Suits against companies for misleading or fraudulent statements (or withholding signification information) that affect the price of the company's stock require proof of causation, that is, that the statements actually had an effect on the market. This case involves whether such proof must be provided at the stage of the case when the judge is deciding whether to certify the case as a class action, or whether that proof can wait until the trial phase. Whether to certify a lawsuit as a class action is often case-dispositive, since certification puts tremendous pressure on companies to settle questionable suits to avoid potentially excessive liability.
The Fifth Circuit ruled that plaintiffs must show evidence of causation prior to certification of the class. Unless the alleged fraud actually caused the loss, a court cannot assume that all the proposed members of the class relied on the fraud when buying their stock. The Supreme Court's reversed on June 6, 2011, holding that plaintiffs need not prove loss causation in order to obtain class certification. It found that loss causation is different from reliance on a misrepresentation or omission, and requires a plaintiff to show that the misrepresentation caused a subsequent economic loss.
As a result, it will be easier for shareholders to file class action lawsuits alleging misrepresentations or omissions by company management.