RESPONDENT: Halliburton Co., et al.
LOCATION: Halliburton Headquarters
DOCKET NO.: 09-1403
DECIDED BY: Roberts Court (2010-2016)
LOWER COURT: United States Court of Appeals for the Fifth Circuit
CITATION: 563 US 804 (2011)
GRANTED: Jan 07, 2011
ARGUED: Apr 25, 2011
DECIDED: Jun 06, 2011
David Boies - for the petitioner
David Sterling - on behalf of the respondents
Nicole A. Saharsky - Assistant to the Solicitor General, Department of Justice, for the petitioner
Facts of the case
A group of Halliburton Co. shareholders, led by the Erica P. John Fund, filed a lawsuit that contends that from 1999 to 2001, the Houston-based company falsified earnings reports, played down estimated asbestos liability and overstated the benefits of a merger. The U.S. District Court for the Northern District of Texas denied the investors' motion for class certification in the case, holding that they couldn't sue as a group because they hadn't established that they lost money as a result of the alleged fraud. The U.S. Court of Appeals for the Fifth Circuit affirmed the lower court order.
In a securities fraud action, must plaintiffs prove that the alleged fraud caused a drop in stock prices in order to get class certification?
Media for Erica P. John Fund, Inc. v. Halliburton Co.Audio Transcription for Oral Argument - April 25, 2011 in Erica P. John Fund, Inc. v. Halliburton Co.
Audio Transcription for Opinion Announcement - June 06, 2011 in Erica P. John Fund, Inc. v. Halliburton Co.
John A. Campbell:
Petitioner Erica P. John Fund or we'll call it EPJ Fund purchased stock in Halliburton Company, one of the respondents here.
After the stock price took a dive, EPJ Fund filed a lawsuit, alleging that Halliburton had committed securities fraud.
The just of the complaint was that Halliburton had made various false statements that inflated its stock price and after the truth came to light, the price of Halliburton stock dropped causing EPJ Fund to lose money.
Now, EPJ Fund is not the only investor who claims to have lost money because of Halliburton's conduct.
EPJ Fund sought to proceed as the representative of the whole class of people who invested and lost money.
These sorts of class actions allow groups of plaintiffs to join together and file one consolidated case.
Now, there are several requirements that must be met in order for such a class action to proceed.
“As relevant here, EPJ Fund had to show that,” and this is a quote from the law, “Questions of law or fact common to class members would predominate over any questions affecting only individual members.
This ensures that it makes sense to have the plaintiffs proceed as a group rather than individually.
Now, to determine whether common questions will predominate over individual ones, you need to consider what the elements of the underlying cause of action are.
In order to prove securities fraud, plaintiffs need to establish several things.
One of those things is reliance.
Reliance is proof that you relied on the false statements when deciding to buy the stock.
Now, in the prior case of ours called Basic Incorporated versus Levinson, we held that we would presume an investor relies an all public statements about a company whenever he buys or sells that company's stock at a price set by the market.
This is based on the theory that the market price reflects all public information about the stock and therefore, when you buy at the stock price, it's like relying on all the statements that go into the price.
Now, this theory helps plaintiffs show that common issues were likely predominate over individual ones.
The courts below applied a rule that in order to invoke this presumption of reliance, the plaintiffs had to show what we called “loss causation.”
Loss causation is a separate element of securities fraud.
To prove loss causation, securities fraud plaintiffs need to show that their claimed economic loss was caused by the defendant's deceptive conduct.
If the truth of the misrepresentation comes out and the stock price drops 10%, you might not be able to show the loss was caused by the fraud, if for example every other company in that line of work also lost 10% because of a bad economic forecast or something like that.
Now in this case, the District Court found that EPJ Fund could not prove loss causation and therefore, could not have its class certified.
The United States Court of Appeals for the Fifth Circuit affirmed because other Courts of Appeals had held that securities fraud plaintiffs do not need to prove loss causation at the class certification stage, we granted certiorari to resolve that conflict and we now reversed, whether or not a lost that an investor suffered was caused by fraud or something else has nothing to do with whether the investor relied on the false statement in the first place.
Loss causation is concerned with the backend of the securities fraud claim whether the defendant's false statements were responsible for the later drop in the stocks price.
Reliance is concerned with the front-end, whether the false statement somehow influenced an investor's decision to buy the stock in the first place, and there's no logical connection between the two.
In fact, Halliburton concedes that EPJ Fund should not have been required to prove loss causation to trigger the presumption of reliance.
Halliburton instead claims that when the lower courts used the term loss causation, they really meant something else, something called “price impact.”
I'm not going to explain what price impact is beyond noting that like loss causation, it’s a familiar term in securities law and the terms mean two very different things.
We take the Court of Appeal as its word.
It used the term loss causation more than 20 times in its opinion.
It never used the term price impact so the decision below cannot stand.