As the securities litigation bar awaits the fate of the fraud-on-the-market theory, an interesting federal district court decision highlights a fact pattern that did not allow for any possible presumption of classwide reliance. In Goodman v. Genworth Financial Wealth Mangement, 2014 WWL 1452048 (E.D.N.Y. April 15, 2014), a group of investors alleged that Genworth made misrepresentations related to the management of their securities portfolios. The court, as part of its class certification analysis, examined whether the investors could demonstrate a common method of proving reliance and concluded that they could not meet that burden.
First, the plaintiffs conceded the inapplicability of the fraud-on-the-market presumption of reliance because they could "identify no efficient market or market price for the particular securities in which the putative class invested."
Second, under Affiliated Ute, there is a presumption of reliance for securities fraud claims "involving primarily a failure to disclose" by one with a duty to disclose. If the withheld facts are material, then individual reliance need not be proven. Because the plaintiffs pointed to various written statements from Genworth about how the portfolios were managed, however, the court concluded that that any "omissions" were only "significant because they contradicted the affirmative misrepresentations." Under these circumstances, the claims could not be described as "primarily" concerning omissions.
Finally, the plaintiffs argued (based on a line of Second Circuit decisions in non-securities fraud cases) that they could prove classwide reliance based on circumstantial evidence. In particular, the plaintiffs cited the conclusion of their expert - a former SEC chairman - that the investors would have relied on the alleged misrepresentations. The court declined to decide whether circumstantial evidence is an acceptable method of common proof in securities fraud cases. Even if it were, however, the court found that the expert opinion merely established that the alleged misrepresentations were material, not that it was reasonable to conclude that every investor actually relied upon them.
Holding: Class certification denied.
It is not too late to sign up for PLI's Handling a Securities Case 2014: From Investigation to Trial and Everything in Between. The program takes place on Thursday, April 24 in New York and via webcast (and, shortly thereafter, on demand). The details can be found here.
Lyle Roberts of Cooley LLP (the author of The 10b-5 Daily) is co-chairing the program. The outstanding faculty will cover a wide range of topics, all while following a hypothetical case from the initial investigation through trial. There even will be a panel on ethical issues, for those in need of ethics credits.
(1) There were 67 settlements last year, a 17.5% increase from 2012. The report concludes that the increase is likely due to the settling of “credit crisis” cases.
(2) The average settlement value was $71.3 million (significantly higher than historical levels), but the median settlement value was $6.5 million (significantly lower than historical levels). The discrepancy can be explained by the presence of six settlements over $100 million, which increased the average settlement value even as the size of more typical settlements declined.
(3) Overall, 50% of cases since 1996 (post-PSLRA) have settled for between $3.6 million and $20.6 million.
(4) In 2013, the median time to settlement from filing was 3.2 years.
Quote of Note (press release): "This past year’s data also represent the fading echoes of the financial crisis, as some of the largest settlements resolve claims of fraud surrounding transactions in mortgage-backed securities. These lawsuits won’t be around in the coming years to drive aggregate settlement values.”