U.S. Supreme Court Finds That Plaintiffs Need Not Prove Loss Causation At Outset Of Securities Fraud Class Actions


Earlier today, the United States Supreme Court issued its decision in Erica P. John Fund, Inc. v. Halliburton Co. (http://www.supremecourt.gov/opinions/10pd f/09-1403.pdf) (“Halliburton”). In a unanimous decision authored by Chief Justice Roberts, the Court held that the Fifth Circuit Court of Appeals had erred in ruling that plaintiffs had to prove loss causation, an element of a securities fraud cause of action, at the class certification stage. The Court’s decision, the second in recent months siding with securities class action plaintiffs,1 takes away an interesting but controversial gambit on the part of class action defendants to terminate a securities class action in its early stages.


Halliburton’s relevant facts are straightforward. As in similar securities class actions, the plaintiffs alleged that Halliburton had made a number of false statements about its business, including the amount of revenue it expected to receive from construction contracts, thus inflating Halliburton’s stock price. The plaintiffs also alleged that Halliburton issued later, corrective statements that caused its stock price to drop and damage investors who bought based on the prior false statements. Typical class action fare.

The plaintiffs then survived a motion to dismiss but ran into a roadblock at the class certification stage. Fifth Circuit precedent (and only Fifth Circuit precedent) required plaintiffs to prove loss causation in order to certify a class. See Oscar Private Equity Invs. v. Allegiance Telecom, Inc., 487 F.3d 261, 269 (5th Cir. 2007). A few basic principles clarify the significance of the Fifth Circuit’s approach. First, to sustain a class action, “questions of law or fact common to class members [must] predominate over any questions affecting only individual members. . . .” F.R.C.P. 23(b)(3). If class certification requirements are not met, a class action cannot be certified and proceeds as an individual action. Second, to establish liability for securities fraud, plaintiffs eventually must prove reliance (i.e., that purchasers of the stock relied on the misrepresentations or omissions). Reliance is the element of a cause of action least susceptible to class treatment because it is individual by its nature. Third, by virtue of a prior Supreme Court decision, Basic, Inc. v. Levinson, 485 U.S. 224, 243 (1988), reliance can be presumed in securities class actions for purposes of certifying a class when certain requirements are met permitting a class to rely on the stock price as having impounded the impact of misrepresentations. Fourth, loss causation is another element of a securities fraud claim and it requires the plaintiff to establish a link between the alleged misrepresentations and corrective statements causing a stock price decline. See Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 342 (2005).

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