The Supreme Court handed its second ruling this Term which favors plaintiffs in securities class actions. What may well be the most important securities decision by the Court this term has yet to be decided.
SEC enforcement brought additional insider trading cases this week. The Commission also settled an insider trading case brought last December against unknown purchasers, filed an investment fund fraud action and a case halting an effort to take over a beer company.
Another defendant pleaded guilty in the expert network investigations. Likewise another former Madoff employee pleaded guilty and began cooperating with prosecutors. The SEC partially settled a parallel action with the employee.
Finally, the Second Circuit reversed a partial grant of summary judgment which had been granted in favor of the SEC, concluding that the district court had improperly imposed a penalty. The court held that the SEC could not obtain a penalty under Section 21(d)(3) based on guilty pleas to insider trading.
In Erica P. Hon Fund, Inc. v. Halliburton Co., No. 09-1403 (Decided June 6, 2011) the Court, in a unanimous ruling, reversed a decision by the Fifth Circuit Court of Appeals which held that plaintiffs at the class certification stage had the burden of proving loss causation. The lower courts agreed that all the Rule 23 requirements had been met and the only unresolved question was loss causation. The Supreme Court thus focused only on Rule 23(b)(3) which requires that common questions of law or fact predominate over individual question for the class to be certified. The key issue here is reliance, an essential element of a Section 10(b) cause of action. Citing Basic Inc. v. Levinsion, 485 U.S. 224, 243 (1988), the Court went on to note that reliance assures there is a proper connection between the defendant's misrepresentation and a plaintiff's injury.
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