Law School Case Brief
Halliburton Co. v. Erica P. John Fund, Inc. - 573 U.S. 258, 134 S. Ct. 2398 (2014)
15 U.S.C.S. § 78j(b) and 17 C.F.R. § 240.10b-5 (2013) prohibit making any material misstatement or omission in connection with the purchase or sale of any security. Although § 78j(b) does not create an express private cause of action, the U.S. Supreme Court recognizes an implied private cause of action to enforce the provision and its implementing regulation. To recover damages for violations of § 78j(b)and § 240.10b-5, a plaintiff must prove: (1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation. The reliance element ensures that there is a proper connection between a defendant’s misrepresentation and a plaintiff’s injury. The traditional (and most direct) way a plaintiff can demonstrate reliance is by showing that he was aware of a company’s statement and engaged in a relevant transaction—e.g., purchasing common stock—based on that specific misrepresentation.
A purchaser of securities (EPJ Fund) brought a putative class action against Halliburton corporation alleging that the corporation made misrepresentations which artificially inflated the price of the securities. According to EPJ Fund, between June 3, 1999, and December 7, 2001, Halliburton made a series of misrepresentations regarding its potential liability in asbestos litigation, its expected revenue from certain construction contracts, and the anticipated benefits of its merger with another company—all in an attempt to inflate the price of its stock. Halliburton subsequently made a number of corrective disclosures, which, EPJ Fund contended, caused the company’s stock price to drop and investors to lose money. EPJ Fund moved to certify a class comprising all investors who purchased Halliburton common stock during the class period. The District Court found that the proposed class satisfied all the threshold requirements. However, Circuit precedent required securities fraud plaintiffs to prove “loss causation”—a causal connection between the defendants’ alleged misrepresentations and the plaintiffs’ economic losses—in order to invoke presumption of reliance and obtain class certification. Because EPJ Fund had not demonstrated such a connection for any of Halliburton’s alleged misrepresentations, the District Court refused to certify the proposed class. On appeal, the United States Court of Appeals for the Fifth Circuit affirmed the denial of class certification on the same ground.
Did the Circuit Court properly deny class certification?
The U.S. Supreme Court unanimously held that the corporation was entitled to present price impact evidence in addressing class certification to rebut the presumption of reliance in the securities fraud case. The presumption remained viable and could be rebutted by proof of a lack of market efficiency, and the purchaser was not required to prove price impact at the class certification stage. However, the corporation was entitled to an opportunity to rebut the presumption of reliance before class certification with evidence of a lack of price impact, and such evidence was appropriate to counter the purchaser's showing of market efficiency in an attempt to establish that common issues did not predominate for purposes of class certification. The case was remanded for further proceedings.
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