Securities Class Actions: U.S. Supreme Court Rules That Loss Causation Need Not Be Proven At Class Certification Stage

Sullivan & Cromwell LLP - June 8, 2011

On June 6, 2011, the U.S. Supreme Court issued a unanimous decision in Erica P. John Fund, Inc. v. Halliburton Co. et al., No. 09-1403, rejecting the Court of Appeals for the Fifth Circuit’s requirement that plaintiffs must prove loss causation in order to trigger the “fraud-on-the-market” presumption of reliance and obtain class certification in an action brought under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5.  Loss causation—which requires plaintiffs to show that the defendant’s misrepresentations or deception caused plaintiffs’ subsequent economic loss—still must be adequately pled and ultimately proven on the merits by plaintiffs, but need not be proven to obtain class certification.  The Court’s limited ruling expressly declined to address the contours of various other issues that defendants often raise at the class certification stage, including issues concerning application of the “fraud-on-the-market” presumption of reliance.  The Court’s rejection of the Fifth Circuit’s standard is in line with the standards applied in several other circuits, including the Second Circuit.