On June 23, 2014, the Supreme Court decided a much-anticipated case in the area of federal securities law. The case, Halliburton Co. v. Erica P. John Fund, Inc. , presented to the Court the following two questions, both dealing with the certification of a class of securities fraud plaintiffs: 1. Whether the Court should overrule or substantially modify the holding of Basic, Inc. v. Levinson, 485 U.S. 224 (1988), to the extent that it recognized a presumption of class-wide reliance derived from the fraud-on-the-market theory. 2. Whether, in a case where the plaintiff invoked the presumption of reliance to seek class certification, the defendant might rebut the presumption and prevent class certification by introducing evidence that the alleged misrepresentations did not distort the market price of its stock. Class certification is important in the securities area, and lawsuits are often brought to challenge the class of plaintiffs attempting to be certified. Class certification is necessary before the case can go forward to be decided on the merits. In addition, the amount of money involved in a class action securities lawsuit may be significant. Individuals with small claims may not be willing to pursue individual lawsuits, but individuals who create a class of plaintiffs may result in a formidable plaintiff. A securities class action lawsuit often presents a stronger case and a case better able than small, individual cases to obtain major attorney representation. Proponents and opponents of securities class actions have actively argued their points. Proponents believe that certification requirements must be kept to a minimum because investors should be able easily to pursue companies that have committed fraud. They argue that investor protection benefits both individual investors and the securities markets in general by maintaining the integrity of the marketplace. Opponents of minimum certification requirements argue that too often investors bring lawsuits that are frivolous, such as when the share price drops for reasons unrelated to fraud, and that companies may feel pressured to pay out large settlements rather than risk even higher litigation costs. They also argue that the only people who benefit from securities class actions are the attorneys who receive large legal fees. The Halliburton cases illustrate the importance of class certification. The history of the cases leading to the second Supreme Court Halliburton decision is lengthy, spanning more than a decade. Thus far, the courts have dealt only with the issue of class certification; they have not yet had the opportunity to address the merits of the plaintiffs' arguments. There have been three rounds of decisions in the Federal District Court for the Northern District of Texas and two rounds in the U.S. Court of Appeals for the Fifth Circuit and the U.S. Supreme Court. After its second decision, the Supreme Court remanded the case for further proceedings consistent with its opinion. The Federal District Court for the Northern District of Texas has issued a third decision on class certification after the Supreme Court's remand. This report will first discuss requirements for securities fraud class action certification and then go through the rounds of the Halliburton federal decisions, ending with the third federal district court decision. Two major federal securities laws, which form the basis for the regulation of securities in the United States, were enacted in the wake of the stock market crash of 1929. These laws are the Securities Act of 1933, which makes it illegal to offer or sell securities to the public unless they have been registered with the Securities and Exchange Commission (SEC), and the Securities Exchange Act of 1934, which requires ongoing company disclosures to the investing public through annual, quarterly, and other filings with the SEC. Section 10(b) of the 1934 act is the general anti-fraud provision and the provision most frequently used by plaintiffs to allege securities fraud. Rule 10b-5, issued to carry out and give effect to Sction 10(b), makes it illegal "for any person ... [t]o make any untrue statement of a material fact or to omit to state a material fact." Neither Section 10(b) nor Rule 10b-5 provides for a private cause of action for plaintiffs to sue. Over the years, courts have established that private plaintiffs, not just the SEC or the Department of Justice (DOJ), have the right to bring a cause of action for violation of Section 10(b) and Rule 10b-5. Kardon v. National Gypsum Company, a 1947 case from the Federal District Court for the Eastern District of Pennsylvania, may be the earliest case to find a private cause of action for plaintiffs to sue for fraud under section 10(b). In the 1971 case, Superintendent of Insurance of the State of New York v. Bankers Life and Casualty Company, the Supreme Court confirmed the private right of action and since then has reaffirmed the right. To establish securities fraud under Section 10(b), a plaintiff must typically "prove (1) a material misrepresentation or omission by the defendant; (2) scienter [knowledge]; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation." Although an individual may bring a private right of action under Section 10(b), a class action, made up in a sense of many individuals combining their private rights of action into a class of plaintiffs, may be a stronger suit than several individual suits. In order for a securities fraud class action suit to go forward to consideration of the merits, the class of plaintiffs must be certified. There is no presumption of class certification. In order to achieve class certification in the securities area, indeed in any area of law, certain requirements must be met. Rule 23 of the Federal Rules of Civil Procedure (FRCP) sets out requirements that class actions must meet. One of the most important requirements for securities fraud class action certification, as it is for class certification in any area of law, is the predominance requirement of Rule 23(b)(3). For the predominance requirement to be met, questions of law or fact which are common to class members [must] predominate over any questions which affect only individual members. General Telephone Company of the Southwest v. Falcon, although not dealing with securities fraud, is perhaps the case best known for setting out the predominance requirement. The Supreme Court in General Telephone did not allow the certification of a class action brought by persons claiming discrimination in promotion based on national origin and persons claiming discrimination in hiring based on national origin. In its decision, the Court emphasized that, to be successful in achieving class certification, the class must satisfy Rule 23(b)'s requirement that "questions of law or fact common to class members [must] predominate over any questions affecting only individual members." Wal-Mart Stores, Inc. v. Dukes , also not a securities fraud class certification case but decided thirty years after General Telephone , used much the same rationale that was used in General Telephone for denying class certification. The Court stated, Rule 23 does not set forth a mere pleading standard. A party seeking class certification must affirmatively demonstrate his compliance with the Rule—that is, he must be prepared to prove that there are in fact sufficiently numerous parties, questions of law or fact, etc. In the area of securities fraud class action certification, Basic v. Levinson discussed the predominance requirement. The Supreme Court stated: The District Court adopted a presumption of reliance by members of the plaintiff class upon petitioners' public statements that enabled the court to conclude that common questions of law or fact predominated over particular questions pertaining to individual plaintiffs. What is especially important about Basic is that the Court stated that the requirement of reliance may be met in some circumstances by allowing a presumption of reliance on material misstatements, instead of requiring each plaintiff to prove direct reliance. "Misleading statements will therefore defraud purchasers even if the purchasers do not directly rely on the misstatements." Basic introduced the fraud-on-the-market theory as the rationale behind the presumption of reliance in certain circumstances. The fraud-on-the-market theory is based on the belief that, in an efficient, well-developed securities market, all material information about a company is available to the public and this information is reflected in the stock price. Courts will allow plaintiffs under the fraud-on-the-market theory to show a rebuttable presumption of reliance on material misstatements, instead of requiring all plaintiffs in all cases to prove direct reliance which would, according to the Supreme Court in Basic , pose an undue burden on plaintiffs. Cases, notably the Halliburton cases, have set out additional parameters for securities fraud class certification. Discussed later in this report, they include proof of loss causation and proof of materiality only at the merits stage, not at the class certification stage, and the right of a defendant to rebut the Basic presumption of reliance at the class certification stage. It should be noted that, in response to the belief that too many frivolous class action securities cases were being brought, particularly in the 1980s, Congress in the 1990s enacted two statutes. The stated reasons for bringing all of these lawsuits were varied—fraud, mismanagement, nondisclosure of material information—but practically all of the lawsuits involved the loss of money by shareholders of the corporation. Some of the lawsuits no doubt had merit, but others were deemed frivolous and were brought as a matter of course when, for example, the share value of the stock of a corporation went down for reasons having nothing to do with the culpability of corporate managers. In 1995, Congress enacted the Private Securities Litigation Reform Act (PSLRA).