Source: https://www.ktmc.com/news/class-certification-and-the-use-of-event-studies-after-comcast
Timestamp: 2019-04-21 22:08:34+00:00

Document:
Two years ago, the U.S. Supreme Court decided Comcast Corp. v. Behrend, which denied class certification to a proffered plaintiff class in an antitrust case because the plaintiffs had failed to establish that “questions of law or fact common to class members predominate over any questions affecting only individual members.”1 Comcast held that, while damages “[c]alculations need not be exact,  at the class-certification stage (as at trial), any model supporting a plaintiff’s damages case must be consistent with its liability case . . .”2 Courts across the country have struggled to interpret Comcast, resulting in a wide array of conflicting readings.
Guided by these principles, to calculate damages in securities cases economists and financial analysts use “event studies,” which calculate artificial inflation based upon the abnormal stock drops accompanying the disclosure of the fraud. Event studies therefore enable a measure of damages that is directly linked to a plaintiff’s theory of liability: the measure of the stock price decline when the artificial inflation caused by the fraud exits the stock price — like the air coming out of a balloon. And because the daily (even minute-to-minute) prices for securities traded in efficient markets are readily available, the measure of inflation in a particular security’s price can be determined with reference to these historical prices and can be mechanically applied to every stock purchaser in the class to determine individual damages.
Thus, in securities fraud class actions, “the fraud-on-the-market doctrine” — which provides a rebuttable presumption of classwide reliance for all purchasers of a security traded in an efficient market — “makes it rather easy for a lead plaintiff to establish that common questions predominate over individual ones.”5 To that end, district courts hearing securities class actions have almost uniformly held that the standard event study methodology satisfies Comcast.6 By contrast, the few securities cases where certification has been denied on Comcast grounds have all involved unconventional damages methodologies.7 Indeed, in the two years since Comcast was decided, no court has ultimately declined to certify a securities class invoking a standard event study methodology to measure traditional out-of-pocket (or “but for”) damages. This article explores the post-Comcast landscape for securities class actions.
As the Supreme Court explained recently in Halliburton II, the fraud-on-the-market presumption which undergirds the modern securities class action system is based on the premise that “the price of stock traded in an efficient market reflects all public, material information — including material misstatements.”22 In the words of Judge Easterbrook of the Seventh Circuit, “[w]hen someone makes a false (or true) statement that adds to the supply of available information, that news passes to each investor through the price of the stock. And since all stock trades at the same price at any one time, every investor effectively possesses the same supply of information. The price both transmits the information and causes the loss.”23 Thus, in the typical securities case, there is one theory of liability (public misrepresentations) that causes one uniform injury (artificial inflation) to one variable (stock price).24 And when the relevant truth concealed by the misrepresentations is disclosed, the stock price falls, removing the inflation.
For many years, courts have recognized event studies as “the most prevalent, accepted method to establish loss causation and damages” in securities class actions.25 An event study is “a statistical regression analysis that examines the effect of an event [, such as the disclosure of a corporate fraud,] on a dependent variable, such as a corporation’s stock price.”26 More specifically, the regression analysis identifies dates on which there is an abnormal stock price decline for the subject company when compared to the overall market. Then, more qualitative analysis, including review of market analyst reports and other sources, is performed to determine the actual cause of the decline — i.e., whether the decline was caused by disclosure of the fraud or other, non-fraud-related, company-specific factors.
Of course, plaintiffs need not prove loss causation at the class certification stage — that inquiry is saved for summary judgment or trial.27 Nor does Comcast “articulate any requirement that a damage calculation be performed” for class treatment.28 But to meet the predominance test of Federal Rule of Civil Procedure 23(b), securities fraud plaintiffs have invoked, and the courts have accepted, the event study methodology as the principal means of estimating damages and a tried method for showing that investors in the same efficiently-traded security are harmed by price inflation in a common (i.e., classwide) manner. These courts have reasoned that, because damages are derived directly from the stock price decline caused by the revelation of the fraud, there is a clear link between the liability theory and the damages methodology, and the event study enables the expert to estimate the price inflation associated with the corrective events.
In Wallace v. Intralinks, plaintiff moved to certify a class of investors bringing claims pursuant to the Exchange Act and a subclass of investors bringing claims pursuant to the Securities Act.54 To satisfy Comcast, plaintiff proposed an event study methodology similar to the event study that it had provided to establish market efficiency.55 Citing heavily to Diamond Foods, plaintiff argued that the event study, which measured inflation based upon corrective disclosure stock drops, was sufficiently tethered to its liability theory because “each [corrective] disclosure . . . directly relates to Lead Plaintiff’s claims. . . .”56 Defendants countered that the relevant truth had been disclosed prior to the class period-ending corrective disclosure, and that plaintiffs had failed to demonstrate predominance for class members who had purchased Intralinks stock after the truth was revealed.
When Comcast was issued, courts and practitioners alike grappled with its impact. In the securities class action domain, however, the district courts have not viewed Comcast as a major obstacle to class certification. Rather, because all investors in a fraud-on-the-market case are injured in a common manner — by the artificial inflation in a company’s stock price caused by a defendant’s false statements — the courts have by and large held that common questions of damages predominate over individualized ones. In particular, these courts have found that the traditional event study methodology, which seeks to estimate inflation based upon the abnormal stock price declines following disclosure of the fraud, is sufficiently tethered to a securities fraud plaintiff’s liability theory to satisfy Comcast. Moreover, given the recent opinions by the federal appeals courts in non-securities cases interpreting Comcast’s holding narrowly, this trend appears likely to continue.
1133 S. Ct. 1426 (2013).
3Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398, 2407 (U.S. 2014) (“Halliburton II”) (quoting Amgen Inc. v. Conn. Ret. Plans and Trust Funds, 133 S. Ct. 1184, 1192 (2013)).
4Halliburton II, 134 S. Ct. at 2405.
5In re Groupon, Inc. Sec. Litig., 2014 U.S. Dist. LEXIS 137382, at *7-9 (N.D. Ill. 2014).
7See, e.g., In re BP p.l.c. Sec. Litig., 2014 U.S. Dist. LEXIS 69900, at *82-89 (S.D. Tex. 2014) (“BP II”) (certifying out-of-pocket subclass but refusing to certify subclass of plaintiffs who “eschew[ed]” the traditional “but for” method); Sicav v. Jun Wang, 2015 U.S. Dist. LEXIS 6815, at *5-8 (S.D.N.Y. 2015) (denying certification where plaintiffs proposed an “unusual theory of classwide injury”).
8133 S. Ct. at 1429-30.
9 Comcast,133 S. Ct. at 1434-35.
17In re Whirlpool Corp. Front-Loading Washer Prod. Liab. Litig., 722 F.3d 838, 861 (6th Cir. 2013).
18Jimenez v. Allstate Ins. Co., 765 F.3d 1161, 1168 (9th Cir. 2014) (quoting Leyva v. Medline Industries Inc., 716 F.3d 510, 514 (9th Cir. 2013) (“‘[T]he amount of damages is invariably an individual question and does not defeat class action treatment.”)).
19Roach v. T.L. Cannon Corp., 2015 U.S. App. LEXIS 2054, at *14 (2d Cir. 2015) (“Comcast . . . did not hold that a class cannot be certified under Rule 23(b)(3) simply because damages cannot be measured on a classwide basis. Comcast’s holding was narrower[:] . . . a model for determining classwide damages relied upon to certify a class under Rule 23(b)(3) must actually measure damages that result from the class’s asserted theory of injury; but the Court did not hold that proponents of class certification must rely upon a classwide damages model to demonstrate predominance. . . .”).
20Sykes v. Mel S. Harris & Assocs., LLC, 2015 U.S. App. LEXIS 2057, at *40 (2d Cir. 2015).
21Leyva, 716 F.3d at 514.
22134 S. Ct. at 2405.
23Schleicher v. Wendt, 618 F.3d 679, 682 (7th Cir. 2010) (Easterbrook, J.) (emphasis added).
24See, e.g., McIntire v. China MediaExpress Holdings, Inc., 2014 U.S. Dist. LEXIS 113446, at *42 (S.D.N.Y. 2014) (certifying class over Comcast argument, explaining that, “Plaintiffs’ theory of liability is that [defendant’s] misrepresentations caused losses of the same kind: the artificial inflation of [the] share price”).
25WM High Yield Fund v. O’Hanlon, 2013 U.S. Dist. LEXIS 90323, at *43 n.20 (E.D. Pa. 2013).
26FindWhat, 658 F.3d at 1313.
27See Erica P. John Fund, Inc. v. Halliburton Co. 131 S. Ct. 2179, 2183 (2011) (“Halliburton I”) (“The question presented in this case is whether securities fraud plaintiffs must also prove loss causation in order to obtain class certification. We hold that they need not.”).
28In re: Cathode Ray Tube (CRT) Antitrust Litig., 2013 U.S. Dist. LEXIS 137945, at *137-38 (N.D. Cal. 2013).
292014 U.S. Dist. LEXIS 137382 (N.D. Ill. Sept. 23, 2014).
32Halliburton I, 131 S. Ct. at 2184.
33Halliburton II, 134 S. Ct. at 2412.
34485 U.S. 224, 108 S. Ct. 978 (1988).
35Halliburton II, 134 S. Ct. at 2412.
37295 F.R.D. 240 (N.D. Cal. 2013).
38See Declaration of Dr. Jay Hartzell in Support of Motion for Class Certification, }}23-24, Diamond Foods 295 F.R.D. 240 (Case No. 11-cv-05386-WHA), Dkt. No. 202-1.
39Defendant Diamond Foods, Inc.’s Sur-Reply in Opposition to Class Certification at 3, Diamond Foods 295 F.R.D. 240 (Case No. 11-cv-05386-WHA), Dkt. No. 225.
40Id. at 251-52 (citing In re Credit Indus., Inc. Sec. Litig., 252 F. Supp. 2d 1005, 1014 (C.D. Cal. 2003); In re Apollo Grp. Inc. Sec. Litig., 509 F. Supp. 2d 837, 844 (D. Ariz. 2007); In re Oracle Sec. Litig., 829 F. Supp. 1176, 1181 (N.D. Cal. 1993)).
41Id. at 251-52 (citing Blackie v. Barrack, 524 F.2d 891, 905 (9th Cir. 1975)).
442014 U.S. Dist. LEXIS 108409, at *3 (D. Minn. 2014).
45See Defendants’ Memorandum in Opposition to Lead Plaintiff’s Motion for Class Certification and Appointment of Lead Plaintiff Marion Haynes as Class Representative at 13-14, Best Buy, 2014 U.S. Dist. LEXIS 108409 (Case No. 11–429 (DWF/FLN)), Dkt. No. 156.
48Best Buy, 2014 U.S. Dist. LEXIS 108409, at *22.
53Best Buy, 2014 U.S. Dist. LEXIS 108409, at *24.
55Memorandum of Law in Support of Lead Plaintiff’s Motion for Class Certification at 21-22, Intralinks, 302 F.R.D. 310 (Civil Action No. 11-CV-8861), Dkt. No. 71.

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