Erica P. John Fund, Inc v. Halliburton Co. Securities Class Action: Loss Causation And Class Certification

In Halliburton, the Supreme Court is deciding "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 action?" In this analysis, Mr. Gorman discusses the court's possible points of departure or concurrence with the Circuit Courts and Federal Government.

Mr. Gorman writes: 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 class action."

The 5th Circuit's Halliburton decision

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. 2010) [enhanced version 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 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 / unenhanced version]. 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.

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