U.S. Supreme Court Unanimously Rejects Fifth Circuit’s Requirement That Plaintiffs in a Securities Fraud Litigation Prove Loss Causation in Order to Obtain Class Certification


On June 6, 2011, the Supreme Court, in Erica P. John Fund v. Halliburton Co., 563 U.S. ___ (2011), held that securities fraud plaintiffs do not need to prove loss causation in order to obtain class certification. Prior to this decision, the Fifth Circuit imposed an exceedingly high burden on plaintiffs at the class certification stage, requiring a plaintiff to prove that the defendant’s conduct caused an economic loss. The decision rejected the Fifth Circuit’s practice and supported the Second, Third, and Seventh Circuits’ holdings that proof of loss causation is not a prerequisite to invoking the fraud-onthe- market presumption of reliance.

The Fraud-on-the-Market Theory

In general, when a plaintiff alleges a securities fraud based on violations of § 10(b) of the Securities Exchange Act of 1934 and the Securities and Exchange Commission’s Rule 10b-5, the plaintiff has the burden of proving (1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase and sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.1 In addition to these requirements, when plaintiffs proceed as a class, it is their burden to prove that common issues predominate over individual ones.

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