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Merck, Pfizer, HSBC could be big winners from shareholder case

By Andrew Longstreth

NEW YORK (Reuters) - Within the next two weeks, the U.S. Supreme Court is expected to rule in a major case that could make it much harder for shareholders to band together against public companies in securities fraud class actions.

If the court rules in favor of Halliburton and against a group of shareholders, then the oilfield services company won't be the only business to gain. A handful of other major companies would also likely reap immediate benefit.

Those companies, including drug makers Merck & Co Inc and Pfizer Inc , banks HSBC Holdings Plc and Regions Financial Corp , and casino company Las Vegas Sands Corp , are defendants in shareholder lawsuits that have been granted class action status.

A decision setting a higher bar for class actions would not end the lawsuits, but it would allow these defendants to file briefs demanding that shareholders have to again seek court approval for the status - and this time under a new, tougher standard. If they fail to get that approval, the cases would effectively end.

In 2013, settlements were reached in 67 cases totaling $4.8 billion, according to Cornerstone Research. A ruling in the oil company's favor in Halliburton v. Erica P. John Fund could save other businesses facing pending class actions hundreds of millions of dollars collectively.

Around 200 shareholder class actions are filed every year alleging that misleading statements and material omissions made by companies and their executives caused a stock’s share price to drop. Nearly 400 shareholder securities class actions are pending in various stages of litigation, according to data gathered by the Stanford Law School Securities Class Action Clearinghouse.

But only a relatively small number of the pending cases have been granted class action status. In each instance, a judge must determine at a certification hearing whether the status is appropriate. One consideration is whether the people in the class have common issues or merely related ones. To be a class, they must have common issues.

'FRAUD ON THE MARKET'

Class certification is a critical stage in shareholder class actions because it puts pressure on defendants to settle by increasing the liability they face.

Generally, the larger the class size, the more damages a company faces and the more that plaintiffs' lawyers can make. Law firms can receive as much as a third of the settlement in attorneys' fees.

In the case before the Supreme Court, Halliburton is seeking to overturn a 1988 decision, Basic v. Levinson, which adopted the “fraud on the market theory.” Under the theory, a defendant's material misrepresentation that affects the price of publicly traded securities is presumed to have been relied on by a purchaser who suffered a loss.

That theory assumes public information about a company is known to the market and plaintiffs do not have to show that they relied on a specific misrepresentation, only that they purchased shares before the truth came out.

In the case against Halliburton, shareholders alleged it understated asbestos liabilities while overstating both revenues in its engineering and construction business and the benefits of its merger with Dresser Industries.

The court has several options, including leaving intact Basic v. Levinson to maintain the status quo. At the other extreme, it could overturn Basic v. Levinson - and so doom securities class actions by requiring plaintiffs to show they relied on misinformation when they purchased securities.

A third option would be to find a middle ground that would require plaintiffs to show that the misrepresentation had a significant effect on the stock price but that would not overturn Basic. During oral arguments, some of the justices appeared to signal that the middle option would be their preference.

The middle option would still be a win for the defendant corporations by creating more hurdles for shareholders to clear before being allowed to sue as a group.

Merck is facing one of the largest pending shareholder cases that already has class action status.

The lawsuit, filed in 2005, alleges that the company made misleading statements about its painkiller drug Vioxx, which the company withdrew from the market in 2004 over concerns that it increased the risk of heart attacks and strokes. The plaintiffs alleged that after Merck disclosed the problems with Vioxx, its market capitalization shrunk by billions of dollars.

In January 2013, U.S. District Judge Stanley Chesler of New Jersey certified a class of individuals and entities who purchased Merck securities from May 21, 1999, to Sept. 29, 2004.

HALT IN THE PROCEEDINGS

Foreshadowing the potential impact of the Halliburton decision, a lawyer for Merck in November asked a federal judge in New Jersey to put a halt to proceedings in the case pending the outcome of the Supreme Court decision in Halliburton. The lawyer said the plaintiffs’ case rested squarely on the fraud on the market theory and that part of the case would likely have to be re-litigated following the Halliburton decision.

The court denied the request.

Merck and an attorney for the plaintiffs had no comment on the potential impact of Halliburton on the case.

HSBC could also benefit from the Supreme Court’s ruling. The bank is appealing a $2.46 billion judgment against one of the company’s units, formerly known as Household International Inc. The plaintiffs alleged that Household was engaged in systemic predatory lending and that it misrepresented the credit quality of its loan portfolio.

The judgment, entered by a federal judge in Chicago last year, was the largest ever following a securities fraud class action trial, according to the plaintiffs’ law firm.

On appeal to the 7th U.S. Circuit Court of Appeals, lawyers for HSBC are seeking an order vacating the judgment and sending the case back to the district court. In a brief filed in February, HSBC said that if the Supreme Court jettisons Basic’s presumption of reliance on a misrepresentation, a class status review "will be beyond question.”

Pfizer is facing a trial later this year over allegations made by shareholders that it fraudulently misrepresented the safety of its Celebrex and Bextra pain-relieving drugs. The lawsuit covers investors who bought Pfizer stock between Oct. 31, 2000, and Oct. 19, 2005, a period in which the company's share price fell by roughly half and its market value tumbled by well over $100 billion.

Pfizer and the plaintiffs agreed to delay the trial until after the Halliburton decision. In a letter to the court, Pfizer said it believed that after the Halliburton decision, it “may be necessary to revisit class certification or other pre-trial motion practice.”

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