Defense Defeats Class Action Certification for Contested Time Period Because Plaintiff’s Evidence Failed to Demonstrate “Cause and Effect” and Only “Weakly” Showed Market Efficiency Massachusetts Court Holds
Plaintiff investors filed a putative class action against PolyMedica and others alleging securities fraud, relying on the “fraud on the market” doctrine to establish the reliance element of their securities fraud claim. In re PolyMedica Corp. Securities Litig., 453 F.Supp.2d 260, 264-65 (D. Mass. 2006). A Massachusetts federal court certified a class action for the time period of October 26, 1998 to August 21, 2001; the First Circuit reversed with respect to the time period of January 1, 2001 to August 21, 2001, and remanded the case for further proceedings. Id., at 264. The new district court explained at page 264, “The sole issue for further adjudication here is whether Rule 23(b)(3) can be satisfied in the circumstances of this case.” (Broadly, Rule 23(b)(3) requires that common questions of law or fact predominate over individual issues and that the class action device be the superior method for resolving the dispute.) The court agreed with defense attorneys that it could not, and refused to certify a class for the 2001 time period.
The federal court began by noting the special problem created by securities fraud class actions, explaining at page 264: “In the context of securities fraud allegations, the nature of Rule 23(b)(3) analysis is quite particularized. Securities frauds, like all frauds, entail proof of reliance… . While reliance is typically demonstrated on an individual basis, the Supreme Court has noted that such a rule would effectively foreclose securities fraud class actions because individual questions of reliance would inevitably overwhelm the common ones under Rule 23(b)(3)… . To avoid this result, the Supreme Court has recognized the fraud-on-the-market theory, which relieves the plaintiff of the burden of proving individualized reliance on a defendant’s misstatement, by permitting a rebuttable presumption that the plaintiff relied on the ‘integrity of the market price’ which reflected that misstatement.” (Citations omitted.) The fraud on the market doctrine requires that the market be “efficient” – that is, “‘one in which the market price of the stock fully reflects all publicly available information,’” id., at 265 (quoting In re PolyMedica Corp. Securities Litig., 432 F.3d 1, 14 (1st Cir. 2005)).
In order to determine market efficiency, the district court turned to the Cammer factors. See Cammer v. Bloom, 711 F.Supp. 1264, 1286-87 (D. N.J. 1989). The First Circuit has summarized those factors as “(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 company’s eligibility to file a Form S-3 Registration Statement; and (5) a cause-and-effect relationship, over time, between unexpected corporate events or financial releases and an immediate response in stock price.” In re Xcelera.com Secs. Litig., 430 F.3d 503, 511 (1st Cir. 2005) (citing Cammer). The last of these factors is the most important, representing “‘the essence of an efficient market and the foundation for the fraud on the market theory,’” In re PolyMedica, at 266 (quoting Cammer, at 1287).
The district court readily concluded that the first four Cammer factors were satisfied. In re PolyMedica, at 266-68. However, the court stated that plaintiff’s analysis of the fifth and “most important” factor “leaves much to be desired.” Id., at 268-69. For example, the “evidence” concerning news and fluctuations in stock price was only “marginally useful” because it failed to consider “any of the myriad variables other than news that might explain the movements in PolyMedica’s stock.” Id., at 270. As the court explained, “It is not sufficient simply to report movement on significant news days. To approach usefulness, an analysis should statistically compare all news days with all non-news days.” Id.
The federal court also concluded that market for PolyMedica’s stock was not “efficient” during the relevant time period, within the meaning of First Circuit requirement that “‘the market price of the stock fully reflects all publicly available information.’” In re PolyMedica, at 271 (citation omitted). The district court explained at page 272, “[The] definition of ‘efficiency’ … erects a significant hurdle which plaintiffs must jump before being permitted to take advantage of the fraud-on-the market-presumption. This is perfectly appropriate since the presumption stands in the place of an important element of a securities fraud claim.” The court concluded that plaintiff could not clear that hurdle. See id., at 272-78. Because plaintiff could not satisfy the fifth Cammer element and could not establish market efficiency, the court denied the request to certify the lawsuit as a class action for the relevant time period. Id., at 278-79.
NOTE: The district court described the testimony of the defense expert as “particularly credible and informative,” and found his responses to the court’s questions “both helpful and impressive.” In re PolyMedica, at 269 n.7. Also, the court noted that its conclusion that the market was not efficient during the “Contested Period” rendered it unnecessary to address defense arguments that “the class is not ascertainable if short sellers are to be excluded.” Id., at 278 n.23.
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