Monday, June 6, 2011
Today the Supreme Court issued its decision in Erica P. John Fund, Inc. v. Halliburton Co., No. 09-1403 (see our earlier coverage here and here). The unanimous opinion by Chief Justice Roberts begins:
To prevail on the merits in a private securities fraud action, investors must demonstrate that the defendant’s deceptive conduct caused their claimed economic loss. This requirement is commonly referred to as “loss causation.” The question presented in this case is whether securities fraud plaintiffs must also prove loss causation in order to obtain class certification. We hold that they need not.
The questions presented in Halliburton potentially invited the Supreme Court to address more generally the extent to which a court must consider at the class-certification stage whether the class's claims are (or are likely to be) meritorious. Such guidance might have impacted certain aspects of the now-pending Wal-Mart v. Dukes case. But that does not appear to have happened.
Rather, the Supreme Court’s Halliburton decision simply corrects the Fifth Circuit’s erroneous view that “an inability to prove loss causation would prevent a plaintiff from invoking the rebuttable presumption of reliance” [Op. 7] -- a presumption that stems from the “fraud-on-the-market” theory the Supreme Court endorsed in Basic Inc. v. Levinson. [Op. 5]. According to Chief Justice Roberts, the Fifth Circuit’s approach “contravenes Basic’s fundamental premise—that an investor presumptively relies on a misrepresentation so long as it was reflected in the market price at the time of his transaction. . . . Loss causation has no logical connection to the facts necessary to establish the efficient market predicate to the fraud-on-the-market theory. The Court of Appeals erred by requiring EPJ Fund to show loss causation as a condition of obtaining class certification.” [Op. 7-8] The opinion concludes: "To the extent Halliburton has preserved any further arguments against class certification, they may be addressed in the first instance by the Court of Appeals on remand." [Op. 9]