United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS
May 16, 2007
FOR THE FIFTH CIRCUIT
Charles R. Fulbruge III
Clerk
No. 05-10791
OSCAR PRIVATE EQUITY INVESTMENTS, Individually and on behalf of
all others similarly situated,
Plaintiff-Appellee,
BRETT MESSING and MARLA MESSING,
Appellees,
versus
ALLEGIANCE TELECOM, INC., et al.,
Defendants,
ROYCE J. HOLLAND; ANTHONY NMI PARELLA,
Defendants–Appellants.
Appeal from the United States District Court
For the Northern District of Texas
Before JOLLY, HIGGINBOTHAM, and DENNIS, Circuit Judges.
PATRICK E. HIGGINBOTHAM, Circuit Judge:
This is a permissible interlocutory appeal from an order
certifying a securities-fraud class action. Plaintiffs allege
violations of section 10(b) and 20(a) of the Securities Exchange
Act of 1934 and Rule 10b-5 of the Securities Exchange Commission.
Relying on the fraud-on-the-market theory, the district court
certified the class. We vacate the certification order and remand,
persuaded that the class certified fails for wont of any showing
that the market reacted to the corrective disclosure. Given the
lethal force of certifying a class of purchasers of securities
enabled by the fraud-on-the-market doctrine, we now in fairness
insist that such a certification be supported by a showing of loss
causation that targets the corrective disclosure appearing among
other negative disclosures made at the same time.
I
The class included all investors who purchased the common
stock of Allegiance Telecom between April 24, 2001 and February 19,
2002. Three investors bring this suit, Oscar Private Equity
Investments, its managing partner, Brett Messing, and his wife,
Marla Messing. They sue Royce Holland, former chairman and CEO of
Allegiance, and Anthony Parella, former executive vice president
for sales. Allegiance Telecom was named in the suit, but filed
for bankruptcy and is not now a party.
Allegiance was a national telecommunications provider based in
Dallas, Texas. It sold local telephone service, long distance,
broadband access, web hosting, and telecom equipment with
maintenance to small and medium sized businesses. Founded in 1997,
by February 2002 it was providing service in thirty-six U.S.
markets. At the beginning of the class period, April 24, 2001,
there were over 112 million common shares of Allegiance stock
2
trading on the NASDAQ. Institutional investors held approximately
68 percent of Allegiance’s stock and over fifty active market
makers traded it.
Plaintiffs allege that Holland and Parella fraudulently
misrepresented Allegiance’s line-installation count in the
company’s first three quarterly announcements of 2001, and that
Allegiance’s stock dropped after Holland and Parella ultimately
restated the count in the 4Q01 announcement. Defendants explain
that the restatement occurred because Allegiance installed a new
billing system in 2001 and reported line-count information from the
new billing system instead of from the order management system
which it replaced. Defendants further argue that the 4Q01
restatement did not cause the stock price to drop.
The relevant announcement history is as follows. Allegiance’s
stock, like that of the rest of the telecom industry, was plunging
during what is now the class period, losing nearly 90% of its value
during 2001. On April 24, 2001, the first day of the class period,
Allegiance announced its 1Q01 results, including (1) 126,200 new
lines installed; (2) revenues of $105.9 million, an 11% increase
over 4Q00; (3) positive sales force growth; and (4) improved gross
margin. The following trading day Allegiance’s stock rose 9%, from
$14.90 to $16.20, but soon declined again.
On July 24, 2001, Allegiance announced its 2Q01 results,
including (1) 135,800 new lines installed; (2) revenues of $124.1
million; (3) an earnings loss of $0.92 per share, $0.03 better than
3
the analysts’ consensus estimate; and (4) positive EBITDA1 results
in thirteen markets. The following trading day Allegiance’s stock
rose 20%, from $10.90 to $13.08 per share, but soon declined again.
On October 23, 2001, Allegiance announced its 3Q01 results,
including (1) the installation of its one-millionth line; (2)
revenues of $135 million; and (3) an earnings loss of $0.94 per
share, $0.03 better than the analysts’ consensus estimate. The
next trading day Allegiance’s stock rose 29%, from $5.21 to $6.74
per share, but remained volatile, falling to $3.70 per share by
February 18, 2002, the day before the curative statements of the
4Q01 announcement.
On February 19, 2002, Allegiance announced its 4Q01 results,
including (1) a restatement of the total installed-line count from
1,140,000 to 1,015,000, a difference of 125,000; (2) missed
analysts’ expectations on 4Q01 and 2001 earnings per share; (3)
greater EBITDA loss than some analysts expected; and (4) a very
thin margin of error for meeting revenue covenants for 2002. The
next trading day Allegiance’s stock continued its downward move,
falling %28, from $3.70 to $2.65 per share. Less than 90 days
later, Allegiance missed its covenants putting its credit lines in
default and on May 14, 2003, filed for bankruptcy.
Six months after Allegiance’s bankruptcy, plaintiffs filed
this class action, alleging that Allegiance’s officers
1
EBITDA is an acronym for earnings before interest, taxes, depreciation
and amortization. It is a measure of profitability.
4
misrepresented the number of installed lines in their 1Q01, 2Q01,
and 3Q01 announcements. Plaintiffs moved for class certification,
relying on the fraud-on-the-market presumption for evidence of
class-wide reliance. The district court certified the class,2 and
we granted interlocutory review.
II
The class certification determination rests within the sound
discretion of the trial court, exercised within the constraints of
Rule 23.3 A district court that premises its legal analysis on an
erroneous understanding of the governing law has abused its
discretion.4
III
This dispute turns on whether the certification order properly
relied upon the fraud-on-the-market theory. This theory permits a
trial court to presume that each class member has satisfied the
reliance element of their 10b-5 claim.5 Without this presumption,
2
The district court certified the following class: “All persons, without
geographical limitation, who purchased Allegiance common stock in the open
market during the period from April 24, 2001 through February 19, 2002,
inclusive, and who were damaged by defendants’ alleged violations of Section
10(b) and/or 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder. Excluded from the Class are Defendants, their legal
representatives, heirs, successors and predecessors in interest, affiliates,
assigns, and any entities in which the Defendants (or any of them) had a
controlling interest in during the Class Period.”
3
Gulf Oil Co. v. Bernard, 452 U.S. 89, 100 (1981).
4
Feder v. Electronic Data Systems Corp., 429 F.3d 125, 129 (5th Cir.
2005).
5
The elements of a 10b-5 action include:
(1) a material misrepresentation (or omission);
(2) scienter, i.e., a wrongful state of mind;
5
questions of individual reliance would predominate, and the
proposed class would fail.6
The Supreme Court in Basic adopted this presumption of
reliance with respect to materially misleading statements or
omissions concerning companies whose shares are traded in an
efficient market.7 Reliance is presumed if the plaintiffs can show
that “(1) the defendant made public material misrepresentations,
(2) the defendant’s shares were traded in an efficient market, and
(3) the plaintiffs traded shares between the time the
misrepresentations were made and the time the truth was revealed.”8
We have observed that Basic “allows each of the circuits room
to develop its own fraud-on-the-market rules.”9 This court has
(3) a connection with the purchase or sale of a security;
(4) reliance, often referred to in cases involving public securities markets
(fraud-on-the-market cases) as “transaction causation,”;
(5)economic loss; and
(6)“loss causation,” i.e., a causal connection between the material
misrepresentation and the loss. Dura Pharms., Inc. v. Broudo, 125 S. Ct. 1627
(2005).
6
Fed.R.Civ.Pro. 23(b)(3).
7
In re LTV Securities Litigation, 88 F.R.D. 134, 143 (N.D. Tex.1980);
Basic Inc. v. Levinson, 485 U.S. 224, 244 (1988).
8
Greenberg v. Crossroads Systems, Inc., 364 F.3d 657, 661 (5th Cir.
2004).
9
Abell v. Potomac Ins. Co., 858 F.2d 1104, 1117-18 (5th Cir. 1988),
vacated on other grounds sub. nom. Fryar v. Abell, 492 U.S. 914 (1989);
Nathenson v. Zonagen Inc., 267 F.3d 400, 414 (5th Cir. 2001).
6
used this room – in Finkel,10 Abell,11 Nathenson,12 and Greenberg13 –
to tighten the requirements for plaintiffs seeking a presumption of
reliance. We now require more than proof of a material
misstatement; we require proof that the misstatement actually moved
the market.14 That is, “the plaintiff [may] recover under the fraud
on the market theory if he [can] prove that the defendant’s non-
disclosure materially affected the market price of the security.”15
Essentially, we require plaintiffs to establish loss causation in
order to trigger the fraud-on-the-market presumption.16 Our most
recent statement of this rule was in Greenberg, which held that “to
trigger the presumption [of reliance] plaintiffs must demonstrate
that . . . the cause of the decline in price is due to the
10
Finkel v. Docutel/Olivetti Corp., 817 F.2d 356, 364 (5th Cir.1987),
cert. denied, 108 S.Ct. 1220 (1988).
11
Abell, 858 F.2d at 1120-21 (stating in dicta that a plaintiff may
recover under the fraud-on-the-market theory “if he could prove that the
defendant's non-disclosures materially affected the market price of the
security”).
12
Nathenson, 267 F.3d at 414 (“It is clear that a fraud-on-the-market
theory may not be the basis for recovery in respect to an alleged
misrepresentation which does not affect the market price of the security in
question.").
13
Greenberg, 364 F.3d at 662, 665–666.
14
Cf. In re Burlington Coat Factory Securities Litigation, 114 F.3d 1410
(3d Cir.1997). (“In the context of an ‘efficient’ market, the concept of
materiality translates into information that alters the price of the firm's
stock.”).
15
Nathenson, 267 F.3d at 414 (quoting Abell, 858 F.2d 1104, 1120-21).
16
Our approach is unaffected by the Supreme Court’s recent and very
narrow decision in Dura Pharms., 125 S. Ct. at 1627.
7
revelation of the truth and not the release of the unrelated
negative information.”17
This requirement was not plucked from the air. Basic plainly
states that the presumption of reliance may be rebutted by “[a]ny
showing that severs the link between the alleged misrepresentation
and . . . the price received (or paid) by the plaintiff.”18 This
would include “a showing that the market price would not have been
affected by the alleged misrepresentations, as in such a case the
basis for finding that the fraud had been transmitted through the
market price would be gone.”19
Quoting this very language, plaintiffs argue that our
requirement improperly shifts the burden, from a defendant’s right
of rebuttal to a plaintiff’s burden of proof. We disagree. As a
matter of practice, the oft-chosen defensive move is to make “any
showing that severs the link” between the misrepresentation and the
plaintiff’s loss; to do so rebuts on arrival the plaintiff’s fraud-
on-the-market theory. In Nathenson, the link was severed by
publicly available information that the misrepresentation didn’t
17
Greenberg, 364 F.3d at 665.
18
485 U.S. at 245. The Basic Court continues, “For example, if
[defendants] could show that the ‘market makers” were privy to the truth about
the merger discusses here with Combustion, and thus that the market price
would not have been affected by their misrepresentations, the causal
connection could be broken.” Id. (emphasis added). Drawing on Abell and
Nathenson, the Greenberg court added a showing to this list of “examples.”
19
Nathenson, 267 F.3d at 414.
8
move the stock price.20 In Greenberg, it was severed by publicly
available evidence that the corrective disclosure was buried in
other bad news.21 Hence, in cases like this one, we have required
plaintiffs invoking the fraud on the market theory to demonstrate
loss causation.22
The contours of this requirement — that the fraud affect the
stock price — is the gist of this appeal. It is a requirement
complicated here by the fact that multiple items of positive
information were released together with the alleged line-count
inflation, and further complicated by the fact that multiple items
of negative information were released together with the corrective
disclosure. In such multi-layered loss-causation inquiries, the
legal standard, at least, is well established: Greenberg requires
that plaintiffs prove “(1) that the negative “truthful” information
causing the decrease in price is related to an allegedly false,
non-confirmatory positive statement made earlier and (2) that it is
20
Id. at 414.
21
Greenberg, 364 F.3d at 665.
22
Our able brother frames our differences well, but is a bit
enthusiastic in our holding. We address here only the simultaneous disclosure
of multiple negatives, not all of which are alleged culpable. Indeed,
applying the fraud-on-the-market theory to such complex circumstances by rote
would yield a victory of habit over reason. With multiple negatives, our
usual approach to gauging efficiency and presuming reliance fails because we
cannot know that the culpable information was priced, even if objectively
material. Proof that the culpable disclosure moved the market addresses this
failure. The dissent is troubled that we have not suggested what form such
proof might take. We have mentioned one form, event studies, for the sake of
exposition only. As we explain below, the plaintiff’s own expert stated that
such proof was well within her grasp. Our further silence is an effort to
leave open options, subject to scrutiny in the first instance by opposing
experts and the district courts.
9
more probable than not that it was this negative statement, and not
other unrelated negative statements, that caused a significant
amount of the decline.”23
Neither party disputes Greenberg’s relevance. Instead, this
appeal raises the question of whether we ought to apply Greenberg’s
loss-causation requirement at the class-certification stage, as
well as the subsidiary question of the sufficiency of the evidence
to establish the requirement. On the first question, defendants
urge that the district court must consider all evidence, both for
and against loss causation, at the class certification stage. On
the second question, defendants argue that the district court
abused its discretion in finding that plaintiffs made a showing
sufficient to establish loss causation. We agree with both
contentions.
A
First we address the question of whether loss causation – a
fraud on the market prerequisite — should properly be addressed at
the class certification stage. The district court ruled that “the
class certification stage is not the proper time for defendants to
rebut lead Plaintiffs’ fraud-on-the-market presumption,” and
suggested that Basic “held that the presumption of reliance was
rebuttable, but only as related to a summary judgment motion.”
Plaintiffs defend the court’s ruling, noting that Greenberg was a
23
Greenberg, 364 F.3d at 666.
10
summary-judgment case and urging that proof of loss causation at
this stage “improperly combines the market efficiency standard with
actual proof of loss causation.”
There is widespread confusion on this point. As we will
explain, the confusion arises from an outdated view that fails to
accord this signal event of the case its due. Under this earlier
view, class certification was to be made “as soon as practicable
after the commencement of the action,” mindful that the decision
was tentative. It could be tailored to facts emerging in
discovery, and with subclasses built around awkward difficulties
of showings that cut across only part of the class first certified.
In short, class certification was a light step along the way,
divorced from the merits of the claim. Whatever reality this
treatment was responsive to, it is not that of a class exceeding
purchasers of millions of shares in a volatile and downward-turning
market over a ten-month period, claiming injury from one of several
simultaneous disclosures of negative information.
The power of the fraud-on-the-market doctrine is on display
here. With proof that these securities were being traded in an
efficient market, the district court effectively concluded that if
plaintiffs can establish at trial that defendants acted with the
requisite intent in counting its installations then defendants
would be liable for millions of dollars in paper losses on the day
following the fourth-quarter filing date, less the amount the
defendant may be able to persuade a jury was caused by other
11
circumstances — whether the purchaser held on and later sold at a
higher price or rode the stock down to bankruptcy. In short, the
efficient market doctrine facilitates an extraordinary aggregation
of claims. We cannot ignore the in terrorem power of
certification, continuing to abide the practice of withholding
until “trial” a merit inquiry central to the certification
decision, and failing to insist upon a greater showing of loss
causation to sustain certification, at least in the instance of
simultaneous disclosure of multiple pieces of negative news. Nor
is there sound reason for an early “tentative” certification, which
leaves loss causation for later more focused examination. It is
not the need for discovery. Little discovery from defendants is
demanded by the fraud-on-the-market regimen. Its “proof” is drawn
from public data and public filings, as in this case. It is
largely an empirical judgment that can be made then as well as
later in the litigation.
These concerns have shaped the evolution of class
certification and Rule 23. Rule 23(c)(1)(A) no longer demands
that the district court rule on class certification “as soon as
practicable,”24 but instead insists only upon a ruling “at an early
practicable time.”25 And although Rule 23 still recognizes that a
24
Fed.R.Civ.P. 23(c)(1)(A)(2003).
25
Fed.R.Civ.P. 23(c)(1)(A)(revised 2003).
12
class may be “altered or amended,”26 it no longer characterizes the
class certification order as “conditional,”27 explaining, in the
advisory committee notes, that “[a] court that is not satisfied
that the requirements of Rule 23 have been met should refuse
certification until they have been met.”28 These subtle changes,
as well as the less-subtle PSLRA, recognize that a district court’s
certification order often bestows upon plaintiffs extraordinary
leverage, and its bite should dictate the process that precedes it.
These changes are the product of years of study by the Advisory
Committee on Civil Rules, including many open hearings and
symposia. This collective wisdom must not be brushed aside. That
there are “important due process concerns of both plaintiffs and
defendants inherent in the certification decision,” cannot be
gainsaid.29 Thus, in Unger, a similar 10b-5 case, we held that
“[t]he plain text of Rule 23 requires the court to ‘find,’ not
merely assume, the facts favoring class certification.”30 And we
concluded that “[b]ecause Rule 23 mandates a complete analysis of
fraud-on-the-market indicators, district courts must address and
26
Id. at 23(c)(1)(C); see id. Advisory Committee Notes to the 2003
Amendments (“[I]t is appropriate to conduct controlled discovery into the
‘merits,’ limited to those aspects relevant to making the certification
decision on an informed basis.”).
27
This word has been demoted to the comments section.
28
See Fed.R.Civ.P. 23 Advisory Committee Notes to the 2003 Amendments.
29
Unger v. Amedisys Inc., 401 F.3d 316, 321 (5th Cir. 2005).
30
Unger, 401 F.3d at 321.
13
weigh factors both for and against market efficiency.”31 This
conclusion, that courts must examine factors both for and against,
applies to the determination of all Rule 23's requirements.
Relatedly, Rule 23's requirements must be given their full
weight independent of the merits. District courts often tread too
lightly on Rule 23 requirements that overlap with the 10b-5 merits,
out of a mistaken belief that merits questions may never be
addressed at the class certification stage.32 This is a misreading
of Eisen, an early class-certification decision by the Supreme
Court.33 The Eisen Court stated, “We find nothing in either the
language or history of Rule 23 that gives a court any authority to
conduct a preliminary inquiry into the merits of a suit in order to
determine whether it may be maintained as a class action.”34 As
Judge Jon Newman of the Second Circuit recently explained, “This
statement has led some courts to think that in determining whether
any Rule 23 requirement is met, a judge may not consider any aspect
of the merits, and has led other courts to think that a judge may
31
Unger, 401 F.3d at 325.
32
See, e.g., Barrie v. Intervoice-Brite, 2006 WL 2792199, *10
(N.D.Tex.,2006) (“Although Basic and Greenberg (the cases relied upon by
Defendants) both held the presumption to be rebuttable at the summary judgment
stage, such a finding by the court here, where the issue is class
certification, would be premature, since the court cannot delve into the
actual merits of Lead Plaintiffs' claims.”).
33
Bell v. Ascendant Solutions, Inc., 422 F.3d 307, 311-41 (5th Cir.
2005).
34
Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 177-78 (1974).
14
not do so at least with respect to a prerequisite of Rule 23 that
overlaps with an aspect of the merits of the case.”35
Eisen did not drain Rule 23 of all rigor. A district court
still must give full and independent weight to each Rule 23
requirement, regardless of whether that requirement overlaps with
the merits.36 The statement in Eisen is troublesome only if read
without the light of its facts. In Eisen, the district court’s
improper merits inquiry was unrelated to the Rule 23 requirements.
And the same was true in our Miller decision, which was relied upon
by Eisen, and which also held that a district court could not deny
certification based on its view of the merits.37 Both Eisen and
Miller “stand for the unremarkable proposition that the strength of
a plaintiff's claim should not affect the certification decision.”38
As the Second Circuit recently concluded, a district court must
resolve[] factual disputes relevant to each Rule 23
requirement and find[] that whatever underlying facts are
relevant to a particular Rule 23 requirement have been
established . . . . [T]he obligation to make such
determinations is not lessened by overlap between a Rule 23
35
Miles v. Merrill Lynch, 471 F.3d 24, 27 (2d Cir. 2006).
36
See General Telephone Company of the Southwest v. Falcon, 457 U.S.
147. 160 (1982) (acknowledging that “class determination generally involves
considerations that are enmeshed in the factual and legal issues comprising
the plaintiffs' cause of action,” and concluding that a class “may only be
certified if the trial court is satisfied, after a rigorous analysis, that the
prerequisites of Rule 23(a) have been satisfied.”).
37
Miller v. Mackey Int'l, 452 F.2d 424, 427 (5th Cir. 1971).
38
Castano v. American Tobacco Co., 84 F.3d 734, 744 (5th Cir. 1996).
15
requirement and a merits issue, even a merits issue that is
identical with a Rule 23 requirement.39
The answer to our first question, then, lies at the
intersection of Greenberg and Unger. Greenberg holds that loss
causation is a fraud-on-the-market prerequisite. Unger mandates
“a complete analysis of fraud-on-the-market indicators” at the
class certification stage, insisting that district courts “find”
the facts favoring class certification. We hold hence that loss
causation must be established at the class certification stage by
a preponderance of all admissible evidence.40
Plaintiffs respond that the question of loss causation
requires only a generalized inquiry into whether the
misrepresentation moved the stock, an inquiry common to all members
of the class. Pressing this point at oral argument, plaintiffs
urged that it was inappropriate to address loss causation at the
class-certification stage because loss causation necessarily
predominates, unlike individualized questions of reliance.
We might agree, if loss causation were only empirical proof of
materiality, unmoored from the question of classwide reliance. Yet
we have explained that the refutation of loss causation “more
39
Miles, 471 F.3d at 41.
40
This is not to say that loss causation, as an element of a 10b-5
claim, cannot be reexamined at summary judgment.
16
appropriately relates to the element of reliance.”41 This is
because loss causation speaks to the semi-strong efficient market
hypothesis on which classwide reliance depends, as we will explain.
The assumption that every material misrepresentation will move
a stock in an efficient market is unfounded, at least as market
efficiency is presently measured. There are two additional
explanations, besides immateriality, for why a misrepresentation
might fail to effect the stock price, both relevant to classwide
reliance. First, it might be that even though the market for the
defendant’s shares has been demonstrated efficient by the usual
indicia,42 the market is actually inefficient with respect to the
particular type of information conveyed by the material
misrepresentation, i.e. analysts and market makers do poorly at
digesting line-count information. Thus our approach gives effect
to information-type inefficiencies, recognizing that “the market
price of a security will not be uniformly efficient as to all types
41
Nathenson, 267 F.3d at 415. This relationship is foremost an artifact
of the common law's influence on 10b-5 actions, yet it persists for good
reason. See Schlick v. Penn Dixie, 507 F.2d 374 (2d Cir. 1974); Huddleston
v. Herman & MacLean, 640 F.2d 549 (5th Cir. 1981), reversed in part Herman &
MacLean v. Huddleston, 459 U.S. 375 (1983).
42
These include “(1) the average weekly trading volume expressed as a
percentage of total outstanding shares; (2) the number of securities analysts
following and reporting on the stock; (3) the extent to which market makers
and arbitrage[]rs trade in the stock; (4) the company's eligibility to file
SEC registration Form S-3; (5) the existence of empirical facts showing a
cause and effect relationship between unexpected corporate events or financial
releases and an immediate response in the stock price; (6) the company's
market capitalization; (7) the bid-ask spread for stock sales; and (8) float,
the stock's trading volume without counting insider-owned stock.” Bell v.
Ascendant Solutions, Inc., 422 F.3d 307, 313 (5th Cir. 2005).
17
of information.”43 A second possible explanation for a
misrepresentation’s failure to move the market is that the market
was strong-form efficient with respect to that type of information,
i.e., due to insider trading, the restated line count was reflected
by the stock price well before the 4Q01 corrective disclosure.
Both explanations resist application of the semi-strong efficient-
market hypothesis, the theory on which the presumption of classwide
reliance depends. This court honors both theory and precedent in
requiring plaintiffs to demonstrate loss causation before
triggering the presumption of reliance. The trial court erred in
ruling that the class certification stage is not the proper time
for defendants to rebut lead Plaintiffs’ fraud-on-the-market
presumption.
B
The legal error immediately identified, however, does not
alone dictate vacatur in this case, as the trial court, out of
caution perhaps, did not premise its analysis on its
misunderstanding of the law. Indeed, the trial court’s memorandum
opinion applies Greenberg and weighs all evidence, both for and
against loss causation, in concluding that “it is more likely than
not that a significant part of the stock decline causing the
putative Class’s loss is attributable to the line count corrective
43
See, e.g., Jonathan R. Macey & Geoffrey P. Miller, Good Finance, Bad
Economics: An Analysis of the Fraud-on-the-Market Theory, 42 Stan. L. Rev.
1059, 1083 (1990).
18
disclosure.” We vacate because this factual conclusion is
untenable. The plaintiff’s expert report did not establish loss
causation, and the district court abused its discretion in
certifying the class.
As we explained above, when unrelated negative statements are
announced contemporaneous of a corrective disclosure, the plaintiff
must prove “that it is more probable than not that it was this
negative statement, and not other unrelated negative statements,
that caused a significant amount of the decline.”44 We will not
attempt to quantify what fraction of a decline is “significant.”
We note only that, under these circumstances, proof of a corrective
disclosure’s significant contribution to a price decline demands a
peek at the plaintiff’s damages model — an empirically-based
inquiry, not speculation about materiality alone. Yet plaintiffs’
evidence on this point consists chiefly of analyst commentary. For
example, after the line-count restatement, James Ott at Hibernia
Southcoast Capital cautioned,
Unfortunately, Bears will have additional fodder during 1Q02,
as [Allegiance] scrubbed their databases and found some
differences in line count between billing and order management
platforms . . . In light of ‘Enron-itis,’ we believe an
increasingly skeptical market will have a negative view of
this adjustment . . . Unfortunately, the line revision will
cloud the company’s otherwise strong performance.
And at BB&T Capital Markets, an analyst groused,
The magnitude of this [line count] adjustment (12% of total)
makes it difficult to swallow . . . Given the issues
44
Greenberg, 364 F.3d at 666.
19
surrounding accounting today, the timing of such an adjustment
could not be worse.
Plaintiffs cite several other such reports — one calls the line-
count restatement “a yellow flag,” and another suggests that “the
Street is completely unwilling to listen to management
explanations.”
Defendants respond in kind, with more analyst quotes,
including one from lead plaintiff Brett Messing, who reported in a
May 15, 2002 column for RealMoney.com that “Allegiance’s stocks and
bonds are trading at distressed levels because of fears of a
revenue covenant violation,45 a more hostile regulatory environment,
and customer churn.” Notably Messing did not mention the line-
count restatement and named Allegiance’s management team “the
industry’s best.” Similarly, Danny Zito at Lehman Brothers was
concerned not with the line-count adjustment, which he opined was
troubling only because it raised concerns with Allegiance’s back
office operations, but with Allegiance’s “potential revenue
covenant violation risk.” Finally, James Ott at Hibernia, the same
analyst quoted extensively by the plaintiffs, also reported that
“[n]o material change ha[d] occurred fundamentally in ALGX’s
business,” and explained that “the vast majority of the revisions
were definitional rather than functional.”
The plaintiffs have the better of this exchange, but
nonetheless, their evidence is little more than well-informed
45
A prescient observation indeed.
20
speculation. To prove loss causation, and thereby trigger the
presumption of reliance, plaintiffs must do better. The
plaintiffs’ expert does detail event studies supporting a finding
that Allegiance’s stock reacted to the entire bundle of negative
information contained in the 4Q01 announcement, but this reaction
suggests only market efficiency, not loss causation, for there is
no evidence linking the culpable disclosure to the stock-price
movement. When multiple negative items are announced
contemporaneously, mere proximity between the announcement and the
stock loss is insufficient to establish loss causation.
Plaintiff’s expert, in her rebuttal, disagrees, but offers as
evidence only the raw opinion of analysts, without supporting study
of the market at issue — such as now common use of basic principles
of econometrics. The expert’s own concluding paragraph advised
that her work was incomplete: “It is possible with further analyses
to quantify the portion of the decline caused by the restated line
count. However, Counsel has advised me that the quantification of
damages is not appropriate at this stage of the litigation.” So
this is less of a dispute over what showing must be made, and more
a dispute over when.
Something like the expert’s “further analyses” is what is
missing. While counsel is correct that quantification of damages
is presently unnecessary – i.e. proof that some percentage of the
drop was attributable to the corrective disclosure – the plaintiffs
21
must, in order to establish loss causation at this stage, offer
some empirically-based showing that the corrective disclosure was
more than just present at the scene.46 And this burden cannot be
discharged by opinion bereft of the analysis plaintiff’s own expert
conceded was necessary, albeit in her counsel’s view at a later
stage. The class certification decision bears due-process
concerns for both plaintiffs and defendants,47 and an empirical
inquiry into loss causation better addresses these concerns than an
impenetrable finding akin to a reasonable man assessment. And
analyst speculation about materiality, while better informed than
a layman, more closely resembles the latter. At least when
multiple negative items are contemporaneously announced, we are
unwilling to infer loss causation without more. In sum, only a
medical doctor who has either conducted a post-mortem or reviewed
the work of another who did so, may credibly opine about the cause
of death. We do not insist upon event studies to establish loss
causation, helpful though they may be. We hold only that the
opinions of these analysts, without reference to any post-mortem
data they have reviewed or conducted, is insufficient here.
Because plaintiffs have failed to trigger the presumption of
reliance provided by the fraud-on-the-market theory, the class
fails and we must vacate the order of certification.
46
Greenberg, 364 F.3d at 666.
47
Unger, 401 F.3d at 320–21.
22
We VACATE and REMAND for further proceedings consistent with
this opinion.
23
DENNIS, CIRCUIT JUDGE, DISSENTING:
I respectfully dissent.
In this appeal from the district court’s order granting
class action certification, the majority departs drastically
from the Supreme Court’s decision in Basic, Inc. v. Levinson,
485 U.S. 224 (1985), which held that securities class action
plaintiffs are entitled to a rebuttable presumption of
reliance, or transaction causation, if the plaintiffs traded
in the stock at issue during the proposed class period in
reliance on the integrity of the price set by an open and
efficient market. The majority instead holds that plaintiffs
are entitled to Basic’s presumption of reliance only if they
also prove loss causation, that is, if they prove by a
preponderance of all admissible evidence that the defendants’
alleged misrepresentations were the proximate cause of the
plaintiffs’ economic loss. The majority’s decision is, in
effect, a breathtaking revision of securities class action
procedure that eviscerates Basic’s fraud-on-the-market
presumption, creates a split from other circuits by requiring
mini-trials on the merits of cases at the class certification
stage, and effectively overrules legitimately binding circuit
precedents.
24
I also respectfully dissent from the majority’s conclusion
that the district court abused its discretion in certifying
this class action. The majority found that the plaintiffs’
evidence was insufficient to establish that the decline in
Allegiance’s share price was related to Allegiance’s disclosure
that it had overstated its line count figures, but the majority
conducted what appears to have been a de novo, rather an abuse
of discretion, review of the evidence in order to make that
determination. In my opinion, the district court did not abuse
its discretion in making the factual findings necessary to its
certification of the case.
I.
The majority opinion relies heavily on this court’s
earlier decision in Greenberg v. Crossroads Systems, Inc., 364
F.3d 657 (5th Cir. 2004), which, the majority urges,
establishes that “we require plaintiffs to establish loss
causation in order to trigger the fraud-on-the-market
presumption.” Supra at 8; see also supra at 16. As I discuss
in greater detail below, Greenberg says no such thing. Neither
Greenberg nor any other decision of this court holds that proof
of loss causation is part of the fraud-on-the-market
presumption. The majority’s holding to the contrary amounts
25
to a profound modification of Greenberg. See infra Part II.
Moreover, by its decision today the majority aggravates
the already serious and unwarranted departure that Greenberg
made from both Basic and prior circuit precedent.1 In Basic,
the Supreme Court held that securities plaintiffs could satisfy
the reliance element of a Section 10(b) claim through the
fraud-on-the-market theory. See Basic, 485 U.S. at 250. The
fraud-on-the-market theory essentially permits plaintiffs to
establish the element of reliance by showing (1) that the
market for the securities in question was efficient and (2)
that they traded in reliance on the integrity of the market
price for the securities. See id. at 241-42 (“‘The fraud on
the market theory is based on the hypothesis that, in an open
and developed securities market, the price of a company’s stock
is determined by the available material information regarding
the company and its business . . . . Misleading statements
will therefore defraud purchasers of stock even if the
1
I have recently argued at length that Greenberg
irreconcilably conflicts with both Basic and this court’s
prior fraud-on-the-market case law. See Regents of the Univ.
of Cal. v. Credit Suisse First Boston (USA), Inc., --- F.3d --
--, 2007 WL 816518, at *22-24 (5th Cir. 2007)(Dennis, J.,
concurring in the judgment).
26
purchasers do not directly rely on the misstatements.’”)
(quoting Peil v. Speiser, 806 F.2d 1154, 1160-61 (3d Cir.
1986)); id. at 247 (“[W]here materially misleading statements
have been disseminated into an impersonal, well-developed
market for securities, the reliance of individual plaintiffs
on the integrity of the market price may be presumed.”).
The Basic court also held that the fraud-on-the-market
presumption is rebuttable, but it made it plain that the
defendant bears the burden of establishing that the presumption
should not apply:
[a]ny showing that severs the link between the
alleged misrepresentation and either the price
received (or paid) by the plaintiff, or his decision
to trade at a fair market price, will be sufficient
to rebut the presumption of reliance. For example,
if [defendants] could show that the “market makers”
were privy to the truth about the merger discussions
here with Combustion, and thus that the market price
would not have been affected by their
misrepresentations, the causal connection could be
broken: the basis for finding that the fraud had been
transmitted through market price would be gone.
Id. at 248 (emphasis added).
Up until our decision in Greenberg in 2004, this court
consistently recognized Basic’s holding that the defendant has
the burden of rebutting the fraud-on-the-market presumption.
See Nathenson v. Zonagen Inc., 267 F.3d 400, 413 (5th Cir.
2001); Fine v. Am. Solar King Corp., 919 F.2d 290, 299 (5th
27
Cir. 1990); see also Lehocky v. Tidel Techs., Inc., 220 F.R.D.
491, 505 (S.D. Tex. 2004). Two years after Basic, this court
held that there are three ways in which a defendant can rebut
the presumption: by showing “(1) that the nondisclosures did
not affect the market price, or (2) that the Plaintiffs would
have purchased the stock at the same price had they known the
information that was not disclosed; or (3) that the Plaintiffs
actually knew the information that was not disclosed to the
market.” Fine, 919 F.2d at 299.
The Greenberg panel itself began by correctly describing
Basic’s presumption of reliance in favor of the plaintiff and
recognizing that Basic places the burden of rebutting the
presumption on the defendant.2 See Greenberg, 364 F.3d at 661-
62. Later in its opinion, however, the Greenberg panel
erroneously concluded, contrary to both Basic and this court’s
prior decisions,3 that securities plaintiffs cannot invoke the
fraud-on-the-market presumption unless they first affirmatively
2
Unlike this case, Greenberg did not involve a motion for
class certification, but was instead an appeal from a grant of
summary judgment. See Greenberg, 364 F.3d at 661.
3
In Regents of the University of California, I explained
why Greenberg is not a correct interpretation of this court’s
precedent. See --- F.3d at ----, 2007 WL 816518, at *23-24
(Dennis, J., concurring in the judgment).
28
show that the market price of the stock actually moved in
response to either the defendants’ alleged misrepresentation
or a corrective disclosure. See Greenberg, 364 F.3d at 663
(noting that plaintiffs must show “actual movement of [the]
stock price” in order to trigger the fraud-on-the-market
presumption). Thus, instead of recognizing, in accord with
Basic, that the plaintiffs were entitled to a presumption of
reliance by virtue of simply trading in an efficient market,
Greenberg placed on the plaintiffs the additional burden of
showing that the misrepresentation or the corrective disclosure
moved the market price.
The conflict between Basic and Greenberg is inescapable.
Under Basic, the court is to presume that the defendant’s
material misstatement distorted the market price of the stock
at issue. See Basic, 485 U.S. at 247 (“Because most publicly
available information is reflected in market price, an
investor’s reliance on any public material misrepresentations,
therefore, may be presumed for purposes of a Rule 10b-5
action.”); Nathenson, 267 F.3d at 415 (“[T]here is generally
a presumption that potentially significant publicly
disseminated information is reflected in the price of stock
traded on an efficient market . . . .”). Greenberg, however,
29
subverts the fraud-on-the-market presumption by requiring the
plaintiffs to prove, as a precondition to the application of
the presumption, the very facts that are to be presumed under
Basic (i.e., that the defendant’s material misrepresentation
was reflected in the stock price). As a result, Greenberg
effectively relieves the defendant of its burden under Basic
to rebut the fraud-on-the-market presumption. See Regents of
the Univ. of Cal., --- F.3d ----, 2007 WL 816518, at *23-24
(Dennis, J., concurring in the judgment).
Confronted with the argument that Greenberg improperly
shifts the Basic burden, changing it from a defendant’s right
of rebuttal to a plaintiff’s burden of proof, the majority
makes a meager effort to claim that both Greenberg and today’s
decision are somehow compatible with Basic’s command that it
falls to the defendant to rebut the presumption of reliance.
The majority attempts to recharacterize the Basic presumption
as a sort of “bursting bubble” presumption, e.g., one that
“disappears if anything to the contrary is placed before the
court.” United States v. Zavala, 443 F.3d 1165, 1169 (9th Cir.
2006); cf. Black’s Law Dictionary 211 (8th ed. 2004) (defining
the “bursting bubble theory” as “[t]he principle that a
presumption disappears once the presumed facts have been
30
contradicted by credible evidence”). The majority posits that
“[a]s a matter of practice, the oft-chosen defensive move is
to make ‘any showing that severs the link’ between the
misrepresentation and the plaintiff’s loss; to do so rebuts on
arrival the plaintiff’s fraud-on-the-market theory.” Supra at
9. Although the majority conspicuously neglects to explain what
type of evidence a defendant would have to produce to meet its
standard, the clear implication is that, in the majority’s
view, the Basic presumption evaporates as soon as a defendant
simply introduces a mere possibility the defendant’s material
misrepresentation might not have affected the market price.
The majority cannot outflank Basic so easily, however. As
noted above, Basic expressly states that the defendants can
rebut the presumption only if they “could show . . . that the
market price would not have been affected by their
misrepresentations.” Basic, 485 U.S. at 248 (emphasis added).
Basic thus clearly places the burdens of both producing
evidence and persuasion on the defendant and requires an actual
showing that the defendant’s misrepresentation did not, or
could not have, affected the market price of the stock. Id.;
Fine, 919 F.2d at 299 (“The presumption of reliance can be
rebutted by showing . . . that the nondisclosures did not
31
affect the market price . . . .”); see also Abell v. Potomac
Ins. Co., 858 F.2d 1104, 1120 (5th Cir. 1988) (stating that
Basic “shift[s] the burden of persuasion, as to reliance, onto
securities fraud defendants”), vacated on other grounds sub
nom., Fryar v. Abell, 492 U.S. 914 (1989). Under no reasonable
reading can that standard be met, as the majority suggests, by
simply asserting that a particular change in the market price
could have been related to something other than the defendant’s
misrepresentations.
For the reasons stated above, I continue to believe that
Greenberg conflicts with binding precedents of both the Supreme
Court and this court, and I do not therefore regard that case
as binding or persuasive on the point at issue. See Modica v.
Taylor, 465 F.3d 174, 183 (5th Cir. 2006) (“‘When panel
opinions appear to conflict, we are bound to follow the earlier
opinion.’”) (quoting H&D Tire & Auto.-Hardware, Inc. v. Pitney
Bowes Inc., 227 F.3d 326, 330 (5th Cir. 2001)). Consequently,
the majority was not bound to repeat the Greenberg panel’s
error. Instead, it should have adhered to Basic and this
court’s pre-Greenberg jurisprudence, rather than repeating and
— as I discuss next — exacerbating Greenberg’s flaws.
II.
32
Even setting aside the preceding discussion of Greenberg’s
conflict with Basic, Greenberg simply does not stand for the
principle the majority purports to draw from it, i.e., that “we
require plaintiffs to establish loss causation in order to
trigger the fraud-on-the-market presumption.” Supra at 8.
In Greenberg, the court stated that in order to merit a
presumption of reliance under the fraud-on-the-market theory,
[a] causal relationship between the statement and
actual movement of the stock price is still required.
. . . It is this actual movement of stock price
which must be shown by fraud-on-the-market plaintiffs
. . . .
Greenberg, 364 F.3d at 663.4 The Greenberg panel later
explained how plaintiffs could satisfy this requirement of
showing actual price movement:
the main concern when determining whether a plaintiff
is entitled to the presumption of reliance is the
causal connection between the allegedly false
statement and its effect on a company’s stock price.
4
Greenberg purported to find that requirement in this
court’s earlier decision in Nathenson, which, on a motion to
dismiss, held that “where the facts properly considered by the
district court reflect that the information in question did
not affect the price of the stock then the district court may
properly deny fraud-on-the-market based recovery.” Nathenson,
267 F.3d at 415. As I explained in Regents of the University
of California, Nathenson does not actually support the
Greenberg panel’s decision to give plaintiffs the affirmative
burden of showing that the misrepresentation moved the market
price. See --- F.3d at ----, 2007 WL 816518, at *24 (Dennis,
J., concurring in the judgment).
33
Nathenson makes it clear that to establish this nexus
the plaintiffs must be able to show that the stock
price was actually affected. This is ordinarily
shown by an increase in stock price immediately
following the release of positive information. We
read Nathenson to also allow plaintiffs to make this
showing by reference to actual negative movement in
stock price following the release of the alleged
“truth” of the earlier misrepresentation.
Greenberg, 364 F.3d at 665. Assuming for the sake of argument
that Greenberg is correct, then, a plaintiff could satisfy
Greenberg in the typical securities fraud case involving
allegations that the defendant’s misrepresentations
artificially inflated the issuer’s stock price by showing that
the market price of the stock moved either upward at the time
of the defendant’s alleged misrepresentation or downward at the
time that the truth was disclosed.
The majority, however, disregards the part of Greenberg
that states that the actual price movement component of its
version of the fraud-on-the-market theory can be satisfied by
showing an increase in the stock price on the heels of the
misrepresentation. Instead, the majority erroneously reads
Greenberg to require the plaintiffs to establish the
conceptually distinct element of loss causation, i.e.,
proximate cause of economic loss, by showing that the stock
price declined in response to a corrective disclosure, to
34
trigger the fraud-on-the-market presumption. The majority’s
rule finds no support in Greenberg. This new rule directly
conflicts with the above-quoted language from Greenberg, and
nothing in Greenberg so much as suggests that the showing it
requires as a condition to a presumption of reliance somehow
includes proof of the distinct element of loss causation.
Accordingly, because the rule that the majority purports
to derive from Greenberg has no basis in that case, I could not
join the majority’s opinion even were I not convinced that
Greenberg conflicts with Basic and this circuit’s precedent.5
III.
Whatever the merits of the majority’s belief that private
securities class action procedure is in need of drastic change
and revision, today’s judicially-enacted reform is, in my
opinion, ill-advised and cannot be justified under current law.
Under the majority’s approach, Basic’s fraud on the market
presumption is essentially a dead letter, little more than a
quaint reminder of earlier times, and its primary holding is
5
Incidentally, it is undisputed, as the majority
acknowledges, that Allegiance’s share price increased
substantially immediately after each of defendants’ allegedly
false statements about the company’s line count. See supra at
3-4. The majority fails utterly to explain why that price
movement is insufficient to trigger the fraud-on-the-market
presumption under Greenberg.
35
supplanted by extensions of the policy considerations that the
majority sees reflected in the enactment of the PSLRA and in
recent amendments to Rule 23 (neither of which actually
purports to alter Basic or to speak directly to the issue in
this case). Such policy considerations, however, no matter how
sincerely interpreted or applied, do not give this court the
authority to overrule the Supreme Court’s decisions or to
change the recognized elements of a Section 10(b) claim, both
of which the majority effectively does today. See Unger v.
Amedisys, 401 F.3d 316, 322 n.4 (5th Cir. 2005) (“[I]t is the
Supreme Court’s job to overrule Basic, in the absence of
outright conflict with the Private Securities Litigation Reform
Act.”)
The majority states that its “approach is unaffected by
the Supreme Court’s recent and very narrow decision in Dura
Pharms.[, Inc. v. Broudo, 125 S. Ct. 1627 (2005)].” See supra
at 8 n.16. Although Dura was indeed a narrow decision, it
nevertheless undercuts the majority’s position in several
respects. The Dura court reaffirmed Basic, repeatedly citing
it with approval, and it expressly recognized that reliance and
loss causation are separate and distinct elements of the
36
Section 10(b) cause of action,6 and that Basic’s fraud-on-the-
market presumption relates only to the former. See Dura, 544
U.S. at 341-42.7
The majority’s approach simply disregards this distinction
and takes the novel step of making proof of loss causation a
prerequisite to the establishment of reliance through the
fraud-on-the-market presumption for purposes of certification.
As neither Basic nor any authority supports the majority’s
6
See Dura, 544 U.S. at 341-42 (“In cases involving
publicly traded securities and purchases or sales in public
securities markets, the action’s basic elements include . . .
. (4) reliance, often referred to in cases involving public
securities markets (fraud-on-the-market cases) as ‘transaction
causation,’ see Basic, supra, at 248-249, 108 S.Ct. 978
(nonconclusively presuming that the price of a publicly traded
share reflects a material misrepresentation and that
plaintiffs have relied upon that misrepresentation as long as
they would not have bought the share in its absence); . . . .
and (6) ‘loss causation,’ i.e., a causal connection between
the misrepresentation and the loss.”).
7
Moreover, I further disagree with the majority to the
extent that its opinion can be read to suggest that loss
causation can be established only by showing a drop in the
market price of the security in response to an explicit
corrective disclosure. Although this will frequently be the
method through which plaintiffs attempt to prove loss
causation, the Dura court specifically refrained from setting
rigid requirements as to how plaintiffs might prove loss
causation. See Dura, 544 U.S. at 346 (“[W]e find the Ninth
Circuit’s approach inconsistent with the law’s requirement
that a plaintiff prove that the defendant’s misrepresentation
(or other fraudulent conduct) proximately caused the
plaintiff’s economic loss. We need not, and do not, consider
other proximate cause or loss-related questions.”).
37
decision to conflate these two elements, I cannot subscribe to
the majority’s unwarranted realignment of securities class
action procedure.
IV.
Because, as the above sections demonstrate, plaintiffs are
not required to prove loss causation as part of the fraud-on-
the-market presumption (and because defendants make no other
plausible arguments for why plaintiffs should be required to
prove loss causation at the class certification stage), the
majority’s decision dramatically expands the scope of class
certification review in this circuit to effectively require a
mini-trial on the merits of plaintiffs’ claims at the
certification stage. In so doing, the decision contradicts
both this circuit’s Rule 23 case law and the decisions of other
circuits concerning the scope of the class certification
inquiry.
Before certifying a class action, the district court must
ensure that the proposed class satisfies all of the
requirements of Rule 23. See, e.g., Unger, 401 F.3d at 320
(“[T]he Supreme Court requires district courts to conduct a
rigorous analysis of Rule 23 prerequisites.”). We must be ever
mindful, however, that class certification hearings “should not
38
be mini-trials on the merits of the class or individual
claims.” Id. at 321 (citing Eisen v. Carlisle & Jacquelin, 417
U.S. 156, 177-78 (1974)). A court must conduct an “intense
factual investigation,” Robinson v. Texas Automobile Dealers
Association, 387 F.3d 416, 420 (5th Cir. 2004), yes, and in
doing so the district court must often go “beyond the
pleadings” and “understand the claims, defenses, relevant
facts, and applicable substantive law in order to make a
meaningful determination of the certification issues.” Castano
v. Am. Tobacco Co., 84 F.3d 734, 744 (5th Cir. 1996). The
district court cannot, however, go beyond those issues
necessary to decide whether the requirements of Rule 23 are
satisfied and rule on merits issues that are unrelated to Rule
23. See In re Initial Pub. Offering Sec. Litig., 471 F.3d 24,
41 (2d Cir. 2006) (“[A] district judge should not assess any
aspect of the merits unrelated to a Rule 23 requirement.”)
(emphasis added); see also Szabo v. Bridgeport Mach., Inc., 249
F.3d 672, 677 (7th Cir. 2001) (“A court may not say something
like ‘let’s resolve the merits first and worry about the class
later’ . . . or ‘I’m not going to certify a class unless I
think that the plaintiffs will prevail.’”).
39
Like the district court, we must restrict our review of
the merits to encompass only those issues necessary to
determining whether the proposed class satisfies the
requirements of Rule 23. See Bell v. Ascendant Solutions,
Inc., 422 F.3d 307, 314 (5th Cir. 2005) (stating that Rule
23(f) permits a party to “‘appeal only the issue of class
certification; no other issues may be raised’”) (quoting
Bertulli v. Indep. Ass’n of Cont’l Pilots, 242 F.3d 290, 294
(5th Cir. 2001)).
Proof of loss causation is not related to the Rule 23
inquiry through the fraud-on-the-market presumption, and it
will not, in the ordinary case, be otherwise relevant to the
district court’s Rule 23 inquiry.8 The majority’s decision to
require proof of loss causation at class certification in
securities class actions therefore represents a drastic
departure from this circuit’s settled limitations, laid out in
Unger and Bell, on the scope of the class certification
8
Even in cases where the defendant asserts that loss
causation is an individual issue, peculiar to each plaintiff,
that defeats the Rule 23 requirements of commonality or
predominance, the district court need not require plaintiffs
to actually prove loss causation at the class certification
stage. Rather, the district court must only find either that
all of the plaintiffs can prove loss causation in the same way
or that any individual issues do not defeat commonality or
predominance.
40
inquiry. Furthermore, it creates a conflict with the decisions
of other circuits. See, e.g., Initial Pub. Offering, 471 F.3d
at 41-42; Gariety v. Grant Thornton, LLP, 368 F.3d 356, 366
(4th Cir. 2004); Szabo, 249 F.3d at 677. The majority’s
consideration of merits issues unrelated to the requirements
of Rule 23 breaches Eisen’s longstanding admonition against
turning class certification into a mini-trial on the merits,
and I cannot follow the majority down that path.
CONCLUSION
In my opinion, the new rule applied by the majority is an
unjustified revision of securities class action procedure,
based in large part upon the majority’s dramatic remolding of
this court’s already problematic decision in Greenberg. In
essence, the majority’s revised standard both incorrectly
deprives plaintiffs of the benefit of the fraud-on-the-market
presumption of reliance afforded them by Basic and inexplicably
requires them to prove the separate element of loss causation
at the class certification stage.
Regardless, however, the majority does not, and cannot,
show that the district court abused its discretion in
certifying the class in this case, even under the majority’s
novel rules. The district court carefully considered the
41
evidence before it and concluded that the plaintiffs had
established that it was more likely than not that Allegiance’s
restatement of its line-count numbers caused a significant
portion of the subsequent decline in Allegiance’s share price.
The majority nevertheless finds the district court’s decision
“untenable,” and reverses simply because it is not in keeping
with the majority’s de novo assessment of the conflicting
evidence.
Because I disagree with both the substance of the
majority’s new rule and the legal reasoning by which it was
derived, and because I can discern no abuse of discretion in
the district court’s decision, I respectfully dissent.
42