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A Fifth Circuit Court of Appeals decision was surprisingly reversed and remanded by the Supreme Court of the United States earlier this month. In a decision on the securities class action against Halliburton, SCOTUS struck down a requirement placed by the Fifth Circuit Court of Appeals and the Federal District Court regarding the securities class action standing of the plaintiff.
The Supreme Court rejected the idea that the plaintiffs had to satisfy a "loss causation" prong in order to bring a securities class action against Halliburton for violation of Rule 10b-5. The Fifth Circuit, upholding a decision from the district court, held that the lead plaintiff could not bring the suit as a class action under Rule 23 of the Federal Rules of Civil Procedure.
The lead plaintiff in the Fifth Circuit case was the Archdiocese of Milwaukee Supporting Fund, Inc. (The Fund). The Fund claimed that Halliburton made several misrepresentations for the purpose of inflating its stock price and brought an action under 10b-5, citing the securities fraud-on-the-market theory. The proposed class included all investors who had purchased Halliburton common stock between June 3, 1999 and December 7, 2001. The misrepresentations alleged by the plaintiffs included the misleading of the plaintiffs on the scope of Halliburton’s possible liability in asbestos litigation, its anticipated revenue from certain construction contracts and the benefits of its merger with another company.
According to the Fifth Circuit Court of Appeals’ opinion, fraud-on-the-market theory states that “in an efficient, well developed market all public information about a company is known to the market and is reflected in the stock price.” As such, misrepresentations made by the company would also result in a presumption that the buyer of company stock relied on the misrepresentations.
Fifth Circuit Court of Appeals precedent dictated that plaintiffs in a securities class action must prove “loss causation” — a showing that the defendant had deceived the plaintiff-investor and that as a result of the deceptive conduct, the plaintiff-investors had suffered the alleged economic loss.
Like the court before it, the Fifth Circuit Court of Appeals upheld the loss causation element in the Halliburton case, making it that much harder for the investors to bring a class action securities lawsuit.
The elements were interpreted differently at the Supreme Court level, however, where the Fifth Circuit decision was reversed and remanded, in light of a different approach. For more information on the Supreme Court’s ruling on the Halliburton case, check out FindLaw’s Supreme Court Blog.