The Supreme Court granted certiorari in a
significant securities case on Friday. Erica P. John Fund, Inc. v.
Halliburton Co, No. 09-1403. The question the Court agreed to consider
focuses on whether plaintiffs in a securities fraud class action must prove
loss causation at the class certification stage. Specifically, the question is:
"Whether, in a private action under Section 10(b) of the Securities Exchange
Act of 1934 . . a plaintiff who invokes the fraud-on-the market presumption of
reliance must prove loss causation in order for the suit to be maintained as a
The case arises from a decision of the Fifth Circuit
Court of Appeals in The Archdiocese of Milwaukee Supporting Fund, Inc. v.
Halliburton Co., No. 08-11195 (5th Cir. Feb. 12, 2010). The complaint
presented three categories of claimed misstatements. First, plaintiffs alleged
that statements concerning Halliburton's exposure to liability in asbestos
litigation and its stated reserves for that litigation are false and
misleading. That liability derived from Halliburton's merger with Dresser
Industries. Supposedly corrective statements were made in press releases and
SEC filings on four dates in 2001.
The second and third groups of claimed misrepresentations
focus on the benefits to Halliburton of its merger with Dresser and its
accounting of revenue from cost-overruns on fixed-price construction and
engineering contracts. Corrective disclosures were supposedly made on four
dates in 1999 and 2000.
The Fifth Circuit affirmed the district court's denial of
class certification concluding that plaintiffs had failed to establish loss
causation as required by the Supreme Court's decision in Dura
Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005) [enhanced version available to lexis.com subscribers / unenhanced version available from lexisONE Free Case Law]. The
court began its analysis by noting that a securities law plaintiff basing a
claim on Section 10(b) must establish six elements: 1) a material
misrepresentation or omission; 2) scienter; 3) a connection with the purchase
or sale of a security; 4) reliance; 5) economic loss; and 6) loss causation.
In a putative class action, plaintiffs can establish a
rebuttable presumption of reliance using the fraud-on-the-market theory under Basic
Inc. v. Levinson, 485 F. 3d 307 (1988). Citing its decision in Greenberg
v. Crossroads Sys., Inc., 364 F. 3d 657 (5th Cir. 2004), the court noted
that plaintiffs can make the required showing by demonstrating that the
defendant company made a material misrepresentation at a time when its shares
were traded in an efficient market and that they traded between the time those
statements were made and the truth was revealed. The defendant can rebut the
presumption by any showing that severs the link between the claimed
misrepresentation and either the price received or paid by the plaintiff or the
decision to trade at fair market price.
The critical question is this case, according to the
court, is the misrepresentation. The parties did not dispute the efficiency of
the market or the trading. Under these circumstances to use the Basic
fraud-on-the-market presumption of reliance plaintiffs must establish loss
causation. Thus the court held that "Plaintiff must prove that the
complained-of-misrepresentation or omission materially affected the market
price of the security . . . In other words, Plaintiff must show that an alleged
misstatement 'actually moved the market.' Thus, we require plaintiffs to
establish loss causation in order to trigger . . . " the presumption (internal
citations and quotations omitted). That proof must be by a preponderance of the
evidence. After a detailed analysis of the proof, including expert testimony,
the circuit court concluded that plaintiffs failed to adequately establish loss
In requesting that the High Court review the case
plaintiffs argued that the Fifth Circuit's decision conflicted with an earlier
opinion of the Second Circuit as well as those of several district courts.
Plaintiffs claimed that the decision was also contrary to the dictates of Rule
23 which governs class certification since it does not require proof of loss
causation. Halliburton argued that there was no split in the circuits and, in
any event, this case presented a poor vehicle to consider the issue.
The United States and the SEC, in an amicus brief,
urged the Court to hear the case. The government told the Court that in fact
the circuit courts are split on the application of Dura and loss
causation at the class certification stage. One view, adopted by the Seventh
Circuit in its recent decision in Schleicher v. Wendt, 618 F. 3d 679
(7th Cir. 2010), expressly rejects the Fifth Circuit's requirement that loss
causation be established at the class certification stage. Rather, the question
of class certification should be governed solely by the dictates of Federal
Civil Rule 23. The merits should only be considered to the extent necessary to
comply with that Rule.
The Second Circuit takes what is essentially an
intermediate view according to the government. In In re Salomon Analyst
Metromedia Litig., 544 F. 3d 474 (2nd Cir. 2008) the court concluded that
some consideration of the merits is allowed at the class certification stage.
Salomon declined to consider loss causation at the certification stage however.
The Solicitor argued that class certification should be
governed by Federal Rule 23. Applying Dura at the certification stage
when analyzing the application of the fraud-on-the-market theory confuses the
requirements of loss causation and reliance the government noted. In any event
it would be inappropriate to go beyond the dictates of Rule 23 at the class
certification stage since discovery may well be incomplete and the evidence not
The case is in briefing.
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