August 27, 2010

Fated To Lose

He's back. Judge Easterbrook has authored a new securities litigation decision for the U.S. Court of Appeals for the Seventh Circuit and, as always, it is interesting and contentious.

In Schleicher v. Wendt, 2010 WL 3271964 (7th Cir. Aug. 20, 2010), the court considered to what extent plaintiffs must establish the existence of loss causation before a class can be certified. Defendants argued, based in part on Fifth Circuit precedent (Oscar Private Equity), that the plaintiffs needed to demonstrate that the alleged false statements materially affected the company's stock price and therefore caused some loss. The court disagreed and held that when and to what extent the alleged false statements affected the stock price are "merits questions" that cannot be resolved as part of the class certification process. Moreover, the Fifth Circuit's approach would "make certification impossible in many securities suits, because when true and false statements are made together it is often impossible to disentangle the [price] effects with any confidence."

Holding: Certification of class affirmed.

Quote of note: "Unlike the fifth circuit, we do not understand Basic to license each court of appeals to set up its own criteria for certification of securities class actions or to 'tighten' Rule 23's requirements. Rule 23 allows certification of classes that are fated to lose as well as classes that are sure to win. To the extent it holds that class certification is proper only after the representative plaintiffs establish by a preponderance of the evidence everything necessary to prevail, Oscar Private Equity contradicts the decision, made in 1966, to separate class certification from the decision on the merits."

Posted by Lyle Roberts at August 27, 2010 11:15 PM | TrackBack
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