BNA Corporate Counsel Weekly reports that:
A unanimous U.S. Supreme Court ruled June 6 that securities fraud plaintiffs need not demonstrate loss causation in order to obtain class certification, reinstating investors' claims that Halliburton Inc. materially misrepresented the cost of asbestos litigation and the benefits of a merger (Erica P. John Fund Inc. v. Halliburton Co., U.S., No. 09-1403, 6/6/11).
In a decision authored by Chief Justice John G. Roberts, the court said that in light of its decision, it need not address other questions regarding its 1988 decision in Basic Inc. v. Levinson, 485 U.S. 224, the presumption of reliance afforded by that ruling, “or how and when it may be rebutted.” ...
In its would-be class securities fraud suit, plaintiff Archdiocese of Milwaukee Supporting Fund Inc., now known as Erica P. John Fund Inc., alleged that Halliburton made material misstatements regarding litigation expenses, changes to its accounting methodology, and the benefits of a merger. It sought to certify a class of investors who acquired Halliburton stock during the June 3, 1999, to Dec. 7, 2001 class period.
However, the district court declined to grant class certification, citing the plaintiff's failure to show loss causation with respect to any of the three issues. Affirming, the U.S. Court of Appeals for the Fifth Circuit said that to take advantage of the fraud-on-the-market presumption of reliance, the plaintiff must show loss causation at the class certification stage by a preponderance of the evidence. The justices agreed to review the controversy earlier this year, and the case was argued April 25 (26 CCW 129, 4/27/11).
However, according to the justices, such a view “contravenes Basic's fundamental premise—that an investor presumptively relies on a misrepresentation so long as it was reflected in the market price at the time of his transaction. The fact that a subsequent loss may have been caused by factors other than the revelation of a misrepresentation has nothing to do with whether an investor relied on the misrepresentation in the first place, either directly or presumptively through the fraud-on-the-market theory. Loss causation has no logical connection to the facts necessary to establish the efficient market predicate to the fraud-on-the-market theory.”...
Vacating and remanding, the high court said the Fifth Circuit erred by requiring the fund to prove loss causation at the class certification stage.
This should not be especially controversial. All the court is really saying is that loss causation is not a predicate for invoking the fraud on the market presumption of reliance. Plaintiffs still have to prove loss causation. I also don't read this opinion as completely shutting the door to defense arguments that, in appropriate cases, the loss causation issue does not involve sufficiently common questions of law and fact to allow class certification. Those probably will be very rare cases, but the argument will still be out there I think.
Dan Fisher correctly notes that “the U.S. Supreme Court once again confounded critics who accuse it of a pro-business bias.”
But I don’t necessarily agree with him that “[t]he decision reaffirms the entire court’s approval of securities class actions as a method of compensating investors for stock-market losses.” Nothing fundamental has changed since the Court tightened the loss causation requirement in Dura Pharmaceuticals or limited the foreign reach of the securities laws in Morrison vs. National Australia Bank. All the Court did is discipline a misapplication of doctrine. Any more basic fix here will have to be up to Congress.
The U.S. Supreme Court unanimously held, in Erica P. John Fund, Inc. v. Halliburton Co.(Download Halliburton), that securities fraud plaintiffs do not have to prove loss causation in order to obtain class certification. In a 10 page opinion, Chief Justice Roberts concisely rejected the Fifth Circuit's requirement of loss causation at the class certification stage, as "not justified by Basic or its logic....Loss causation addresses a matter different from whether the investor relied on a misrepresentation...." "Loss causation has no logical connection to the facts necessary to establish the efficient market predicate to the fraud-on-the market theory."
In fact, Halliburton conceded at the oral argument that the 5th Circuit was wrong to require plaintiffs to prove loss causation in order to invoke Basic's presumption of reliance and sought to revise the Fifth Circuit's analysis -- the court didn't mean "loss causation," it meant "price impact." Justice Roberts made short work of this: "We do not accept Halliburton's wishful interpretation of the Court of Appeals' opinion. As we have explained, loss causation is a familiar and distinct concept in securities law; it is not price impact." "Whatever Halliburton thinks the Court of Appeals meant to say, what it said was loss causation....Based on those words, the decision below cannot stand."
The Court explicitly does not "address any other question about Basic, its presumption, or how and when it may be rebutted."
Additional commentary: Jim Hamilton (long and detailed, good read); Kevin LaCroix (ditto).
