On June 6, 2011, the U.S Supreme Court ruled that plaintiffs in securities fraud actions do not need to prove loss causation at the class certification stage. The unanimous opinion written by Chief Justice Roberts overturns the Fifth Circuit requirement that plaintiffs must establish loss causation in order to invoke the presumption of reliance under the fraud-on-the-market doctrine. The Court's opinion resolved a circuit split between the Fifth Circuit and the Second, Third and Seventh Circuits, which hold that plaintiffs need not prove loss causation at class certification in order to take advantage of the presumption of reliance.
The Court's opinion addresses the fraud-on-the-market theory, which provides that a properly functioning market takes into account all publicly available information about a security when setting stock prices, including any allegedly misleading information issued by a company. Under the fraud-on-the-market theory, plaintiffs in a securities class action need not prove that they actually relied on alleged misrepresentations; plaintiffs are entitled to a presumption that they relied on the market. The Court held that early in the case, when determining class certification, it is inappropriate to require proof of loss causation in order to invoke the fraud-on-the-market presumption of reliance. However, the plaintiff class will ultimately have to prove loss causation on the merits.
The plaintiffs alleged that the company violated Section 10(b) by making misrepresentations in connection with its asbestos litigation, earnings reports and merger with another company. The district court denied class certification on the grounds that the plaintiff did not prove that the company's later corrective statement caused the stock drop and the plaintiff's losses. The Fifth Circuit affirmed the district court on the grounds that the plaintiff had not proven loss causation. In the Supreme Court's narrow opinion, it reversed the Fifth Circuit only on the grounds of loss causation and remanded the case to consider other arguments relating to class certification.