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 lexis.com
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].
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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