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James M. Wilson Jr. On Securities Class Actions - Analysis Of The Supreme Court's Decision In Erica P. John Fund, Inc. v. Halliburton Co.


Introduction: On June 6, 2011, the Supreme Court unanimously rejected the Fifth Circuit Court of Appeal's requirement that plaintiffs in securities class actions prove "loss causation" at the class certification stage of the case. In order for investors to proceed as a class action under Section 10(b) of the Securities Exchange Act of 1934, they must demonstrate that the elements of Section 10(b) may be proven on a class-wide basis and that the court will not be required to examine each investor's individualized claim. Loss causation - similar to "proximate causation" - is one of several elements that plaintiffs ultimately must prove to establish liability in a Section 10(b) case. "Loss causation" means that a defendant's deceptive conduct caused investor losses. The Fifth Circuit Court of Appeals established in 2007 that investors pursuing securities fraud claims in that circuit were required to demonstrate not only that loss causation was capable of being proved on a class-wide basis, but also to actually prove that loss causation existed. This was a draconian approach. Other circuit courts of appeals had rejected this stringent requirement mandating investors only to show that, as with the other elements of a Section 10(b) claim, they could ultimately prove loss causation later on at trial on a class-wide basis. The Supreme Court rejected the Fifth Circuit's approach as not in line with the requirements of Rule 23 of the Federal Rules of Civil Procedure (which governs class actions in federal courts) and prior precedent.

Background To Halliburton

Plaintiffs brought a securities fraud class action against Halliburton Company and one of its executives (Defendants) alleging that Defendants made various misrepresentations designed to inflate the company's stock price, in violation of Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5. Plaintiffs also contended that Defendants made a number of corrective disclosures that caused the stock price to drop and, consequently, investors to lose money. Plaintiffs moved to have their case certified as a class action under Federal Rule of Civil Procedure 23. The District Court found that Plaintiffs had demonstrated all of the requirements necessary under Rule 23 to proceed as a class action except for one that is specific to the Fifth Circuit. Fifth Circuit precedent (Oscar Private Equity Invs. v. Allegiance Telecom, Inc., 487 F.3d 261, 269 (5th Cir. 2007) [an enhanced version of this opinion is available to subscribers / unenhanced version available from lexisONE Free Case Law]) required securities fraud plaintiffs to prove "loss causation," i.e., that the Defendant's deceptive conduct caused the investors' claimed economic loss in order to obtain class certification, and that Plaintiffs failed to do so. The Court of Appeals agreed and affirmed the lower court's denial of class certification. 597 F.3d 330 (5th Cir. 2010) [enhanced version / unenhanced version].

Legal Background.

The elements of a private securities fraud claim based on violations of Section 10(b) are: (i) a material misrepresentation or omission by the defendant; (ii) scienter (i.e., that defendants acted with the requisite state of mind, either intent or recklessness); (iii) a connection between the misrepresentation or omission and the purchase or sale of a security; (iv) reliance upon the misrepresentation or omission; (v) economic loss; and (vi) loss causation. See Matrixx Initiatives, Inc. v. Siracusano, 131 S. Ct. 1309 (2011) [enhanced version / unenhanced version].

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