The class certification decision in In Diamond Foods, Inc. Sec. Litig., 2013 WL 1891382 (N.D. Cal. May 6, 2013) contains a number of interesting holdings.
(1) Market efficiency is an issue for the finder of fact – A rebuttable presumption of reliance based on the fraud-on-the-market theory is only available to plaintiffs if the company’s stock traded on an efficient market. Market efficiency means that the company’s stock price reflected all publicly available information, which is typically tested by examining a number of empirical factors. In Diamond Foods, the court noted that the Supreme Court and the Ninth Circuit have never addressed “whether market efficiency is an issue for the jury to determine in trial (or, where appropriate, summary judgment), or is a matter reserved for the judge.” The court concluded, however, that the majority of courts correctly “treat efficiency as an issue for the finder of fact.”
(2) Comcast decision inapplicable to securities class actions – In the Supreme Court’s recent Comcast decision, it held that class certification should be denied if damages are incapable of measurement on a classwide basis. The Diamond Foods court found that the Comcast holding was inapplicable to securities class actions, where it is widely accepted that an event study can be “used to identify the economic loss caused by alleged fraud.” Indeed, the defendant failed “to identify any specific complications that would make such a calculation impossible or ill-advised in this case.”
(3) Pay-to-play allegations insufficient to find proposed class representative inadequate – The lead counsel had made political contributions to Mississippi Attorney General Jim Hood, who controlled the lead plaintiff’s selection of counsel. The court found that none of the contributions, however, were made “after counsel were approved by the Court in June 2012.” While lead counsel also had made contributions to the Democratic Attorneys General Assocation in 2012, there did not appear be any “communication between the law firms and Attorney General Hood, or his office, regarding any expectation that the law firms contribute to DAGA or that such contributions would eventually make their way to Attorney General Hood.” Accordingly, the court held that “[d]efendant has not advanced a record adequate to torpedo this action based on a pay-to-play theory.”
Holding: Motion for class certification granted.