MEMORANDUM OF POINTS AND AUTHORITIES

IN OPPOSITION TO ALL MOTIONS TO DISMISS THE COMPLAINT

 

1.            INTRODUCTION

This diversity action arises from a fraud perpetrated by directors and officers of Halliburton Company (“Halliburton”) against shareholders and potential investors in Halliburton stock and the integrity of the entire market for Halliburton stock.  This action is brought by Halliburton shareholders, individually, and asserts claims for common law and statutory fraud pursuant to Texas State law.

Defendants are moving to dismiss the Complaint pursuant to Rule 12(b)(1) for lack of subject matter jurisdiction, on the grounds that (a) the amount in controversy is less than $75,000.00, and (b) the presence of Doe defendants defeats complete diversity.  Defendants are also moving to dismiss the Complaint pursuant to Rules 9(b) and 12(b)(6) for lack of particularity in pleading fraud.  In effect, Defendants argue that Plaintiffs must plead more than they will be required under Texas substantive law to prove at trial.  The Motions to Dismiss must be denied for the detailed reasons set forth below.

2.            SUMMARY OF THE COMPLAINT

Halliburton used Arthur Andersen and related entities for accounting, auditing, and management consulting.  Complaint ¶¶ 27-45.  Hatchett was the lead Andersen auditor for Halliburton.  Id. ¶ 36.  At all relevant times, Andersen entities focused their services more on adopting and implementing a very aggressive, pro-active, pro-client business strategy and management-consulting philosophy of fostering “inventiveness” and promoting client success through value creation as measured by increased market capitalization, and less on being an independent and objective accountant and auditor.  Id. at ¶¶ 32-35.


Defendant Cheney, as Halliburton CEO from 1995 into 2000, was a strong proponent of and participant in Andersen’s aggressive, pro-active, pro-client program of fostering “inventiveness” and promoting value creation measured by increased market capitalization.  Cheney used his position and influence to persuade the other Director and Officer Defendants to consider, adopt, and implement AA’s foregoing strategy and philosophy as well as to hire Defendant Lesar, previously an Andersen partner, away from AA around 1995.  Cheney even participated in an AA promotional video, stating that “I get good advice, if you will, from [Andersen’s] people based upon how we’re doing business and how we’re operating over and above just the normal by-the-books auditing arrangements.”  Id. at ¶ 11.

Halliburton’s business includes inter alia long-term engineering and construction contracts.  Id. at ¶ 46.  Until the late 1990's, Halliburton entered into contracts on a cost-plus basis, which provided for payment of costs actually incurred, plus a small profit margin.  In the late 1990's, Defendants started making more fixed-price contracts, which do not guarantee a profit margin in case of cost overruns or change orders.  Fixed-price contracts force Halliburton to negotiate or sue for payment of cost overruns and change orders.  The resulting disputes may take months or years to resolve and their outcome cannot be foreseen reliably.  Nonetheless, Defendants improperly started recognizing speculative revenue from unresolved and uncertain disputed claims in 1998 (the “Change in Accounting Principle”).  Id. at ¶ 47.

Without making disclosure to its shareholders or investors, Halliburton implemented the Change in Accounting Principle around Q4 1998, at a time when Halliburton was having a very difficult year, was acquiring and digesting Dresser Industries, Inc., and was facing a net loss for the year.  Id. at ¶ 49.  As a result of this undisclosed change, Halliburton reported extra revenue of $89 million for FY 1998, $98 million for FY 1999, $113 million for FY 2000, and $234 million for FY 2001, all based on unapproved and disputed cost overruns, changes orders, and unresolved claims.  Id. at ¶ 50.


The Change in Accounting Principle violated Generally Accepted Accounting Principles (“GAAP”) because: (1) recognition of extra contract revenue was improper in that collection was not probable and its amount could not be reliably estimated (Statement of Position 81-1; Complaint ¶¶ 50-54); (2) Halliburton never conspicuously disclosed the Change in Accounting Principle as such (APB 20; Complaint ¶ 55); (3) Halliburton never justified the accounting change as preferable to the previous accounting method (APB 20; Complaint ¶¶ 54-55); (4) Halliburton never conspicuously disclosed the effect of adopting the new principle on income (APB 20; Complaint ¶ 56); (5) Halliburton and Hatchett misrepresented that its financial statements were prepared in accordance with GAAP despite foregoing violations of GAAP; and (6) Halliburton never caused Andersen or Hatchett to file a letter supporting the preferability of the change with the U.S. Securities and Exchange Commission (“SEC”) (SEC Regulation S-X; Complaint ¶ 59).  These deficiencies were never adequately disclosed or corrected.

The foregoing violations of GAAP first occurred in 1998 and continued in 1999, 2000, and 2001, as a result of which Halliburton’s reported financial results and its financial statements for 1998, 1999, 2000, and 2001 were materially false and misleading when made.  Complaint ¶¶ 58, 65, 77, 91, and 109.

After identifying the specific GAAP provisions that were violated, the Complaint identifies and explains in great detail (1) the false and misleading financial statements, audit reports, SEC filings, press releases, and their widespread publication to shareholders, potential investors, securities analysts, news media, and others who affect the securities market; (2) the exact dates of all those documents and their publication in and for 1998, 1999, 2000, and 2001; (3) the individuals who signed the documents and thereby uttered their contents; and (4) precisely how and why the representations about Halliburton’s income and compliance with GAAP were false and misleading.  Complaint ¶¶ 61-113, 119-20, 128-29.

Cheney knew that Andersen was helping Halliburton “operat[e] over and above just the normal by-the-books auditing arrangements”; he said so.  Id. at ¶ 48.  Lesar was an Andersen partner before Cheney lured him to Halliburton in 1995.  Id. at ¶¶ 11, 48.  Hatchett was the lead Andersen partner on the Halliburton account after Lesar left.  Id. at ¶ 36.  Cheney, Hunt, Crandall, Dibona, Howell, Martin,  Eagleburger, Precourt, Silas, and Muchmore signed, endorsed, and uttered the 1998 and 1999 10-K’s.  Id. at ¶¶ 62, 74.  Lesar, Hunt, Crandall, Dibona, Eagleburger, Howell, Martin, Precourt, Silas, and Muchmore signed, endorsed, and uttered the 2000 10-K.  Id. at ¶ 88.  Lesar, Hunt, Crandall, Dibona, Eagleburger, Howell, Martin, Silas, Precourt, Foshee, and Muchmore signed, endorsed, and uttered the 2001 10-K.  Id. at ¶ 106.  All these 10-K’s included false and misleading financial statements.


All Defendants knew or recklessly failed to learn that Halliburton’s financial statements, 10-K’s, and other documents and communications for 1998, 1999, 2000, and 2001 violated GAAP and were false and misleading, given their jobs, collaboration, and work together in preparing, finalizing, filing, and consenting to wide distribution of those documents and communications.  Id. at ¶¶ 10-23, 25, 48, 64, 66, 79-80, 93-94, 111-12.  Despite this knowledge or recklessness, Defendants continued to work for Halliburton and lend their good names, services, and work product to a fraud, without resigning, blowing the whistle, or raising a red flag.  Id. at ¶¶ 67, 81, 95, 113.  They did so “for the purpose of preserving their directorships and/or other positions with Halliburton, keeping their contracts with Halliburton, their income, compensation, and fringe benefits, supporting the value of their Halliburton securities, and/or concealing their participation in and liability for fraudulent reporting and activities.”  Id. at ¶ 60.

Defendants acted intentionally, wilfully, maliciously, with knowledge of, or with recklessness as to the materially incomplete, misleading, and fraudulent nature of the misrepresentations.  Id. at ¶¶ 121, 130.  Defendants intended and had reason to expect that the misrepresentations would be relied upon by the investing public, would influence and manipulate the market for Halliburton securities, and would artificially inflate the price paid in all purchases and received in all sales thereof.  Id. at ¶¶ 122, 131.

In fact, Defendants’ misrepresentations (and failure to correct the misrepresentations) induced reliance, manipulated and influenced the market for Halliburton securities, and artificially inflated the price paid in purchases and received in sales thereof.  Id. at ¶¶ 123, 132.  Plaintiffs actually relied on the foregoing misrepresentations, on the integrity of the securities market, and on the absence of a fraud on the securities market in purchasing and selling securities.  Id. at ¶¶ 124, 133.  As a result, Plaintiffs were injured in that they were fraudulently induced to purchase Halliburton stock at artificially inflated prices and lost some or all of the actual or projected amount and value of their investments.  Id. at ¶¶ 125, 134.

3.            ARGUMENT RE SUBJECT MATTER JURISDICTION

A. Each Plaintiff Has More than $75,000.00 in Controversy.

Texas law controls the measure of damages.  Erie R.R. Co. v. Thompkins, 304 U.S. 64 (1938).

When a state statute authorizes attorneys’ fees, the amount in controversy includes attorneys’ fees.  Missouri State Life Ins. Co. v. Jones, 290 U.S. 199 (1933); H&D Tire & Automotive Hardware, Inc. v. Pitney Bowes, Inc., 227 F.3d 326, 330 (5th Cir. 2000).


Plaintiffs seek attorneys’ fees pursuant to Section 27.01(e) of the Texas Business & Commerce Code.  An award of attorneys’ fees is mandatory: “Any person who violates the provisions of this section shall be liable to the person defrauded for reasonable and necessary attorney’s fees, expert witness fees, costs for copies of depositions, and costs of court.”  Tex. Bus. & Com. Code §27.01(e) (emphasis added).  Defendants have retained scorched-earth law firms that will force each Plaintiff to incur over $75,000.00 in attorneys’ fees, especially given the risk of collateral estoppel in concurrent class actions.

Similarly, attorneys' fees may be awarded as a component of exemplary damages for common law fraud.  Cantu v. Butron, 921 S.W.2d 344, 354-55 (Tex. App.– Corpus Christi1996, writ denied).  Such a fee award would be limited and largely a function of Defendants’ own tactics in fighting liability for their wrongdoing.  Hence, this fee component of punitive damages does not threaten a parade of horrible constitutional problems.

Defendants concede that the amount in controversy includes punitive damages when they are recoverable.  Bell v. Preferred Life Assur. Soc., 320 U.S. 238 (1943); St. Paul Reinsurance Co. v. Greenberg, 134 F.3d 1250, 1253 (5th Cir. 1998).  At this time, after voluntary dismissal of the Andersen entities, sixteen (16) named defendants remain.  If each Plaintiff recovers a mere $5,000.00 in punitive damages from each Defendant, each Plaintiff would recover $80,000.00 in punitive damages alone and meet the amount requirement.  Despite Defendants’ hypertechnical percentage analysis, it is frivolous to argue that such a slap on the wrist would violate constitutional protections.  No court has ever so held.

The Texas Legislature has capped punitive damages.  Section 41.008 of the Texas Civil Practice & Remedies Code caps and authorizes punitive damages of up to $200,000.00, irrespective of actual damages.  The Legislature has the prerogative to authorize up to $200,000.00 in punitive damages where actual damages are modest, but the misconduct at issue merits punishment on a much grander scale.


The $200,000.00 cap on exemplary damages applies on a per‑defendant basis – rather than a per‑plaintiff basis – separately against each Defendant.  Seminole Pipeline v. Broad Leaf Partners, 979 S.W.2d 730, 750‑752 (Tex. App.–Houston [14th Dist.] 1998, no pet.). The focus is not on the recovery of individual Plaintiffs who are harmed, but rather on the total harm caused by Defendants.  Serv‑Air, Inc. v. Profitt, 18 S.W.3d 652, 662 (Tex. App.– San Antonio1999, pet. dism’d by agr.).

No fixed standard exists to assess whether exemplary damages are excessive.  Seminole Pipeline, 979 S.W. 2d at 752.  The relevant factors include: (1) the nature of the wrong; (2) the character of a defendant’s misconduct; (3) the degree of a defendant’s culpability; (4) the situation and sensibility of the parties; and (5) the extent to which the misconduct offends the public sense of justice and propriety.  Id.  The ratio between actual and exemplary damages varies according to the facts of each case.  Alamo Nat’l Bank v. Kraus, 616 S.W. 2d 908, 910 (Tex. 1981).  This is so because a major purpose of punitive damages is to punish and deter misconduct.  Transportation Ins. Co. v. Moriel, 879 S.W.2d 10, 29 (Tex. 1994).  A punitive damages award may be vacated or reduced only if it is so factually unsupported or so against the great weight and preponderance of the evidence as to be manifestly unjust.  Id. at 30.

A punitive damages award of $5,000.00 per defendant is a slap on the wrist and not manifestly unjust.  This corporate accounting scandal is part of a wave involving Enron, WorldCom, Global Crossing, Providian, and other major companies, which have rocked the U.S. stock markets and world economy, causing many thousands of workers, investors, and elderly citizens to lose their jobs, life savings, and retirements.  The character of such misconduct exceeds the unconscionable.  Defendants are culpable as intentional tortfeasors who acted callously with conscious disregard for the systemic injury they would cause to many thousands as they lined their own pockets with the fruits of fraud.  Almost all victims are innocent bystanders.  As part of a wave of corporate accounting scandals by very greedy and predatory executives who cook the books to enrich themselves while many thousands suffer injury, the Defendants’ conduct offends egregiously the public sense of justice and propriety and calls for a severe punishment.  Given the vast multitude of victims, a $5,000.00 slap on the wrist per Defendant probably amounts to less than one penny per victim per Defendant.  Such an award is not manifestly unjust.


Plaintiffs’ damages allegations control the amount in controversy because they are made in good faith.  St. Paul Mercury Indem. Co. v. Red Cab Co., 303 U.S. 283 (1938).  A case cannot be dismissed based on the amount in controversy unless it appears to a “legal certainty” that the jurisdictional amount is lacking.  Id.  To dismiss, the Court must be very confident that Plaintiffs cannot recover that amount. See e.g. Jones v. Landry, 387 F.2d 102, 104-05 (5th Cir. 1967).  Given the attorneys’ fees and punitive damages, it cannot be said to a legal certainty that less than the jurisdictional amount is in controversy.

The “legal certainty” test is applied liberally in favor of jurisdiction.  In Bell, supra, the plaintiff alleged that he had been f0raudulently induced to buy an insurance certificate and claimed $200,000.00 in actual and punitive damages, although he had paid only $202.35 on the certificate, and the maximum value of the certificate was only $1,000.00.  320 U.S. at 239-40.  The Supreme Court held that it did not appear to a legal certainty that the plaintiff could not recover sufficient punitive damages to satisfy the minimal jurisdictional amount, and that it was no answer to contend that a verdict in that amount would be set aside as excessive.  Id. at 240-41.  Defendants are repeating the same discredited argument.

B. The Doe Allegations Do Not Defeat Diversity.

Defendants speculate that Doe Defendants might be domiciled in the same states as Plaintiffs, i.e. Indiana or New Mexico.  That is highly unlikely.  Plaintiffs have no intention of defeating complete diversity by naming non-diverse Does.  If, in a bizarre coincidence, it turns out that a Doe is domiciled in Indiana or New Mexico, Plaintiffs would dismiss that party.  A non-diverse defendant may be dismissed at any time, even after entry of judgment.  Newman-Green, Inc. v. Alfonzo-Larrain, 490 U.S. 826, 832 (1989).  A joint tortfeasor is not indispensable.  Temple v. Synthes Corp., 498 U.S. 5, 7 (1990).

In 1988, 28 U.S.C. §1441 was amended to ignore a Doe defendant’s citizenship in removal.  The diversity statute, 28 U.S.C. § 1332, should be read consistently with this statute.  Machareras v. Center Art Galleries, 776 F. Supp. 1436, 1439-40 (D. Haw. 1991) (Doe defendants do not defeat diversity); W. Weber Co. v. Kosack, 1997 U.S. Dist. Lexis 16786, at *5 (S.D.N.Y. 1997) (same).  Defendants would otherwise have a unilateral forum-selection advantage, in that they could remove a state case naming Doe defendants, while Plaintiffs could not bring the same case as a diversity action in federal court.


4.            ARGUMENT RE PLEADING FRAUD WITH PARTICULARITY

A. General Principles as to the Pleading of Fraud

A Complaint is not dismissable under Rule 12(b)(6) “unless it appears beyond doubt that plaintiff can prove no set of facts in support of his claim which would entitle him to relief.”  Conley v. Gibson, 355 U.S. 41, 45-46 (1957).  The Court must accept the allegations of the Complaint as true and draw all inferences in Plaintiffs’ favor.  H.J., Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 249 (1989). 

When the information relating to fraud is only within the knowledge of the defendants, the particularity requirements of Rule 9(b) should be relaxed.  In re Craftmatic Sec. Lit. v. Kraftsow, 890 F.2d 628, 645 (3rd Cir. 1989); Michaels Bldg. Co. v. Ameritrust Co., 848 F.2d 674, 680 (6th Cir. 1974); The Cadle Co. v. Schultz, 779 F.Supp. 392, 396 (N.D. Tex. 1991); Temple v. Haft, 73 F.R.D. 49, 53 (D. Del. 1976).  Rule 9(b) does not require omniscience; rather, Rule 9(b) requires only that Plaintiffs plead the circumstances of the fraud with sufficient specificity to place Defendants on fair notice as to the nature and basis of the fraud claims against them.  Ameritrust, 848 F.2d at 680.

Rule 9(b) must be read together with Rule 8, which requires a “short and plain statement of the claim showing that the pleader is entitled to relief.”  Fed. R. Civ. P. 8(a).  When Rules 8(a) and 9(b) are harmonized, the Complaint need only give fair notice of the claim and the grounds upon which it rests. Williams v. WMX Technologies, Inc., 112 F.3d 175, 178 (5th Cir. 1997); Landry v. AirLine Pilots Ass’n Int’l, 901 F.2d 404, 430 (5th Cir. 1990).  Rule 9(b) should not be applied in a hypertechnical manner.

The Rule 9(b) particularity requirement covers “the circumstances constituting fraud....”  Rule 9(b) provides that “Malice, intent, knowledge, and other condition of mind of a person may be averred generally.”  Rule 9(b) makes no distinction between the mental states of plaintiffs and defendants.


The Private Securities Litigation Reform Act of 1995 (“PSLRA”) imposes a heightened pleading standard on the scienter element of federal securities fraud claims brought pursuant to the Securities Exchange Act of 1934 (“1934 Act”).  15 USCS § 78u‑4(b)(2); Nathenson v. Zonagen, Inc., 267 F.3d 400, 406 (5th Cir. 2001)  The PSLRA has no application to the Complaint herein, which asserts only Texas state law claims.  Matassarin v. Lynch, 174 F.3d 549, 562 (5th Cir. 1999) (analyzing Texas state fraud claims separately from federal securities fraud claims and rejecting trial court’s determination that the state claims could be dismissed without analysis after dismissal of the federal claims).

Although Plaintiffs must plead the circumstances constituting fraud with particularity, they need not plead detailed evidence.  ABC Arbitrage v. Tchuruk, 291 F.3d 336, 351 n. 70 (5th Cir. 2002) (“even when the requirements of Rule 9(b) are combined with the [heightened pleading] requirements of ... the PSLRA, the plaintiff need not plead ‘all his evidence’ related to a securities fraud claim”); Williams, 112 F.3d at 178 (Rule 9(b) “did not reflect a subscription to fact pleading”).

B. The True Significance of Plaintiffs’ Market Fraud Allegations

Defendants contend that the Complaint improperly states a “fraud on the market” theory as a substitute for reliance.  (Plaintiffs plead actual reliance.  Complaint ¶¶ 124, 133.)  Rather, the market allegations do not rest on the Fraud-on-the-Market Theory based on the Efficient Market Hypothesis and adopted in federal securities class actions.  See generally Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 153-54 (1972) (“_ll that is necessary [in a case involving primarily a failure to disclose] is that the facts withheld be material in the sense that a reasonable investor might have considered them important in making [his investment] decision”), and Finkel v. Docutel/Olivetti Corp., 817 F.2d 356, 360 (5th Cir. 1987) (“The fraud on the market theory is premised on the hypothesis that the market price of a security, in an open market ... , accurately reflects the value of that security if all relevant information has been disclosed in the marketplace”).  Rather, the market allegations relate primarily to Defendants’ intent and are appropriate under settled common law.


“The rule of decision in [Texas] consists of those portions of the common law of England that are not inconsistent with the constitution or the laws of this state, the constitution of this state, and the laws of this state.”  Tex. Civ. Prac. & Rem. Code § 5.001.  The common law of England includes “that which was declared by the courts of the different States of the United States.”  Grigsby v. Reib, 153 S.W. 1124, 1125 (Tex.1913), followed in Great Southern Life Ins. Co. V. City of Austin, 243 S.W. 778, 780 (Tex.1922) (“The common law as declared by the courts of the several States is the rule of decision in this State, and has been so by statute since ... 1840") (citations omitted), and Thoroughbred Horsemen’s Association of Texas, Inc. v. Dyer, 905 S.W.2d 752, 754 (Tex. App.– Houston [14th Dist.] 1995, no writ) (“where not otherwise provided by the Constitution or laws of Texas, the common law of the various states remains in effect here”).

The common law has long allowed recovery from fraudfeasors who intend to defraud a market.  In The King v. De Berenger, 105 Eng. Rep. 536, 3 M & S 66 (1814) (App. A), during a war with France, defendants circulated false rumors of Napolean’s death and an imminent peace to inflate the sale price for their government securities, “with the wicked intention thereby to injure and aggrieve all the subjects of the King who should, on the 21st of February, purchase or buy any part or parts, share or shares” of the securities.  3 M & S at 68-69 (App. A at 2).  On conviction, Defendants appealed inter alia a failure to plead those sought to be defrauded.  Lord Ellenborough said that the “purpose itself is mischievous, it strikes at the price of a vendible commodity in the market, and if it gives it a fictitious price, by means of false rumors, it is a fraud leveled against all the public, for it is against all such as may possibly have any thing to do with the [securities] on that particular day.”  Id. at 72-73 (App. A at 3).  “The offence being to raise funds on a future day, its object was to injure all those who should become purchasers on that day, and not some individuals in particular.”  Id. at 74 (App. A at 4).  Judge Bayley held “it is enough if it be prejudicial to a class of the subjects,” adding that “the end is illegal, for it is to create a temporary rise in the funds without any foundation, the necessary consequence of which must be to prejudice all those who become purchasers during the period of that fluctuation.”  Id. at 75 (App. A at 4).


In Stainbank v. Fernley, 59 Eng. Rep. 473, 9 SIM. 556 (1839) (App. B), directors of the Northern and Central Bank of England issued false and misleading statements about the bank’s financial condition and its ability and intent to issue dividends, so that they could sell their own stock at an inflated price.  The plaintiff was a victim of this fraud.  The defendants demurred on the ground inter alia that the representations as to the prosperity of the bank were made, not to the plaintiff individually, but to the public at large.  9 SIM. at 561 (App. B at 7).  Vice-Chancellor Shadwell upheld the bill because it “distinctly alleged that false representations were made by the directors and their agents, to induce the public to purchase their shares at a price which they were not justified to ask, having regard to the foundation on which that price was asked.”  Id. at 566 (App. B at 9).

In Bedford v. Bagshaw, 157 Eng. Rep. 951, 4 H. & N. 537 (1859) (App. C), a defendant falsely represented to the listing committee of a London stock exchange that an offering was fully subscribed, was two-thirds paid up, and certificates were ready to be issued.  The plaintiff saw the shares listed and, knowing the conditions for listing, bought shares to his injury.  Bramwell, B. stated that “it is not a bad rule that a person who makes a fraudulent representation, which is intended to be generally circulated, shall be liable to any person injured by acting upon it however remote the consequences may be.”  Id. at 548 (App. C at 15-16).  Pollock, C.B. stated:

The defendant acted fraudulently and made representations to the committee of the Stock Exchange with a view to induce persons to believe the existence of a particular state of things as to these shares.  All persons buying shares on the Stock Exchange must be considered as persons to whom it was contemplated that the representation would be made.  I am not prepared to lay down, as a general rule, that if a person makes a false representation every one to whom it is repeated, and who acts upon it, may sue him.  But it is a different thing where a director of a Company procures an artificial and false value to be given to the shares in the Company which he professes to offer to the public.  Generally, if a false and fraudulent statement is made with a view to deceive the party who is injured by it, that affords a ground of action.  But I think that there must always be this evidence against the person to be charged, viz. that the plaintiff was one of the persons to whom he contemplated that the representation should be made, or a person whom the defendant ought to have been aware he was injuring or might injure.  If a director of a Company, one of the persons who puts the shares forth into the world, deliberately adopts a scheme of falsehood and fraud, the effect of which is that parties buy the shares in consequence of the falsehood, I should feel no difficulty in saying that in such case an action is maintainable.

 

Id. at 548-49 (App. C at 16).


The preceding English cases and common law rules were expressly embraced into the American common law in several States.  See, e.g., Ottinger v. Bennett, 203 N.Y. 554, 96 N.E. 1123 (N.Y. App. Div. 1911) (App. E), reversing upon the dissenting opinion of Miller, J., at 144 A.D. 525, 129 N.Y.S. 819 (1911) (App. D) (approving Stainbach v. Fernley and Bedford v. Bagshaw in case of an illegal declaration of dividends); Blewett v. Ward, 159 Wash. 651, 294 P. 577 (S.C. 1930) (App. F) (fraud proven where investor was induced to buy stock based on fraudulent market data that broker caused to be placed in official daily sheets of Spokane Stock Exchange); United States v. Brown, 5 F. Supp. 81, 85-93 (S.D.N.Y. 1993) (App. G) (“the grossest kind of fraud” for two or more persons, by a joint effort, to raise a listed stock price artificially, “when such a procedure is accompanied by active propaganda seeking to interest the public in the shares thus artificially inflated in price”), followed in Willcox v. Harriman Securities Corp., 10 F. Supp. 532, 535 (S.D.N.Y. 1933) (App. H) (“that information as to sales at artificial figures comes to the victims by reports or quotations published in the newspapers rather than by direct communications from the manipulators does not break the chain of causation.  That is the very medium of information contemplated and intended by the operators of the plan”).


Under the common law discussed above, it is settled that one who seeks to defraud the public (i.e. all market participants) may be liable in fraud to one who is thereby induced to buy or sell securities to his injury.  This rule was settled prior to the 1934 Act.  A. A. Berle, Jr., Liability for Stock Market Manipulation, 31 Colum. L. Rev. 264, 268-70  (1931) (App. I) (“knowing publisher of false information is liable in an action of [common law] fraud to anyone who relies on it, or, probably, even to anyone who acts to his loss in the open market on a false valuation as a result of such statement”); James W. Moore & Frank M. Wiseman, Market Manipulation and the Exchange Act, 2 U. Chi. L. Rev. 46, 56, 72, 77 (1934) (App. J) (“Upon the law which has recognized and given protection under the concept of a free and open market the [1934] Act effects little change”); A. A. Berle, Jr., Stock Market Manipulation, 38 Colum. L. Rev. 393, 394-95, 401, 403 (1938) (App. K) (“a number of converging lines have brought development of the common law theories affecting open market operations....  While the Act of 1934 has contributed greatly to the application of remedies, the fundamental doctrines appear to have been pounded out by the courts, independent of statutory rule”); Paul L. Porterfield, Securities: Stock Market Manipulation at Common Law and Under Recent Federal Securities Legislation, 28 Cal. L. Rev. 378, 380 (1940) (App. L) (discussing English and American common law of fraud prior to enactment of the 1934 Act); James I. Jaconette, Note: The Fraud-on-the-Market Theory in State Law Securities-Fraud Suits: Mirkin v. Wasserman and an Examination of Market Reliance Principles in the Common Law of Deceit, 46 Hastings L. J. 1967, 1968-72, 1993-2003 (1995) (App. M) (arguing that the principle of open market reliance was settled at common law prior to enactment of the federal securities laws).

The foregoing principles are Texas common law.  Tex. Civ. Prac. & Rem. Code § 5.001.  Thoroughbred, 905 S.W.2d at 754; Great Southern Life, 243 S.W. at 780; Grigsby, 153 S.W. at 1125.  Hence, Plaintiffs properly plead that Defendants acted with the intent to defraud the public, and that Plaintiffs relied on the integrity of the market (and misrepresentations) in purchasing Halliburton stock.

C. The Elements of the Fraud Claims under Texas Law

Pursuant to Section 27.01 of the Texas Business & Commerce Code, Plaintiffs need only plead: (a) a misrepresentation of past or existing material fact; (b) made to Plaintiffs for the purpose of inducing a stock transaction; (c) relied upon by plaintiffs in entering said transaction.  Tex. Bus. & Com. Code §27.01(a).  Statutory fraud does not require actual awareness of falsity for actual damages.  Diversified, Inc. v. Walker, 702 S.W.2d 717, 723 (Tex. App.– Houston [1st Dist.] 1985, writ ref’d n.r.e.); Brush v. Reata Oil & Gas Corp., 984 S.W.2d 720, 726 (Tex. App.– Waco1998, pet. denied).  However, to recover exemplary damages under the statute, Plaintiffs must plead and prove that Defendants made the false representations with actual awareness of their falsity.  Id. at §27.01(c). 

The elements of common law fraud are: (a) a material representation; (b) that is false; (c) the speaker, when he made it, knew it was false or made it recklessly, without any knowledge of its truth and as a positive assertion; (d) the speaker made it intending that it be acted upon; and (e) a party acted in reliance on it and (f) thereby suffered injury.  Trenholm v. Ratcliff, 646 S.W.2d 927, 930 (Tex. 1983).


A Defendant may be liable for statutory and common law fraud even if he himself did not make a misrepresentation.  A Defendant may be liable under Section 27.01 if he (a) has actual awareness of the falsity of another’s representation; (b) fails to disclose the falsity of the representation; and (c) benefits therefrom.  Tex. Bus. & Com. Code §27.01(d).  Likewise, under the common law, Plaintiffs need not attribute specific misrepresentations to each defendant for all to be liable.  Rather, all parties to a fraud are liable for each other’s acts and representations pursuant to a mutual understanding or in furtherance of a common plan, design, or scheme.  Penroc Oil Corp. v. Donahue, 476 S.W.2d 849, 851 (Tex. App.– El Paso 1972, writ ref’d n.r.e.).  A director or officer who participates in a fraud may be liable even if he did not make the representations and regardless of whether he personally benefitted.  Dixon v. State, 808 S.W.2d 721, 723 (Tex. App.-- Austin 1991, writ dism’d w.o.j.).

Similarly, Defendants may each be liable for the acts and omissions of each other in furtherance of a civil conspiracy, the elements of which are: (a) two or more persons; (b) an end to be accomplished; (c) meeting of the minds on the end or course of action; (d) one or more overt, unlawful, or tortious acts; and (e) proximately causing injury.  Operation Rescue – National v. Planned Parenthood, 975 S.W.2d 546, 553-54 (Tex. 1998); Massey v. Armco Steel Co., 652 S.W.2d 932, 934 (Tex. 1983).  A defendant need not have personally perpetrated each and every element of the underlying tort, but may be liable based on his “participation in some underlying tort for which the plaintiff seeks to hold at least one of the named defendants liable.”  Tilton v. Marshall, 925 S.W.2d 672, 681 (Tex. 1996) (emphasis added).  A defendant need not have intended to defraud a specific party, so long as he knowingly joined the conspiracy with the intent to defraud its general targets.  Schlumberger Well Surveying Corp. v. Nortex Oil & Gas Corp., 435 S.W.2d 854, 855-57 (Tex. 1968); Switzer v. Joseph, 442 S.W.2d 845, 849 (Tex. App.– Austin 1969, no writ).  Liability extends to all who assist the wrongdoer.  Carroll v. Timmers Chevrolet, 592 S.W.2d 922, 925 (Tex.1979).

Plaintiffs’ compliance with Rule 9(b) must be judged under these Texas substantive standards.

D. The General Averment of Intent, Knowledge, and Other Mental States


As to the Section 27.01 claim, Plaintiffs need not plead or prove knowledge of falsity or intent to defraud in order to recover actual damages.  Walker, 702 S.W.2d at 723.  Defendants are mistaken in arguing that Plaintiffs must allege scienter to obtain punitive damages that are sufficient to satisfy the minimum amount in controversy for diversity jurisdiction.  As explained in Part 3.A supra, statutory attorneys’ fees alone will probably exceed $75,000.00 per Plaintiff.

Rule 9(b) allows general averment of “Malice, intent, knowledge, and other condition of mind of a person” for the common law fraud claim.  Defendants cite Ernst & Young LLP. v. Pacific Mutual Life Ins. Co., 51 S.W.3d 573 (Tex.2001), arguing that Plaintiffs must “plead” facts showing that Defendants knew their representations were false or made recklessly as a positive assertion without knowledge of truth.  However, Ernst & Young held that a plaintiff must “prove” that.  Id. at 577.  This confusion between pleading and proof runs throughout the Motions to Dismiss.  As discussed above, Plaintiffs need not plead detailed evidence.  ABC Arbitrage, 291 F.3d at 351 n. 70; Williams, 112 F.3d at 178.

Texas courts recognize that intent to defraud is not susceptible to direct proof and must be proven by circumstantial evidence.  Anderson, Greenwood & Co. V. Martin, 44 S.W.3d 200, 215 (Tex. App. –

 Houston [14th Dist.] 2001, pet. denied).  While a defendant’s intent is determined at the time of the misrepresentation (or omissions), it may be inferred from the party’s subsequent acts.  Id.  Even slight circumstantial evidence of fraud, when considered along with the underlying representations (or omissions), is sufficient to support a finding of fraudulent intent under Texas common law.  Id.

Texas law takes a similar reasonable approach to the intention to form and act in furtherance of a civil conspiracy to commit common law fraud.  As one federal trial court recently observed,

When men enter into conspiracies, they are not likely to call in a witness.... In such cases the injured party must necessarily have recourse to circumstantial evidence.  For it is only by the inferences and deductions which men properly and naturally draw from the acts of others in such cases, that their intentions can be ascertained.  They are not likely to proclaim them in the hearing of witnesses.

 


Ameristar Jet Charter, Inc. v. Signal Composites, 2001 U.S. Dist. Lexis 14020 at *21 (N.D.Tex. 2001) (citations and internal quotation marks omitted), following Carroll, 592 S.W.2d at 926.  A conspiracy may be proven by anything that co-conspirators do or say touching upon what they intended to do.  Id.

To be held liable for civil conspiracy relating to fraud, a defendant need not intend to defraud a specific person, so long as he knowingly joined the conspiracy intending to defraud its general targets.  Schlumberger, 435 S.W.2d at 855-57; Switzer, 442 S.W.2d at 849.

Plaintiffs allege ample facts to support an inference that Defendants had the requisite knowledge and intent for exemplary damages under Section 27.01, for common law fraud, and for civil conspiracy liability.  Cheney strongly supported the aggressive promotion of value creation measured by increased market capitalization, Complaint ¶ 11, and knew that Andersen was helping Halliburton “operat[e] over and above just the normal by-the-books auditing arrangements.”  Id. at ¶ 48.  Lesar was an Andersen partner (i.e. very sophisticated) before joining Halliburton in 1995.  Id. at ¶¶ 11, 48.  Hatchett was the lead Andersen partner on the Halliburton account after Lesar.  Id. at ¶ 36. Cheney, Hunt, Crandall, Dibona, Eagleburger, Howell, Martin, Precourt, Silas, and Muchmore signed, endorsed, and uttered the 1998 and 1999 10-K’s.  Id. at ¶¶ 62, 74.  Lesar, Hunt, Crandall, Dibona, Eagleburger, Silas, Howell, Martin, Precourt, and Muchmore signed, endorsed, and uttered the 2000 10-K.  Id. at ¶ 88.  Lesar, Hunt, Crandall, Dibona, Eagleburger, Howell, Martin, Silas,  Precourt, Foshee, and Muchmore signed, endorsed, and uttered the 2001 10-K.  Id. at ¶ 106.  All these 10-K’s misrepresented compliance with GAAP and included false and misleading Halliburton financial statements for 1998 through 2000.


Moreover, Defendants were sophisticated accountants, directors, and/or financial officers in the company, collaborated and worked together in preparing Halliburton’s financial statements, 10-K’s, and other documents and communications for 1998, 1999, 2000, and 2001, signed one or more of those documents, and consented to their wide distribution.  Id. at ¶¶ 10-23, 25, 48, 64, 66, 79-80, 93-94, 111-12.  Despite their sophistication, high-level corporate positions, and endorsement and approval of such documents and communications, they allowed violations of GAAP and numerous misrepresentations and continued to work for Halliburton and lend their good names, services, and work product to a fraud, without resigning, blowing the whistle, or raising a red flag.  Id. at ¶¶ 67, 81, 95, 113.  Defendants had a motive and self-interest to preserve their directorships and other positions with Halliburton, to keep their contracts with Halliburton, their income, compensation, and fringe benefits, to inflate the value of their Halliburton stock, and to hide their participation in fraudulent reporting and activities.  Id. at ¶ 60.

Furthermore, the Change in Accounting Principle was implemented secretly in the first year.  Id. at ¶ 58.  In later years, Defendants vaguely referred to one aspect of the change, but never conspicuously disclosed the change as such.  Id. at ¶ 55.  They never tried to justify the change as preferable to the old method.  Id. at ¶¶ 54-55.  They never conspicuously disclosed the effect of the new principle on income.  Id. at ¶ 56.  As a result of these omissions, representations that Halliburton financial statements complied with GAAP were false and misleading.  To make matters worse, Defendants never caused Andersen or Hatchett to file a letter supporting the preferability of the change with the SEC.  Id. at ¶ 59.  One would expect precisely these kinds of furtive acts and omissions from directors, officers, and accountants who, aware that the Change in Accounting Principle is not justifiable, proceeded to implement it secretively so as to inflate Halliburton’s income figures and stock price while attempting to avoid public detection.


Defendants argue that their misrepresentations and omissions in 1998 “ceased to exist” because disclosures were made in later years.  Defendants make a similar argument that once they had failed to disclose the accounting change and misrepresented compliance with GAAP in 1998, they were relieved of any duty to correct their misrepresentations or comply belatedly with GAAP.  These arguments are absurd.  Defendants never disclosed the change as a change, gave the requisite justification, or explained the effects on income.  Without these specific GAAP disclosures, raw information in later years could not be understood for what it was, i.e. a consequence of an accounting change that was never disclosed, justified, or explained as to its effects on income.  These omissions carried over and infected financial statements in later years.  Hence, representations of compliance with GAAP were false and misleading not only in 1998, but also in 1999, 2000, and 2001, as were income figures for those years.  As explained in Part 4.G infra, Defendants had a continuing duty to correct misrepresentations by inter alia restating financial statements and making belated disclosures; failure to do so is an additional basis for liability.

Defendants argue that their knowledge of falsity should not be inferred because “complex accounting principles” are involved.  Defendants are attempting to have their cake and eat it, too, given their separate argument that Plaintiffs could not justifiably have relied on their misrepresentations and omissions because of later disclosures.  Compare Halliburton Defendants’ Motion to Dismiss at p. 19 with p. 22.  In essence, Defendants contend that the accounting principles at issue are simple enough for a lay investor to understand, yet too complex for sophisticated accountants and corporate officers and directors.  (In reality, the central accounting requirement is simple – if a company changes an accounting principle, then the company must clearly disclose the change as a change, justify it as better than the old principle, and explain its effects on income.  Defendants never did these things.)  Defendants should not be heard to talk out of both sides of their mouths.  All inferences must be drawn in Plaintiffs’ favor particularly at this stage of the pleadings.

E. Plaintiffs’ Particularity in Pleading False and Misleading Statements

  Plaintiffs may satisfy Rule 9(b) by pleading one false or misleading statement by one Defendant pursuant to a mutual understanding or in furtherance of a common plan, design, or scheme.  Penroc Oil, 476 S.W.2d at 851.  Plaintiffs do much more, alleging a multitude of specific misrepresentations and representations that were made misleading by the omission of material facts; when, how, and by whom they were made; and why they were false and misleading.  See Part 2 supra (Summary of Complaint).

These particulars give Defendants’ fair notice of the claims and their grounds.  Rule 9(b) should not be applied unreasonably to require the pleading of concealed information.  The Cadle Co., 779 F.Supp. at 396.  To require more at the pleading stage, in a case not covered by the PSLRA, would allow sophisticated defrauders to conceal and get away with a massive fraud.  Craftmatic, 890 F.2d at 645.


Prior to the PSLRA, the “group pleading” or “group published information” doctrine supported a presumption that misrepresentations in corporate publications were the collective action of officers and directors.  See e.g. Kunzweiler v. Zero.net, Inc., 2002 U.S. Dist. Lexis 12080, *41 n.15 (N.D. Tex. 2002) (discussing “group published information” doctrine in light of heightened pleading standards imposed by the PSLRA).  Although this doctrine is no longer viable in 1934 Act cases under the PSLRA, Plaintiffs may still invoke this doctrine because they assert only state law claims.  Hence, the misrepresentations here are presumptively collective acts, not only of signatories, but also of their cohorts who directed the day-to-day corporate affairs.  In re Silicon Graphics Sec. Lit., 970 F.Supp. 746, 759 (N.D. Cal. 1997).

F. The Materiality of the False and Misleading Statements

Defendants make a feeble attempt at arguing that the misrepresentations were not material.  Plaintiffs’ have specifically alleged that Halliburton’s revenues were overstated by $89 million in 1998, $98 million in 1999, $113 million in 2000, and $234 million in 2001 – i.e. $534 million over four years.  Complaint ¶ 50.  These overstatements of income were substantial enough to turn a net loss for 1998 into a net profit.  Id. at ¶ 49.  Moreover, the overstatements for 1999, 2000, and 2001 were large enough to wipe out entire quarters of net income or large percentages thereof.  Id. at ¶¶ 68, 70, 72, 82, 84, 96, 98, 100, 103.  It is absurd to argue that such large income overstatements over several years are immaterial.

G. Defendants’ Duty to Correct Misstatements and to Disclose the Truth

Once Defendants had made false and misleading statements to the public and the market about Halliburton’s financial condition and compliance with GAAP, Defendants had a common law duty to correct their misstatements and to disclose Halliburton’s true financial condition:

A duty to speak may arise in at least three other situations:  First, when one voluntarily discloses information, he has a duty to disclose the whole truth.  Second, when one makes a representation, he has a duty to disclose new information when he is aware the new information makes the earlier representation misleading or untrue.  Finally, when one makes a partial disclosure and conveys a false impression, he has a duty to speak.

 

Martin, 44 S.W.3d at 212-13 (citations omitted).


As discussed above, a defendant may be liable under Section 27.01 if he (a) has actual awareness of the falsity of a representation made by another; (b) fails to disclose the falsity of the representation; and (c) benefits therefrom.  Tex. Bus. & Com. Code §27.01(d).  Therefore, Defendants also had a statutory duty to speak to disclose the falsity of and to correct their misrepresentations.

Omissions of material fact may give rise to liability under both common law fraud and Section 27.01.  Fletcher v. Edwards, 26 S.W. 3d 66, 70 (Tex. App.–Waco 2002, pet denied)(a Section 27.01 claim differs from common law fraud only in that knowledge or recklessness is not required to recover actual damages); Voskamp v. Arnoldy, 749 S.W. 2d 113, 119 (Tex. App.– Houston [1stDist.] 1987, writ denied)(common law fraud); Wink Enterprises, Inc. v. Dow, 491 S.W.2d 451 (Tex. App.– El Paso 1973, writ ref’d n.r.e.)(Section 27.01); Rowntree v. Rice, 426 S.W.2d 890, 892 (Tex. App.– San Antonio 1968, writ ref’d n.r.e.)(common law fraud).

Given the duty to speak at common law and under Section 27.01, Defendants may be held liable for failing to correct their misrepresentations with the truth.  Anderson v. Anderson, 620 S.W.2d 815, 819 (Tex. App.– Tyler 1981, no writ).  More specifically, Defendants may be liable for not disclosing that Halliburton’s financial statements in 1998 through 2001 were incomplete, false, and misleading because (a) the accounting change was never disclosed conspicuously as such; (b) the change was never justified as preferable to the old accounting method; (c) the resulting statements violated GAAP; and (d), as a result of the improper accounting change, the company’s revenues were materially overstated by $89 million in 1998, $98 million in 1999, $113 million in 2000, and $234 million in 2001 – $534 million over four years.

For these reasons, even those Defendants who may not have personally signed or uttered the misrepresentations may be held liable in fraud for omitting to correct them with the truth.

H. The Sufficiency of Plaintiffs’ Allegations of Reliance

Reliance is partially a “condition of mind” and may be averred generally.  Fed. R. Civ. P. 9(b).  Plaintiffs specifically allege that they actually relied on Defendants’ misrepresentations in purchasing Halliburton stock on specific dates.  Complaint ¶¶ 124-25, 133-35.  These allegations satisfy Rule 9(b).


In Herrmann Holdings, Ltd. v. Lucent Technologies, Inc., 302 F.3d 552 (5th Cir. 2002), the Fifth Circuit specified the details that must be pled with particularity: “Rule 9(b) imposes certain pleading requirements on securities fraud and other fraud claims ... requiring a plaintiff pleading fraud ‘to specify the statements contended to be fraudulent, identify the speaker, state when and where the statements were made, and explain why the statements were fraudulent.’”  Id. at 564-565 (internal citations and quotation marks omitted); see also Nathenson v. Zonagen, Inc., 267 F.3d 400, 412 (5th Cir. 2001) (same).  Reliance is not among the elements for which the Fifth Circuit here required particularity.

Reliable financial statements that comply with GAAP are essential to investors.  Fischer v. Kletz, 266 F. Supp. 180 (S.D.N.Y. 1967).  Given that the misrepresentations were in (and information needed to correct them was omitted from) Halliburton’s own financial statements, documents, and other releases to the public, Defendants are hard-pressed to argue that their statements played no part in Plaintiffs’ investment decisions.  Rifkin v. Crow, 574 F.2d 256, 263 (5th Cir. 1978).  That was their purpose.

Absent knowledge to the contrary, one has the right under Texas common law to rely on another person’s representations.  Colvin v. Allsworth, 627 S.W.2d 430, 431 (Tex. App.– Houston [1st Dist]1981, no writ).  If one is induced to enter into a transaction by fraudulent conduct, the person committing the fraud cannot defeat a claim for damages based upon the plea that the party defrauded might have discovered the truth by the exercise of ordinary care.   Isenhower v. Bell, 365 S.W.2d 354, 357 (Tex. 1963).   These same principles apply with equal force to omissions.  Koral Ind., Inc. v. Security-Connecticut Life Ins. Co., 802 S.W.2d 650, 651 (Tex. 1990).


Defendants misstate the test for justifiability of reliance at common law.  In Haralson v. E.F. Hutton Group, Inc., 919 F.2d 1014, 1026 (5th Cir. 1991), overruled on other grounds, as recognized by Lewis v. Fresne, 252 F.3d 352, 358 (5th Cir. 2001), the Fifth Circuit summarized the Texas rule:  “To determine justifiability, courts inquire whether – given a fraud plaintiff’s individual characteristics, abilities, and appreciation of facts and circumstances at or before the time of the alleged fraud – it is extremely unlikely that there is actual reliance on the plaintiff’s part.”  The Fifth Circuit observed that “justifiable reliance” is a lesser burden on fraud plaintiffs than what “reasonable reliance” might imply.  Id. at 1025.  Given the allegations of fraudulent concealment of Halliburton’s financial condition, it cannot be said that reliance on the misrepresentations and omissions is “extremely unlikely,” especially when Plaintiffs’ allegations are accepted as true and all inferences are drawn in Plaintiffs’ favor.

In any event, Texas courts are adopting a variant of the Fraud-on-the-Market Doctrine in appropriate cases.  For example, in Adams v. Reagan, 791 S.W.2d 284, 289 (Tex. App.- Fort Worth 1990, no writ), in the context of class certification, the court held that the commonality requirement is met where class members were subject to the same misrepresentations and omissions by reason of common documents pertaining to the sale of a security.  The court approved Blackie v. Barrack, 524 F.2d 891 (9th Cir. 1975), cert. denied, 429 U.S. 816 (1976), where the Ninth Circuit discussed open market reliance:

Moreover, proof of subjective reliance on particular misrepresentations is unnecessary to establish a 10b‑5 claim for a deception inflating the price of stock traded in the open market.  Proof of reliance is adduced to demonstrate the causal connection between the defendant's  wrongdoing and the plaintiff's loss. We think causation is adequately established in the impersonal stock exchange context by proof of purchase and of the materiality of misrepresentations, without direct proof of reliance. Materiality circumstantially establishes the reliance of some market traders and hence the inflation in the stock price ‑ when the purchase is made the causational chain between defendant's conduct and plaintiff's loss is sufficiently established to make out a prima facie case.

 

Defendants argue that proof of causation solely by proof of materiality is inconsistent with the requirement of the traditional fraud action that a plaintiff prove directly both that the reasonable man would have acted on the misrepresentation (materiality), and that he himself acted on it, in order to establish the defendant's responsibility for his loss, which justifies the compensatory recovery.

 

We disagree.  The 10b‑5 action remains compensatory; it is not predicated solely on a showing of economic damage (loss causation). We merely recognize that individual "transactional causation" can in these circumstances be inferred from the materiality of the misrepresentation, and shift to defendant the burden of disproving a prima facie case of causation. Defendants may do so in at least 2 ways: 1) by disproving materiality or by proving that, despite materiality, an insufficient number of traders relied to inflate the price; and 2) by proving that an individual plaintiff purchased despite knowledge of the falsity of a representation, or that he would have, had he known of it.


524 F.2d at 906 (citations and internal quotation marks omitted).  See also Weatherly v. Deloitte & Touche, 905 S.W.2d 642, 648 (Tex. App.– Houston [14th Dist.] 1995, writ dism’d w.o.j.) (fraud-on-the-market theory “arguably state[s] a proper claim under state law for purposes of class certification”) (citation omitted), and Daughety v. National Assoc. of Home Builders, 970 S.W.2d 178 (Tex. App.– Dallas 1998, no pet.) (motion for certification of putative class action asserting a fraud on the market denied on other grounds).

In Ernst & Young, 51 S.W.3d 573, the Texas Supreme Court essentially approved a fraud-on-the-market theory.  “Our fraud jurisprudence has traditionally focused not on whether a misrepresentation is directly transmitted to a known person alleged to be in privity with the fraudfeasor, but on whether the misrepresentation was intended to reach a third person and induce reliance.”  Id. at 578 (citation omitted).  A “misrepresentation made through an intermediary is actionable if it is intended to influence a third person's conduct.”  Id.  A “person who makes a misrepresentation is liable to the person or class of persons the maker intends or ‘has reason to expect’ will act in reliance upon the misrepresentation.”  Id. (emphasis added), approving RESTATEMENT (SECOND) OF TORTS § 531 (1977).  “[T]he alleged fraudfeasor must ‘have information that would lead a reasonable man to conclude that there is an especial likelihood that it will reach those persons and will influence their conduct.’” Id. at 580 (original emphasis), approving  RESTATEMENT (SECOND) OF TORTS § 531 cmt. d (1977).  The plaintiff in Ernst & Young did not meet these conditions because he bought “unrelated securities” with respect to which the auditor’s report was not prepared.  Id. at 582.


Defendants herein acted with intent to manipulate the entire market for Halliburton stock and to inflate the market price of its stock with their false and misleading financial statements and information.  Complaint ¶¶ 32-35, 48, 60, 63, 78, 92, 110, 122-23, 131-32.  In fact, Plaintiffs were induced to purchase Halliburton stock, i.e. the very stock that Defendants sought to manipulate and inflate, and not unrelated securities.  Id. at ¶¶ 124-25, 133-34.  Plaintiffs were among the purchasers that Defendants intended and had reason to expect would be influenced to buy Halliburton stock.  Under Ernst & Young and the well-settled common law authorities discussed in Part 4.B supra, Plaintiffs may sue for common law fraud.

5.            ARGUMENT RE THE INDIVIDUAL MOTIONS TO DISMISS

Defendants Burgher, Foshee, and Hatchett have separate Motions to Dismiss and incorporate the main, Halliburton Defendants’ Motion to Dismiss.  Most of their arguments are addressed above.

Burgher’s main point is that he did not join Halliburton as Vice President of Investor Relations until September 26, 2001, and had no role in the prior Change in Accounting Principle.  However, after that date, Halliburton issued a press release on October 23, 2001 (Complaint ¶ 100), filed a Form 10-Q with the SEC on November 8, 2001 (id. at ¶ 101), issued another press release on January 23, 2002 (id. at ¶ 102), and filed its 10-K for 2001 with the SEC on March 12, 2002 (id. at ¶ 106).  These documents were false and misleading for reasons previously explained (id. at ¶ 109) and were provided not only to the SEC, but also, with the knowledge, approval, and consent of all Defendants (including Burgher), to Halliburton shareholders, potential investors, securities analysts, the news media, and others who affect the securities market (id. at ¶ 110).  As Vice President of Investor Relations, Burgher would have been a central participant in distributing the false and misleading financial information.  These facts suffice to hold Burgher for statutory fraud under Section 27.01, without scienter.  Diversified, Inc. 702 S.W.2d at 723.  Plaintiffs need not seek punitive damages from Burgher to have the requisite amount in controversy (see Part 3.A supra), which applies to each Plaintiff, not to each Defendant.


Foshee’s main point is that he did not join Halliburton as Executive Vice President and Chief Financial Officer until August 6, 2001, and had no role in the prior Change in Accounting Principle.  However, after that date, Halliburton filed a Form 10-Q with the SEC on August 9, 2001 (Complaint ¶ 99) and promulgated the documents listed for Burgher in the preceding paragraph.  These documents were false and misleading for reasons previously explained (id. at ¶ 109) and were provided not only to the SEC, but also, with the knowledge, approval, and consent of all Defendants (including Foshee), to Halliburton shareholders, potential investors, securities analysts, the news media, and others who affect the securities market (id. at ¶ 110).  As Chief Financial Officer, Foshee was the Halliburton officer who was chiefly responsible for the preparation, filing, and distribution of the false and misleading financial information.  These facts suffice to hold Foshee for statutory fraud under Section 27.01, without scienter.  Diversified, 702 S.W.2d at 723.  That Foshee signed the 2001 10-K (Complaint ¶ 106) shows his direct participation in Halliburton’s financial affairs, even if Plaintiffs had already bought their stock.  As with Burgher, Plaintiffs need not seek punitive damages from Foshee to have the amount in controversy.

At common law, Burgher and Foshee may be liable for the acts and representations of the other Defendants pursuant to a mutual understanding or in furtherance of a common plan, design, or scheme.  Penroc Oil, 476 S.W.2d at 851.  They may be liable even if they did not make the misrepresentations or benefit personally.  Dixon, 808 S.W.2d at 723.  Similarly, they may be liable for civil conspiracy even if they acted without intent to defraud specific persons, so long as they knowingly joined the conspiracy intending to defraud its general targets.  Schlumberger, 435 S.W.2d at 855-57; Switzer, 442 S.W.2d at 849.  Hence, neither Burgher nor Foshee gets a free pass just because they joined late in the game.

Hatchett mischaracterizes the allegations directed specifically against him.  The theory is not that he “acquiesced in the alleged misrepresentations made by Halliburton in various SEC filings, financial statements and press releases.”  Hatchet Motion to Dismiss at p. 1.  Nor is the theory one of “derivative liability.”  Id. at p. 1 n. 4.  Rather, Hatchett was the lead Andersen auditor on the Halliburton account.  Complaint ¶ 36.  He was Andersen’s point man for the aggressive, pro-active, pro-client program of fostering “inventiveness” and promoting value creation measured by increased market capitalization – i.e. the abandonment of the traditional role of an auditor and accountant, for the purpose of inflating stock prices.  Id. at ¶¶ 27-41.  As lead auditor, he was directly responsible for issuing the false audit reports misrepresenting that the financial statements complied with GAAP.  Id. at ¶¶ 61, 73, 87, 104.  He is the individual primarily in mind in all allegations relating to the “Accountant Defendants.”  Id. at ¶ 38.

6.            CONCLUSION


Premises considered, all Motions to Dismiss should be denied in their entirety.  Alternatively, in the unlikely event that the Court rules in the Defendants’ favor, Plaintiffs should be granted reasonable leave to amend.  Hart v. Bayer Corp., 199 F.3d 239, 247 (5th Cir. 2000).  Plaintiffs hereby respectfully request Oral Argument.

Dated: December ____, 2002

 

Respectfully submitted,

 

JUDICIAL WATCH, INC.

 

 

 

_______________________________         

James F. Marshall, Esq.

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LOCAL COUNSEL:

 

JUDICIAL WATCH, INC.

 

Todd W. Hutton, Esq.

Texas State Bar No. 24012880           

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Telephone:  (214) 739-7188

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OF COUNSEL:

 

JUDICIAL WATCH, INC

Larry Klayman, Esq.

Admitted to the N.D. Texas Bar

Dist. Columbia Bar No. 334581

Meredith Cavallo, Esq.

Admitted to the N.D. Texas Bar

New Jersey Bar No. 04427-2000

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Washington, D.C.  20024

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