Erica P. John Fund v. Halliburton

Under the fraud-on-the-market theory of reliance adopted in Basic Inc. v. Levinson, there is a rebuttable presumption that investors relied on the market price of the security in choosing to buy or sell. Therefore, if a company makes a material misstatement, each plaintiff presumably relied on a material misstatement, allowing for class-wide reliance. In addition to reliance, a successful plaintiff must show loss causation—meaning that the material misstatement actually caused the loss by affecting the market price.

The parties dispute the proper role of loss causation at the class certification stage. Respondent Halliburton maintains that because reliance on price is effectively a substitute for reliance on information, if the defendant is able to show that the misstatements did not affect the price of the security, then the defendant has effectively rebutted the reliance presumption. In essence, Halliburton claims that a defendant can prove a lack of reliance by demonstrating that there was no loss causation. The Fifth Circuit agreed with this position, but went further to hold that unless the plaintiff can demonstrate that the defendant’s misstatements affected the market price, no presumption of reliance will exist to aid the plaintiff in meeting the requirements for certification as a class. Petitioner Erica P. John Fund urges that these theories regarding the presumption conflate the two core elements of fraud-on-the-market—loss causation and reliance—in a manner not permitted by Federal Rule of Civil Procedure 23 (“Rule 23”) during class certification. In this case, the Supreme Court must resolve what plaintiffs must establish during the certification stage to take advantage of a rebuttable presumption of reliance.

What must a plaintiff demonstrate at the class certification?

The Fund notes that in Basic Inc. v. Levinson, the Supreme Court recognized a growing effort among the circuit courts to create a rebuttable presumption that market investors rely on the listed market prices as a reflection of all publicly available information about the products. The Fund asserts that, to meet the class certification requirements of Rule 23, plaintiffs do not have to prove that they will prevail on the merits. Therefore, the Fund argues that at class certification plaintiffs must demonstrate that their reliance claim is based on shared evidence, but they do not need to prove that they will eventually succeed at trial In addition, for the loss causation prong, the Fund maintains that plaintiffs need only show that common issues predominate, not that they will be successful on the merits. Loss causation, according to the Fund, only asks whether the defendant company’s misstatements affected the value of the company’s stock. The mere fact that a plaintiff held the stock is enough to establish a shared harm across the class for certification purposes; to actually inquire whether the disclosure caused the loss would be an impermissible examination of the merits of the case.

Halliburton argues that courts routinely inquire into all relevant issues during class certification, even if doing so means the court has to consider issues that overlap with the merits of the case. Moreover, Halliburton asserts that plaintiffs have the burden of persuading the court that the rebuttable presumption is well-established, as part of plaintiffs’ burden of showing that the case is appropriate for class certification. Halliburton argues that this inquiry into loss causation is permissible at the class certification stage because it relies on publicly available information, namely the market prices of a security and the company’s statements. Therefore, Halliburton dismisses concerns that the loss causation inquiry will be too complex. Halliburton also notes that securities-fraud plaintiffs often use studies and expert testimony at the certification stage to establish that there was an efficient market.

The Fund maintains that the Fifth Circuit’s requirement of proof of loss causation places an improperly high burden on plaintiffs at the certification stage, consuming time and resources. The Fund maintains that certification would permit more extensive discovery, allowing the Fund “to establish what Halliburton knew and when it knew it.”

Can a defendant use a lack of loss causation to prove a lack of reliance?

While the Fifth Circuit held that the plaintiff must prove loss causation for class certification, Halliburton primarily argues on appeal that the defendant can prove a lack of loss causation to rebut the presumption of reliance. Halliburton argues that neither Basic nor the Federal Rules of Evidence require the defendant to restrict its attacks to the evidence that invokes a presumption. Halliburton reasons that as long as a reasonable fact-finder could believe that a defendant company’s misstatements did not cause the plaintiffs’ stock losses, the presumption is effectively rebutted.

Although there may be a presumption of reliance, Halliburton asserts that evidence against loss causation directly attacks that presumption by showing that the market itself did not use the defendant’s misstatements to determine the stock’s market value. In this case, the Fund’s argument depends on a showing that the correction of misstatements by Halliburton caused a drop in stock prices. Therefore, Halliburton concludes that its presentation of evidence to rebut the presumption, demonstrating that the alleged losses were not linked to any of Halliburton’s corrections, was sufficient to defeat the Fund’s request for class certification. In closing, Halliburton argues that, whether or not the burden is on the plaintiff or the defendant regarding the existence of loss causation, the Supreme Court should affirm the Fifth Circuit’s opinion.

While the Fund is primarily concerned with the Fifth Circuit’s requirement that the plaintiff prove loss causation, it additionally argues that a defendant cannot rebut the presumption of reliance through a lack of loss causation. This is because loss causation focuses on whether corrective disclosure caused the plaintiff’s loss, rather than whether there was a price distortion when the plaintiff bought or sold the security. According to the Fund, because fraud-on-the-market focuses on the time of the purchase or sale, and not the corrective disclosure, loss causation is not relevant to the reliance inquiry.