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In Halliburton case, Supreme Court may sanction corporations lying to investors

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Wednesday, January 26, 2011 14:37 EDT
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The Supreme Court’s decision in the upcoming case Erica P. John Fund Inc v. Halliburton could prevent companies that deceive their investors from being held accountable, according to Jeff McCord of The Investor Advocate.

In early January, the Supreme Court agreed to review a US appeals court ruling that denied a group of investors could sue energy giant Halliburton in a broad class action. The lawsuit was filed in federal court in 2007 by Halliburton shareholders who bought stock between June 1999 and December 2001.

The investors claimed that Halliburton and Chief Executive Officer David Lesar falsely inflated the company’s stock prices by overstating revenues in its construction business, along with inflating the benefits of its merger with Dresser Industries. Eventually the company disclosed that it had overstated its revenues and its stock prices consequentially fell, causing a loss to the stockholders.

The US Court of Appeals for the Fifth Circuit ruled that the shareholders could not band together as a class action unless they proved the various misrepresentations caused the stock price to fall. The court’s decision was appealed by the shareholders.

“These shareholders, who have already lost money due to demonstrable misrepresentations of Halliburton’s financial condition by management, which in-and of-itself is illegal, are being told they must spend more money to hire high priced consulting economists and/or forensic accountants before they are able to take advantage of rules that provide for payment of such costs by the entire class of investors, should they their case succeed,” McCord explained.

The Supreme Court is expected to hear arguments in April and make a decision in June. The court will only rule on whether the investors can be granted a class action status and will not address the merits of the fraud allegations.

“If allowed to stand, the Fifth Circuit’s ‘Catch-22′ barrier to investors’ pursuit of valid fraud claims, the federal civil justice system doors will be locked for the tens of thousands of defrauded investor who cannot on their own afford to hire high-priced experts to essentially prove their case before they even enter court,” McCord warned.

Ira Schochet, president of the National Association of Shareholder and Consumer Attorneys, told The Investor Advocate that the Supreme Court could prevent companies from being held responsible for fraud if it upholds the Fifth Circuit’s ruling. Without being able to band together as a class action, investors would not be able to acquire the funds needed to hire the experts to prove their claims.

“If the Supreme Court and Congress will not permit investors to band together in classes in order to bring white collar criminals to court and hold them accountable, the vast majority of fraud perpetrators will never be punished,” McCord said.

A study published in December found the Supreme Court, under Chief Justice John Roberts, had undergone a fundamental shift in its outlook, ruling in favor of businesses much more often than previous courts.

In the study, commissioned by the New York Times, researchers found the Roberts court has sided with business interests in 61 percent of relevant cases, compared to 46 percent in the last five years of Chief Justice William Rehnquist, who passed away in 2005.

 
 
 
 
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