Supreme Court to Decide Whether Class Certification in a Securities Fraud Case Requires Proof of Loss Causation


In Basic Inc. v. Levinson, 485 U.S. 224 (1988), the Supreme Court held that in a federal securities fraud class action, if the plaintiff proves that the defendant’s shares are publicly traded on an efficient, well developed market and that the plaintiff purchased shares of the defendant after the defendant made material false representations and before the truth about these misrepresentations was revealed, then a rebuttable presumption arises that the plaintiff relied on the defendant’s misrepresentations in purchasing the shares. While reliance is typically an issue that requires individualized proof, defeating certification, the fraud on the market presumption allows the class representative to use common proof to establish that putative class members relied on an alleged misrepresentation.


In its certiorari petition, the plaintiff contended that the Fifth Circuit’s holding that proof of loss causation is required for the fraud on the market presumption to apply and for class certification conflicts with the Supreme Court’s holding in Basic Inc and with contrary holdings by the Second Circuit Court of Appeals and by multiple district courts. The plaintiff also contends that by requiring proof of loss causation for class certification, the Fifth Circuit’s holding conflicts with Federal Rule of Civil Procedure 23, which governs class actions but does not require proof of loss causation for class certification.

At the Supreme Court’s request, the Solicitor General filed an amicus brief urging the Court to grant certiorari. This brief argued that the Fifth Circuit had improperly added additional requirements for Rule 23 certification and had erroneously required the plaintiff to prove an essential element of its case on the merits as a precursor to class certification.

On January 7, 2011, the Supreme Court granted the petition for certiorari and decided to review the Fifth Circuit’s decision. Erica P. John Fund, Inc. v. Halliburton Co., No. 09-1403 (S. Ct. Jan. 7, 2011). A decision is likely later this year.