Class Certification

If the motion to dismiss is the principal tool for weeding out securities fraud class actions, class certification comes second in importance. The Roberts Court has grappled with that issue twice to date.

Erica P. John Fund, Inc. v. Halliburton

Halliburton[1] resolved a circuit split over the question of what a plaintiff was required to prove to certify a class. The Fifth Circuit stood alone in requiring plaintiffs to prove loss causation at the class certification stage,[2] which had proved a challenging barrier for plaintiffs in that circuit. Chief Justice Roberts, writing for a unanimous Court, made short work of reversing the Fifth Circuit.

The Fifth Circuit had held that plaintiffs were required to prove loss causation in order to trigger the fraud-on-the-market presumption of Basic, Inc. v. Levinson.133 The chief justice, however, found that the fraud-on-the market presumption had no connection to loss causation; the presumption was about reliance, not loss causation.

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.134

It is hard to see Halliburton as anything more than mere error correction. But the case does demonstrate a willingness by the Roberts Court to take securities cases to rein in circuits imposing undue burdens on plaintiffs. Halliburton is hardly a case that called out for resolution; one circuit, not a terribly significant one for securities class actions, had made an obvious mistake. The Supreme Court could have left the issue to percolate in the lower courts with the hope that the deviant court of appeals would bring itself into line with the other circuits. Instead, the Court invested the time to bring the Fifth Circuit into line when it imposed an unwarranted burden on plaintiffs. If the Roberts Court has a “probusiness” agenda, its selection of cases for review seems poorly suited for promoting its aims.

  • [1] Erica P. John Fund, Inc. v. Halliburton Co., 131 S. Ct. 2179 (2011).
  • [2] See In re Salomon Analyst Metromedia Litig., 544 F.3d 474, 483 (2d Cir. 2008) (expungingthe requirement that investors prove loss causation at class certification stage); Schleicher v. Wendt,618 F.3d 679, 687 (7th Cir. 2010) (same); In re DVI, Inc. Sec. Litig., 639 F.3d 623, 636-37 (3d Cir.2011) (same).
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