Case: 08-11195 Document: 00511026584 Page: 1 Date Filed: 02/12/2010
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
February 12, 2010
No. 08-11195 Charles R. Fulbruge III
Clerk
THE ARCHDIOCESE OF MILWAUKEE SUPPORTING FUND, INC, On
Behalf of Itself and All Others Similarly Situated,
Plaintiff-Appellant
v.
HALLIBURTON CO; DAVID J LESAR,
Defendants-Appellees
Appeal from the United States District Court
for the Northern District of Texas
Before REAVLEY, CLEMENT, and SOUTHWICK, Circuit Judges.
REAVLEY, Circuit Judge:
The Archdiocese of Milwaukee Supporting Fund, Inc. filed this putative
securities fraud class action as lead plaintiff against Halliburton Company and
David Lesar, the Chief Operating Officer and then CEO during the class period,
alleging violations of sections 10(b) and 20(a) of the Securities Exchange Act of
1934 and Securities Exchange Commission Rule 10(b)-5. The district court
denied the Plaintiff’s motion for class certification under F ED. R. C IV. P. 23, and
Plaintiff appeals that order. Finding no abuse of discretion by the district court,
we AFFIRM the denial of class certification.
Case: 08-11195 Document: 00511026584 Page: 2 Date Filed: 02/12/2010
No. 08-11195
I.
This is a private securities fraud-on-the-market case. Under the fraud-on-
the-market theory, it is assumed that in an efficient, well-developed market all
public information about a company is known to the market and is reflected in
the stock price. When a company has publicly made material
misrepresentations about its business, we may presume that a person who buys
the company’s stock has relied on the false information. The stockholder then
suffers losses if the falsity becomes known and the stock price declines. See
Basic Inc. v. Levinson.1 It is the response of the market to the correction that
proves the effect of the false information and measures the plaintiff stockholder’s
loss.
Plaintiff here claims that Halliburton made false statements about three
areas of its business: (1) Halliburton’s potential liability in asbestos litigation,
(2) Halliburton’s accounting of revenue in its engineering and construction
business, and (3) the benefits to Halliburton of a merger with Dresser Industries.
It contends that investors lost money when Halliburton issued subsequent
disclosures correcting the false statements and the market declined following the
negative news. In order to obtain class certification on its claims, Plaintiff was
required to prove loss causation, i.e., that the corrected truth of the former
falsehoods actually caused the stock price to fall and resulted in the losses.2
1
485 U.S. 224, 246–47, 108 S. Ct. 978, 991–92 (1988).
2
Plaintiff contends that our precedent, specifically the requirement of Oscar Private
Equity Investments v. Allegiance Telecom, Inc., 487 F.3d 261, 269 (5th Cir. 2007), that class
plaintiffs prove loss causation at the class certification stage, is contrary to Supreme Court
and sister circuit precedent. Plaintiff may not assail Oscar as wrongly decided, as we are
bound by the panel decision. See Soc’y of Separationists, Inc. v. Herman, 939 F.2d 1207, 1211
(5th Cir. 1991) (“In this circuit, one panel may not overrule the decision, right or wrong, of a
prior panel in the absence of an intervening contrary or superseding decision by the court en
banc or the Supreme Court.”).
2
Case: 08-11195 Document: 00511026584 Page: 3 Date Filed: 02/12/2010
No. 08-11195
The district court denied class certification because it found that Plaintiff
failed to prove this causal relationship. We review the district court’s
certification decision for an abuse of discretion, but we review de novo the legal
standards employed by the district court. Fener v. Operating Eng’rs Constr.
Indus. & Miscellaneous Pension Fund (Local 66).3 Plaintiff contends that the
district court applied an erroneous standard for loss causation and required it
to prove more than is required under law. Our review of the district court’s
order and the evidence leads us to conclude, however, that the district court fully
understood loss causation under our precedent and correctly applied the legal
standard. As we explain, the district court’s decision was well supported and
was not an abuse of discretion.
II.
Before discussing the Plaintiff’s specific allegations against Halliburton,
we first set forth the appropriate framework for a private securities fraud case
and consider the district court’s application of that framework. A securities
fraud claim under § 10(b) of the Securities Exchange Act and Rule 10b-5 requires
a plaintiff to show (1) a material misrepresentation (or omission); (2) scienter;
(3) a connection with the purchase or sale of a security; (4) reliance; (5) economic
loss; and (6) loss causation. Dura Pharms., Inc. v. Broudo.4 In the case of a
putative class, a plaintiff may create a rebuttable presumption of reliance under
the fraud-on-the-market theory by showing “that (1) the defendant made public
material misrepresentations, (2) the defendant’s shares were traded in an
efficient market, and (3) the plaintiffs traded shares between the time the
misrepresentations were made and the time the truth was revealed.” Greenberg
3
579 F.3d 401, 406 (5th Cir. 2009).
4
544 U.S. 336, 341–42, 125 S. Ct. 1627, 1631 (2005).
3
Case: 08-11195 Document: 00511026584 Page: 4 Date Filed: 02/12/2010
No. 08-11195
v. Crossroads Sys., Inc.5 A defendant may rebut the presumption “by ‘[a]ny
showing that severs the link between the alleged misrepresentation and either
the price received (or paid) by the plaintiff, or his decision to trade at fair market
price[.]’” 6
Here, the parties contest only the alleged misrepresentations and do not
dispute the efficiency of the market or Plaintiff’s trading activity. In order to
take advantage of the fraud-on-the-market presumption of reliance, Plaintiff
must prove that the complained-of misrepresentation or omission “materially
affected the market price of the security.” Alaska Elec. Pension Fund v.
Flowserve Corp.7 In other words, Plaintiff must show that an alleged
misstatement “actually moved the market.” 8 Thus, “we require plaintiffs to
establish loss causation in order to trigger the fraud-on-the-market
presumption.”9 And we require this showing “at the class certification stage by
a preponderance of all admissible evidence.”10
The district court explicitly recognized the need for Plaintiff to establish
a causal link between the alleged falsehoods and its losses in order to invoke the
fraud-on-the market presumption. See Nathenson v. Zonagen, Inc.11 The court
5
364 F.3d 657, 661 (5th Cir. 2004).
6
Id. at 661–62 (quoting Basic, 485 U.S. at 248, 108 S. Ct. at 992).
7
572 F.3d 221, 228 (5th Cir. 2009) (quotation and citation omitted).
8
Oscar, 487 F.3d at 265.
9
Id.
10
Id. at 269. Although Plaintiff must establish loss causation at the certification stage,
the court may examine the issue at a variety of stages during the course of the litigation. See
Fener, 579 F.3d at 407 (“A court can examine loss causation at the pleadings stage, the class
certification stage, on summary judgment, or at trial.”) (footnotes omitted).
11
267 F.3d 400, 413 (5th Cir. 2001) (Loss causation is “a direct causal link between the
misstatement and the claimant’s economic loss.”) (internal quotation marks and citation
omitted).
4
Case: 08-11195 Document: 00511026584 Page: 5 Date Filed: 02/12/2010
No. 08-11195
also correctly recognized that the causal connection between an allegedly false
statement and the price of a stock may be proved either by an increase in stock
price immediately following the release of positive information, or by showing
negative movement in the stock price after release of the alleged “truth” of the
earlier falsehood.12 Plaintiff here relies only on stock price decreases following
allegedly corrective disclosures by Halliburton.
That being the case, the district court correctly noted that Plaintiff has an
added burden because it is not enough merely to show that the market declined
after a statement reporting negative news.13 We must bear in mind that the
main concern when addressing the fraud-on-the-market presumption of reliance
is whether allegedly false statements actually inflated the company’s stock
price.14 By relying on a decline in price following a corrective disclosure as proof
of causation, a plaintiff need prove that its loss resulted directly because of the
correction to a prior misleading statement; otherwise there would be no
inference raised that the original, allegedly false statement caused an inflation
in the price to begin with.15 In other words, the decline in price following a
corrective disclosure must raise an inference that the price was actually affected
by earlier alleged misrepresentations.16 We therefore require plaintiffs to show
that a loss occurred from the decline in stock price because the truth “‘ma[de] its
way into the marketplace,’” rather than for some other reason, such as “a result
12
See Greenberg, 364 F.3d at 665.
13
See id. (holding that plaintiffs must do more than “simply offer[] evidence of any
decrease in price following the release of negative information”).
14
Id.
15
Id.
16
See Nathenson, 267 F.3d at 415 (stating that “where the facts properly considered by
the district court reflect that the information in question did not affect the price of the stock
then the district court may properly deny fraud-on-the-market based recovery”).
5
Case: 08-11195 Document: 00511026584 Page: 6 Date Filed: 02/12/2010
No. 08-11195
of ‘changed economic circumstances, changed investor expectations, new
industry-specific or firm-specific facts, conditions,’ or other factors independent
of the fraud.” 17 Similarly, if a company releases multiple items of negative
information on the same day, the plaintiff must establish a reasonable likelihood
that a subsequent decline in stock price is due to the revelation of the truth of
the earlier misstatement rather than to the release of the unrelated negative
information.18 In this way, the plaintiff must satisfy the court that its loss likely
resulted from the specific correction of the fraud and not because of some
independent reason. A subsequent disclosure that does not correct and reveal
the truth of the previously misleading statement is insufficient to establish loss
causation.19
Causation therefore requires the Plaintiff to demonstrate the joinder
between an earlier false or deceptive statement, for which the defendant was
responsible, and a subsequent corrective disclosure that reveals the truth of the
matter, and that the subsequent loss could not otherwise be explained by some
additional factors revealed then to the market.20 This requirement that the
corrective disclosure reveal something about the deceptive nature of the original
false statement is consistent with liability in a securities fraud action, where it
17
Flowserve, 572 F.3d at 229 (quoting Dura, 544 U.S. at 342–43, 125 S. Ct. at 1627).
18
Greenberg, 364 F.3d at 665.
19
See Flowserve, 572 F.3d at 230 (holding that “to establish loss causation this disclosed
information must reflect part of the ‘relevant truth’–the truth obscured by the fraudulent
statements”).
20
See Greenberg, 364 F.3d at 662 (noting that loss causation may be proved from a
“decrease in price following the revelation of the misleading nature of these [prior]
statements”) (discussing Nathenson, 267 F.3d at 414); id. at 665 (“To raise an inference
through a decline in stock price that an earlier false, positive statement actually affected a
stock’s price, the plaintiffs must show that the false statement causing the increase was
related to the statement causing the decrease.”).
6
Case: 08-11195 Document: 00511026584 Page: 7 Date Filed: 02/12/2010
No. 08-11195
is those who affirmatively misrepresent a material fact affecting the stock price
that are held responsible for losses.21
It is also necessary “that the earlier positive misrepresentation not be
confirmatory.” 22 Confirmatory information is already known to the market and,
having been previously digested by the market, will not affect the stock price.23
After surveying our precedent, the district court correctly summed up
Plaintiff’s burden in this case by stating that because Plaintiff presented no
evidence that a false, non-confirmatory positive statement caused a positive
effect on the stock price, Plaintiff would have to show “(1) that an alleged
corrective disclosure causing the decrease in price is related to the false, non-
confirmatory positive statement made earlier, and (2) that it is more probable
than not that it was this related corrective disclosure, and not any other
unrelated negative statement, that caused the stock price decline.” 24 This was
the correct standard.25
21
See Dura, 544 U.S. at 344, 125 S. Ct. at 1632–33 (noting that in private securities
fraud actions, which have common-law roots, “a person who ‘misrepresents the financial
condition of a corporation in order to sell its stock’ becomes liable to a relying purchaser ‘for
the loss’ the purchaser sustains ‘when the facts . . . become generally known’ and ‘as a result’
share value ‘depreciate[s].’”) (quoting RESTATEMENT (SECOND ) OF TO RTS §548A cmt. b)
(emphasis added).
22
Greenberg, 364 F.3d at 666.
23
Id.
24
Archdiocese of Milwaukee Supporting Fund, Inc. v. Halliburton Co., No. 3:02-CV-
1152, 2008 WL 4791492, at *3 (N.D. Tex. Nov. 4, 2008) (emphasis in original) (internal
quotation marks and citation omitted).
25
The district court’s statement of the Plaintiff’s burden was nearly identical to the
standard we announced in Greenberg. See Greenberg, 364 F.3d at 666 (stating that plaintiffs
must prove “(1) that the negative ‘truthful’ information causing the decrease in price is related
to an allegedly false, non-confirmatory positive statement made earlier and (2) that it is more
probable than not that it was this negative statement, and not other unrelated negative
statements, that caused a significant amount of the decline”).
7
Case: 08-11195 Document: 00511026584 Page: 8 Date Filed: 02/12/2010
No. 08-11195
III.
Plaintiff argues that the district court misapplied our precedent, however,
because it incorrectly required Plaintiff to prove actual fraud at the class
certification stage. Plaintiff asserts that this requirement runs afoul of our
recent decision in Flowserve.26 We do not agree with the Plaintiff’s reading of
Flowserve or its characterization of the district court’s opinion.
In Flowserve, certain alleged misstatements by the defendant concerned
projected earnings guidance released in October 2001 for the company’s fiscal
year 2002. The subsequent alleged corrective disclosures were downward
revisions to the earnings guidance released in July and September 2002. The
defendant argued that the standard for loss causation required plaintiffs to show
a “fact-for-fact” disclosure that fully corrected prior misstatements, which had
not occurred in either of the alleged corrective disclosures.27 We rejected that
approach, but we also insisted that plaintiffs need to show more than that a
subsequent disclosure reveals the defendant’s true financial condition.28 We held
that the disclosure “must reflect part of the ‘relevant truth’–the truth obscured
by the fraudulent statements.” 29 The Flowserve court found erroneous the
district court’s belief that the defendant’s revised earnings guidance in July and
September 2002 was not relevant to any prior alleged misrepresentations, and
we therefore reversed the district court’s denial of class certification.30
26
See Flowserve, 572 F.3d at 230 (rejecting as incorrect defendant’s theory that “a fraud
causes a loss only if the loss follows a corrective statement that specifically reveals the fraud”).
27
Id. at 229.
28
Id. at 230.
29
Id.
30
Id. at 231.
8
Case: 08-11195 Document: 00511026584 Page: 9 Date Filed: 02/12/2010
No. 08-11195
But Flowserve did not eliminate the requirement at class certification that
plaintiffs must prove the corrective disclosure shows the misleading or deceptive
nature of the prior positive statements.31 We have previously explained that the
“relevant truth” necessary in an alleged corrective disclosure is such that “the
truth disclosed must simply make the existence of the actionable fraud more
probable than it would be without that alleged fact (taken as true).” Lormand
v. US Unwired, Inc.32 When confronted with allegedly false financial predictions
and estimates, the district court must decide whether the corrective disclosure
more probably than not shows that the original estimates or predictions were
designed to defraud. As we held in Flowserve, “[i]f [Plaintiff] cannot prove by a
preponderance of the evidence that the market learned more than that
[Defendant’s] earnings guidance was lower and so its business seemed less
valuable, it cannot establish that its loss was caused by [Defendant’s]
misstatements . . . .” 33 Thus, the truth revealed by the corrective disclosure must
show that the defendant more likely than not misled or deceived the market
with earnings misstatements that inflated the stock price and are actionable.
Otherwise, the misstatements would do little more than “touch upon” the alleged
loss rather than cause the loss.34
We are satisfied that the district court here understood the need for the
corrective disclosures to reveal the actionable truth about prior misstatements.35
31
See Greenberg, 364 F.3d at 662.
32
565 F.3d 228, 256 n.20 (5th Cir. 2009).
33
Flowserve, 572 F.3d at 232.
34
See Dura, 544 U.S. at 343, 125 S. Ct. at 1632 (holding that it is insufficient for a
misrepresentation to merely “touch upon” a later economic loss because “[t]o ‘touch upon’ a loss
is not to cause a loss”).
35
Plaintiff challenges statements in the district court’s decision that Plaintiff had not
identified a disclosure specifically revealing fraud. We recognize that a plaintiff need not
9
Case: 08-11195 Document: 00511026584 Page: 10 Date Filed: 02/12/2010
No. 08-11195
The district court correctly stated that “[i]mportantly, it is the
misrepresentations themselves, not the corrective disclosures, which form the
basis of a valid securities fraud claim. . . . Unless actionable statements, which
were later corrected, are identified, Plaintiffs cannot establish loss causation.”36
The court went on to conclude that Plaintiff largely failed to identify disclosures
that had a corrective effect linked to a specific misrepresentation, as opposed to
simply a negative effect, and that many of the alleged corrective disclosures
constituted confirmatory information. We therefore conclude that the district
court did not apply an incorrect legal standard, and we turn to the specific
statements and corrective disclosures alleged in Plaintiff’s complaint.
IV.
Plaintiff contends that it has identified specific misrepresentations by
Halliburton and linked those misrepresentations to partial corrective
disclosures. It asserts that the allegations of its complaint together with the
report of its expert, Jane Nettesheim, demonstrated that those disclosures are
related to the misrepresentations and proximately caused its losses. Upon
examining the alleged corrective disclosures and the evidence, we remain
unpersuaded.
Plaintiff relies on three general categories of alleged misstatements by
Halliburton made during a class period of June 3, 1999, to December 7, 2001.
The first category of statements concerns Halliburton’s exposure to liability in
asbestos litigation and the company’s stated reserves for such litigation. The
prove at the class certification stage intentional fraud by the defendant. See Flowserve, 572
F.3d at 230. But reading the entirety of the Flowserve opinion, we conclude that a plaintiff
still must prove that the defendant is responsible for the error of the misrepresentation. We
read the district court’s decision to say no more.
36
Archdiocese of Milwaukee Supporting Fund, 2008 WL 4791492, at *5.
10
Case: 08-11195 Document: 00511026584 Page: 11 Date Filed: 02/12/2010
No. 08-11195
allegedly corrective statements were made in press releases and SEC filings on
June 28, 2001, August 9, 2001, October 30, 2001, and December 4–7, 2001.
Halliburton’s asbestos liability derived from its 1998 merger with Dresser
Industries and from a former subsidiary of Dresser known as Harbison-Walker
Refractories Company. As of May 2001, Halliburton reported that its reserves
were approximately $30 million to cover asbestos-related liability. On June 28,
2001, Halliburton reported in a press release that Harbison-Walker had asked
Halliburton to provide financial assistance for asbestos claims that Harbison-
Walker had previously agreed to assume when it spun off from Dresser in 1992.
The release reported that this was a new development, as Harbison-Walker had
previously reaffirmed its responsibility for those claims. Halliburton reported
in the press release that in response it would need to increase its asbestos
reserves by $50 million to $60 million, after tax. On August 9, 2001, Halliburton
filed a Form 10-Q with the SEC reporting that its asbestos reserves were $124
million. On October 30, 2001, Halliburton announced in a press release that a
Mississippi jury had returned a plaintiff’s verdict in an asbestos suit on October
26, 2001, for which Halliburton was responsible for $21.3 million. Then on
December 4 and 7, 2001, Halliburton reported in a SEC filing and press release
additional judgments against Dresser in other asbestos cases. Halliburton’s
stock price declined following each of these statements. Plaintiff contends that
the filings and press releases related directly to and corrected Halliburton’s
previous misrepresentations that its asbestos reserves were adequate. We find
no merit to this contention.
The June 28, 2001, press release does not correct any specific
misrepresentation by revealing a previously obscured truth.37 Nowhere in the
release is there any mention of prior asbestos reserve estimates, and Plaintiff
37
See Flowserve, 572 F.3d at 230.
11
Case: 08-11195 Document: 00511026584 Page: 12 Date Filed: 02/12/2010
No. 08-11195
makes no argument that Halliburton made prior statements about exposure
from claims related to Harbison-Walker.38 At most, the release relates to prior
estimates that asbestos reserve levels were adequate generally, but it does not
correct a specific prior alleged misstatement.39 Just as merely lowering earnings
estimates does not reveal that a defendant previously misrepresented those
estimates, merely raising the asbestos reserves does not show that those prior
reserve estimates were intentionally misleading—the market must learn more
than that Halliburton’s business was potentially less valuable because of
erroneous estimates of asbestos liability.40 We agree with the district court that
the situation could be different if Plaintiff had alleged that Halliburton
previously stated it was including Harbison-Walker claims in its asbestos
reserve estimates but actually did not do so, or if Halliburton had previously
stated it had no exposure from Harbison-Walker claims and that it would not
cover them, when in fact that was not true. Instead, Plaintiff asks us to draw
an inference that the June 28, 2001 press release corrected prior allegedly false
estimates of asbestos reserves merely because those reserves changed. But a
company is allowed to be proven wrong in its estimates, and we can discern no
indication from the June 28, 2001 press release that Halliburton’s prior asbestos
38
See Greenberg, 364 F.3d at 667 (holding that an allegedly corrective disclosure was
not related to prior allegedly false reports on the speed of new routers where the disclosure
“makes no reference to increased router speed”); id. at 668 (holding that an alleged corrective
disclosure reporting problems with third quarter earnings was not related to prior statements
about first or second quarter earnings where the disclosure made “no reference at all” to the
first and second quarters).
39
See, e.g., Nathenson, 267 F.3d at 419 (rejecting as inadequate plaintiff’s allegations
that “suffer[ed] from a lack of required specificity . . . in pin-pointing the particular misleading
statement (other than general statements that the Phase III results were ‘positive’)”).
40
See Flowserve, 572 F.3d at 232.
12
Case: 08-11195 Document: 00511026584 Page: 13 Date Filed: 02/12/2010
No. 08-11195
reserve estimates were misleading or deceptive.41 It follows that the June 28,
2001 press release was not an actionable corrective disclosure.
The same is true for the August 9, October 30, and December 4–7, 2001
SEC filings and press releases. Although Halliburton reported a much larger
reserve for the asbestos litigation on August 9, this information was actually
confirmatory because Halliburton had previously reported that it would need to
increase its reserves by an additional amount of approximately $60 million, after
tax. The August 9, 2001 Form 10-Q reported, consistent with Halliburton’s prior
statements, that the company “recorded as discontinued operations . . . an
accrual of $92 million ($60 million, after tax).”
The announcements of various jury verdicts were also not actionable
corrections. As noted by the district court, Halliburton actually repeated in a
series of public filings the warning about “the uncertainties of litigation and the
possibility that a series of adverse court rulings could materially impact the
expected resolution of asbestos claims.” We are not moved by Plaintiff’s
suggestion that these warnings, which appeared in at least five of Halliburton’s
10-K and 10-Q filings, constituted mere boilerplate disclaimers of the risks
associated with litigation.42
Neither the announcement of the Mississippi verdict nor the verdicts in
other states demonstrated that Halliburton’s previous estimates of asbestos
41
See id. at 232 (“Flowserve was free to be wrong in its October 2001 earnings guidance
and even for such error to cause investors loss when it was revealed in July and September
2002–so long as Flowserve did not commit fraud. Only if Flowserve’s October 2001 guidance
(or another alleged misstatement) was fraudulent would any loss it caused Alaska be
actionable.”).
42
See Rubinstein v. Collins, 20 F.3d 160, 167–68 (5th Cir. 1994) (while not dispositive
per se, cautionary language is relevant to materiality of predictive statements as basis for
securities fraud claim).
13
Case: 08-11195 Document: 00511026584 Page: 14 Date Filed: 02/12/2010
No. 08-11195
liability obscured the relevant truth about the asbestos estimates.43 While
Plaintiff cites news reports about the asbestos verdicts and has shown that
Halliburton’s stock price reacted to the negative news, a decline in price
following negative news does not prove loss causation.44 We see in the evidence
concerning the asbestos litigation a pattern of Halliburton keeping the market
abreast of asbestos developments as they occurred and its necessary adjustments
to the litigation reserves. We think this undermines any conclusion that the
asbestos-related statements corrected prior misrepresentations or that the
company acted with deception.
V.
We reach a similar conclusion with respect to the second and third group
of alleged public misrepresentations by Halliburton. These alleged
misrepresentations concern the benefits to Halliburton of its merger with
Dresser Industries, and the company’s accounting of revenue from cost-overruns
on fixed-price construction and engineering contracts (so-called unapproved
claims). The alleged corrective disclosures occurred on October 4, 1999, January
5, 2000, October 24, 2000, and December 21, 2000.
Halliburton announced on October 4, 1999, that it was selling its interest
in two Dresser joint ventures and that it expected its third quarter earnings to
be less than previously expected, due in part to lower than expected profits from
joint ventures and other business units of the Dresser group. On January 5,
43
Plaintiff contends that the disclosure of the Mississippi verdict exposed the falsity
of estimates of asbestos liability in part because one analyst wrote that “[t]his jury award sets
new precedents; the size of the award is enormous.” However, rather than show that
Halliburton’s previous statements obscured the truth about asbestos exposure, this analyst’s
statement appears to confirm the unexpected nature of a precedent-setting jury verdict. The
district court noted that another analyst, cited in the report of Plaintiff’s expert, also
supported the perception by the market that the verdict was a surprise rather than a
revelation of a falsehood. That analyst stated, “[w]e expect a vigorous defense by [Halliburton]
and remain optimistic that the asbestos liability will remain under control.”
44
See Greenberg, 364 F.3d at 665.
14
Case: 08-11195 Document: 00511026584 Page: 15 Date Filed: 02/12/2010
No. 08-11195
2000, two analysts reduced their earnings estimates for Halliburton after
discussions with company executives. According to Plaintiff, the October
announcement and the analyst reports exposed the inaccuracy of Halliburton’s
previous positive statements about merging with Dresser, particularly
statements in July and September 1999 that Halliburton expected annualized
cost savings of $500 million from the merger.
Even if it were possible to say that the prior statements were more than
erroneous expectations, both the October 4, 1999 announcement and the analyst
reports contained multiple pieces of negative news. This required Plaintiff to
“demonstrate that there is a reasonable likelihood that the cause of the decline
in price is due to the revelation of the truth and not the release of the unrelated
negative information.”45 This showing of loss causation is a “rigorous process”
and requires both expert testimony and analytical research or an event study
that demonstrates a linkage between the culpable disclosure and the stock-price
movement.46
Plaintiff’s expert failed to do this. The October 4, 1999 announcement
reported that the Dresser Equipment Group was experiencing lower than
expected profits; that there had been a decline in the downstream engineering
and construction business segment; and that the earnings of the energy services
group would be flat or only slightly higher because of low spending levels by
energy industry customers. As a result of these items, the release then reported
lower guidance on Halliburton’s third quarter earnings per share. Nettesheim
indicated in her expert report that the decline in Halliburton’s stock price
following the October 4, 1999 release was due to the reduction in the earnings
45
Greenberg, 364 F.3d at 665.
46
Fener, 579 F.3d at 410–11; see also Oscar, 487 F.3d at 271 (“[T]he plaintiffs must, in
order to establish loss causation at this stage, offer some empirically-based showing that the
corrective disclosure was more than just present at the scene.”).
15
Case: 08-11195 Document: 00511026584 Page: 16 Date Filed: 02/12/2010
No. 08-11195
guidance and recognized that the lower guidance in turn was based on more
than one factor. When questioned about the report, however, Nettesheim
testified that she did not perform any statistical or econometrical analyses of the
three different pieces of information in the release because she was not asked to
do so. Nettesheim’s report indicated that her conclusions were based on
statements from “news commentary and analysts.” We have characterized such
evidence as merely “well-informed speculation.”47
Similarly, the January 2000 analyst reports indicated that the earnings
estimate was reduced because of “less powerful synergies from the Dresser
merger” and because of reduced expectations for offshore construction and a
reduced growth estimate for oilfield spending. Although she recognized that the
reports included non-culpable information, especially the decline in oilfield
spending, Nettesheim presented no empirically-based evidence to show that
news related to Dresser more probably affected the stock price than the other
negative information.48
Plaintiff also argues generally that several alleged corrective disclosures
demonstrated the falsity of former CEO Dick Cheney’s statement about Dresser
that “[t]he merger with Dresser Industries is now behind us” and “[t]he potential
rewards to our shareholders are vast.” We think, however, that this statement,
appearing in a letter in Halliburton’s 1999 Annual Report, is the kind of
“generalized positive statement[] about a company’s progress [that is] not a basis
for liability.”49
47
Oscar, 487 F.3d at 271 (rejecting as insufficient to show loss causation “the raw
opinion of analysts, without supporting study of the market at issue–such as now common use
of basic principles of econometrics”). Nettesheim testified in her deposition that she could
have performed a more refined analysis and had done so in other cases.
48
See Fener, 579 F.3d at 409; Greenberg, 364 F.3d at 666.
49
Nathenson, 267 F.3d at 419 (citing Lasker v. N.Y. State Elec. & Gas Corp., 85 F.3d
55, 59 (2d Cir. 1996) (observing that “broad, general statements” are “precisely the type of
16
Case: 08-11195 Document: 00511026584 Page: 17 Date Filed: 02/12/2010
No. 08-11195
Turning to alleged misstatements about Halliburton’s accounting
methodology, Plaintiff contends that Halliburton improperly recorded cost-
overruns in fixed-price construction contracts as revenue by misleadingly
deeming the cost-overruns “probable” of collection, even if a customer had not
agreed to pay the additional amount. Plaintiff argues that Halliburton revealed
the falsity of its previous accounting methods when (1) it announced on October
24, 2000, that it would undertake a massive restructuring of its construction
business and (2) it announced on December 21, 2000, that it would take a fourth
quarter charge of $120 million as a result of the restructuring.
Plaintiff fails to show these announcements corrected any prior misleading
statements and revealed deceptive practices in Halliburton’s accounting
assumptions. The October 24 press release does not mention fixed price
contracts, unapproved claims, or the method for recognition of revenue from such
claims. Rather than revealing the truth about unapproved claims, the release
attributes a large drop in the group’s revenue to a decline in customer spending.
Nettesheim’s expert opinion that the October 24 disclosure concerned the
company’s booking of unapproved claims is also conclusory. She admitted in her
deposition testimony that she did not match the October 24 statements to any
particular prior misrepresentations by Halliburton.
Nettesheim’s report shows that she relied for her conclusions on her
examination of news reports and statements from analysts and the subsequent
stock price movement. But the news reports Nettesheim cited discuss only
problems and weak results generally in Halliburton’s engineering and
construction business. Nettesheim makes too great a leap in her conclusion that
because analysts reduced earnings estimates based on weakness in Halliburton’s
construction business as a whole, the downgrades to estimates were due to
‘puffery’ that this and other circuits have consistently held to be inactionable”)).
17
Case: 08-11195 Document: 00511026584 Page: 18 Date Filed: 02/12/2010
No. 08-11195
Halliburton improperly recognizing revenue from unapproved claims. We see
no such relationship evident in the statements.
Finally, we find no loss causation evident from the December 21, 2000
announcement, which indicated that the $120 million fourth quarter charge
would include $25 million for reorganization costs, leaving approximately $95
million for project specific matters. 50 As with other alleged corrective
disclosures, the December 21 announcement included clearly non-culpable
negative information. For example, the release informed the market about “the
poor near term market outlook for the downstream engineering and construction
business,” which Halliburton attributed to a “consolidating customer base,
difficult relationships with certain customers, and some financially stressed
competitors and a fiercely competitive environment.” The negative information
constituted non-culpable changes in market conditions and the competitive
environment that Halliburton faced, which Plaintiff’s expert failed to
differentiate from any allegedly culpable information.
The market recognized that Halliburton’s business faced general economic
difficulties and industry-wide pressures. One reporting service, CIBC World
Markets, noted the following after the December 21 release:
The customer base for [engineering and construction] is
consolidating and financially pressured competitors have intensified
competition and pricing in the marketplace. As a result, HAL is
restructuring its company into two operating segments . . . Labor
disturbances in Venezuela and West Africa caused significant costs
to be incurred on several large fixed-fee E&C contracts. . . . General
industry-wide issues are also impacting the E&C business. Despite
50
Plaintiff’s contention is that the $25 million is attributed to problems with the
Dresser integration, and that this disclosure provided corrective information about
Halliburton’s prior false representations about the merger. Nettesheim conceded in her
report, however, that the $25 million disclosure “does not appear to have been a surprise or
a concern” to the market because some charge was already expected due to prior
announcements. This portion of the December release was therefore confirmatory information
and was not an actionable corrective disclosure. See Greenberg, 364 F.3d at 666.
18
Case: 08-11195 Document: 00511026584 Page: 19 Date Filed: 02/12/2010
No. 08-11195
high oil and natural gas prices, spending for engineering and
construction projects remains depressed. The difficult operating
environment has forced some of Halliburton’s E&C competition to
cut prices and increase competitiveness.
We think the consolidating customer base, increased competition, and other
“industry-wide issues,” like depressed customer spending, are the kind of
economic circumstances and industry-specific facts that are not actionable and
must be proven by Plaintiff to have played a much lesser role in the stock price
movement than alleged culpable disclosures.51
Nettesheim’s conclusion that the December 21 disclosure related to cost-
overruns in construction projects was based on news commentary. But the
commentary shows reaction only to “the entire bundle of negative information,”
including the general downturn in Halliburton’s construction business. By
failing to provide empirical data to account for other negative news in the
disclosure that was also part of the problem with Halliburton’s engineering and
construction business (e.g., increased labor costs, consolidated customer base,
fiercely competitive environment), Nettesheim failed to provide the necessary
linkage between the change in stock price and the allegedly culpable information
(cost-overruns). Plaintiff therefore seeks to prove loss causation from the
December 21 release by improperly relying only on evidence of a decrease in
stock price following the negative disclosure of a fourth quarter charge.52
Plaintiff has failed to prove loss causation with respect to the December 21, 2000
disclosure.
VI.
After reviewing the alleged misrepresentations and corrective disclosures,
we conclude that Plaintiff has failed to meet this court’s requirements for
51
See Flowserve, 572 F.3d at 229.
52
See Greenberg, 364 F.3d at 665.
19
Case: 08-11195 Document: 00511026584 Page: 20 Date Filed: 02/12/2010
No. 08-11195
proving loss causation at the class certification stage. Therefore, the district
court’s judgment denying the Plaintiff’s motion for class certification is
AFFIRMED.
20