In order to certify a class under Fed. Rule Civ. Proc. 23(b)(3), a court must find that the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy. Fed. Rule Civ. Proc. 23(b)(3). Considering whether questions of law or fact common to class members predominate begins with the elements of the underlying cause of action.
Petitioner Erica P. John Fund, Inc. (EPJ Fund), was the lead plaintiff in a putative securities fraud class action filed against Halliburton Co. and one of its executives (collectively Halliburton). EPJ Fund alleged that Halliburton made various misrepresentations designed to inflate the company's stock price, in violation of § 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5. EPJ Fund also contended that Halliburton later made a number of corrective disclosures that caused the stock price to drop and, consequently, investors to lose money. EPJ Fund sought to have its proposed class certified pursuant to Federal Rule of Civil Procedure 23. The District Court found that the suit could proceed as a class action under Rule 23(b)(3), but a Fifth Circuit precedent 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. The District Court concluded that EPJ Fund had failed to satisfy that requirement. The Court of Appeals agreed and affirmed the denial of class certification.
Do securities fraud plaintiffs need to prove loss causation in order to obtain class certification?
In denying Rule 23(b)(3) certification, the appellate court found that the investor failed to establish loss causation with respect to its claims. In a unanimous decision, the U.S. Supreme Court held that securities fraud plaintiffs were not required to prove loss causation in order to establish that reliance was capable of resolution on a common, class-wide basis. Loss causation was not a precondition for invoking Basic's rebuttable presumption of reliance. Under Basic, reliance in a Rule 10b-5 action was transaction causation and not loss causation. Under Basic's fraud-on-the-market doctrine, an investor presumptively relied on a misrepresentation if that information was reflected in the market price at the time of the relevant transaction. Loss causation required showing that a misrepresentation affecting the integrity of the market price also caused a subsequent economic loss. The fact that a subsequent loss might have been caused by factors other than a misrepresentation had nothing to do with whether an investor relied on the misrepresentation. Accordingly, loss causation was not necessary to establish the efficient market predicate to fraud-on-the-market under Rule 10b-5.