Supreme Court Eases Standards for Securities Fraud Class Action Suits to Proceed

Supreme Court Eases Standards for Securities Fraud Class Action Suits to Proceed

By Matt O’Donnell

The Supreme Court has ruled that shareholders of a public company may bring class action lawsuits for securities fraud without first proving they lost money through the company’s actions, a burden securities fraud plaintiffs once had to bear.

The decision arose from the case Erica P. John Fund v. Halliburton, in which plaintiffs alleged securities fraud violations against Halliburton that included falsifying earnings reports, playing down estimates of liability from damage caused by exposure to asbestos, and inflating the benefits of a merger during the 1999-2001 period.

A district court found that the Halliburton securities fraud class action lawsuit could not proceed as a class action because the 5th Circuit precedent required securities fraud plaintiffs to prove “loss causation” (i.e., that the defendant’s deceptive conduct caused the investors’ claimed economic loss) in order to obtain class certification. The case was thus denied class certification.

In the Supreme Court decision, however, Chief Justice John Roberts pointed to the “fraud of market” criteria in Basic, Inc. v. Levinson — a theory that holds the market price reflects all publicly available information, including any material misrepresentations. Based on this, the Supreme Court reversed the 5th Circuit Court’s decision and allowed Erica P. John Fund v. Halliburton to proceed as a class action.

The Supreme Court decision has now changed precedent in the 5th U.S. Circuit Court of Appeals, which district courts in other circuits rely on. It still leaves open the possibility for Halliburton to make other arguments on remand to the district court, however.