Securities Fraud Plaintiffs Need Not Prove Loss Causation to Obtain Class Certification

The Supreme Court announced its decision in Erica P. John Fund, Inc. v. Halliburton Co. today, resolving a split among the Circuit Courts of Appeals and holding that securities fraud plaintiffs do not need to prove loss causation in order to obtain class certification.

The issue revolved around the plaintiffs’ invocation of the fraud on the market theory, which affords them a rebuttable presumption of reliance on the challenged statements. The idea is that the “market price of shares reflects all publicly available information and, hence, any material misrepresentations.” Basic, Inc. v. Levinson, 485 U.S. 224, 246 (1988). To invoke the presumption, plaintiffs must show that the alleged misrepresentations were publicly known, that the stock traded in an efficient market, and that the transactions at issue took place between the time of the misrepresentation and the revelation of the truth. Halliburton, slip op. at 5-6.

They do not, however, have to prove loss causation, which the Supreme Court explains in Halliburton is a separate idea entirely. To prove loss causation, plaintiffs must show that the stock price dropped because of the correction of the prior misrepresentation, and not because of other factors in the market. Id. at 6. The Court declared that this proof has “no logical connection” to proving the facts necessary to invoke the fraud on the market theory.

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