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Supreme Court Permits Securities Fraud Class Action

The U.S. Supreme Court rejected a federal appeals court's ruling that had sharply limited the rights of investors to pursue a class action lawsuit regarding misrepresentations of material information relevant to investors.


Securities fraud litigation initiated by private parties under the U.S. Securities and Exchange Commission's 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 latter 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 argued that before moving forward with class certification, the plaintiffs must 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, 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 studies show that private enforcement actions are an essential tool not only in stopping misconduct, but in compensating victims. Foreclosing or inhibiting class actions would make it difficult or impossible to engage in private litigation; securities litigation is costly, time-consuming and technically difficult, requiring specialized legal assistance that is often unaffordable to individual investors. Without a realistic threat of being held accountable on a large scale by way of the class action, companies would have little incentive to comply with securities anti-fraud laws.

The Court agreed. "The fact that a subsequent loss may have been acaused by factors other than the revelation of a misrepresentation has nothing to do with whether an investor relied on the misrepresentation in the first place," the Court ruled.

What's at Stake

People age 50 and older comprise a significant percentage of the investing public. 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.

Case Status

The U.S. Supreme Court remanded Erica P. John Fund, Inc. v. Halliburton for a full trial.