563 U.S. 804 (2011)
Erica P. John Fund, Inc. served as the lead plaintiff in a putative securities fraud class action against Halliburton Co. and one of its executives.1 The action was filed on behalf of all investors who purchased Halliburton common stock between June 3, 1999, and December 7, 2001.2 EPJ Fund alleged that Halliburton made false statements about the scope of its potential liability in asbestos litigation, its expected revenue from construction contracts, and the benefits of its merger with another company, in violation of section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.3 EPJ Fund further alleged that Halliburton later made corrective disclosures that caused the stock price to drop and investors to lose money.4
After the district court denied a motion to dismiss the complaint, EPJ Fund sought class certification under Federal Rule of Civil Procedure 23.5 The district court found that the proposed class satisfied the requirements of Rule 23(a).6 Relying on Fifth Circuit precedent, the district court required EPJ Fund to prove loss causation at the certification stage.7 The district court concluded that EPJ Fund had failed to establish loss causation with respect to any of its claims.8
The Court of Appeals for the Fifth Circuit affirmed the district court's denial of class certification.9 The Court of Appeals held that EPJ Fund was required to prove loss causation to obtain class certification.10 The Court of Appeals concluded that EPJ Fund had not met that requirement.11 The Supreme Court granted EPJ Fund's petition for certiorari to resolve a conflict among the circuits regarding whether securities fraud plaintiffs must prove loss causation to obtain class certification.12
Whether securities fraud plaintiffs must prove loss causation to obtain class certification under Federal Rule of Civil Procedure 23(b)(3)?13
To certify a class under Rule 23(b)(3), a court must find that the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.14 Considering whether questions of law or fact common to class members predominate begins with the elements of the underlying cause of action.15 The elements of a private securities fraud claim based on violations of section 10(b) and Rule 10b-5 are a material misrepresentation or omission by the defendant, scienter, a connection between the misrepresentation or omission and the purchase or sale of a security, reliance upon the misrepresentation or omission, economic loss, and loss causation.16 Whether common questions of law or fact predominate in such an action often turns on the element of reliance.17 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 based on that specific misrepresentation.18 The Court recognized in Basic Inc. v. Levinson, however, that requiring 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 overwhelm the common ones.19 The Court in Basic sought to alleviate that concern by permitting plaintiffs to invoke a rebuttable presumption of reliance based on the fraud-on-the-market theory.20 According to that theory, the market price of shares traded on well-developed markets reflects all publicly available information, and, hence, any material misrepresentations.21 Under that doctrine, one can assume an investor relies on public misstatements whenever he buys or sells stock at the price set by the market.22 The Court also made clear that the presumption could be rebutted by appropriate evidence.23
No. The district court found that the proposed class satisfied the requirements of Rule 23(a). It denied certification under Rule 23(b)(3) because Fifth Circuit precedent required EPJ Fund to prove loss causation at the certification stage.24 EPJ Fund had failed to do so with respect to any of its claims.25 The Court of Appeals for the Fifth Circuit affirmed. It held that EPJ Fund was required to prove loss causation to obtain class certification. It had not met that requirement. This requirement is not justified by Basic or its logic.26 Loss causation addresses a matter different from whether an investor relied on a misrepresentation, presumptively or otherwise, when buying or selling a stock.27
The Court has referred to the element of reliance in a private Rule 10b-5 action as transaction causation, not loss causation.28 Consistent with that description, when considering whether a plaintiff has relied on a misrepresentation, the Court has typically focused on facts surrounding the investor's decision to engage in the transaction.29 Loss causation, by contrast, requires a plaintiff to show that the misrepresentation caused a subsequent economic loss.30 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.31
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.32 The fact that a subsequent loss may have been caused 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.33 This holds true either directly or presumptively through the fraud-on-the-market theory.34