U.S. Supreme Court: Investors Can Seek Class Action Status Without Proving Loss Causation


In Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. __ (June 6, 2011), the U.S. Supreme Court resolved a split in the lower courts as to whether securities fraud plaintiffs must prove loss causation to obtain class certification, ruling in a unanimous opinion that such proof is not a prerequisite to obtaining class certification in a securities fraud case. The investors alleged that the company made various misrepresentations designed to inflate its stock price in violation of Section 10b of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The district court found that the suit could not proceed as a class action because the plaintiff did not show loss causation, which the Fifth Circuit required of securities fraud plaintiffs seeking class certification. The Fifth Circuit affirmed the denial of class certification, see 597 F.3d 330 (5th Cir. 2010), but the Supreme Court reversed.

Although this ruling will affect class certification proceedings in the Fifth Circuit, the narrow scope of the opinion—coupled with the fact that several other circuits had already rejected the requirement of showing loss causation at the class certification stage—makes it unlikely that this decision will have a significant effect outside the Fifth Circuit or the securities fraud context.


The Erica P. John Fund’s (EPJ Fund’s) class action complaint asserted that Halliburton made false statements about “(1) the scope of its potential liability in asbestos litigation, (2) its expected revenue from certain construction contracts, and (3) the benefits of its merger with another company.” Halliburton, 563 U.S. ___, slip op. at 2. It further alleged that Halliburton later issued corrective disclosures that caused the stock price to drop and, consequently, investors to lose money. Id.

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