• Proof of Loss Causation Poses a Significant Obstacle to Class Certification
  • June 20, 2007 | Authors: Charles Wachter; Julie Simone Sneed
  • Law Firm: Fowler White Boggs P.A. - Tampa Office
  • The Fifth Circuit has imposed significant potential obstacles to certifying a class action involving alleged fraud-on-the-market in Oscar Private Equity Inv. v. Allegiance Telecom, Inc., No. 05-10791, 2007 WL 1430225 (5th Cir. May 16, 2007). Given “the lethal force of certifying a class” the Court explained that it must “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.” Id. at *1. In Oscar, the plaintiffs sought to rely on the fraud-on-the-market theory and certify a securities fraud class action alleging violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities Exchange Commission.

    The Fifth Circuit reversed class certification and “tightened the requirements for plaintiffs seeking a presumption of reliance.” Id. at *3. The court reasoned that the Supreme Court’s decision in Basic Inc. v. Levinson, 485 U.S. 224 (1988) “allows each of the circuits room to develop its own fraud-on-the-market rules.” Id. Accordingly, the Fifth Circuit announced that it “now requires more than proof of a material misstatement; we require proof that the misstatement actually moved the market.” Id. The court also clarified that notwithstanding Eisen v. Carlisle & Jacquelin, 417 U.S. 156 (1974), loss causation must be established at the class certification stage by a preponderance of all admissible evidence. Id. at *6. Contact Charles or Julie for more information.