On January 7, 2011, the Supreme Court agreed to hear Erica P. John Fund, Inc. v. Halliburton Co. (No. 09-1403). This case presents the Court with an opportunity to resolve a split in the Circuits about an important issue in how securities fraud cases are litigated. Specifically, the Supreme Court will consider the extent to which courts must resolve issues of "loss causation" – i.e., whether the alleged fraud actually caused a company's stock price to decline and thereby caused investors to suffer losses – at the class certification stage. The Court's decision could have far-ranging implications on defendants' ability to end meritless cases early in a litigation.
In Halliburton, the Supreme Court will review the denial of class certification in a case alleging that defendants made false statements regarding Halliburton's litigation exposure, its revenues, and the effects of a merger. The district court held that none of the corrective disclosures identified by the plaintiffs actually revealed the alleged fraud, and accordingly, the plaintiffs had failed to sufficiently establish loss causation. As a result of this failure, the district court denied the plaintiffs' motion for class certification.
The Fifth Circuit affirmed. In doing so, it followed its earlier decision in Oscar Private Equity Investments v. Allegiance Telecom, Inc., holding that in order to satisfy class certification standards, plaintiffs must establish, by a preponderance of the evidence, that they can satisfy the element of loss causation. In Oscar and other decisions, the Fifth Circuit has reasoned that proof of loss causation is necessary for plaintiffs to avail themselves of the "fraud-on-the-market" presumption of reliance. Without the fraud-on-the-market presumption, a securities fraud claim cannot proceed as a class action because plaintiffs would be unable to prove on a classwide basis that all investors relied on an alleged misstatement or omission.
Other Circuits have followed a different approach to loss causation on class certification. For example, in Salomon Analyst Metromedia Litigation, the Second Circuit held that plaintiffs do not bear the burden of establishing loss causation at the class certification stage. The Second Circuit did, however, make clear that defendants may present loss causation evidence at the class certification stage in rebutting the fraud-on-the-market presumption.
Highlighting this difference in approach, both the Halliburton plaintiffs and the United States government (the views of which the Court had solicited) urged the Supreme Court to review the Fifth Circuit's decision in Halliburton.
In agreeing to hear the case, the Supreme Court will consider this split in the Circuits, including whether plaintiffs are required to establish loss causation at the class certification stage. The Court's decision could have a significant impact on the way securities cases are litigated: In addition to weeding out cases that are inappropriate for class treatment, early consideration of loss causation provides defendants with a valuable tool to challenge or otherwise limit weak cases before discovery expenses and coercive settlement pressures mount.
The Supreme Court is expected to hear argument in Halliburton in April 2011, with a decision likely by the end of June. We will monitor developments in the case and keep you posted.