Monday, August 23, 2010
The Seventh Circuit, in an opinion authored by Judge Esterbrook, recently reaffirmed the fraud-on-the-market theory of reliance and disapproved of the Fifth Circuit's Oscar Private Equity opinion that held that proof of loss causation is essential at the class certification stage, Schleicher v. Wendt (Aug. 20, 2010) (Download SchleigervWendt). Stating that Oscar Private Equity would make class certification "impossible in many securities statutes," it rejected the Fifth Circuit's view that Basic "license[d] each court of appeals to set up its own criteria for certification of securities class actions or to 'tighten' Rule 23's requirements."
In this case, plaintiffs were both long and short sellers of Conseco common stock, a large corporation whose stock was actively traded on the NYSE; a financial expert had concluded that the market for Conseco's stock was efficient. Conseco's stock price was falling during the class period, and plaintiffs alleged that defendants made unduly optimistic statements to conceal the extent of its losses, until the company filed for bankruptcy. Defendants argued that before class certification the district judge must determine that the contested statements actually caused material changes in stock prices. In rejecting this, the Seventh Circuit refused to draw any distinctions between material misstatements that caused the stock price to rise and material misstatements that retarded the fall of the stock price and deemed defendants' invocation of "materialization-of-risk" irrelevant to the analysis. In addition, it deemed irrelevant the fact that the proposed class included short sellers, because both long and short sellers are affected by news that influences the stock prices for their transactions. Finally, the court reaffirmed the principle that under Rule 23, class certification is largely independent of the merits.