Securities class actions rarely go to trial. When they do, as in the Household International case where the plaintiffs won a $2.46 billion verdict, they make the news. But it is axiomatic that big verdicts lead to big appeals. Last month, the Seventh Circuit agreed with the defendants that a new trial was warranted, at least as to certain determinations.
In Glickenhaus & Co. v. Household Int’l, Inc., 2015 WL 2408028 (7th Cir. May 21, 2015), the court offered guidance on two interesting issues.
(1) Loss causation – The jury applied a “leakage model” to determine damages, apparently concluding that information about Household’s alleged fraud had become available to market participants before the relevant disclosures. This model “calculates every difference, both positive and negative, between the stock’s predicted return [using a regression analysis] and the stock’s actual return during the disclosure period.” All of these residual returns are then added up and this amount is “assumed to be the effect of the disclosures.” While the Seventh Circuit agreed that the leakage model of loss causation was legally sufficient, it also found that the expert’s “conclusory opinion that no firm-specific, nonfraud related information affected the stock price during the relevant time period” was subject to challenge. It ordered a new trial on the issue of loss causation to allow the defendants an opportunity to rebut the accuracy of that opinion.
(2) Maker of the statements – The jury was instructed that the defendants could be held liable if they “made, approved, or furnished information to be included in a false statement of fact.” The Supreme Court subsequently issued its Janus decision, holding that liability is limited to “the person or entity with ultimate authority over the statements, including its content and whether or how to communicate it.” When the defendants moved for a new trial based on Janus‘s holding, the district court denied the motion, “reasoning that the Court’s holding applied only to legally independent third parties.” On appeal, the Seventh Circuit found that this was error because “[t]he Court’s interpretation applies generally, not just to corporate outsiders.” Accordingly, it ordered a new trial as to which of the false statements were “made” by the individual officer defendants (this would include, for example, a jury determination as to whether Household’s CEO actually exercised control over the company’s press releases).
Holding: Defendants are entitled to a new trial on loss causation and whether the individual officer defendants “made” certain of the false statements.