel and amicii trace the Fifth Circuit's stance back to Oscar, but to me this all goes back to another little Houston firm called Enron.  In 2007, a few months before Oscar, the Fifth Circuit de-certified an Enron shareholder class action suit against four banks who were involved in the Nigerian Barge transaction, alleging a violation of 10b-5 (Regents of the U. of Calif. v. Credit Suisse First Boston (USA), Inc., 482 F.3d 372 (5th Cir. 2007).  The suit, even in a post-Central Bank world, had survived a motion to dismiss based on the theory that the banks were secondary actors, not primary violators.  Both the denial of the MTD and the certification of the class were appealed from the Southern District of Texas to the Fifth Circuit.  The Fifth Circuit issued an opinion on the class certification first, stopping the lawsuit in its tracks.

What was interesting to me, being a measly corporate law scholar and no civil procedure expert, was that the Fifth Circuit said that certification was not possible because the banks were secondary actors.  OK, which part of Rule 23 is that?  Well, eerily similar to Oscar and Halliburton, the court held that certification of the class depended on whether the presumption of reliance found in Basic applied.  In order for Basic to apply, the plaintiff must show that the defendant made public, material misrepresentations, the defendant's shares were traded in an "efficient market" and the plaintiff traded shares at the relevant time.  Here, the Fifth Circuit said that Basic didn't apply because as secondary actors, the banks made no public statements, merely aided and abetted Enron's public misstatements.  At the time, my question was Why here?  Why not reverse the MTD denial?  The case was appealed to the Supreme Court, was told to wait until Stoneridge, then was forgotten forever as just another secondary actor case.

In light of that history, the Fifth Circuit seems to be waging a war on securities fraud class actions by introducing various elements of 10b-5 at the class certification stage, even though those issues are ones in which common issues predominate -- whether someone is a secondary actor or primary actor and loss causation.  And, the method to the madness is shoehorning these elements into the Basic/reliance inquiry.  In the Enron case, the secondary actor issue was used to defeat one prong of reliance, but in the Halliburton case it is the second prong -- whether the market is efficient.  According to the Fifth Circuit, plaintiffs have to prove loss causation in order to prove that the market is efficient (or else the price would not go up and down with disclosures).  My former boss David Sterling of Baker Botts rephrases this as "price impact," but it's hard to prove a price impact but not loss causation or vice versa.  Now of course, the rather convoluted first part of the SCOTUS hearing proves how circular securities fraud elements are -- materiality can hinge on a price drop, as does loss causation, as does whether the market is efficient. 

So, my question still is Why here?  Why not just dismiss the same case for failure to prove loss causation?  The justices seem to be asking Mr. Sterling whether wouldn't it be better to explore merits questions with full discovery at the MSJ stage.  But wouldn't all this be decided at the MTD stage during the discovery stay anyway?  Are we really saving this cases by getting all this stuff out of class certification or just merely making the two inquiries cleaner and neater, even if at the end of the day the outcome will be the same?

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