Corporate & Securities Law

By Jim Hamilton

5th Circuit Remains Hostile Terrain for Class Actions

In Fener v. Belo Corp., a 5th Circuit panel continued that circuit's narrow view of securities class action pleading. Initially, the court rejected claims that that the Supreme Court's Stoneridge decision effectively overruled the 5th Circuit's 2007 decision in Oscar Private Equity Investments v. Allegiance Telecom, Inc. In the 2007 case, the appeals panel, in an interlocutory appeal, vacated a class certification that was based on a presumption of reliance under the fraud on the market theory. According to the majority opinion in Oscar, "[e]ssentially, we require plaintiffs to establish loss causation in order to trigger the fraud-on-the-market presumption." The panel rejected the district court's conclusion that the class certification stage was not the proper time for the defendants to rebut the lead plaintiffs' fraud on the market presumption.

In effect, the 5th Circuit in Oscar reversed the burden of proof involved with the fraud on the market presumption. Rather than requiring the defendant to rebut the presumption, plaintiffs were required to prove by a preponderance of the evidence the existence of a sufficient and specific causal link. The panel in Fener found nothing in Stoneridge that invalidated its Oscar holding, noting that "when the Supreme Court discusses a general legal standard and cites its earlier caselaw on point, it does not necessarily overrule intervening decisions of the lower courts."

The case involved alleged misstatements by the officers of the publisher of the Dallas Morning News concerning the paper's circulation numbers. The company issued a press release stating that an internal investigation had revealed irregularities in the circulation numbers. The press release also stated that the circulation declines were ?coupled with? losses previously announced and with circulation declines anticipated due to overall industry weakness.

The 5th Circuit noted that when there are several negative statements absorbed by the markets that fraud plaintiffs must show at this initial state of the litigation 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." The court found that the plaintiffs' expert witness and other evidence did not establish a sufficient connection between the disclosure of the alleged fraud and the stock price drop.

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Full post as published by Jim Hamilton's World of Securities Regulation on August 14, 2009 (boomark / email).