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Update: U.S. Supreme Court Rejects Potential Obstacle to Certification of Securities Fraud Class Actions Against Public Companies

Monday, June 06, 2011

By Janissa Strabuk

In a unanimous opinion, the United States Supreme Court today held that securities fraud plaintiffs need not prove loss causation for a misrepresentation case to be certified as a class action. While plaintiffs must "demonstrate that the defendant's deceptive conduct caused their claimed economic loss," to prevail on the merits of their case, they need not prove loss causation at the class certification stage, wrote Chief Justice John Roberts for the court in Erica P. John Fund, Inc. v. Halliburton Co., et al. The Court's ruling resolves a split in the federal Circuit courts and removes what had been a potential obstacle to class certification of certain securities fraud lawsuits against public companies.

The plaintiff, Erica P. John Fund, Inc., sued Halliburton on behalf of a proposed class of investors, alleging that Halliburton violated section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5 by making deliberate false statements about certain potential liabilities in asbestos litigation, expected revenues from construction contracts, and the benefits of a merger with Dresser Industries. The Fund further alleged that after Halliburton issued disclosures correcting the purported false statements, Halliburton's stock price fell causing the investors' losses.

The key question on appeal was whether the Fund met Federal Rule of Civil Procedure 23(b)(3)'s requirements for class certification by demonstrating, among other requirements, that common questions of law and fact predominate over individual issues. Justice Roberts noted that "[w]hether common questions of law and fact predominate in a securities fraud action often turns on the element of reliance." Both the District Court and the Fifth Circuit concluded that the Fund had to prove loss causation to establish that the issue of reliance could be resolved on a class-wide basis. Because the Fund could not prove loss causation, certification was denied. In rejecting that ruling, Roberts wrote that such a requirement was contrary to the high court's prior rulings and that securities fraud plaintiffs need not establish loss causation to obtain class certification.

The case now goes back to the trial court, which, Justice Roberts, noted, said it would certify the class were it not for the "loss causation requirement."

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