By Britt Latham and Erin M. Everitt
The U.S. Supreme Court has recently issued a flurry of opinions that directly affect securities law cases either procedurally or substantively. These opinions reflect a shift by the Court toward a more strict interpretation of the securities law statutes.
Janus Capital Group Inc. v. First Derivatives Traders, 131 S. Ct. 2296 (2011) – This case involved whether Janus Capital Management (“JCM”), an investment advisor, could be liable under Rule 10b-5 for allegedly false statements in the prospectuses of Janus Investment Fund, the mutual fund for which it served as investment advisor. In a 5-4 decision, the Court held that JCM could not be held liable because merely “participating in the writing and dissemination” of prospectuses is not enough to confer primary liability; “the maker of a statement is the entity with authority over the content of the statement and whether and how to communicate it.”
Takeaway: The Court reinforced its holdings in Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 167 (2008) and Cent. Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994) that preclude secondary liability under Rule 10b-5. A mutual fund investment advisor and manager cannot be held secondarily liable under the federal securities laws for alleged misrepresentations in the mutual funds’ prospectus even when the prospectus is written by the investment advisor/manager, provided the mutual fund is a separate legal entity from the investment advisor/manager.
Erica P. John Fund Inc. v. Halliburton Co.,131 S. Ct. 2179 (2011) – In this case, the Erica P. John Fund (the “Fund”) brought a securities class action alleging that Halliburton and an executive made misstatements designed to inflate its stock price in violation of §10(b) and Rule 10b-5. Seeking class certification, the Fund invoked the rebuttable presumption of reliance under the fraud-on-the-market theory. The Fifth Circuit affirmed the denial of class certification on the basis that loss causation is a prerequisite to the fraud-on-the-market presumption and the Fund had not shown that Haliburton’s statements caused the losses alleged. The Supreme Court unanimously rejected the Fifth Circuit’s holding and noted that the element of reliance in a private Rule 10b-5 action is “transaction causation, not loss causation.”
Takeaway: A securities plaintiff relying on the “fraud-on-the-market” theory to establish reliance does not have to separately establish loss causation to certify a class under Rule 23.
Wal-Mart Stores, Inc. v. Dukes, 131 S.Ct. 2541 (2011) – Wal-Mart is not a securities case, but its ruling on class certification will likely have significance for securities cases. In Wal-Mart, the Supreme Court held that to establish commonality under Rule 23(a)(2), the respondents must provide “convincing proof of a companywide discriminatory pay and promotion policy.” The Court rejected Respondents’ expert testimony advancing sociological, statistical, and anecdotal evidence of sex discrimination, noting that district courts must conduct a “rigorous analysis” of the movants’ claims, which “frequently will entail some overlap with the merits of plaintiffs’ underlying claim.”
Takeaway: If plaintiffs seek to rely on anecdotal evidence to establish commonality throughout a class (e.g., nationwide evidence of misrepresentative marketing of securities), the number of anecdotes must sufficiently represent the class across a wide swath of relevant data points.
Takeaway: Defendants are entitled to individualized determinations of monetary claims (e.g., individual stock losses) and individualized proceedings cannot be replaced with “Trial by Formula,” where the individual monetary claims of a random sampling are calculated and then extrapolated to the class as a whole.
On their face, the Halliburton and Wal-Mart decisions may seem to contradict each other as Halliburton held that Plaintiffs would not need to prove the merits to certify a class while Wal-Mart held that class certification under Rule 23 required a “rigorous analysis” that will “entail some overlap with the merits of the plaintiff’s underlying claim.” Anticipating this confusion, the Court explained in Wal-Mart that in a securities class action, plaintiffs relying on the fraud-on-the-market presumption satisfy Rule 23’s commonality requirement not by requiring individualized proof of reliance, but by “prov[ing] that their shares were traded in an efficient market,” which is “an issue that they will surely have to prove again at trial in order to make out their case on the merits.”
(Britt K. Latham is a Member of Bass, Berry & Sims PLC, focusing his practice on complex business, securities and class action litigation and the representation of clients in connection with internal and governmental investigations. Erin M. Everitt is an attorney at Bass, Berry & Sims PLC, focusing her practice on complex commercial, securities, and class action litigation).