IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
August 12, 2009
No. 08-10576
Charles R. Fulbruge III
Clerk
TODD FENER, on Behalf of Himself and All Others Similarly Situated, et al.,
Plaintiffs,
BELO CORPORATION; ROBERT W. DECHERD, BARRY PECKHAM;
JAMES M. MORONEY, III,
Defendants-Appellees,
versus
OPERATING ENGINEERS CONSTRUCTION INDUSTRY
AND MISCELLANEOUS PENSION FUND (LOCAL 66),
Appellant.
Appeals from the United States District Court
for the Northern District of Texas
Before SMITH, GARZA, and CLEMENT, Circuit Judges.
JERRY E. SMITH, Circuit Judge:
Todd Fener and other plaintiffs filed a class action against Belo Corpora-
No. 08-10576
tion and some of its officers (collectively “Belo”) alleging violations under the Se-
curities Exchange Act of 1934. Fener moved for class certification, which the dis-
trict court denied. He appeals, and we affirm.
I.
Belo is a media company that owns television stations, websites, and news-
papers, including the Dallas Morning News (“DMN”). Revenue from the DMN
makes up about 60% of Belo’s publishing revenue and 30% of its total revenue;
90% of the DMN’s revenue comes from advertising sales, which are priced based
on circulation.
The plaintiffs allege that Belo engaged in a fraudulent scheme designed
to inflate DMN’s circulation artificially in the face of a nationwide downward
trend in newspaper circulation. Belo allegedly paid bonuses for achieving circu-
lation targets, rigged audits of DMN’s circulation, and implemented a no-return
policy that eliminated any incentive for distributors to return unsold newspa-
pers. Those actions, the plaintiffs claim, allegedly artificially increased recorded
circulation, which led to higher advertising revenues for DMN and larger profits
for Belo.
On March 9, 2004, Belo announced that DMN’s future circulation would
be down 2.5% on daily papers and 3.5% on the Sunday paper. On August 5, after
the New York Stock Exchange (“NYSE”) closed, Belo issued a press release (“the
press release”) that admitted that an internal investigation had revealed ques-
tionable circulation practices.
According to the press release, the allegedly fraudulent practices resulted
in a 1.5% daily paper circulation decline and a 5% Sunday decline. The press re-
lease noted that the declines were “coupled with” the circulation declines an-
nounced in March and with lower anticipated circulation for the next six months;
the total circulation decline from all of these announcements was predicted to
2
No. 08-10576
be 5% for the daily paper and 11.5% for Sunday. The press release also stated
that Belo would begin exercising more stringent control over possible improper
manipulation of circulation.
When the NYSE opened the next day, Belo’s stock, which had closed the
previous day at $23.21, dropped to as low as $18.00. It finished the day at
$21.55, down $1.66 from the previous day’s close. Several securities analysts
lowered their earning estimates for Belo and downgraded its stock.
On August 16, Belo announced that it would compensate advertisers by
approximately $23 million, with an additional $3 million to cover costs related
to an ongoing internal investigation. On September 29, Belo revised its initial
circulation figures, projecting a decrease of 5.1% in daily circulation and 11.9%
for Sunday. It said that most of the declines were related to the overstatements.
Plaintiffs 1 sued on behalf of those who held Belo’s common stock between
May 12, 2003, and August 6, 2004, alleging that Belo and five of its senior offi-
cers and directors had violated § 10(b) of the Securities Exchange Act of 1934,
15 U.S.C. § 78j(b), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5. They claimed the
class members had bought Belo stock when its price was artificially (and fraudu-
lently) inflated as a result of the manipulation of DMN’s reported circulation and
were injured when Belo revealed the fraud and its stock price fell. Plaintiffs
eventually 2 moved for class certification under Federal Rule of Civil Proce-
dure 23.
Belo opposed class certification and presented expert Dr. Paul Gompers,
1
The district court designated Operating Engineers Construction Industry and Miscel-
laneous Pension Fund as the lead plaintiff.
2
Other developments, including the district court’s dismissal of some claims against
the individual defendants, are described in district court opinions on this dispute. See Fener
v. Belo Corp., 425 F. Supp. 2d 788 (N.D. Tex. 2006) (Fener I); Fener v. Belo Corp., 513 F. Supp.
2d 733 (N.D. Tex. 2007) (Fener II); Fener v. Belo Corp., Nos. 3:04-CV-1836-D, 3:04-CV-1869-D,
3:04-CV-2156-D, 2007 WL 4165709 (N.D. Tex. Nov. 26, 2007) (Fener III).
3
No. 08-10576
who testified that class certification was inappropriate because plaintiffs could
not show that the fraudulent disclosure in the press release was the primary
cause of the stock price decline. Plaintiffs responded with a declaration from ex-
pert Dr. Scott Hakala, who rejected Gompers’s testimony and stated that the de-
cline was “entirely or almost entirely attributable to the revelation of the rele-
vant truth in this case.” 3 After hearing from the experts and examining the oth-
er evidence, the district court denied class certification.
II.
“We review class certification decisions for abuse of discretion in recogni-
tion of the essentially factual basis of the certification inquiry and of the district
court’s inherent power to manage and control pending litigation. Whether the
district court applied the correct legal standard . . ., however, is a legal question
that we review de novo.” Regents of the Univ. of Cal. v. Credit Suisse First Bos-
ton (USA), Inc., 482 F.3d 372, 380 (5th Cir. 2007) (citation, internal quotation
marks, and ellipses omitted). “Where a district court premises its legal analysis
on an erroneous understanding of governing law, it has abused its discretion.”
Id. (citing Unger v. Amedisys Inc., 401 F.3d 316, 320 (5th Cir. 2005)). “A district
court must conduct a rigorous analysis of the rule 23 prerequisites before certi-
fying a class. . . . The party seeking certification bears the burden of proof.”
Castano v. Am. Tobacco Co., 84 F.3d 734, 740 (5th Cir. 1996).
“[C]lass certification creates insurmountable pressure on defendants to
settle, whereas individual trials would not.” Id. at 746 (citation omitted). “The
risk of facing an all-or-nothing verdict presents too high a risk, even when the
probability of an adverse judgment is low.” Id. (citation omitted). This risk is
particularly high in securities-fraud class actions, in which the current “class-
3
We discuss Gompers’s and Hakala’s testimony more thoroughly infra.
4
No. 08-10576
based compensatory damages regime in theory imposes remedies that are so cat-
astrophically large that defendants are unwilling to go to trial even if they be-
lieve the chance of being found liable is small.” Janet Cooper Alexander, Re-
thinking Damages in Securities Class Actions, 48 S TAN. L. R EV. 1487, 1511
(1996). Some have observed that seeking class certification to force favorable
settlements does not benefit small investors 4 but instead resembles a shake-
down 5 or “judicial blackmail.” 6
III.
In securities fraud cases, the plaintiff must prove
(1) a material misrepresentation (or omission); (2) scienter, i.e., a
wrongful state of mind; (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 caus-
ation”; (5) economic loss; and (6) “loss causation,” i.e., a causal con-
nection between the material misrepresentation and the loss.
Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341-42 (2005) (citations omitted).
In Basic v. Levinson, 485 U.S. 224 (1988), the Court held that requiring proof of
“actual reliance” was unduly burdensome to plaintiffs, and instead it “recognized
the securities fraud theory of fraud-on-the-market.” Greenberg v. Crossroads
Sys., Inc., 364 F.3d 657, 661 (5th Cir. 2004) (citation omitted). Under that the-
ory, plaintiffs can create a rebuttable presumption of reliance if they can show
4
See Janet Cooper Alexander, Do the Merits Matter? A Study of Settlements in Securi-
ties Class Actions, 43 STAN . L. REV . 497, 501 (1991) (“[T]he actual distribution of the settle-
ment funds suggests that the present system does not really benefit the small investors who
are presumed to be the beneficiaries of class actions, and it may actually foreclose more effi-
cient client-controlled litigation by large investors.”).
5
Vincent E. O’Brien, The Class-Action Shakedown Racket, WALL ST . J., Sept. 10, 1991,
at A20.
6
Castano, 84 F.3d at 746.
5
No. 08-10576
“(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.” Id. (citation omitted). When proving reliance, “plaintiffs cannot trig-
ger the presumption . . . by simply offering evidence of any decrease in price fol-
lowing the release of negative information. . . . [They instead] must show that
the false statement causing the increase was related to the statement causing
the decrease.” Id. at 665. This last requirement for fraud-on-the-market reli-
ance is known as loss causation, a concept that is at the heart of the instant
case.7
Proving loss causation “require[s] a plaintiff additionally to ‘prove that the
defendant’s non-disclosure materially affected the market price of the security.’”
Alaska Elec. Pension Fund v. Flowerserve Corp., 572 F.3d 221, 2009 WL
1740648, at *4 (5th Cir. June 19, 2009) (per curiam) (citing Nathenson v. Zona-
gen Inc., 267 F.3d 400, 414 (5th Cir. 2001)). A plaintiff must show “(1) that the
negative truthful information causing the decrease in price is related to an al-
legedly false, non-confirmatory positive statement made earlier and (2) that it
was more probable than not that it was this negative statement, and not other
unrelated negative statements, that caused a significant amount of the decline.”
7
In Oscar Private Equity Investments v. Allegiance Telecom, Inc., 487 F.3d 261 (5th Cir.
2007), we further detailed our requirements for loss causation:
We now require more than proof of a material misstatement; we require proof
that the misstatement actually moved the market. That is, the plaintiff may re-
cover 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. Essentially,
we require plaintiffs to establish loss causation in order to trigger the fraud-
on-the-market presumption. 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 revelation
of the truth and not the release of the unrelated negative information.
Id. at 265 (footnotes, internal quotation marks, ellipses, and brackets omitted).
6
No. 08-10576
572 F.3d at ___, 2009 WL 1740648, at *4 (internal quotation marks and brackets
omitted) (citing Greenberg, 364 F.3d at 666). “[L]oss causation as an issue of pre-
dominance must be established at the class certification stage by a preponder-
ance of all admissible evidence.” 572 F.3d at ___, 2009 WL 1740648, at *5 (cita-
tions omitted).
A court can examine loss causation at the pleadings stage,8 the class certi-
fication stage, 9 on summary judgment,10 or at trial. The proof needed for loss
causation at the pleadings stage should not be conflated with the requirements
needed at the class certification stage.11 We must examine whether these plain-
tiffs have presented enough information to show loss causation under rule 23.
IV.
A.
As a threshold issue, we address plaintiffs’ argument that Stoneridge In-
vestment Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008), overruled
some of our earlier opinions, specifically Greenberg and Oscar Private Equity In-
vestments v. Allegiance Telecom, Inc., 487 F.3d 261 (5th Cir. 2007). Plaintiffs
cannot direct us to any mention of either case in Stoneridge or to any discussion
of this circuit’s fraud-on-the-market theory. They point only to Stoneridge’s gen-
8
See Lormand v. US Unwired, Inc., 565 F.3d 228, 255-58 (5th Cir. 2009) (discussing
pleading standards for loss causation).
9
See Oscar, 487 F.3d at 266-70 (establishing that this examination is appropriate as
part of the class certification inquiry).
10
See id. at 269 n.40 (“This is not to say that loss causation, as an element of a 10b-5
claim, cannot be reexamined at summary judgment.”).
11
The parties submitted extensive letters regarding the impact of Lormand, which,
however, examines what is required under Federal Rule of Civil Procedure 8 to survive the
pleadings stage. To the degree those standards are easier to meet than are our requirements
for class certification, Lormand does not inform our decision.
7
No. 08-10576
eral summary of the fraud-on-the-market theory, urging that that discussion
somehow indicates that the Supreme Court meant to strike down our recent se-
curities fraud caselaw.
Plaintiffs are mistaken. First, when the Supreme Court discusses a gener-
al legal standard and cites its earlier caselaw on point, it does not necessarily
overrule intervening decisions of the lower courts. Moreover, Basic “allows each
of the circuits room to develop its own fraud-on-the-market rules.” Oscar, 487
F.3d at 264 (quoting Abell v. Potomac Ins. Co., 858 F.2d 1104, 1117-18 (5th Cir.
1988), vacated on other grounds, 492 U.S. 914 (1989)). In Greenberg and Oscar,
we used this “room” to develop specific rules. Stoneridge and its general discus-
sion of the fraud-on-the-market theory do not affect those rules.
B.
Recognizing that Stoneridge does not change our fraud-on-the-market an-
alysis, we turn to whether plaintiffs met our requirements for proving loss caus-
ation at the class certification stage. Plaintiffs filed their certification motion
with about one hundred pages of support.12 The relevant information consisted
of excerpts from Belo’s SEC Form 10-K for two years, Belo’s historical stock pric-
es, Belo’s SEC S-3 forms from 1996 to 2006, financial data from Yahoo! finance,
and a chart of Belo’s daily share price. Plaintiffs submitted no expert testimony.
In response, Belo presented Gompers’s testimony and an event study that
he had conducted. Gompers argued that the press release contained not one
piece of information but three separate items of news: DMN’s circulation de-
crease resulted from (1) fraudulent overstatements;13 (2) changes in DMN’s
12
Of those hundred pages, eighty were the resumes of the lawyers at Fener’s law firm.
That information is not helpful for the class certification motion.
13
We refer to this part of the press release as “the fraudulent disclosure.”
8
No. 08-10576
methodology; and (3) industry-wide decline in newspaper circulation.14 Gom-
pers’s event study examined 132 analyst reports and found that the stock price
decline was primarily related to the non-fraudulent disclosures instead of the
fraudulent one.
Plaintiffs responded with Hakala’s testimony and event study. That study
concluded that Belo’s stock was efficiently traded during the class period, that
revenue at DMN was closely tied to circulation, that Belo’s stock moved in close
connection with the industry’s other stocks, and that its share price had moved
significantly when it issued the press release. More importantly, he disputed
Gompers’s conclusion that the press release could be separated into three parts,
claiming instead that the fraudulent and non-fraudulent parts of the press re-
lease had to be examined together as one disclosure. Finally, he alleged that the
market had already absorbed the non-fraudulent disclosures’ information, and
thus only the fraudulent disclosure affected Belo’s stock price.15
Whether we view the press release as one complete disclosure or three sep-
arate ones is important. In Oscar, 487 F.3d at 266, we specified how parties
must prove loss causation in cases in which “multiple items of negative informa-
tion were released together with the corrective disclosure.” “In such multi-lay-
ered loss-causation inquiries,” we require that the plaintiff shows 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.” 16 Id. (cit-
14
We refer to parts 2 and 3 of the press release collectively as “the non-fraudulent dis-
closures.”
15
Gompers submitted a response to Hakala’s study challenging his conclusions and an-
alysis. Ultimately, however, we do not need to examine Gompers’s reply, because his initial
studySSrather than Hakala’sSSdiscusses the proper way in which to examine Belo’s disclos-
ures.
16
We also clarified that this inquiry is appropriate at the class certification stage. See
Oscar, 487 F.3d at 266-70.
9
No. 08-10576
ing Greenberg, 364 F.3d at 666). Thus, if we view the press release as multiple
pieces of information, plaintiffs must prove that the fraudulent disclosure caused
a significant amount of the decline.
By its plain language, the press release consists of three separate pieces
of information, andSScontrary to plaintiffs and Hakala’s beliefSSGompers did not
invent that three-part classification.17 The press release first discusses the
fraudulent “overstatement” and the estimated “decline in circulation related to
this matter.” It then recognizes that the disclosure is “coupled with” the earlier
reduction announcement and the “anticipated lower circulation” over a six-
month period. Thus, the release divides the news into fraudulent and non-fraud-
ulent information related to possible future circulation declines.
Plaintiffs assert, however, that even if the news can be divided into three
parts, they still meet Oscar’s requirement of showing that the fraudulent disclo-
sure caused a significant reduction in Belo’s stock price. As an initial point,
plaintiffs’ original motion for certification does not meet our standards for prov-
ing loss causation. They submitted only SEC reports, stock-price charts, analyst
reports, and other similar information; they did not include expert testimony.
As we stated in Oscar, these items contain “little more than well-informed
speculation.” Id. at 271. Although analyst reports and stock prices are helpful
17
The relevant part of the press release reads as follows:
Belo Corp. announced today that [DMN], a wholly-owned subsidiary, will re-
port a greater than expected decline in its September 2004 circulation. An in-
ternal investigation, which is ongoing, has disclosed practices and procedures
that led to an overstatement in circulation, primarily in single copy sales. Belo
estimates the decline in circulation related to this matter to be approximately
1.5 percent daily and five percent Sunday. This decline, coupled with a reduc-
tion in state circulation that was first communicated publicly on March 9, 2004,
of approximately 2.5 percent daily and 2.5 percent Sunday, and anticipated low-
er circulation volumes for the six month period ending September 30, 2004, will
result in a total decline in circulation of approximately five percent daily and
11.5 percent Sunday . . . .
10
No. 08-10576
in any inquiry, the testimony of an expertSSalong with some kind of analytical
research or event studySSis required to show loss causation. See id. For all of
the reasons stated in Greenberg and Oscar, stock prices and analyst reports,
without more, are insufficient at the class certification stage.
Even considering the plaintiffs’ analyst commentary and stock price infor-
mation together with Hakala’s testimony and event study, the motion for class
certification still falls short. As the district court correctly held, Hakala’s testi-
mony was fatally flawed; he wedded himself to the idea that the press release
was only one piece of news and conducted his event study based on that belief.
We reject any event study that shows only how a “stock reacted to the entire
bundle of negative information,” rather than examining the “evidence linking the
culpable disclosure to the stock-price movement.” Id. Because Hakala based his
study on that incorrect assumption, it cannot be used to support a finding of loss
causation.
Without the event study, the rest of Hakala’s testimony relates to analyst
opinions about Belo’s stock decline. Again, this “well-informed speculation” can-
not support a finding of loss causation “without reference to any post-mortem
data [the analysts] have reviewed or conducted.” Id. Thus, once we disregard
Hakala’s flawed event study, the rest of his testimony is insufficient to prove loss
causation.
Plaintiffs’ other arguments are also flawed. First, they argue that the
press release recognizes that the fraudulent disclosure would result in a 1.5% to-
tal daily paper decline and a 5% Sunday decline. This, they claim, is nearly one-
third of the total daily decline and over 40% of the total Sunday decline from all
three disclosures. Assuming arguendo that one-third of a given stock decline is
a “significant amount” of the total, we do not need to answer that question,18
18
Like the court in Oscar, “[w]e will not attempt to quantify what fraction of a decline
(continued...)
11
No. 08-10576
because plaintiffs fail to understand which decline we are examining. A court
should examine the decline in the stock price related to the disclosure, not the
decline in the circulation.
Conceivably, DMN’s fraudulent practices could have resulted in 90% of the
circulation decline, but if the stock price fell because the market was concerned
only with the reason for the other 10%, loss causation could not be proven. Be-
lo’s fraud regarding DMN was significant, but for long-term investors, news
about the substantial and continuing decline in nationwide newspaper circula-
tion could be much more disconcerting than were the fraudulent practices. If in-
vestors sold Belo’s stock because of that long-term trend, and not because of the
fraud, there is no loss causation.
Plaintiffs’ only remaining argument is premised on Hakala’s allegation
that the market already knew about and had absorbed the impact of the non-
fraudulent disclosures. If that is so, the plaintiffs argue, Oscar does not apply,
the stock drop after the press release is related to only the one fraudulent dis-
closure, and the drop in stock price alone proves loss causation. We disagree.
“There is no reason why the concerns stated in Oscar do not equally apply to cas-
es in which only one negative disclosure is at issue.” Luskin v. Intervoice-Brite
Inc., 261 F. App’x 697, 702 (5th Cir. 2008). Plaintiffs still must prove loss causa-
tion through the same rigorous process that we established in Oscar, even if
there is only one negative disclosure. “[P]laintiffs cannot trigger the presump-
tion of reliance by simply offering evidence of any decrease in price following the
release of negative information.” Greenberg, 364 F.3d at 665.
Under an alternative system, were a defendant to release a corrective dis-
closure on a particularly volatile market day, its stock could plummet regardless
of whether the market cared about the disclosure. Such a drop, even coupled
18
(...continued)
is ‘significant.’” Oscar, 487 F.3d at 270.
12
No. 08-10576
with the disclosure, is insufficient, however, unless there is a showing that the
disclosure actually caused the decline. A class action may not proceed against
a defendant whose only fault is releasing a disclosure on a volatile trading day.
Securities fraud litigation is not “a scheme of investor’s insurance” 19 but
instead is designed to protect those who buy stock at fraudulently inflated prices.
If the fraud did not cause the price of the stock to increase, and its disclosure
does not cause the price to go down, no injury has occurred. Thus, regardless of
the number of disclosures, plaintiffs must establish the connection between the
disclosure and the decline in price.20
V.
In summary, the district court did not abuse its discretion in denying class
certification. Plaintiffs’ failure to present an expert witness with an event study
or other analytical evidence of loss causation runs afoul of Oscar. The order
denying class certification is AFFIRMED.
19
Basic, 485 U.S. at 252 (White, J., concurring in part and dissenting in part) (citation
omitted).
20
Hakala also failed to submit enough evidence to prove that the stock market absorbed
the other pieces of information. He admitted that his analysis was incomplete, and the conclu-
sions he did reach lack analytical support.
13