Corporate Governance

From the Pages of The Pomerantz Monitor: Must Loss Causation be Proven at the Class Cert Stage?

By Carolyn Moskowitz

As Adam Prussin opines in the current issue of The Pomerantz Monitor, few decisions have caused more members of the plaintiffs? bar to pull their hair out than the Fifth Circuit?s 2007 decision in Oscar Private Equities. There the court held that a class could not be certified in a securities fraud case unless the plaintiff could prove, by a preponderance of the evidence, that the false statements caused the investors? losses. This is a critical issue because the Supreme Court has held that ?loss causation? is  an essential element of a securities fraud  claim, and that it requires a showing that disclosure of the true facts actually caused a drop in the market price of the company?s shares. 

Oscar caused such agita because the Fifth Circuit seemed to be saying that now plaintiff had to prove, at the class certification stage, not only that there were ?common questions? concerning loss causation, but also that he was going to prevail on that merits-related issue. This is not an academic question, because experts often disagree about what may have caused the price of a stock to move on any given day. In Oscar itself, certification was denied because the company disclosed other information at the same time as it corrected its previous fraudulent statements, and plaintiff?s expert could not separate the effects of one disclosure from the effects of the other. Needless to say, companies in the position of making ?corrective disclosures? have become more and more sophisticated in mixing such disclosures up with other disclosures so as to obscure the ?loss causation? effects. 

This issue has enormous practical consequences, because if Oscar is upheld, an additional obstacle will be interposed in securities fraud cases. Defendants would now have three chances before trial to attack the case on the merits: at the motion to dismiss stage; at summary judgment; and, now, at the class certification stage as well. Until recently, it had been accepted that the courts were to decide issues related to the merits of the case in the course of ruling on a class certification motion.  

Luckily, no other Circuit has gone along with the Oscar decision; and now, there is a good chance that even in the Fifth Circuit the Oscar rule may bite the dust. Although Oscar never went up to the Supreme Court, the principle established in that case has finally found its way there, in another Fifth Circuit case, involving Halliburton. In that case, an institutional investor alleged that Halliburton executives deliberately misrepresented the company?s financial results, and when Halliburton subsequently disclosed the true facts, the market declined. However, the lower courts denied class certification because plaintiffs had not proven that disclosure of the fraud had caused the market price of the shares to fall.

If, as we expect (hope) that decision is reversed, Oscar will be history. 

Full post as published by PomTalk on February 10, 2011 (boomark / email).