U.S. Supreme Court Unanimously Rejects Fifth Circuit Rule Requiring Securities Fraud Plaintiffs to Prove “Loss Causation” in Order to Obtain Class Certification


Yesterday, the U.S. Supreme Court unanimously rejected the Fifth Circuit’s rule that securities fraud plaintiffs are required to prove “loss causation” (i.e., that the defendant’s deceptive conduct caused their economic loss) to obtain class certification of their claim under Federal Rule of Civil Procedure 23. (Erica P. John Fund, Inc. v. Halliburton Co.) The Court agreed to hear the case to resolve a conflict between the Fifth Circuit’s rule and the opposing view taken by the Second, Third, and Seventh Circuits that there is no such requirement.

Lead plaintiff Erica P. John Fund, Inc., on behalf of a putative class of purchasers of Halliburton common stock between June 1999 and September 2001, alleged that Halliburton violated Section 10(b) of the Securities and Exchange Act of 1934 and SEC Rule 10b-5 by making various misrepresentations designed to inflate its stock price during that period. The district court found that class plaintiffs met all of the standard requirements of Rule 23, but nonetheless denied their motion for class certification on the sole ground that they had failed to prove loss causation, as required by binding Fifth Circuit precedent. Unsurprisingly, the Fifth Circuit affirmed.

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