Erica P. John Fund, Inc. v.
Halliburton Co, No. 09-1403 has the potential to rewrite the standards for
certifying a class in securities fraud actions. The High Court heard argument
on April 25, 2011 and should hand down its decision prior to the end of the
term in June.
The issue the Court is considering 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 class
The lower courts
The case arises from a decision of the Fifth Circuit Court of Appeals in The
Archdiocese of Milwaukee Supporting Fund, Inc. v. Halliburton Co., 597 F. 3d
330 (5th Cir. Feb. 12, 2010) [an enhanced version of this opinion is available to lexis.com
subscribers / unenhanced version available from lexisONE Free Case Law]. The complaint is based on
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 alleged misrepresentations focus on the benefits
to Halliburton of its merger with Dresser and its accounting for 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 / unenhanced version]. The Circuit Court began its analysis
by noting that a securities law plaintiff basing a claim on Exchange Act
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.
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