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Posts Tagged ‘loss causation’

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.

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The Colorado Supreme Court issued one of its most significant class action decisions in recent years today in Farmers Ins. Exch. v. Benzing, No. 07SC483 (Colo., April 27, 2009), rejecting the so-called “fraud on the market” theory of reliance and loss causation in an insurance class action.  Justice Bender authored the decision on behalf of a unanimous court, with two justices not participating.  The key issues addressed in the opinion include:

1) the trial court had discretion to decertify a previously certified class, despite the court of appeals’ finding that the facts and arguments presented in connection with the  decertification motion could have been raised at the initial certification stage, as part of the court’s “continuing obligation to review whether proceeding as a class action is appropriate”, Benzing, slip op. at 19; and

2) the fraud-on-the-market theory of reliance and loss causation was not applicable in an insurance class action where there was no efficient market and where the information alleged to have been concealed was a matter of public record.  Benzing, slip op. at 23-31.

The Court declined to address an alternative theory, also borrowed from the securities context, that common reliance or injury could be established by presumption or inference in a case involving a material omission of fact, as articulated in Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 153-54 (1972).  The court acknowledged a split of authority on whether the Affiliated Ute doctrine could be applied in consumer class actions, but declined to rule one way or another, stating that the issue been “insufficiently raised” before the trial court and court of appeals.  Benzing, slip op. at 32-33 & n.9.

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