The Supreme Court is considering whether to take up two securities class actions suits on appeal regarding loss causation, and in each case it has asked the acting Solicitor General of the United States, Neal Katyal, to provide the Obama Administration's opinion regarding the issues.
In the first case, a shareholder suit against drug distributor, Omnicare, Inc., the Supreme Court has asked the Administration for its opinion regarding whether loss causation can be used to dismiss accounting claims brought under Section 11 of the Securities Exchange Act of 1933 in securities class actions. In October of 2009, Judge Richard Mills of the U.S. District Court for the District of Illinois dismissed the case against Omnicare in its entirety. After reviewing the case de novo, the Sixth Circuit affirmed the dismissal of plaintiffs' 1934 Act claims, but remanded the Section 11 accounting-related claims to the district court to determine whether or not such claims can be subject to dismissal on the ground that the complaint lacked sufficient allegations of loss causation. The district court denied a rehearing on the issue.
The Omnicare plaintiffs filed a petition for certiorari arguing that the Sixth Circuit had imposed a burden on plaintiffs that Congress had rejected when it chose to impose strict liability on issuers under Section 11 and require defendants to "prove the absence of both negligence and fraud in order to carry an affirmative defense." In responding to the plaintiffs' petition, Omnicare noted that most circuit courts have found that accounting related claims can be dismissed on loss causation grounds.
In the second case, a securities suit against Halliburton Co., the issue is whether plaintiffs in putative securities fraud class actions should be required to establish loss causation in order to trigger the fraud-on-the-market presumption at the class certification stage. The Supreme Court requested that the Administration address whether the Fifth Circuit correctly held that plaintiffs in securities fraud actions must not only satisfy the requirements to trigger the fraud-on-the-market theory but must also establish loss causation at the class certification stage. The District Court denied plaintiff's motion for class certification because plaintiff had failed to prove a causal relationship between the alleged misrepresentations and the claimed losses. The Fifth Circuit, following its 2007 decision in Oscar Private Equity Investments v. Allegiance Telecom Inc., affirmed and held that the plaintiff had failed to show an actual effect on the stock price. Plaintiff argued in its petition for certiorari that the Fifth Circuit's holding is in "direct conflict" with the Second Circuit and district courts in seven other circuits as well as the principles in Basic v. Levinson.