Stuebler v. Xcelera.com

United States Court of Appeals
For the First Circuit

No. 05-1221

In re XCELERA.COM SECURITIES LITIGATION

ALEX STUEBLER; JIM HICKS; JACK LADUE; GLOVER POWELL; DOUG HORAN,

Plaintiffs-Appellees,

v.

XCELERA.COM; ALEXANDER M. VIK; GUSTAV M. VIK,

Defendants-Appellants.

APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Rya W. Zobel, U.S. District Judge]

Before

Torruella, Cyr, and Lipez, Circuit Judges.

Louis R. Cohen, with whom Todd C. Zubler, Jonathan Cedarbaum,
Peter J. Macdonald, Robin L. Alperstein, and Wilmer Cutler
Pickering Hale and Dorr LLP were on brief, for appellants.
Peter A. Pease, with whom Patrick T. Egan, Colleen M. Conners,
Berman Devalerio Pease Tabacco Burt & Pucillo, Elaine Kusel,
Jeffrey Spinazzola, and Milberg Weiss Bershad & Schulman LLP were
on brief, for appellees.

December 13, 2005
 LIPEZ, Circuit Judge. We treat this interlocutory appeal

from an order certifying a class in a securities fraud case as a

companion case to In re PolyMedica Corp. Sec. Litig., No. 05-1220,

slip op. (1st Cir. Dec. _, 2005), also decided this day. Our

determination in PolyMedica of the standard of efficiency to be

used in the application of the fraud-on-the-market theory informs

the analysis in this case. Defendants-Appellants Xcelera Inc.1, an

Internet holding company, and its directors, Alexander and Gustav

Vik (collectively, "Defendants"), argue that the district court

erred in determining that the market for Xcelera stock was

efficient during the relevant time period, and certifying the class

on that basis. For the reasons set forth below, we affirm.

I.

Alex Stuebler, Jim Hicks, Jack Ladue, Glover Powell, and

Doug Horan ("Plaintiffs") are purchasers of Xcelera stock, who seek

to represent a class of all purchasers of Xcelera stock from April

1, 1999, through August 8, 2000 (the "Class Period").2 According

1
While Plaintiffs (and the case caption) refer to the company
involved in this case as "Xcelera.com, Inc.," we refer to the
company by the name used by Defendants, "Xcelera Inc."
2
Plaintiffs also seek to represent a subclass of all purchasers of
Xcelera stock who purchased stock on the same day or within three
trading days after each of Alexander and Gustav Vik's allegedly
insider sales, which are said to have taken place on and between
February 22, 2000, and June 22, 2000. Certification of the
subclass necessarily hinges upon certification of the class. Since
we affirm the district court's order certifying the class, and
since Defendants do not object to that portion of the district
court's order certifying the subclass, we do not address the

-2-
to Plaintiffs, Defendants issued a press release on April 1, 1999,

stating that Xcelera had acquired a majority interest in Mirror

Image Internet, Inc. ("Mirror Image"), an Internet holding company.

More press releases and television appearances followed throughout

the Class Period, touting Xcelera's ownership of Mirror Image.

Defendants allegedly did not disclose, however, that this

acquisition was part of a joint venture with two other companies,

Kahnberget Holding, Ltd., and JAM Investments, Ltd. (collectively,

"JAM"), both of which had contributed a substantial portion of the

funds used to acquire the majority interest, $3.24 million, and

which were therefore entitled to a significant portion of the

Mirror Image stock pursuant to their joint-venture agreement.

Defendants also allegedly did not disclose the risk of dilution3 to

Xcelera shareholders should Defendants decide to issue Xcelera

stock in satisfaction of its obligation to JAM.

Plaintiffs contend that it was not until August 4, 2000

– when Xcelera issued its Annual Report for that year – that

Xcelera shareholders first learned that Xcelera might be required

to issue new shares of its stock to "certain third parties" in

order to pay for its investment in Mirror Image, and that this may,

in turn, result in a material dilution of Xcelera stock. That same

district court's decision to certify the subclass.
3
"Dilution" means "[t]he reduction in the monetary value or voting
power of stock by increasing the total number of outstanding
shares." Black's Law Dictionary (8th ed. 2004).

-3-
day, the price of Xcelera's stock fell by 2.5%, from $12.31 to $12

per share. Several days later, after a brief rise in stock price

on August 7, the price of Xcelera stock fell again, this time by

approximately 16%, from $14 on August 8, 2000, to $11.75 on August

9, 2000.

On April 2, 2001, Plaintiffs filed a consolidated amended

complaint, alleging that Defendants artificially inflated the price

of Xcelera stock during the Class Period by failing to disclose the

ownership dispute surrounding the Mirror Image stock and the risk

of dilution of Xcelera stock. The complaint further alleged that

Alexander and Gustav Vik made insider sales of over 3.2 million

shares of Xcelera stock to the unknowing public during the Class

Period, reaping proceeds of over $250 million. Plaintiffs seek

damages against Defendants under § 10(b) of the Securities and

Exchange Act of 1934, 15 U.S.C. § 78j(b) (the "Exchange Act") and

Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, and

against Alexander and Gustav Vik under § 20(a) and § 20A of the

Exchange Act, 15 U.S.C. § 78t(a), § 78t-1.

On November 12, 2002, Plaintiffs filed a motion for

certification of the class and the insider trading subclass

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pursuant to Fed. R. Civ. P. 23(a)4 and (b)(3).5 In order to satisfy

Rule 23(b)(3)'s requirement that common questions of law and fact

predominate over individual questions, Plaintiffs relied upon the

"fraud-on-the-market" presumption of reliance. Defendants opposed

the motion, arguing that Plaintiffs were not entitled to a

presumption of reliance because the market was not "efficient" – a

prerequisite for presuming reliance. In support of this position,

Defendants submitted the affidavit of Dr. Matthew P. Richardson, a

professor of finance at New York University and a Research

Associate of the National Bureau of Economic Research. He

concluded that the market for Xcelera stock was not efficient

during the Class Period. Plaintiffs responded by submitting the

affidavit of Dr. Scott A. Hakala, director of CBIZ Valuation Group,

Inc., a national business and valuation firm, who came to the

opposite conclusion.

4
Defendants do not dispute that the requirements of Rule 23(a) –
numerosity, typicality, commonality, and adequacy – have been met;
thus, we do not address them.
5
Rule 23(b)(3) provides, in relevant part, that "[a]n action may
be maintained as a class action if the court finds that the
questions of law or fact common to the members of the class
predominate over any questions affecting only individual members."
As we noted in PolyMedica, "[t]his requirement, although
reminiscent of the commonality requirement of Rule 23(a), is far
more demanding because it tests whether proposed classes are
sufficiently cohesive to warrant adjudication by representation."
No. 05-1220, slip op. (internal quotation marks and citation
omitted).

-5-
 At Defendants' request, the district court conducted a

two-day evidentiary hearing on November 20 and 21, 2003. Both

parties presented oral argument, and each expert gave testimony

concerning the meaning of market efficiency and whether the market

for Xcelera stock was efficient. Defendants argued that the market

for a particular stock is efficient if it rapidly and accurately

reflects all material, publicly available information, and that

Xcelera's market did not meet these standards. Plaintiffs, on the

other hand, argued that while efficiency requires that market price

reflect all material, publicly available information "relatively

rapidly or within a reasonable period of time," the market price

need not reflect such information accurately. According to

Plaintiffs, the standard of market efficiency that they advocate is

satisfied by application of the factors set forth in Cammer v.

Bloom, 711 F. Supp. 1264 (D.N.J. 1989), which weigh in favor of a

finding of efficiency in the Xcelera market.

On September 30, 2004, the district court issued its

decision certifying both the class and the insider trading

subclass.6 The court credited Plaintiffs' expert analysis which

largely tracked the Cammer factors, and rejected Defendants' expert

analysis as focusing too much on whether market price "perfectly

6
In its decision, the district court also granted Plaintiffs'
motion to certify additional class representatives. Defendants do
not object to the grant of this motion, and we therefore do not
address it.

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and correctly incorporate[d]" – as opposed to merely reflected –

publicly available information.

On February 15, 2005, we granted Defendants' petition for

permission to appeal the district court's order pursuant to Rule

23(f) of the Federal Rules of Civil Procedure.7 Defendants argue

that the district court erred in adopting a definition of "market

efficiency" which did not require that market price rapidly and

accurately reflect all publicly available information. Defendants

further argue that the district court erred in applying only the

Cammer factors to determine market efficiency.

II.

As we stated in PolyMedica,

[t]he formulation of the proper standard for efficiency
is a purely legal question reviewed de novo. Reviewing
the application of that standard to the facts of a case
involves the review of a mixed question of law and fact.
Given the various factors relevant to an efficiency
determination, and the abundant evidence that can be
developed with respect to each factor, the determination
of whether a market is efficient is a fact-dominated
inquiry. Therefore, deferential clear-error review
applies to that determination. The ultimate decision to
certify a class is, of course, a discretionary one.

No. 05-1220, slip op. (internal citation omitted).

In a securities fraud action under § 10(b) of the

Exchange Act, and Rule 10b-5 promulgated thereunder, plaintiffs are

7
Rule 23(f) provides, in relevant part, that "a court of appeals
may in its discretion permit an appeal from an order of a district
court granting or denying class action certification under this
rule if application is made to it within ten days after entry of
the order." Fed. R. Civ. P. 23(f).

-7-
typically required to prove that they individually relied on a

defendant's misrepresentation. Id. Requiring proof of

individualized reliance, of course, would effectively preclude

securities fraud class actions under Rule 23(b)(3). Individual

issues of reliance would necessarily overwhelm the common ones.

The fraud-on-the-market theory eliminates the need to prove

individualized reliance by allowing a rebuttable presumption that

the plaintiff relied on the "integrity of the market price" which

reflected the misrepresentation. "Before an investor can be

presumed to have relied upon the integrity of the market price,

however, the market must be 'efficient.'" Id. In an efficient

market, the defendant's misrepresentations are absorbed into, and

reflected by, the market price. Investors who rely on the market

price, therefore, indirectly rely on those misrepresentations,

thereby justifying a presumption of reliance under the fraud-on-

the-market theory. Conversely, when a market lacks efficiency,

there is no assurance that market price reflects the defendant's

misrepresentations and that investors therefore indirectly relied

on those misrepresentations.

A. Standard of "Market Efficiency"

1. "Market Efficiency" Under PolyMedica

In PolyMedica, we held that "an efficient market is one

in which the market price of the stock fully reflects all publicly

available information." Id. This definition focuses on whether a

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market is efficient in the informational sense, that is, whether

market prices respond rapidly to new information, such that prices

impound all publicly available information (and misinformation),

thereby justifying a presumption of reliance under the fraud-on-

the-market theory.

2. The District Court's Standard of Efficiency

According to the district court, an efficient market is

one in which "market price reflect[s] publicly available

information." In re: Xcelera.Com Sec. Litig., No. 00-11649-RWZ, at

6 (D. Mass. Sept. 30, 2004) (unpublished opinion). This definition

of market efficiency does not provide explicitly that market price

must "fully" reflect "all" available information, the standard set

forth in PolyMedica. However, the district court's reliance upon

Cammer to determine whether the Xcelera market was efficient means

that it necessarily applied the standard of efficiency used in

Cammer, which tracks the definition we adopted in PolyMedica. See

Cammer, 711 F. Supp. at 1281 (stating that an efficient market is

one in which "current price reflects all available information,"

and citing economic commentator Eugene Fama's definition of market

efficiency as "[a] market in which prices always 'fully reflect'

available information").

Still, Defendants argue that the district court's

definition of an efficient market is incomplete. Missing from the

court's definition, Defendants assert, is a requirement that in an

-9-
efficient market, "stock prices rapidly and accurately reflect all

publicly available information." (Emphasis added.) Because of

these omissions, Defendants argue, the district court wrongfully

concluded that Xcelera's market was efficient.

a. Rapidly

While we agree with Defendants that an efficient market

must "rapidly" reflect all publicly available information, and so

stated in PolyMedica, that characteristic is implicit in the

requirement that a market "fully reflect" all publicly available

information. See PolyMedica, No. 05-1220, slip op. (stating that

"market price 'fully reflects' all publicly available information

when prices respond so quickly to new information that it is

impossible for traders to make trading profits on the basis of that

information") (internal quotation marks and citation omitted).

Therefore, where, as here, the district court correctly determined

that market price must fully reflect all publicly available

information for purposes of defining market efficiency, the

district court understood that market price must "rapidly" reflect

such information in an efficient market. Moreover, the district

court's reliance upon Cammer, which emphasized the importance of an

efficient market "rapidly reflect[ing] new information in price,"

711 F. Supp. at 1276 n.17, again indicates that the district court

understood that an efficient market rapidly absorbs and reflects

new information.

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 b. Accurately

Defendants argue that an efficient market must also

respond to information accurately. According to their expert

witness, Richardson, an efficient market "accurately" reflects all

publicly available information when "investors [are] rational and

fac[e] no trading frictions such that stock prices equal their

'fundamental value.'" Accuracy, Richardson argues, thus hinges

upon a stock price's consistency with its fundamental value, which,

in turn, hinges upon the market behaving rationally.

Elaborating further, Richardson explains that

"fundamental value is the discounted sum of expected future cash

profits of the stock." In an efficient market, Richardson states,

information should "tell you something about . . . the expected

cash flow of the asset or the risk of that asset[,] and that

information should get incorporated into that price." Richardson

argues that "fundamental, or true, value" does not, however, mean

"ultimate future value," such that "investors [must] be fortune

tellers." Rather, it means a "fair price" that "incorporates all

the information currently available to investors," such that price

adjustments are "accurate on average: the prices should neither

underreact nor overreact to particular news announcements."

But investors are not always rational, Richardson

contends; the presence of irrational investors in the market causes

prices "to diverg[e] from fundamentals." The decisions of these

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irrational investors, Richardson argues, "begin to move prices away

from their fundamental value" – away from expected risks and

returns – "meaning they're not reflecting the information in a

rational way." Richardson acknowledges, however, that the presence

of these irrational investors "is not enough per se to refute the

hypothesis that the market is efficient." On the contrary, "prices

will eventually adjust until the mispricings disappear," so long as

there are a sufficient number of rational investors active in the

market, and provided that these rational investors are not limited

in their ability "to take advantage of, or 'arbitrage,' these

mispricings" by "purchas[ing] the underpriced securities (i.e.,

relative to fundamental value) and sell[ing] the overpriced ones to

the irrational investors." Thus, in order "for prices to not

accurately reflect fundamental information," Richardson contends,

"there must be a reason why asset prices diverged from

fundamentals, e.g., the presence of irrational investors . . . and

[] there must be some limits to arbitrage that prevent rational

capital from forcing prices and fundamental value to converge."

Not surprisingly, Plaintiffs insist that "accuracy"

should be excluded from the definition of efficiency. According to

Hakala, their expert, a market is efficient when "all relevant and

publicly available information is impounded in share price." By

requiring that market price "accurately" reflect public

information, Hakala argues that Defendants are advocating "a higher

-12-
standard" of market efficiency imposed by academics, which demands

that markets must behave rationally so that stock prices will

"always conform to some idealized fundamental value that is

demonstrated in retrospect." Hakala contends that market

efficiency demands only that market price "reflects all public

information" so that "an average investor wo[n't] ordinarily be

able to beat the market . . . . It doesn't say anything about

whether the market was right or wrong in retrospect. . . ."

According to Hakala, "[Richardson's] analysis confuses market

efficiency with a level of hyper-rationality or perfect foresight

on the part of market participants that is unrealistic and not

required for a presumption of fraud-on-the-market." This analysis,

Hakala contends, "amounts to second-guessing the market, concluding

that the market, in retrospect . . . [was] over-valued."

In response to arguments raised by the parties in

PolyMedica, we have already resolved this debate in favor of

Plaintiffs. As we explained in PolyMedica, the fraud-on-the-market

presumption of reliance does not depend on the accuracy of the

market price, and whether it "mirror[s] the best possible

estimates, in light of all available information, of the actual

economic values of securities in terms of their expected risks and

returns." No. 05-1220, slip op. (internal quotation marks and

citation omitted). Rather, this presumption depends on whether the

market price of the stock reflects all available information, such

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that an investor can be deemed to have indirectly relied on the

misrepresentation. Whether the stock was "worth" more or less in

some fundamental value sense, while arguably relevant to the

efficiency inquiry, is not essential to it.

As we stated in PolyMedica, "[w]hile fundamental value

efficiency may be the more comprehensive of the two concepts,

encompassing both speed and accuracy, [e]fficiency is not an all-

or-nothing phenomenon." Id. (emphasis in original) (internal

quotation marks and citation omitted). We explained that "for

purposes of establishing the presumption of reliance, therefore,

investors need only show that the market was informationally

efficient," not fundamental value efficient. Id.; see also id.

(stating that "the fraud-on-the-market theory does not require

'proof that the market correctly reflects some 'fundamental value'

of the security. To apply the fraud-on-the-market theory, it is

sufficient that the market for a security be 'efficient' only in

the sense that market prices reflect the available information

about the security'") (quoting In re Verifone Sec. Litig., 784 F.

Supp. at 1479 n.7).

Defendants do not, and cannot, cite to any language in

Basic requiring that the market price of a stock must accurately

reflect its fundamental value for purposes of demonstrating market

efficiency. In fact, as we noted in PolyMedica, the Supreme Court

in Basic declined to explicitly address the meaning of market

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efficiency – much less a fundamental value theory of market

efficiency – stating that, "[w]e do not intend conclusively to

adopt any particular theory of how quickly and completely publicly

available information is reflected in market price." Id. (quoting

Basic, 485 U.S. at 249 n.28).8

Defendants contend that the district court, abetted by

Plaintiffs' expert, misconstrued "accuracy" to mean that the

Xcelera market must "correctly predict" what the fundamental value

of the security (i.e., "the discounted sum of expected future cash

profits of the stock") will be in the future. On the contrary,

Defendants argue, "accuracy" means only that a stock's price will

reflect its fundamental value "at any given moment." This is a

disingenuous argument. Like any lawsuit, the securities fraud

action involves the recreation of past events through proof. Proof

of fundamental value "at any given moment" would necessarily be a

retrospective analysis which, in the words of Hakala, "amounts to

second-guessing the market, concluding that the market, in

8
We are unpersuaded by the cases cited by Defendants which
generally allude to stock price's consistency with "accuracy" and
"value." None of these cases specifically hold that a market is
inefficient where the stock's price fails to "accurately" reflect
all publicly available information, see, e.g., Ross v. Bank South,
N.A., 885 F.2d 723 (11th Cir. 1989); Hurley v. FDIC, 719 F. Supp.
27 (D. Mass. 1989), nor do any of these cases analyze whether a
market was inefficient based on the failure of stock price to
mirror fundamental value, i.e., "the discounted sum of expected
future cash profits of the stock," see, e.g., Gariety v. Grant
Thornton, LLP, 368 F.3d 356 (4th Cir. 2004); Freeman v. Laventhol
& Horwath, 915 F.2d 193 (6th Cir. 1990).

-15-
retrospect . . . [was] over-valued." If this retrospective

judgment was that the stock price at a given moment was over-

valued, that judgment would be tantamount to the conclusion that

the stock price was a poor predictor of what subsequent analysis

would reveal about fundamental value at that given moment.

We find no error in the district court's determination

that, pursuant to Defendants' definition of market efficiency, "a

robust stock market would always present a defense at the class

certification stage and on the merits that depends on highly

subjective, retrospective analysis of what people trading in a

stock should have been thinking." The court's reference to

"retrospective analysis" is not incorrect. The present-day

analysis of the fundamental value of Xcelera's assets by

Defendants' expert during the Class Period is necessarily

"retrospective." In addition, we find no error in the court's

rejection of Defendants' expert's "suggest[ion] that market

efficiency is a rare phenomenon." Defendants' expert conceded that

"[t]he Internet sector as a whole, at least the 400 sample firms,"

was inefficient "in aggregate," and relied on an economic treatise

whose author concluded that "financial markets in most scenarios

are not expected to be efficient. Market efficiency only emerges

as an extreme special case, unlikely to hold under plausible

circumstances." (Citing Andrei Shleifer, Inefficient Markets: An

Introduction to Behavioral Finance 24 (2000).) This emphasis on

-16-
the rarity of efficient markets, grounded in the concept of

fundamental value efficiency, would have the likely effect of

making it unduly difficult to establish the fraud-on-the-market

presumption of reliance.

The district court was right to worry about these

implications of Defendants' efficiency arguments; it did not err by

rejecting Defendants' proposed definition of market efficiency

requiring consistency with fundamental value. By drawing on the

standard of efficiency in Cammer and holding that "a share's market

price [must] reflect publicly available information, not . . .

perfectly and correctly incorporate it," the district court adopted

the correct standard of efficiency. We must now decide whether the

court correctly applied this standard in determining that the

Xcelera market was efficient.

III.

A. Level of Inquiry

In evaluating whether the Xcelera market was efficient,

the district court considered the "persuasive and widely followed"

factors enumerated in Cammer. Xcelera, No. 00-11649-RWZ, at 5.

These factors are: (1) the stock's average trading volume; (2) the

number of securities analysts that followed and reported on the

stock; (3) the presence of market makers and arbitrageurs; (4) the

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company's eligibility to file a Form S-3 Registration Statement9;

and (5) a cause-and-effect relationship, over time, between

unexpected corporate events or financial releases and an immediate

response in stock price. Cammer, 711 F. Supp. at 1286-87. These

factors provide useful evidence from which market efficiency may be

inferred, and are therefore relevant to a district court's

determination of whether a market is efficient. As we noted in

PolyMedica, however, these factors are not exhaustive. No. 05-

1220, slip op. (citing Unger, 401 F.3d at 323, 325 (noting that

Cammer factors are not exhaustive, and are "an analytical tool,"

not "a checklist")).

Crediting Plaintiffs' expert analysis, the district court

concluded, without further discussion of the factors, "that the

stock's trading volume was high; Xcelera received the attention of

the press and analysts as well as the participation of

sophisticated investors; there were no undue limits to arbitrage,

and that the stock price did respond to information." Xcelera, No.

00-11649-RWZ, at 5. Plaintiffs argue that the district court

correctly determined that these factors were satisfied and that the

Xcelera market was therefore efficient. Defendants contend that

9
Companies permitted by the SEC to file an S-3 Registration
Statement, an abbreviated prospectus requiring fewer disclosures
than Forms S-1 or S-2, are those which meet the $75 million market
capitalization requirement and have filed reports with the SEC for
twelve consecutive months. 17 C.F.R. § 239.13 (2003).

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the district court's concise analysis of market efficiency is

inconsistent with the searching inquiry demanded by Rule 23.

We disagree. As Plaintiffs point out, the district court

received and reviewed hundreds of pages of briefing and exhibits

focused on the issue of market efficiency, received multiple

affidavits from experts on both sides and heard two days of

testimony from those experts and arguments from counsel regarding

market efficiency. In holding that Xcelera's market was efficient,

the court specifically credited the testimony of Plaintiffs' expert

over that of Defendants' expert, noting Xcelera's satisfaction of

the Cammer factors and rejecting Defendants' evidence that market

price did not "perfectly and correctly" incorporate publicly

available information. This is not a case where the district court

"simply presumed the facts in favor of an efficient market" based

on "bare allegations" raised in the plaintiff's complaint. Unger,

401 F.3d at 323, 325.

Here, the district court properly "engaged in a case-

specific analysis that went well beyond the pleadings," weighing

the competing evidence concerning market efficiency and offering a

succinct explanation of its determination that the fraud-on-the-

market presumption should apply to this class action. PolyMedica,

05-1220, slip op. (quoting Waste Mgmt. Holdings, Inc. v. Mowbray,

208 F.3d 288, 297 (1st Cir. 2000)). The district court was not

required to explain itself in greater detail. The more important

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issue is whether the evidence supports its determination to apply

the presumption.

B. The Cammer Factors

1. Cause-and-Effect Relationship

Starting with the fifth, and in many ways, the most

important, Cammer factor, Plaintiffs contend that the district

court correctly found a historical cause-and-effect relationship

between company disclosures and an immediate response in stock

price. This relationship is, of course, "the essence of an

efficient market and the foundation for the fraud on the market

theory." Cammer, 711 F. Supp. at 1287. In the absence of such a

relationship, there is little assurance that information is being

absorbed into the market and reflected in its price. To

demonstrate the existence of a cause-and-effect relationship

between corporate information and stock price, Plaintiffs' expert

presented the results of a sophisticated event study analyzing how

Xcelera stock price reacted to company-specific events.10

Plaintiffs' study lists more than forty separate instances, thirty-

10
In addition to company-specific events, the study also analyzed
how Xcelera's stock price reacted to information in the industry
and in the general stock market (the NASDAQ, which is "the largest
electronic, screen-based market in the world"). PolyMedica, No.
05-1220, slip op. (internal quotation marks and citation omitted).
Plaintiffs' expert found that the movements of Xcelera's stock
price correlated with the movements of a sampling of other Internet
companies and with the NASDAQ as well, thereby further indicating
that "Xcelera's common stock price is efficiently reacting to
public information."

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six of which occurred during the Class Period, in which Xcelera

stock price rose or fell (in several cases, by more than 50%, and

in one case, rose by more than 100%) within one day11 of the release

of company-specific information.

For instance, on April 1, 1999, Xcelera's stock price

increased 194% following an announcement that Xcelera had purchased

a majority interest in Mirror Image that day; on December 21, 1999,

following the announcement of Hewlett-Packard's $32 million

investment in Xcelera that day, Xcelera's stock increased 20%; a

glowing report in the Gilder Technology Report on February 12, 2000

caused Xcelera stock price to increase 42% on that day; and on July

11
In addition to a one-day window, Plaintiffs' event study lists,
as a control, the effect of company-specific information over
longer windows of two, three, and five days, respectively. For
example, following the announcement on March 22, 2000 that Exodus
would invest $637.5 million in Mirror Image, Xcelera's stock price
increased by 24% on that day. According to the event study, this
information accounted for a 23% increase in price two days after
the announcement, a 25% increase after three days, and a 23%
increase after five days. Defendants argue that the two- and five-
day (and presumably, the three-day) windows are inconsistent with
the requirement that an efficient market must rapidly reflect all
publicly available information. However, because Plaintiffs' event
study captures the same-day reaction of Xcelera's stock price to
company-specific events, Defendants' arguments concerning the
multi-day windows are unavailing. See Jonathan R. Macey et al.,
Lessons from Financial Economics: Materiality, Reliance, and
Extending the Reach of Basic v. Levinson, 77 Va. L. Rev. 1017, 1031
(1991) (stating that "financial economists often define the event
period as the two-day period consisting of the announcement day and
the following day"); see also Lehocky v. Tidel Techs., Inc., 220
F.R.D. 491, 506-07 (S.D. Tex. 2004) (concluding that plaintiff's
expert's event study using two-day window was "sufficient to
demonstrate, for class certification purposes, that a cause and
effect relationship between company-specific announcements and
stock price may exist").

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13, 2000, the day Lazard Freres released a negative analyst report

on Xcelera, the stock price dropped 19%. Conversely, Plaintiffs'

expert also found that re-releases of old information, such as

secondary announcements about acquisitions or new investments,

resulted in only a modest stock price reaction or no reaction at

all. Based on these findings, Plaintiffs' expert concluded that

the Xcelera market reacted strongly – both positively and

negatively – to new information concerning the company (including,

but not limited to, disclosures at issue in this case).

Defendants argue that Plaintiffs' reliance upon various

news events to demonstrate this cause-and-effect relationship was

an exercise in post-hoc logic. In support of this argument,

Defendants cite to the Fifth Circuit’s decision in Unger, in which

the court concluded that such post-hoc reasoning, without

supporting expert statistical analysis, failed to take into account

the many other factors that could affect stock price. 401 F.3d at

324. In that case, however, the plaintiffs offered only "sketchy"

evidence of a cause-and-effect relationship, including "one-sided

affidavits, and unexplained Internet printouts," and provided no

expert statistical evidence whatsoever. Id. at 320, 325.

Plaintiffs argue that in this case, by contrast,

Plaintiffs' expert submitted an event study which "sought to

identify all or nearly all of the news and information" pertaining

to Xcelera – whether "statistically significant" or not – "in the

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form of published articles, press releases, reports, news bulletins

and financial filings of Xcelera," for the proposed Class Period.

As noted above, in addition to this company-specific information,

Plaintiffs' event study included a determination of how Xcelera

stock price reacted to general-market and industry-specific

information, the kind of information the court found lacking in

Unger. Id. at 325 (stating that statistical evidence touching on

"the daily market average; national, local and industry-specific

economic news; [and] competitors' activities" may be helpful to

determination of efficiency). Plaintiffs' expert also supported

his event study with two affidavits, and provided testimony at a

two-day hearing devoted, in part, to the findings of the event

study.

2. The Stock's Average Trading Volume

Plaintiffs presented evidence that the average weekly

trading volume for Xcelera stock, that is, the number of

outstanding shares being traded on a weekly basis, was high. A

high average weekly trading volume suggests market efficiency since

it implies "significant investor interest in the company" and "a

likelihood that many investors are executing trades on the basis of

newly available or disseminated corporate information." Cammer,

711 F. Supp. at 1286. Plaintiffs demonstrated that the average

daily trading volume for Xcelera stock exceeded 1,000,000 shares

per day throughout the Class Period. Put another way, the average

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daily trading volume represented more than 4% of approximately 27.5

million total outstanding shares – well above the 1% or 2% figures

suggested by several courts as the benchmark for supporting a

presumption of efficiency. See, e.g., O'Neil v. Apel, 165 F.R.D.

479, 508 (W.D. Mich. 1996); Cammer, 711 F. Supp. at 1293.

Defendants argue that Plaintiffs overstate the trading

volume of Xcelera shares by using split-adjusted shares12 as opposed

to the smaller number of actual (unadjusted) shares. For instance,

Defendants object to Plaintiffs' calculation of the daily trading

volume for August 10, 1999 using the 9,600 split-adjusted shares

traded that day, instead of the only 400 unadjusted shares traded

that day. Yet Defendants do not cite any authority for the

proposition that Plaintiffs may not adjust for stock splits in

order to derive a uniform trading volume for the Class Period.

3. Number of Securities Analysts

Both parties agree that the greater the number of

securities analysts following and reporting on a company's stock,

12
Xcelera's stock underwent several stock splits throughout the
Class Period. A stock split refers to "[t]he issuance of two or
more new shares in exchange for each old share without changing the
proportional ownership interests of each shareholder," thereby
"lower[ing] the price per share and thus mak[ing] the stock more
attractive to potential investors." Black's Law Dictionary (8th
ed. 2004). For example, Xcelera's 2-for-1 stock split on September
30, 1999 would have given an owner of 100 shares of Xcelera stock
a total of 200 shares, or two shares for each share previously
owned. In order to establish a uniform trading volume for the
Class Period, which contained multiple stock splits, Plaintiffs
adjusted their calculation of trading volume by taking into account
all splits that had occurred over the Class Period.

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the greater the likelihood that information released by a company

is being relied upon by investors. As the court in Cammer noted,

the existence of a significant number of analysts implies that

company reports are "closely reviewed by investment professionals,

who would in turn make buy/sell recommendations to client

investors." 711 F. Supp. at 1286. The parties also agree that

only one analyst followed Xcelera's stock and issued only one

report during the Class Period – far fewer than the fifteen

research reports on the company at issue in Cammer, whose market

was found to be efficient, id. at 183.

Defendants argue that one analyst is not enough, see

O'Neil, 165 F.R.D. at 501 (stating that "[m]ajor corporations are

closely followed by hundreds of securities analysts throughout the

country"), and that the news coverage relied upon by Plaintiffs was

more "journalistic commentary" than the kind of "analysis that

would help investors understand the published information about the

company and invest on that basis." In addition, Defendants argue

that the Xcelera market lacked the presence of sophisticated

institutional investors who "search out, distill, trade on, and

disseminate information affecting an issuer" and who are thus vital

to an efficient market. See Lehocky, 220 F.R.D. at 508 (crediting

plaintiff's expert's assertion that "there is a general

understanding that a high level of institutional interest in a

security serves to increase the efficiency of the market").

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 Notwithstanding the presence of only one securities

analyst, Plaintiffs contend that information about Xcelera was

widely distributed through "news articles, press releases,

television interviews and the Company's SEC filings," and indirect

coverage from numerous influential brokerage firms reporting on

other Internet and technology stocks. This media attention,

Plaintiffs argue, more than made up for the lack of securities

analysts. See Cheney v. Cyberguard Corp., 213 F.R.D. 484, 499

(S.D. Fla. 2003) (stating that significant number of news items

featuring defendant company "indicat[ed] that information regarding

[the company] may have been widely distributed, which would support

a finding of efficiency"). In addition, in response to Defendants'

charge that the Xcelera market lacked institutional investors,

Plaintiffs point to the fact that two major institutions – Hewlett

Packard and Exodus Communications – made significant investments in

Xcelera, and that for the last six months of the Class Period, at

least thirty other institutional investors also invested in

Xcelera.

4. Number of Market-Makers and Arbitrageurs

A market-maker is "[o]ne who helps establish a market for

securities by reporting bid-and-asked quotations" (the price a

buyer will pay for a security and the price a seller will sell a

security), Black's Law Dictionary (8th ed. 2004), and who "stand[s]

ready to buy or sell at these publicly quoted prices," Lehocky, 220

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F.R.D. at 508 n.24. According to Plaintiffs' expert, a market-

maker, more particularly, "is a brokerage firm or special

securities firm that actively buys and sells stocks on its own

account with the intention of holding them for a relatively short

period of time so as to make a market."

While the court in Cammer found that market-makers (and

arbitrageurs13) contribute to market efficiency by "react[ing]

swiftly to company news and reported financial results by buying or

selling stock and driving it to a changed price level," 711 F.

Supp. at 1287, Defendants argue that the mere existence of market-

makers, without more, is not meaningful. See O'Neil, 165 F.R.D. at

502 (stating that "it is impossible to accord much significance to

the number of market makers, until one knows the volume of shares

that they committed to trade, the volume of shares they actually

traded, and the prices at which they did so"); see also id. (noting

that "the economic literature has criticized reliance upon the

number of marker makers as an indicator of efficiency," and citing

study which found "no empirical correlation between the number of

market makers and the efficiency of the market"). Defendants

13
Neither Cammer nor other courts addressing this factor
distinguish between market-makers and arbitrageurs, but instead
refer to the two somewhat interchangeably. As we noted in
PolyMedica, "arbitrageurs" are professional investors who exploit
price differences in different markets by buying and selling
identical securities in those markets. Id. While arbitrageurs are
distinct from market-makers, who seek to facilitate trading in a
particular security, both play an important role in keeping markets
efficient.

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contend that Plaintiffs' evidence establishes only the presence of

market-makers in the Xcelera market, not whether they in fact

contributed to market efficiency by "buying or selling Xcelera's

stock and driving it to a price reflective of all information

bearing on value."14

Plaintiffs contend that more than twenty market-makers

participated in the market for Xcelera stock, with seven market-

makers trading over one million shares each in the final quarter of

the Class Period. They say that this evidence demonstrates not

only that there was a sufficient number of market-makers present to

facilitate trading, see, e.g., Cheney, 213 F.R.D. 484, 500 (S.D.

Fla. 2003) (holding that presence of between fifteen and nineteen

market-makers weighed in favor of finding of market efficiency)

(citing Cammer, 711 F. Supp. at 1283 n.30 (finding that presence of

eleven market-makers weighed in favor of efficiency)), but also

14
In addition, Defendants argue that Plaintiffs offered no evidence
whatsoever for the presence of arbitrageurs in the Xcelera market.
Defendants contend that the absence of arbitrageurs demonstrates
that there were limits on the ability of rational investors to
engage in short sales, thereby "push[ing] prices to incorporate all
publicly available information." Plaintiffs argue that Defendants'
evidence of constraints on short sales relates to rationality, not
efficiency, and thus has no place in the Cammer analysis. (We
address below Defendants' evidence of irrationality in the Xcelera
market). In any event, Plaintiffs contend, "during the Class
Period investors were able to and did sell Xcelera's shares short,
and the number of people shorting Xcelera stock grew" during most
of the Class Period.

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that these market-makers were in fact conducting trades in

significant volume.15

C. The District Court's Fraud-on-the-Market Determination

Although Defendants insist that the evidence we have

summarized here did not support the district court's finding of an

efficient market on the basis of the Cammer factors, we disagree.

As we have already noted, "the determination of whether a market is

efficient is a fact-dominated inquiry. Therefore, deferential

clear-error review applies to that determination." The district

court was entitled to resolve the evidentiary conflicts in favor of

Plaintiffs. There was no clear error in the district court's

evaluation of the evidence under Cammer.

Anticipating the obstacles posed by clear-error review,

Defendants attempt to inject into the clear-error analysis an

argument that is more akin to a claim of legal error. Defendants

argue that even if the Cammer factors were met, the district court

should have concluded that Xcelera's market was inefficient based

on other factors rejected by the court. According to Defendants,

the district court erroneously applied the Cammer factors in

15
While listing "eligibility to file an S-3 Registration Statement"
as one of the five factors "that could give rise to an inference of
an efficient market," the district court chose not to address this
Cammer factor. Although both parties invoke this factor in support
of their respective positions, the district court did not err in
foregoing analysis of this factor in favor of Cammer's other
factors, and, therefore, we need not reach the parties' arguments
regarding this factor.

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isolation, rather than viewing them as part of a broader analysis

of the structure of the Xcelera market. "[T]he ultimate question

of market efficiency," Defendants argue, "is structural, and [the

Cammer factors] are only partial indicators of market structure."

In order to determine whether the Xcelera market was efficient,

Defendants argue that the district court should have analyzed

whether Xcelera's market behaved "rationally".

Defendants contend that Xcelera's market was dominated by

irrational investors "not basing their decisions on analysis . . .

of the fundamental value of the stock in light of all currently

available information." Defendants further contend that

constraints on short sales in the Xcelera market prevented

arbitrageurs from acting on analyses that "push[] prices into line

with all information bearing on the security's fundamental value."16

Lastly, Defendants argue that Xcelera's stock price behaved

irrationally – reaching levels "that were orders of magnitude too

16
Defendants offer several pieces of evidence in support of the
existence of limits on capacity for arbitrage, including: high
costs of borrowing Xcelera stock to sell short (i.e., low "rebate
rates"); violations of put-call parity in the options market,
which, according to Defendants, "necessarily imply a limit to
arbitrage and, in particular, a short sales constraint"; a "high
turnover" of individual investors, indicating that investors were
buying and selling Xcelera stock within a relatively brief time,
and thereby not loaning their shares to short-sellers; a high level
of existing short interest, which, Defendants argue, implies
constraints on other would-be short-sellers; a high bid-ask spread,
suggesting that stock is too expensive to trade; and high risks
faced by short-sellers in light of the rapid rise in Xcelera's
stock price during the Class Period.

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high, based on any possible range of future earnings growth, to be

consistent with an efficient market"; reacting to "minor"

developments in ways greatly disproportionate to the economic

significance of such developments; and "fluctuat[ing] wildly"

throughout the Class Period.17

As we stated in PolyMedica,

[t]he question of how much evidence of efficiency is
necessary in order for a court to accept the fraud-on-
the-market presumption of reliance at the class-
certification stage is . . . one of degree. District
courts must draw these lines sensibly, mindful of the
fact that while evidence of fundamental value may be
relevant to the determination of informational
efficiency, other more accessible and manageable evidence
may be sufficient at the certification stage to establish
the basic facts that permit a court to apply the fraud-
on-the-market presumption.

No. 05-1220, slip op. Here, focusing on the Cammer factors, the

district court concluded that Plaintiffs demonstrated the basic

facts necessary to justify a presumption of reliance at the class-

certification stage. The court's determination that "Defendant's

[sic] expert focuses too much on the rationality of the market, as

opposed to its efficiency," was an appropriate exercise of its

discretion. Xcelera, No. 00-11649-RWZ, at 5. As discussed above,

17
In order to demonstrate that Xcelera's stock price behaved
irrationally, Defendants offered the following: a comparison of
the price movements of Xcelera stock and those of the Dow Jones and
other Internet stocks from the same period; an analysis of whether
Xcelera's stock "could reasonably be said to reflect the
fundamental value of [its] assets"; evidence of "extraordinarily
high" volatility in Xcelera's stock price; and an analysis of
company-specific events to which Xcelera's stock price failed to
respond rationally.

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for purposes of establishing the fraud-on-the-market presumption of

reliance, market efficiency does not require that a market be

"rational, i.e., consistent with fundamental value." While

evidence of irrationality in the Xcelera market – i.e., the

presence of irrational investors and limits to arbitrage which

prevented market price from reflecting fundamental value – may have

been "relevant to the extent it raises questions about

informational efficiency," the district court did not err in

finding "other more accessible and manageable evidence" sufficient

to establish the presumption of reliance.

The district court's consideration of four of the Cammer

factors, and its rejection of the rationality factors advanced by

Defendants, was thus proper for purposes of determining market

efficiency. Because there is no "magic number" of factors for

determining efficiency, we leave it to the district court in the

first instance to decide which factors and how many factors it will

consider, emphasizing that the ultimate efficiency determination is

subject to clear error review. Obviously, if the district court

considers too few factors or too little evidence, the determination

will not survive clear error review. That did not happen here.

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 IV.

For the foregoing reasons, the district court's order

certifying the class and the insider trading subclass is affirmed.

Costs are taxed against Defendants.

So ordered.

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