February 25, 2009

Not Expert Enough

In In re Williams Sec. Litig. - WCG Subclass, 2009 WL 388048 (10th Cir. Feb. 18, 2009), the court considered whether the plaintiffs' expert was able to "reliably link the class's losses to the revelation of the alleged misrepresentations." In examining the validity of the expert's methodology, the court also provided its views on the application of the Supreme Court's Dura decision on loss causation.

(1) Although loss causation "is easiest to show when a corrective disclosure reveals the fraud to the public and the price subsequently drops," a "leakage theory that posits a gradual exposure of the fraud rather than a full and immediate disclosure" is permissible under the Dura decision.

(2) To be a corrective disclosure, "the disclosure need not precisely mirror the earlier representation, but it must at least relate back to the misrepresentation and not to some other negative information about the company."

(3) The plaintiffs must be able to demonstrate that the stock price decline was due "to the revelation of the fraud and not to another significant piece of negative information that was released" at the same time.

As to the plaintiffs' expert, the court found that his "leakage theory" failed to adequately identify when the "materialization of the concealed risk" occurred. The expert's alternative theory - that there was a series of corrective disclosures at the end of the class period - was inadequate because he failed to show "that it was the revelation of the fraud, and not other factors, that caused the subsequent declines in price."

Holding: Affirmed district court's exclusion of expert testimony and grant of summary judgment in favor of defendants.

Addition: Note that the plaintiffs did not appeal the district court's rejection of the "constant percentage" method of calculating damages (see here for a discussion of that holding).

Addition: A summary of the case by the defendants' expert can be found here.

Posted by Lyle Roberts at February 25, 2009 2:28 PM | TrackBack
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