Supreme Court Reverses Fifth Circuit’s Error in Halliburton Class Action


On Monday, June 6, the Supreme Court issued a very short and, for plaintiffs’ securities lawyers, sweet decision almost summarily reversing the Fifth Circuit’s decision denying Rule 23 (b)(3) class certification to the lead plaintiff in a 10b-5 securities fraud class action.  Erica P. John Fund, Inc. v. Halliburton, 563 U.S. ____(2011).  This should not be taken as a sign that this Supreme Court has turned soft on plaintiffs or hard on big business. It was just that the Fifth Circuit was so very wrong.

While it is no longer true that the merits are entirely banished from the Rule 23 class certification proceeding, the Fifth Circuit’s attempted imposition of a Rule 23 requirement of “proof” of one of the key elements of a 10b-5 claim was leading to pitched battles over class discovery, which would rival full merits discovery if the burden to “prove” loss causation at that early stage became the law of the land.  Such a requirement, Chief Justice Roberts wrote, simply cannot be found in Rule 23.

Concern over the imposition of stricter loss causation scrutiny under Rule 23 has already caused many plaintiffs to engage expensive market experts to perform  premature “event studies”.  These are elaborate analyses of market trading and disclosures for widely traded public companies, to support the allegations in a securities fraud class action  complaint that plaintiff investors suffered losses when defendants’ false representations about the company were eventually revealed to the world and caused the market price of the company’s stock to fall. 

 Now, plaintiffs will not be required to prove loss causation twice–once in a mini-bench trial and again before the jury.