Have Their Cake And Eat It Too

In the wake of the techology crash (way back at the turn of the century) a number of securities class actions were brought alleging misrepresentations by analysts. A key issue in those cases was whether the fraud-on-the-market theory, pursuant to which reliance by investors on a material misrepresentation is presumed if the company’s shares were traded on an efficient market, would apply to analyst statements about a company. In 2008, the U.S. Court of Appeals for the Second Circuit found that the fraud-on-the-market theory applies in this scenario. That said, plaintiffs still have the burden of demonstrating that the analyst statements caused the relevant stock price declines.

Proving once again that securities class actions can last a long time, the District of Massachusetts has issued a decision in an analyst case showing how the reliance and loss causation elements can overlap. In Bricklayers and Trowel Trades Int’l Pension Fund v. Credit Suisse First Boston, 2012 WL 118486 (D. Mass. Jan. 13, 2012) (originally filed in 2003), the court considered whether to preclude the testimony of the plaintiffs’ causation expert in a case based on statements by CSFB’s analysts regarding AOL.

The defendants argued that the expert’s event study was unreliable because it “flouts established event study methodology and draws unreasonable conclusions from the data presented.” The court agreed and found that the study improperly (a) cherry-picked days with unusual stock price volatility, (b) overused dummy variables to make it appear that AOL’s stock price was particularly volatile on the days CSFB issued its reports, (c) attributed “volatility in AOL’s stock price to the reports of defendants analysts when, at the time of the inflation or deflation, an efficient market would have already priced in the reports,” and (d) failed to conduct “an intra-day trading analysis for each event day with confounding information (which is, to say, nearly all of them) in order to provide the jury with some basis for discerning the cause of the stock price fluctuation.”

Holding: Event study excluded and summary judgment granted to the defendants based on the plaintiffs’ failure to raise a triable issue of fact on the element of loss causation.

Quote of note: “For example, [plaintiffs’ expert] labels April 18, 2002 as a corrective date, and attributes stock price deflation to the defendants, even though the information released on that day, Deutsche Bank’s lowered estimate and price target, was released nine days earlier without any corresponding impact. Plaintiffs may not at the same time presume an efficient market to prove reliance and an inefficient market to prove loss causation. They may not have their cake and eat it too.”