NU Online News Service, June 7, 10:17 a.m.EDT

The Supreme Court has ruled that shareholders of a publiccompany may bring class-action suits for securities fraud withoutfirst proving they lost money through the company’s actions.

In the suit, Erica P. John Fund v. Halliburton,plaintiffs alleged securities-fraud violations, including falsifiedearnings reports, playing down estimates of liability from damagecaused by exposure to asbestos, and inflating the benefits of amerger during the 1999-2001 period, when former Vice President DickCheney served as chairman and CEO.

The district court found that the suit could not proceed as aclass action because 5th Circuit precedent requiredsecurities-fraud plaintiffs to prove “loss causation”—that thedefendant’s deceptive conduct caused the investors’ claimedeconomic loss—in order to obtain class certification.

The district court concluded that EPJ Fund had failed to satisfythat requirement, with the 5th Circuit agreeing by affirming thedenial of class certification.

In the Supreme Court decision, though, Chief Justice JohnRoberts says that in order to certify a class under Rule 23(b)(3),a court must find “that the questions of law or fact common toclass members predominate over any questions affecting onlyindividual members and that a class action is superior to otheravailable methods for fairly and efficiently adjudicating thecontroversy.”

Roberts says the court established the “fraud of market”criteria in Basic, Inc. v. Levinson.

David Elliott, chairman of the shareholder and securitieslitigation practice at Day Pitney, in Hartford, Conn., says thatwhat the Supreme Court ruled in Basic is that it is notnecessary to require individual reliance by every member of a classaction in order to establish reliance.

“The fraud on the market theory holds that the market pricereflects all publicly available information including, therefore,any material misrepresentations,” Elliott says.

He adds, “So, the Supreme Court reversed the 5th Circuit andsaid plaintiffs can take advantage of Basic’s reliance onthe fraud of market theory at the class-certification stage.”

Michael Young, chairman of Wilkie Farr’s securities litigationand enforcement practice group lawyer at Willkie Farr &Gallagher LLP, in New York, says the unanimous decision onlychanged precedent in the 5th U.S. Circuit Court of Appeals, wherethe suit was brought.

Elliot says the decision brings the 5th Circuit rule in linewith those of the 2nd U.S. Circuit Court of Appeals and the 3rdU.S. Circuit of Appeals. He also notes that district courts inother circuits rely on the 5th Circuit precedent.

“It now becomes the law of the land,” Elliott says.

Young says the decision does not bar courts from using rejectiontools to throw out a lawsuit further along in the process, forexample, in acting on a motion to dismiss or in granting summaryjudgment.

“All other options for dismissing a lawsuit during thelitigation process remain,” Young says.

Elliott agrees. He says the Supreme Court decision left open thepossibility for Haliburton to make other arguments on remand to thedistrict court.