Feeds:
Posts
Comments

Posts Tagged ‘fraud on the market’

The United States Supreme Court granted certiorari today in Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, No. 11-1085, to address the requirements for certifying a securities class action based on the “fraud-on-the-market” theory of reliance.  The “fraud-on-the-market” theory involves allegations that public misrepresentations or omissions adversely affected the market price of a stock causing losses to an entire class of investors whether or not they individually relied on the information.  The theory can alleviate a common barrier to class certification, the need to prove individual reliance on alleged fraud.  As summarized by the folks at SCOTUS blog, the issues accepted for review are as follows:

(1) Whether, in a misrepresentation case under Securities and Exchange Commission Rule 10b-5, the district court must require proof of materiality before certifying a plaintiff class based on the fraud-on-the-market theory; and (2) whether, in such a case, the district court must allow the defendant to present evidence rebutting the applicability of the fraud-on-the-market theory before certifying a plaintiff class based on that theory. (Breyer, J., recused)

Amgen comes close on the heels of the Court’s decision last term in Erica P. John Fund Inc. v. Halliburton Co., in which a unanimous Court overturned a Fifth Circuit Court of Appeals ruling that the plaintiff in a securities class action brough under the fraud-on-the-market theory must prove loss causation at the class certification phase.  While the Court in Erica P. John Fund held that proof of the element of loss causation on the merits could not be required as a precondition of class certification, it was not presented with the question of what proof is needed at the class certification phase to support the application of the fraud-on-the-market doctrine itself.

The case will be heard in the October 2012 Supreme Court term.

Read Full Post »

It’s not too late to sign up for tomorrow’s Strafford Publications Webinar Class Certification After Dukes, Bayer and Halliburton Rulings.   As a preview, here is a copy of the written materials for my portion of the presentation, Opposing Class Certification After Dukes, Bayer and Halliburton.  I hope you can make it.

 

Read Full Post »

Just when we were starting to think that 2011 might mark the end of the great American class action…

Today, the Supreme Court issued a unanimous decision reversing a denial of class certification in the securities class action Erica P. John Fund, Inc. v. Halliburton Co., No. 09-1403, slip op (June 6, 2011).  In the opinion, authored by Chief Justice Roberts, the Court held that the Fifth Circuit Court of Appeals had erred by requiring a securities fraud plaintiff proceeding under a “fraud on the market” theory to prove loss causation as a prerequisite to class certification. 

The decision does not necessarily mean that class certification will be granted, however.  It just means that the denial of class certification cannot rest on the conclusion that the plaintiff failed to prove loss causation at that stage.  The case will be remanded to the Fifth Circuit, which may consider any other arguments against class certification to the extent that they have been preserved by the defendant.  See Slip Op. at 9.

Read Full Post »

The United States Supreme Court heard oral argument today in the case of Erica P. John Fund, Inc. v. Halliburton Co., No. 09-1403.  A transcript of the argument is now available on the Court’s website. 

Erica P. John Fund involves the appropriate standard for assessing class certification in securities fraud cases brought under the “fraud on the market theory.”  Much of the argument was focused on whether the lower courts properly applied existing precedent in determining whether common issues predominated and whether the district court improperly considered the merits of the plaintiffs’ claim by requiring proof of loss causation at the class certification stage.  Many of these issues are unique to the securities fraud context.  The “fraud on the market” theory has been rejected in other contexts.  (See, e.g. CAB entry dated April 27, 2009.)  However, one seemingly off-the-wall hypothetical from Justice Breyer helps to illustrate what creates a common rather than an individualized question when evaluating either a securities fraud claim or another other fraud, misrepresentation, or nondisclosure claim: 

JUSTICE BREYER: Does your rule apply in all fraud cases? That is, a thousand farmers say, Mr. Jackson was our common buying agent, and the defendant lied to Mr. Jackson, and he relied on the lie.  It is a common issue whether he relied on the lie or he didn’t rely on the lie. I can understand somebody saying at the certification stage they have to see whether he’s really a common agent. But let’s imagine that’s assumed. The only question left is, did he rely or not rely?

Is that a question for the merits or is that a question for the common — for the —

MR. STERLING: Basic is really an exception that applies only –

JUSTICE BREYER: So you’re saying in the case that I just gave you reliance is for the merits?

MR. STERLING: Correct, Your Honor.

JUSTICE BREYER: Whether he really relied or didn’t rely, the common agent is for the merits?

MR. STERLING: But you couldn’t have

JUSTICE BREYER: Is that — is that your answer is?

MR. STERLING: No, Your Honor. You couldn’t have a case in that situation because reliance is an individual issue.

JUSTICE BREYER: No. A thousand people say Mr. Jackson is our common buying agent, and the defendant lied to this common buying agent, and he represented us. Relied on that. I’m asking if you that issue of reliance in an appropriate case is for the certification stage?

MR. STERLING: Yes, Your Honor, because

JUSTICE BREYER: Yes.

MR. STERLING: — you still have everybody having to say Mr. Jackson is my agent. That’s

JUSTICE BREYER: And they also have to prove there is a lie?

MR. STERLING: Right. And that’s a — but the individualized question of reliance is simply, is Mr. Jackson your agent or not? Because of that there is no common issue that — that predominates on reliance.

JUSTICE BREYER: Okay.

Slip op. at 44-45.

Setting aside the possibility of an individual question relating to the agency relationship, Justice Breyer’s hypothetical gets to the heart of what could make a fraud claim susceptible to class treatment.  First, although fraud requires reliance, in many contexts, it does not usually require reliance by the plaintiff.  In Justice Breyer’s hypothetical, a single party meets the reliance requirement for the entire class.  In other words, a false statement was made, and there was reliance because Mr. Jackson believed and acted upon it.  There could also be common causation of injury if, due to his reliance on the lie, Mr. Jackson paid $1 per thousand seed when he could have paid $.99 for seed with the same attributes somewhere else. 

The agency issue could very well be an individual issue, as Mr. Sterling surmised, but there really aren’t enough facts in the hypothetical to know this for sure.  For example, there could be a single document that all of the farmers signed, to which there is no dispute about authenticity, and which designates Mr. Jackson as the agent for all.  (Nor does Mr. Sterling’s answer probably help the defendant in a securities fraud case, since the “Mr. Jackson” in a “fraud on the market” claim is the market itself.  If it is an efficient market, so the theory goes, it sets the price that everyone pays regardless of their individual assent.)

The problem with the hypothetical, therefore, is not that it fails to describe the type of fraud claim that might be appropriate for class treatment but instead that it does not describe most real-life fraud cases that are brought as class actions.

In most fraud claims, however, neither the question of reliance nor the question of loss causation is a common question.  In most cases, the reliance that would have to be proved for any class member to prevail would be the class member’s own reliance.  Unless the case involves a situation in which no reasonable person would take any action other than the one that the plaintiff claims could have been taken for class members to avoid injury, reliance is probably not a common question.  Moreover, the existence of a common injury is not necessarily a common question in most cases because the existence of some better alternative often can only be evaluated on a case-by-case basis.  

For example, take away the common agent and change the hypothetical as follows, and the common issues go away: A seed salesman sells corn seed to 1000 farmers for $1 per thousand, and falsely claims, uniformly to each of the farmers, that the seeds grow ears of white-colored corn, but truthfully claims that the corn will be drought-tolerant and delicious.  In fact, they the seeds grow ears of slightly yellowish corn.  

Though the fraudulent statement was uniform, the lack of a common agent to rely on it injects problems with reliance and causation that should prevent this claim from being tried (fairly anyway) on a class-wide basis.  Proof of reliance will require that the color of the corn was an important attribute to each farmer, and that he would not have purchased the seeds if they had been advertised as being off-white.  Many farmers may not care what color the corn is, as long as it is drought-tolerant and delicious, and the only way to resolve the reliance question for sure is to adjudicate each farmer’s claim individually.  Proof of causation will require, in addition, that a given farmer had an alternative source of white corn available.  If not, and the farmer would have been compelled to buy the supplier’s seeds regardless of the color, then the false statement, even it if was relied upon, caused no injury.  Note that even in the hypothetical that includes a common agent, causation of injury may not be common because there may be farmers on whose behalf the agent would have been forced to buy the supplier’s seeds regardless of the false statement about color.  These same issues come up any time there was not one obvious course of action and palatable alternative that all members of a would-be class would take if the true facts had been revealed.

So, Justice Bryer’s hypothetical may illustrate the type of fraud claim that would be appropriate for a class action, the unique facts in the example can also serve to illustrate why many fraud claims should not be certified as class actions.

Read Full Post »

Matt Masich of Law Week Colorado has a good article out today previewing oral arguments scheduled for tomorrow in four class-action related cases.  The outcome of these cases could have a dramatic effect on class action practice in the state. 

The issues to be considered include the proper standard for reviewing class certification, the burden of proof on class certificeation, the level of scrutiny to be given to expert testimony at the class certification stage, the extent to which a plaintiff must prove that all class members suffered injury to justify class treatment, and whether reliance and causation can be presumed in putative class actions seeking damages for fraud.

Here is the schedule of the oral arguments to be held tomorrow, March 1, 2011, in the four cases, along with the issues presented in each case:

9:00 a.m., State Farm v. Reyher, No. 10SC77 (see the Court of Appeals’ Opinion)

Whether the court of appeals erred in reversing the trial court’s denial of class certification under C.R.C.P. 23.

10:00 a.m., Garcia v. Medved Chevrolet, No. 09SC1080 (see the Court of Appeals’ opinion)

Whether the court of appeals erred in reversing the trial court’s certification of a class.

1:30 p.m., BP America v. Patterson, No. 10SC214 (See the Court of Appeals’ opinion)

Whether the court of appeals erred in affirming the trial court’s certification of a class.

2:30 p.m., Jackson v. Unocal Corp., No. 09SC668 (See the Court of Appeals’ opinion)

1) Whether the court of appeals erred by creating a “preponderance of the evidence” burden of proof in the certification of a class pursuant to C.R.C.P. 23.

2) Whether the court of appeals erred by requiring the trial court to assess the credibility of expert testimony at the class certification stage.

3) Whether the court of appeals’ construction of C.R.C.P. 23 improperly invaded the trial court’s case management discretion.

The oral argument in each case is scheduled for one hour.

Read Full Post »

Instead of a trilogy of class action decisions by the U.S. Supreme Court this term, it looks like there will be a “quadrilogy“!

For the fourth time in the October 2010 Term, the Court has granted certiorari in a class action-related case.  Today, the Court granted cert in Erica P. John Fund, Inc. v. Halliburton Co., No. 09-1403.  The appeal raises issues regarding the burden of proof  for class certification in a securities fraud case when the plaintiff intends to prove causation and reliance based on a “fraud on the market” theory. 

According to SCOTUS Blog, the specific issues presented for review are:

(1) Whether the Fifth Circuit correctly held that plaintiffs in securities fraud actions must not only satisfy the requirements to trigger a rebuttable presumption of fraud on the market, but must also establish loss causation at class certification by a preponderance of admissible evidence without merits discovery; (2) whether the Fifth Circuit improperly considered the merits of the underlying litigation when it held that a plaintiff must establish loss causation to invoke the fraud-on-the-market presumption.

(See SCOTUS Blog case file for Case No. 09-1403).

Although Erica P. John Fund, Inc. is a securities case, the Court’s decision may have ramifications in other areas, including consumer class actions.  Class action plaintiffs often attempt to employ the “fraud on the market” theory of reliance in consumer fraud cases, with varying success.  (See these CAB entries dated April 27, 2009 and February 24, 2008).

Read Full Post »

In April, the Colorado Supreme Court decided Farmers Ins. Exchange v. Benzing, 206 P.3d 812 (Colo. 2009), in which it rejected the “fraud on the market” theory of reliance in a consumer class action.  Now, Garcia v. Medved Chevrolet, Inc., No. 09CA1465 (Colo. Ct. App., Nov. 12, 2009), the Colorado Court of Appeals has rejected the alternative reliance theory that the Benzing court  declined to address: the presumed reliance theory first recognized in the securities class action context in Affiliated Ute Citizens v. United States, 406 U.S. 128 (1972) could apply to establish common proof of reliance in a consumer class action involving alleged fraud by omission.  A synopsis, along with a copy of the opinion, is available at Law Week: http://www.lawweekonline.com/?p=1914

Read Full Post »

« Newer Posts - Older Posts »