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From Securities Regulation Daily, January 17, 2014

Class certification twice rejected, no reliance presumption

By Mark S. Nelson, J.D.

A securities fraud plaintiff whose hopes of certifying a class action have been dashed may not later ask to certify the same class previously denied certification in an effort to win court approval of a settlement with the defendant company’s former auditor, said the federal court in Manhattan. (George v. China Automotive Systems, Inc., et al, January 15, 2014, Forrest, K.).

Flawed event studies. The court found that class plaintiffs’ had not refined their argument for predominance regarding reliance since the court’s earlier finding that the Supreme Court’s Basic presumption was unavailable to them. Previously, the court had found the class plaintiffs’ reliance studies deficient because all but one was not an event study and the one that was used a defective methodology. If anything, the court said, the plaintiffs’ studies showed the inefficiency of the market.

The court also noted that if it certified the proposed class for purposes of settlement, many plaintiffs who did not rely on any alleged misstatements or omissions could recover. This would result in those plaintiffs who did rely being short-changed in their recovery.

Materiality analogy inapt. The court rejected the plaintiffs’ analogy to the Supreme Court’s 2013 Amgen opinion holding that proof of materiality is not needed at the class certifications stage. The plaintiffs here argued that asking them to show predominance regarding reliance for purposes of class certification is akin to asking them to prove materiality.

The court, however, said this analogy is deficient because materiality applies to all securities fraud plaintiffs. By contrast, proof of reliance requires that securities fraud plaintiffs must either individually rely on the alleged misstatements or omissions or they must invoke the Supreme Court’s Basic market efficiency presumption.

Future of presumption. The Supreme Court’s Basic fraud-on-the-market presumption is now being challenged in the second iteration of the Halliburton case it decided in 2011. The petitioner asks the court to reconsider the Basic presumption now that economic scholarship has questioned its validity. The Supreme Court is set to hear oral argument in Halliburton on March 5, 2014.

Last Fall, the Sveriges Riksbank awarded the Prize in Economic Sciences in Memory of Alfred Nobel to three individuals who have studied market efficiency. Eugene Fama and Robert Shiller, in particular, offer differing views of market efficiency.

The case is No. 11 Civ. 7533 (KBF).

Attorneys: Jeremy Alan Lieberman (Pomerantz Haudek Block Grossman & Gross LLP) and Peretz Bronstein (Bronstein, Gewirtz & Grossman) for Nancy George, Robert George, and Randall Whitman. John Erik Schreiber (Winston & Strawn LLP) for China Automotive Systems, Inc. Lee Gordon Dunst (Gibson, Dunn & Crutcher, L.L.P.) for Schwartz Levitsky Feldman LLP.

Companies: China Automotive Systems Inc.; Schwartz Levitsky Feldman LLP

MainStory: TopStory NewYorkNews AccountingAuditing FraudManipulation

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