In re Williams Securities Litigation—WCG Subclass: How Dura Met Daubert

I. INTRODUCTION The United States Court of Appeals for the Tenth Circuit recently decided a large securities fraud case that will have a significant impact on evidentiary standards pertaining to loss causation theories. The court's February 18, 2009, opinion was its first to apply the Supreme Court's loss causation standard set forth in Dura Pharmaceuticals, Inc. v. Broudo.1 The case, In re Williams Securities Litigation - WCG Subclass,2 addressed the question of whether the district court abused its discretion in granting summary judgment to the defendants on the issue of loss causation after excluding the plaintiffs' expert witness testimony. The court excluded the expert's testimony on the ground that his loss causation scenarios were based on an unreliable methodology.3 In deciding Williams, the Tenth Circuit became the first federal appellate court to consider Dura's requirements in response to a Daubert challenge. After juxtaposing Dura's standards with those set forth by Daubert and its progeny, the appellate court affirmed both the lower court's exclusion of the plaintiffs' expert testimony and its grant of summary judgment for the defendants. Though the standards announced by the Tenth Circuit are more burdensome on plaintiffs than those imposed by other courts, Williams is more in line with the Supreme Court's reasoning and policy underlying Dura than cases decided in other jurisdictions. II. FACTS AND PROCEDURAL HISTORY A. Factual Background Following the forced breakup of AT&T in the early 1980s,4 WMB (an energy company that produces and transports natural gas) planned to run fiber-optic cables through decommissioned pipelines.5 As part of this plan, WMB formed a telecommunications subsidiary called Williams Telecommunications Company ("WilTel"), which eventually constructed a nationwide digital fiberoptic network of approximately 9,700 route miles.6 In 1995, WMB sold WilTel for $2.5 bulion to LDDS Communications.7 Excluded from the sale, among other things, was a single fiber-optic strand along the original nationwide network.8 As a condition of the sale, WMB agreed to a three year non-compete agreement that prevented it from reentering the telecommunications industry until 1998.9 When WMB's non-compete agreement expired in January 1998, the Telecom Index was thriving - up 42% since the beginning of the previous year.10 Seeking to reenter the telecommunications industry, WMB formed the subsidiary WCG with the objective of budding a nationwide fiber-optic network for the exclusive purpose of providing services to communications service providers.11 By the end of the year, the Telecom Index climbed to 500.91, up 63%. 12 In light of the favorable market conditions and in an effort to raise additional capital for operations and continued network construction, WCG conducted an IPO on October 1, 1999. 13 That day, WCG's stock ended trading at $28.06 per share, and the Telecom Index reached 616.80 (a gain for the Index of 23% since the end of 1998 ).14 The months following WCG's IPO showed exceptional growth for both WCG's stock price and the Telecom Index, with WCG peaking on March 7, 2000, at $61.81 and the Telecom Index reaching its peak three days later at 1248.06.15 Over the next several months, WCG and the Telecom Index both declined significandy.16 By July 21, 2000, WCG's trading price was down to $29.38 (a decrease of more than 50% compared to its peak).17 Similarly, the Telecom Index had fallen an alarming 28% since its zenith.18 On July 24, 2000, the beginning of the class period, WMB announced its plan to spin off WCG in a tax free distribution to its shareholders.19 A November 16, 2000, press release quoted WMB's CEO, defendant Keith Bailey, as saying: This important step continues a process that we believe remains in the best long-term interests of our shareholders. [WMB and WCG] have tremendous opportunities before them. Creating the most effective and efficient access to capital will help fuel that growth, and we believe that can best be achieved by creating two independent businesses. …