Erica P. John Fund v. Halliburton
Issues
Whether the Fifth Circuit’s ruling contradicts Supreme Court precedent and violates Federal Rule of Civil Procedure 23 by requiring securities-fraud plaintiffs to show loss causation at the class certification stage rather than at trial.
Halliburton is accused of making misstatements about its financial position regarding asbestos litigation, a merger, and costs-overruns on fixed price contracts. As those misstatements came to light or were corrected, Halliburton’s stock price dropped. The Erica P. John Fund asserts that these misstatements defrauded Halliburton’s investors and seeks class certification to recover investors' losses from Halliburton. The Court of Appeals for the Fifth Circuit held that in order to be certified as a class, investors must not only demonstrate elements common to the class, but must also prove that the fraud actually caused the drop in stock value. Halliburton asserts that this is necessary because, unless the fraud actually caused the loss, no presumption of reliance on the misstatement can arise, and therefore the plaintiffs have failed to make the case for certification as a class. The Erica P. John Fund argues that the Fifth Circuit’s holding contradicts the Federal Rules of Civil Procedure and Supreme Court precedent, and that requiring proof of loss causation undermines the values and goals of the reliance presumption. The Supreme Court’s decision in this case will affect the ability of investors to pursue private securities actions against companies who misstate their financial positions.
Questions as Framed for the Court by the Parties
1. Whether the Fifth Circuit correctly held, in direct conflict with the Second Circuit and district courts in seven other circuits and in conflict with the principles of Basic v. Levinson, 485 U.S. 224 (1988), that plaintiffs in securities fraud actions must satisfy not only the requirements set forth in Basic to trigger a rebuttable presumption of fraud on the market, but must also establish loss causation at class certification by a preponderance of admissible evidence without merits discovery.
2. Whether the Fifth Circuit improperly considered the merits of the underlying litigation, in violation of both Eisen v. Carlisle & Jacquelin, 417 U.S. 156 (1974), and Federal Rule of Civil Procedure 23, when it held that a plaintiff must establish loss causation to invoke the fraud-on-the-market presumption even though reliance and loss causation are separate and distinct elements of security fraud actions and even though proof of loss causation is common to all class members.
In an action for securities fraud under Securities and Exchange Commission Rule 10b-5, a plaintiff must show (1) that he or she relied upon a defendant’s material misstatement or omission in buying or selling the security and (2) that the misstatement was a direct cause of the investor’s loss. See David M. Brodsky & Jeff G. Hammel,
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Additional Resources
· Wex: Class Action
· Securities Docket: Second Circuit Reverses Class Certification in In re Salomon Credit Analyst Metromedia Litigation (Oct. 2, 2008)
· New York Law Journal, David M. Brodsky and Jeff G. Hammel: The Fraud on the Market Theory and Securities Fraud Claims (Oct. 24, 2003)
· New York Law Journal, Samuel H. Rudman: Oscar: Misinterpretation of Fraud-on-the-Market Theory (Jul. 17, 2009)