The U.S. Court of Appeals for the Fifth Circuit sharply limited the rights of investors to pursue a class action lawsuit to hold accountable companies that misrepresent or omit material information relevant to investors. AARP has asked the U.S. Supreme Court to reverse this ruling.
Securities fraud litigation initiated by private parties under the U.S. Securities and Exchange Commission’s (SEC) Rule 10b-5 is an essential means of protecting the integrity of the securities markets for investors, maintaining investor confidence in markets, and making victims whole.
In order to prove a violation of Rule 10b-5, a party must demonstrate: (1) a material misrepresentation or omission; (2) made knowingly; (3) a connection between that misrepresentation/omission and a transaction; (4) reliance on that misrepresentation/omission; and (5) economic loss caused by that misrepresentation/omission. The Supreme Court has endorsed the bringing of class action lawsuits for Rule 10b-5 violations
The Erica P. John Fund sued Halliburton Company for alleged misrepresentations that it says caused it to invest in Halliburton stock that later plummeted in value. The Fund and others sued as a class, arguing that they had all relied on the same misrepresentations and taken the same actions in reliance on those misrepresentations, and as a consequence they suffered losses of the same nature.
Halliburton argues that before moving forward with class certification, the plaintiffs must not only allege but actually prove the loss causation element of the five pronged test. This is often difficult to prove by the legal applicable standards until after discovery, because typically the bulk of relevant evidence is held by the company.
Attorneys with AARP Foundation Litigation filed AARP’s “friend of the court” brief in this case, pointing out the legislative history and court precedents favoring class actions under Rule 10b-5, and pointing out how critically important a vigorous private right of action is for the vitality of the markets. The SEC does not have the resources to adequately police the securities marketplace, and study after study shows that private enforcement actions are an essential tool not only in stopping misconduct but in compensating victims.
Foreclosing or inhibiting class actions, AARP argues, will make it difficult if not impossible to engage in private litigation as securities litigation is costly, time-consuming, and technically difficult, requiring specialized legal assistance that is not likely to be affordable to many individual investors. Without a realistic threat of being held accountable on a large scale by way of the class action, companies will have little incentive to comply with securities anti-fraud laws.
What’s at Stake
A significant percentage of the investing public in the United States’ markets is comprised of people age 50 and older. They are frequent targets of financial fraud because they often have significant assets and are looking for investment opportunities to supplement Social Security and other sources of retirement income.
Status of the Case
Erica P. John Fund, Inc. v. Halliburton, Co. is before the U.S. Supreme Court.