The following first appeared in the October 2004 SCAS Alert:

Halliburton Court Rejects Proposed Settlement
By Bruce Carton, Executive Director

On Sept. 9, a federal court in Dallas rejected the proposed $6 million settlement in the Halliburton Co. securities class action at the "fairness hearing" stage. The court's refusal to approve the Halliburton settlement serves as a reminder of the purpose and importance of the fairness hearing, as well as the key factors that the court will review and the pitfalls that proponents of a settlement must avoid to keep a settlement on track.

Under Rule 23(e) of the Federal Rules of Civil Procedure, a court may approve a class settlement only after finding that it is "fair, reasonable, and adequate." At a fairness hearing, plaintiffs in favor of the settlement have the burden of proving that the proposed settlement meets this standard, and the court has a fiduciary duty to the class to ensure that the interests of every member are adequately represented.

In the Halliburton case, the court concluded that it had not been presented with sufficient evidence to reach an intelligent and informed opinion on the merits of the case and the wisdom of the proposed settlement. In its opinion, a copy of which is available on the Internet here, the court ruled that:

since the Court is not satisfied that the settlement proposed is fair, reasonable and adequate, and since the Court has concerns both about the manner in which the settlement was reached, and the terms of the proposed settlement, the Court will not approve it at this time.

The court provided several reasons for its concern:

--Perhaps most notably, the court stated that it was "dismayed" that lead counsel negotiated the settlement without the knowledge of all of the lead plaintiffs, which "deprived the class of the benefits of multiple Lead Plaintiffs." This appeared to be the court's most significant concern.

--The lead plaintiffs in favor of the settlement presented "virtually no evidence" other than conclusory declarations regarding the lawsuit's likelihood of success on the merits. In such situations, of course, plaintiffs are in the somewhat awkward position of arguing the weaknesses of their own case to support the amount offered in settlement.

--None of the pro-settlement plaintiffs appeared at the hearing to articulate their views on why the proposed settlement was advisable for the class. The court found that their absence ran counter to their fiduciary duty to the class either to appear or submit affidavits stating their position.

--Lead counsel offered no analysis of the likely recovery to class members under the settlement. The court's own efforts to determine the approximate recovery indicated a range between a low of $0.006 (six-tenths of one cent!) per share and a high of $0.12 per share.

--The record did not provide a damages estimate sufficient to permit the court to assess whether the proposed settlement was within an acceptable range.

These factors, plus others, led the court to take the rare step of disapproving the settlement. Perhaps to spur another quick settlement in the case, the court ordered the parties to engage in mediation by Nov. 1, and warned that if the case was not resolved by Dec. 3, the court "will consider whether the appointment of Lead Plaintiffs and Lead Counsel should be modified…."

The court's decision also presented an interesting issue for shareholders with claims in the Halliburton case: what was the remaining significance, if any, of the Sept. 27 claim deadline in the original settlement notice? Lawyers involved in the case stated that because the court had not formally extended that deadline, it was their view that the only "prudent" course of action was to proceed as if the original deadline was still in place.