Halliburton Decided

As predicted, the U.S. Supreme Court has issued a narrow decision in the Halliburton case rejecting the Fifth Circuit’s requirement that securities fraud plaintiffs must prove loss causation to obtain class certification. The unanimous (and short) opinion authored by Chief Justice Roberts holds that loss causation is not a precondition for invoking the fraud-on-the-market presumption of reliance and, therefore, is not necessary to establish that reliance is capable of resolution on a common, classwide basis.

While the Court endorsed the majority position adopted by the Second Circuit, Third Circuit, and Seventh Circuit, it focused entirely on the nature of the fraud-on-the-market presumption and did not address the scope of Federal Rule of Civil Procedure 23 (governing class certification). Moreover, the Court gave short shrift to the defendants’ argument that although the Fifth Circuit specifically said “loss causation,” it really was imposing a “price impact” test designed to determine whether the alleged misrepresentation had affected the company’s stock price in the first place. The Court noted that “loss causation is a familiar and distinct concept in securities law; it is not price impact” and declined to do anything other than take the Fifth Circuit “at its word.”

Holding: Judgment vacated and remanded to district court for further proceedings consistent with opinion.

Quote of note: “According to the Court of Appeals, however, an inability to prove loss causation would prevent a plaintiff from invoking the rebuttable presumption of reliance. Such a rule contravenes Basic’s fundamental premise—that an investor presumptively relies on a misrepresentation so long as it was reflected in the market price at the time of his transaction. The fact that a subsequent loss may have been caused by factors other than the revelation of a misrepresentation has nothing to do with whether an investor relied on the misrepresentation in the first place, either directly or presumptively through the fraud-on-the-market theory. Loss causation has no logical connection to the facts necessary to establish the efficient market predicate to the fraud-on-the-market theory.”

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