The US Supreme Court [official website; JURIST news archive] unanimously ruled [opinion, PDF] on Monday in Erica P John Fund v. Halliburton [Cornell LII backgrounder; JURIST report] that, though a party to a private securities fraud action must demonstrate that the defendant';s misrepresentation caused economic loss, securities fraud plaintiffs do not need to prove loss causation for class certification. Erica P John Fund (EPJ Fund) sought class certification in a suit to recover investors' losses from Halliburton. Halliburton, according to EPJ Fund, made misstatements about its financial position which, when revealed to be false, caused Halliburton's stock price to fall. The US Court of Appeals for the Fifth Circuit [official website] held [opinion, PDF] that investor losses need to be proven by a preponderance of the evidence at the class certification stage prior to full discovery in order for the class action lawsuit to proceed. The Supreme Court disagreed. Federal Rule of Civil Procedure 23(b)(3) [text] requires that, for a class satisfying Rule 23(a) to be certified, "the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy." Chief Justice John Roberts pointed to Basic v. Levinson [opinion] where the Court held that an investor presumptively relies on a defendant's misrepresentation if that "information is reflected in [the] market price" of the stock at the time of the relevant transaction:
Whether common questions of law or fact predominate in a securities fraud action often turns on the element of reliance. The courts below determined that EPJ Fund had to prove the separate element of loss causation in order to establish that reliance was capable of resolution on a common, classwide basis." [...] We recognized in Basic, however, that limiting proof of reliance in such a way "would place an unnecessarily unrealistic evidentiary burden on the Rule 10b-5 plaintiff who has traded on an impersonal market."The Court accordingly vacated the appeals court judgment and remanded the case for consistent proceedings.
To invoke the Basic court's rebuttable presumption of reliance based on the "fraud-on-the-market" theory, plaintiffs must demonstrate that the alleged misrepresentations were publicly known, that the stock traded in an efficient market, and that the relevant transaction took place "between the time the misrepresentations were made and the time the truth was revealed." Loss causation is not one of the elements that triggers the rebuttable presumption. The form of the rule adopted by the Court ultimately lessens the burden on plaintiffs seeking securities fraud class certification.