In 2003, America Online (AOL) investors brought a securities class action alleging that Credit Suisse First Boston (CSFB) fraudulently withheld relevant information from the market in its reporting on the AOL-Time Warner merger. After many years of litigation, the D. of Mass. granted summary judgment to CSFB, finding that the plaintiffs had failed to raise a triable issue of fact as to loss causation.
The key basis for the district court’s decision was its rejection of the plaintiffs’ expert study. In particular, the district court 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.”
On appeal, the First Circuit affirmed the exclusion of the expert testimony and the grant of summary judgment. See Bricklayers and Trowel Trades Int’l Pension Fund v. Credit Suisse Securities (USA) LLC, 2014 WL 1910961 (1st Cir. May 14, 2014). The appellate court disagreed that the expert’s use of dummy variables was “inconsistent with the methodology or goals of a regression analysis” and concluded that it was a “dispute that should be resolved by the jury.” However, the other three deficiencies identified by the district court were “more than sufficient” to find that the district court had not abused its discretion.
The plaintiffs argued that affirming the district court’s decision was inappropriate because it was uncontested that 5 of the event days identified by the expert as having “statistically significant abnormal returns” (out of a total of 57 days) “did not suffer from any methodological infirmities.” While the appellate court conceded that it could be an abuse of discretion to reject “mostly salvageable expert testimony for narrow flaws,” in this case it “confront[ed] the reverse situation – pervasive problems with [the expert’s] event study that, allegedly, still leave a few dates unaffected.” Under these circumstances, the district court properly treated the entire event study as inadmissible.
Holding: Affirming exclusion of expert testimony and grant of summary judgment to defendants.
Quote of note: “Requiring judges to sort through all inadmissible testimony in order to save the remaining portions, however small, would effectively shift the burden of proof and reward experts who fill their testimony with as much borderline material as possible. We decline to overturn the district court’s ruling on this specious logic.”