(Slip Opinion) OCTOBER TERM, 2010 1
Syllabus
NOTE: Where it is feasible, a syllabus (headnote) will be released, as is
being done in connection with this case, at the time the opinion is issued.
The syllabus constitutes no part of the opinion of the Court but has been
prepared by the Reporter of Decisions for the convenience of the reader.
See United States v. Detroit Timber & Lumber Co., 200 U. S. 321, 337.
SUPREME COURT OF THE UNITED STATES
Syllabus
ERICA P. JOHN FUND, INC., FKA ARCHDIOCESE OF
MILWAUKEE SUPPORTING FUND, INC. v.
HALLIBURTON CO. ET AL.
CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR
THE FIFTH CIRCUIT
No. 09–1403. Argued April 25, 2011—Decided June 6, 2011
Petitioner Erica P. John Fund, Inc. (EPJ Fund), is the lead plaintiff in a
putative securities fraud class action filed against Halliburton Co.
and one of its executives (collectively Halliburton). EPJ Fund alleges
that Halliburton made various misrepresentations designed to inflate
the company’s stock price, in violation of §10(b) of the Securities Ex
change Act of 1934 and Securities and Exchange Commission Rule
10b–5. EPJ Fund also contends that Halliburton later made a num
ber of corrective disclosures that caused the stock price to drop and,
consequently, investors to lose money. EPJ Fund sought to have its
proposed class certified pursuant to Federal Rule of Civil Procedure
23. The District Court found that the suit could proceed as a class
action under Rule 23(b)(3), but for one problem: Fifth Circuit prece
dent required securities fraud plaintiffs to prove “loss causation”—
i.e., that the defendant’s deceptive conduct caused the investors’
claimed economic loss—in order to obtain class certification. The
District Court concluded that EPJ Fund had failed to satisfy that re
quirement. The Court of Appeals agreed and affirmed the denial of
class certification.
Held: Securities fraud plaintiffs need not prove loss causation in order
to obtain class certification. Pp. 3–10.
(a) In order to certify a class under Rule 23(b)(3), a court must find
“that the questions of law or fact common to class members predomi
nate over any questions affecting only individual members, and that
a class action is superior to other available methods for fairly and ef
ficiently adjudicating the controversy.” Considering whether “ques
2 ERICA P. JOHN FUND, INC. v. HALLIBURTON CO.
Syllabus
tions of law or fact common to class members predominate” begins, of
course, with the elements of the underlying cause of action. The ele
ments of a private securities fraud claim based on violations of §10(b)
and Rule 10b–5 are: “(1) a material misrepresentation or omission by
the defendant; (2) scienter; (3) a connection between the misrepresen
tation or omission and the purchase or sale of a security; (4) reliance
upon the misrepresentation or omission; (5) economic loss; and (6)
loss causation.” Matrixx Initiatives, Inc. v. Siracusano, 563 U. S. ___,
___.
Whether common questions of law or fact predominate in such an
action often turns on the element of reliance. The traditional way a
plaintiff can demonstrate reliance is by showing that he was aware of
a company’s statement and engaged in a relevant transaction—e.g.,
purchasing common stock—based on that specific misrepresentation.
The Court recognized in Basic Inc. v. Levinson, 485 U. S. 224, how
ever, that “[r]equiring proof of individualized reliance from each
member of the proposed plaintiff class effectively would” prevent such
plaintiffs “from proceeding with a class action, since individual is
sues” would “overwhelm[ ] the common ones.” Id., at 242. The Court
in Basic sought to alleviate that concern by permitting plaintiffs to
invoke a rebuttable presumption of reliance based on what is known
as the “fraud-on-the-market” theory. According to that theory, “the
market price of shares traded on well-developed markets reflects all
publicly available information, and, hence, any material misrepre
sentations.” Id., at 246. Under that doctrine, the Court explained,
one can assume an investor relies on public misstatements whenever
he “buys or sells stock at the price set by the market.” Id., at 247.
The Court also made clear that the presumption could be rebutted by
appropriate evidence. Pp. 3–5.
(b) It is undisputed that securities fraud plaintiffs must prove cer
tain things in order to invoke Basic’s rebuttable presumption of reli
ance. According to the Court of Appeals, EPJ Fund had to prove the
separate element of loss causation in order to trigger the presump
tion. That requirement is not justified by Basic or its logic. This
Court has never mentioned loss causation as a precondition for invok
ing Basic’s rebuttable presumption. Loss causation addresses a mat
ter different from whether an investor relied on a misrepresentation,
presumptively or otherwise, when buying or selling a stock.
The Court has referred to the element of reliance in a private Rule
10b–5 action as “transaction causation,” not loss causation. Dura
Pharmaceuticals, Inc. v. Broudo, 544 U. S. 336, 341–342. Consistent
with that description, when considering whether a plaintiff has relied
on a misrepresentation, the Court has typically focused on facts sur
rounding the investor’s decision to engage in the transaction. Loss
Cite as: 563 U. S. ____ (2011) 3
Syllabus
causation, by contrast, requires a plaintiff to show that the misrepre
sentation caused a subsequent economic loss. That has nothing to do
with whether an investor relied on that misrepresentation in the first
place, either directly or through the fraud-on-the-market theory. The
Court of Appeals’ rule contravenes Basic’s fundamental premise—
that an investor presumptively relies on a misrepresentation so long
as it was reflected in the market price at the time of his transaction.
Pp. 5–8.
(c) Halliburton concedes that securities fraud plaintiffs should not
be required to prove loss causation in order to invoke Basic’s pre
sumption of reliance. Halliburton nonetheless defends the judgment
below on the ground that the Court of Appeals did not actually re
quire EPJ Fund to prove “loss causation” as the Court has used that
term. According to Halliburton, “loss causation” was shorthand for a
different analysis. The lower court’s actual inquiry, Halliburton in
sists, was whether EPJ Fund had demonstrated “price impact”—that
is, whether the alleged misrepresentations affected the market price
in the first place.
The Court does not accept EPJ Fund’s interpretation of the Court
of Appeals’ opinion. Loss causation is a familiar and distinct concept
in securities law; it is not price impact. Whatever Halliburton thinks
the Court of Appeals meant to say, what it said was loss causation.
The Court takes the Court of Appeals at its word. Based on those
words, the decision below cannot stand. Pp. 8–9.
597 F. 3d 330, vacated and remanded.
ROBERTS, C. J., delivered the opinion for a unanimous Court.
Cite as: 563 U. S. ____ (2011) 1
Opinion of the Court
NOTICE: This opinion is subject to formal revision before publication in the
preliminary print of the United States Reports. Readers are requested to
notify the Reporter of Decisions, Supreme Court of the United States, Wash
ington, D. C. 20543, of any typographical or other formal errors, in order
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SUPREME COURT OF THE UNITED STATES
_________________
No. 09–1403
_________________
ERICA P. JOHN FUND, INC., FKA ARCHDIOCESE
OF MILWAUKEE SUPPORTING FUND, INC.,
PETITIONER v. HALLIBURTON CO. ET AL.
ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF
APPEALS FOR THE FIFTH CIRCUIT
[June 6, 2011]
CHIEF JUSTICE ROBERTS delivered the opinion of the
Court.
To prevail on the merits in a private securities fraud
action, investors must demonstrate that the defendant’s
deceptive conduct caused their claimed economic loss.
This requirement is commonly referred to as “loss causa
tion.” The question presented in this case is whether
securities fraud plaintiffs must also prove loss causation
in order to obtain class certification. We hold that they
need not.
I
Petitioner Erica P. John Fund, Inc. (EPJ Fund), is the
lead plaintiff in a putative securities fraud class action
filed against Halliburton Co. and one of its executives
(collectively Halliburton). The suit was brought on behalf
of all investors who purchased Halliburton common stock
between June 3, 1999, and December 7, 2001.
EPJ Fund alleges that Halliburton made various mis
representations designed to inflate its stock price, in viola
tion of §10(b) of the Securities Exchange Act of 1934 and
2 ERICA P. JOHN FUND, INC. v. HALLIBURTON CO.
Opinion of the Court
Securities and Exchange Commission Rule 10b–5. See 48
Stat. 891, 15 U. S. C. §78j(b); 17 CFR §240.10b–5 (2010).
The complaint asserts that Halliburton deliberately made
false statements about (1) the scope of its potential liabil
ity in asbestos litigation, (2) its expected revenue from
certain construction contracts, and (3) the benefits of its
merger with another company. EPJ Fund contends that
Halliburton later made a number of corrective disclosures
that caused its stock price to drop and, consequently,
investors to lose money.
After defeating a motion to dismiss, EPJ Fund sought to
have its proposed class certified pursuant to Federal Rule
of Civil Procedure 23. The parties agreed, and the District
Court held, that EPJ Fund satisfied the general require
ments for class actions set out in Rule 23(a): The class was
sufficiently numerous, there were common questions of
law or fact, the claims of the representative parties were
typical, and the representative parties would fairly and
adequately protect the interests of the class. See App. to
Pet. for Cert. 3a.
The District Court also found that the action could
proceed as a class action under Rule 23(b)(3), but for one
problem: Circuit precedent required securities fraud plain
tiffs to prove “loss causation” in order to obtain class certi
fication. Id., at 4a, and n. 2 (citing Oscar Private Equity
Invs. v. Allegiance Telecom, Inc., 487 F. 3d 261, 269 (CA5
2007)). As the District Court explained, loss causation is
the “ ‘causal connection between the material misrepresen
tation and the [economic] loss’ ” suffered by investors.
App. to Pet. for Cert. 5a, and n. 3 (quoting Dura Pharma
ceuticals, Inc. v. Broudo, 544 U. S. 336, 342 (2005)). After
reviewing the alleged misrepresentations and corrective
disclosures, the District Court concluded that it could not
certify the class in this case because EPJ Fund had “failed
to establish loss causation with respect to any” of its
claims. App. to Pet. for Cert. 54a. The court made clear,
Cite as: 563 U. S. ____ (2011) 3
Opinion of the Court
however, that absent “this stringent loss causation re
quirement,” it would have granted the Fund’s certification
request. Ibid.
The Court of Appeals affirmed the denial of class certifi
cation. See 597 F. 3d 330 (CA5 2010). It confirmed that,
“[i]n order to obtain class certification on its claims, [EPJ
Fund] was required to prove loss causation, i.e., that the
corrected truth of the former falsehoods actually caused
the stock price to fall and resulted in the losses.” Id., at
334. Like the District Court, the Court of Appeals con
cluded that EPJ Fund had failed to meet the “require
ments for proving loss causation at the class certification
stage.” Id., at 344.
We granted the Fund’s petition for certiorari, 562 U. S.
___ (2011), to resolve a conflict among the Circuits as to
whether securities fraud plaintiffs must prove loss causa
tion in order to obtain class certification. Compare 597
F. 3d, at 334 (case below), with In re Salomon Analyst
Metromedia Litigation, 544 F. 3d 474, 483 (CA2 2008) (not
requiring investors to prove loss causation at class certifi
cation stage); Schleicher v. Wendt, 618 F. 3d 679, 687 (CA7
2010) (same); In re DVI, Inc. Securities Litigation, No. 08–
8033 etc., 2011 WL 1125926, *7 (CA3, Mar. 29, 2011)
(same; decided after certiorari was granted).
II
EPJ Fund contends that the Court of Appeals erred by
requiring proof of loss causation for class certification. We
agree.
A
As noted, the sole dispute here is whether EPJ Fund
satisfied the prerequisites of Rule 23(b)(3). In order to
certify a class under that Rule, a court must find “that the
questions of law or fact common to class members pre
dominate over any questions affecting only individual
4 ERICA P. JOHN FUND, INC. v. HALLIBURTON CO.
Opinion of the Court
members, and that a class action is superior to other
available methods for fairly and efficiently adjudicating
the controversy.” Fed. Rule Civ. Proc. 23(b)(3). Consider
ing whether “questions of law or fact common to class
members predominate” begins, of course, with the ele
ments of the underlying cause of action. The elements of a
private securities fraud claim based on violations of §10(b)
and Rule 10b–5 are: “ ‘(1) a material misrepresentation or
omission by the defendant; (2) scienter; (3) a connection
between the misrepresentation or omission and the pur
chase or sale of a security; (4) reliance upon the misre-
presentation or omission; (5) economic loss; and (6) loss
causation.’ ” Matrixx Initiatives, Inc. v. Siracusano, 563
U. S. ___, ___ (2011) (slip op., at 9) (quoting Stoneridge
Investment Partners, LLC v. Scientific-Atlanta, Inc., 552
U. S. 148, 157 (2008)).
Whether common questions of law or fact predominate
in a securities fraud action often turns on the element of
reliance. The courts below determined that EPJ Fund had
to prove the separate element of loss causation in order to
establish that reliance was capable of resolution on a
common, classwide basis.
“Reliance by the plaintiff upon the defendant’s deceptive
acts is an essential element of the §10(b) private cause of
action.” Stoneridge, supra, at 159. This is because proof of
reliance ensures that there is a proper “connection be
tween a defendant’s misrepresentation and a plaintiff’s
injury.” Basic Inc. v. Levinson, 485 U. S. 224, 243 (1988).
The traditional (and most direct) way a plaintiff can
demonstrate reliance is by showing that he was aware
of a company’s statement and engaged in a relevant
transaction—e.g., purchasing common stock—based on
that specific misrepresentation. In that situation, the
plaintiff plainly would have relied on the company’s decep
tive conduct. A plaintiff unaware of the relevant state
ment, on the other hand, could not establish reliance on
Cite as: 563 U. S. ____ (2011) 5
Opinion of the Court
that basis.
We recognized in Basic, however, that limiting proof of
reliance in such a way “would place an unnecessarily
unrealistic evidentiary burden on the Rule 10b–5 plaintiff
who has traded on an impersonal market.” Id., at 245.
We also observed that “[r]equiring proof of individualized
reliance from each member of the proposed plaintiff class
effectively would” prevent such plaintiffs “from proceeding
with a class action, since individual issues” would “over
whelm[ ] the common ones.” Id., at 242.
The Court in Basic sought to alleviate those related
concerns by permitting plaintiffs to invoke a rebuttable
presumption of reliance based on what is known as the
“fraud-on-the-market” theory. According to that theory,
“the market price of shares traded on well-developed
markets reflects all publicly available information, and,
hence, any material misrepresentations.” Id., at 246.
Because the market “transmits information to the investor
in the processed form of a market price,” we can assume,
the Court explained, that an investor relies on public
misstatements whenever he “buys or sells stock at the
price set by the market.” Id., at 244, 247 (internal quota
tion marks omitted); see also Stoneridge, supra, at 159;
Dura Pharmaceuticals, 544 U. S., at 341–342. The Court
also made clear that the presumption was just that, and
could be rebutted by appropriate evidence. See Basic,
supra, at 248.
B
It is undisputed that securities fraud plaintiffs must
prove certain things in order to invoke Basic’s rebuttable
presumption of reliance. It is common ground, for exam
ple, that plaintiffs must demonstrate that the alleged
misrepresentations were publicly known (else how would
the market take them into account?), that the stock traded
in an efficient market, and that the relevant transaction
6 ERICA P. JOHN FUND, INC. v. HALLIBURTON CO.
Opinion of the Court
took place “between the time the misrepresentations were
made and the time the truth was revealed.” Basic, 485
U. S., at 248, n. 27; id., at 241–247; see also Stoneridge,
supra, at 159.
According to the Court of Appeals, EPJ Fund also had to
establish loss causation at the certification stage to “trig
ger the fraud-on-the-market presumption.” 597 F. 3d, at
335 (internal quotation marks omitted); see ibid. (EPJ
Fund must “establish a causal link between the alleged
falsehoods and its losses in order to invoke the fraud-on
the-market presumption”). The court determined that, in
order to invoke a rebuttable presumption of reliance, EPJ
Fund needed to prove that the decline in Halliburton’s
stock was “because of the correction to a prior misleading
statement” and “that the subsequent loss could not other
wise be explained by some additional factors revealed then
to the market.” Id., at 336 (emphasis deleted). This is the
loss causation requirement as we have described it. See
Dura Pharmaceuticals, supra, at 342; see also 15 U. S. C.
§78u–4(b)(4).
The Court of Appeals’ requirement is not justified by
Basic or its logic. To begin, we have never before men
tioned loss causation as a precondition for invoking Basic’s
rebuttable presumption of reliance. The term “loss causa
tion” does not even appear in our Basic opinion. And for
good reason: Loss causation addresses a matter different
from whether an investor relied on a misrepresentation,
presumptively or otherwise, when buying or selling a
stock.
We have referred to the element of reliance in a pri-
vate Rule 10b–5 action as “transaction causation,” not loss
causation. Dura Pharmaceuticals, supra, at 341–342
(citing Basic, supra, at 248–249). Consistent with that
description, when considering whether a plaintiff has
relied on a misrepresentation, we have typically focused
on facts surrounding the investor’s decision to engage in
Cite as: 563 U. S. ____ (2011) 7
Opinion of the Court
the transaction. See Dura Pharmaceuticals, supra, at
342. Under Basic’s fraud-on-the-market doctrine, an in
vestor presumptively relies on a defendant’s misrepre
sentation if that “information is reflected in [the] market
price” of the stock at the time of the relevant transaction.
See Basic, 485 U. S., at 247.
Loss causation, by contrast, requires a plaintiff to show
that a misrepresentation that affected the integrity of the
market price also caused a subsequent economic loss. As
we made clear in Dura Pharmaceuticals, the fact that a
stock’s “price on the date of purchase was inflated because
of [a] misrepresentation” does not necessarily mean that
the misstatement is the cause of a later decline in value.
544 U. S., at 342 (emphasis deleted; internal quotation
marks omitted). We observed that the drop could instead
be the result of other intervening causes, such as “changed
economic circumstances, changed investor expectations,
new industry-specific or firm-specific facts, conditions, or
other events.” Id., at 342–343. If one of those factors were
responsible for the loss or part of it, a plaintiff would not
be able to prove loss causation to that extent. This is true
even if the investor purchased the stock at a distorted
price, and thereby presumptively relied on the misrepre
sentation reflected in that price.
According to the Court of Appeals, however, an inability
to prove loss causation would prevent a plaintiff from
invoking the rebuttable presumption of reliance. Such a
rule contravenes Basic’s fundamental premise—that an
investor presumptively relies on a misrepresentation so
long as it was reflected in the market price at the time of
his transaction. The fact that a subsequent loss may have
been caused by factors other than the revelation of a mis
representation has nothing to do with whether an investor
relied on the misrepresentation in the first place, either
directly or presumptively through the fraud-on-the-market
theory. Loss causation has no logical connection to the
8 ERICA P. JOHN FUND, INC. v. HALLIBURTON CO.
Opinion of the Court
facts necessary to establish the efficient market predicate
to the fraud-on-the-market theory.
The Court of Appeals erred by requiring EPJ Fund
to show loss causation as a condition of obtaining class
certification.
C
Halliburton concedes that securities fraud plaintiffs
should not be required to prove loss causation in order to
invoke Basic’s presumption of reliance or otherwise
achieve class certification. See Tr. of Oral Arg. 26–29.
Halliburton nonetheless defends the judgment below on
the ground that the Court of Appeals did not actually
require plaintiffs to prove “loss causation” as we have used
that term. See id., at 27 (“it’s not loss causation as this
Court knows it in Dura”). According to Halliburton, “loss
causation” was merely “shorthand” for a different analysis.
Brief for Respondents 18. The lower court’s actual in
quiry, Halliburton insists, was whether EPJ Fund had
demonstrated “price impact”—that is, whether the alleged
misrepresentations affected the market price in the first
place. See, e.g., id., at 16–19, 24–27, 50–51; see also Tr. of
Oral Arg. 27 (stating that the Court of Appeals’ “test is
simply price impact” and that EPJ Fund’s “only burden
under the Fifth Circuit case law was to show price
impact”).*
“Price impact” simply refers to the effect of a misrepre
sentation on a stock price. Halliburton’s theory is that if a
——————
* Halliburton further concedes that, even if its conception of what the
Court of Appeals meant by “loss causation” is correct, the Court of
Appeals erred by placing the initial burden on EPJ Fund. See Tr. of
Oral Arg. 29 (“We agree . . . that the Fifth Circuit put the initial burden
of production on the plaintiff, and that’s contrary to Basic”). According
to Halliburton, a plaintiff must prove price impact only after Basic’s
presumption has been successfully rebutted by the defendant. Tr. of
Oral Arg. 28, 38–40. We express no views on the merits of such a
framework.
Cite as: 563 U. S. ____ (2011) 9
Opinion of the Court
misrepresentation does not affect market price, an inves
tor cannot be said to have relied on the misrepresentation
merely because he purchased stock at that price. If the
price is unaffected by the fraud, the price does not reflect
the fraud.
We do not accept Halliburton’s wishful interpretation of
the Court of Appeals’ opinion. As we have explained, loss
causation is a familiar and distinct concept in securities
law; it is not price impact. While the opinion below may
include some language consistent with a “price impact”
approach, see, e.g., 597 F. 3d, at 336, we simply cannot
ignore the Court of Appeals’ repeated and explicit refer
ences to “loss causation,” see id., at 334 (three times), 334
n. 2, 335, 335 n. 10 (twice), 335 n. 11, 336, 336 n. 19, 336
n. 20, 337, 338, 341 (twice), 341 n. 46, 342 n. 47, 343, 344
(three times).
Whatever Halliburton thinks the Court of Appeals
meant to say, what it said was loss causation: “[EPJ Fund]
was required to prove loss causation, i.e., that the cor
rected truth of the former falsehoods actually caused the
stock price to fall and resulted in the losses.” 597 F. 3d, at
334; see id., at 335 (“we require plaintiffs to establish loss
causation in order to trigger the fraud-on-the-market
presumption” (internal quotation marks omitted)). We
take the Court of Appeals at its word. Based on those
words, the decision below cannot stand.
* * *
Because we conclude the Court of Appeals erred by
requiring EPJ Fund to prove loss causation at the certifi
cation stage, we need not, and do not, address any other
question about Basic, its presumption, or how and when it
may be rebutted. To the extent Halliburton has preserved
any further arguments against class certification, they
may be addressed in the first instance by the Court of
Appeals on remand.
10 ERICA P. JOHN FUND, INC. v. HALLIBURTON CO.
Opinion of the Court
The judgment of the Court of Appeals is vacated, and
the case is remanded for further proceedings consistent
with this opinion.
It is so ordered.