Supreme Court Resolves Uncertainty: Securities Fraud Plaintiffs Need Not Prove Loss Causation At Class Certification
The highly anticipated Supreme Court decision in Erica P. John Fund, Inc. v. Halliburton, 131 S.Ct. 2179 (2011), was released on June 6th. Justice Roberts delivered the opinion for a unanimous Court, which settled a disagreement among the Circuits by holding that a securities fraud plaintiff need not prove loss causation in order to obtain class certification.
At the class certification stage, a securities fraud plaintiff must prove that questions of law or fact common to the class members predominate over questions affecting individual members. Establishing the predominance of common questions of law or fact generally hinges on the issue of reliance. The Supreme Court previously recognized in Basic Inc. v. Levinson, 485 U.S. 224 (1988), that requiring individualized proof of reliance from every class member would almost always result in individual issues predominating over common ones. Thus, the Supreme Court established that securities fraud plaintiffs may invoke a rebuttable presumption of reliance through the fraud-on-the-market theory.
Although not provided for under Basic, the Fifth Circuit Court of Appeals extended the ruling in Basic to require that EPJ Fund prove loss causation at the class certification stage to invoke the rebuttable presumption of reliance. The U.S. Supreme Court disagreed. While it is ultimately necessary to prove loss causation to prevail in a securities fraud action, “[l]oss causation has no logical connection to the facts necessary to establish the efficient market predicate to the fraud-on-the-market theory.” Halliburton, 131 S.Ct. at 2186. Accordingly, the Supreme Court reversed the Fifth Circuit and held that securities fraud plaintiffs need not prove loss causation at the class certification stage.
The Supreme Court’s entire opinion in Erica P. John Fund, Inc. v. Halliburton can be read here.
E. Powell Miller
Marc L. Newman
Casey A. Fry
The Miller Law Firm, P.C.
