Today the Supreme Court held in Erica P. John Fund v. Halliburton that a securities fraud plaintiff does not have to prove loss causation in order to obtain class certification.
The Erica P. John Fund claimed that Halliburton made false statements that harmed investors in violation of securities law. Specifically, they claimed that Halliburton deceived investors and tried to inflate stock prices by underestimating the company’s liability in an asbestos lawsuit, overprojecting the cost-savings benefits of a merger, and overprojecting the revenue from construction contracts. Halliburton’s stock price dropped when it corrected those misstatements. The Fund filed a class action lawsuit to recover financial losses suffered by the Fund and similarly situated investors which they claim occurred because of Halliburton’s misrepresentations.
The Supreme Court previously held in Basic Inc. v. Levinson that plaintiffs in a securities fraud action enjoy a rebuttable presumption of reliance on false statements known as the “fraud-on-the-market” theory. This is essential in a securities fraud case because requiring each class member to prove individual reliance on the misrepresentations would often be impossible and prevent plaintiff shareholders from banding together as a class.
The Fifth Circuit upheld the district court’s denial of class certification, holding that the Fund could not enjoy the rebuttable presumption of reliance unless it demonstrated at the class certification stage that Halliburton’s corrective announcement caused the stock price to drop. The Fund argued that adding a loss causation requirement created a standard that would be impossible to meet.
The Supreme Court overturned the Fifth Circuit decision, stating that the “Court of Appeals’ requirement is not justified by Basic or its logic.” The opinion added that “we have never before mentioned loss causation as a precondition for invoking Basic’s rebuttable presumption of reliance.” The Court stated that the Fifth Circuit’s rule “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.” As a result, the Court concluded, the Fifth Circuit “erred by requiring EPJ Fund to show loss causation as a condition of obtaining class certification.”
Although the decision is a natural one given the Court’s precedent in Basic Inc., one wonders whether that decision from 1988, with its rule-bending method of proving reliance in the class action securities context, would have come out the same today. Today’s Corporate Court is typically not willing to help class action plaintiffs.