U.S. Supreme Court Rules That Proof of Loss Causation Is Not a Prerequisite for Class Certification in Securities Fraud Cases
In a decision announced on Monday, the U.S. Supreme Court unanimously rejected a defendant’s request for tougher class certification requirements in shareholder securities fraud suits. Delivering the Court’s 10-page opinion, Chief Justice John G. Roberts wrote that securities class action plaintiffs are not required to prove loss causation at the class certification stage. Erica P. John Fund (EPJ Fund) v. Halliburton Co. et al., No. 09-1403 (June 6, 2011).
The EPJ Fund brought claims under §10(b) of the Securities Exchange Act of 1934, as well as SEC Rule 10b-5, alleging that “Halliburton deliberately made false statements about (1) the scope of its potential liability in asbestos litigation, (2) its expected revenue from certain construction contracts, and (3) the benefits of its merger with another company.” EPJ Fund, slip op. at 2. The district court determined, and the parties agreed, that the EPJ Fund met the Federal Rule of Civil Procedure 23(a) requirements for class actions; however, the district court denied class certification, relying on Fifth Circuit precedent that required securities fraud plaintiffs to show loss causation in order to win class certification.
The Fifth Circuit affirmed the district court’s denial of class certification, based on its own interpretation of Basic Inc. v. Levinson, 485 U.S. 224, 243 (1988). The Fifth Circuit held that EPJ Fund needed to “establish a causal link between the alleged falsehoods and its losses in order to invoke the fraud-on-the-market presumption.” EPJ Fund v. Halliburton, 597 F.3d 330, 335 (5th Cir. 2010).
The Supreme Court reversed, stating that the Fifth Circuit’s conclusion was “not justified by Basic or its logic.” EPJ Fund, slip op. at 6-8.
[W]e have never before mentioned loss causation as a precondition for invoking Basic’s rebuttable presumption of reliance . . . . Loss causation addresses a matter different from whether an investor relied on a misrepresentation, presumptively or otherwise, when buying or selling a stock . . . . Loss causation has no logical connection to the facts necessary to establish the efficient market predicate to the fraud-on-the-market theory. The Court of Appeals erred by requiring EPJ Fund to show loss causation as a condition of obtaining class certification.
The Supreme Court’s decision brings the Fifth Circuit in line with other Courts of Appeals, such as the Second, Third, and Seventh Circuits, which had already recognized that proof of loss causation is unnecessary at the class certification stage. Ultimately, however, the Supreme Court’s ruling in EPJ Fund will not alter the general class certification calculus much, particularly outside of the Fifth Circuit.