On July 13, 2011, the Wall Street Journal's Law Blog referenced a report about the increased number of class action lawsuits seeking damages for lost share value filed by investors against companies involved in mergers and acquisitions. A recent U.S. Supreme Court decision, Erica P. John Fund, Inc. v. Halliburton Co., provides insight into where the courts stand on securities class action litigation.
In Halliburton, decided on June 6, 2011, the Supreme Court overturned a Fifth Circuit ruling that vacated class certification for a securities fraud class action. The proposed class alleged that Halliburton issued false statements about its prospects in order to manipulate the market price of its stock. The Fifth Circuit held that the investors failed to prove "loss causation" which, according to a prior Fifth Circuit case, Oscar Private Equity Invs. v. Allegiance Telecom, Inc., is required to entitle the plaintiffs to a "fraud on the market" presumption to establish each investor's reliance on the alleged misrepresentations. That presumption is a product of the Supreme Court's 1988 ruling in Basic, Inc. v. Levinson, which permitted a presumption of reliance when the security is traded on an efficient market. Without the presumption, the plaintiffs would have to establish reliance on an individual basis and, thus, would likely fail to meet the requirement for Rule 23(b)(3) class actions that common issues "predominate" over issues affecting each class member. But the Fifth Circuit's requirement of proof of "loss causation" to establish the "fraud on the market" presumption would effectively require the investors to prove the merits of their whole case before being allowed to proceed as a class. In Halliburton, the Supreme Court concluded that securities fraud plaintiffs need not prove loss causation in order to be entitled to the presumption of "fraud on the market" required for class certification.
On the law blog PrawfsBlawg, University of Miami Professor of Law Sergio J. Campos notes that the Fifth Circuit's (reversed) position in Halliburton and the Supreme Court's more recent decision in Wal-Mart Stores, Inc. v. Dukes evidence a strong impulse by courts to require a merits determination before class certification. However, in the context of securities class action litigation, the U.S. Supreme Court has effectively removed that hurdle from the certification process.