Securities Fraud Class Certification: a Battleground For Expert Witnesses

Joseph B. Evans, J.D.

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— Updated on February 18, 2021

Securities Fraud Class Certification: a Battleground For Expert Witnesses

Class Certification Expert WitnessIn recent years, whether a putative securities class is certified or not has been coming down to the expert witnesses involved, as well as their reports and event studies. This is due do the fact that the issues the Court must decide are not merely legal. The Court must determine whether the particular market is efficient and whether the alleged misstatement actually impacted the price of the security. These are questions that are best answered by expert witnesses. As one District Judge aptly concluded, whether one wins or loses securities class certification is ultimately a question of which expert’s event studies better persuade the Court.

Class Certification

In order to certify as a class, plaintiffs must establish that they meet the requirements of Rule 23(a). Class plaintiffs must establish that they are (1) sufficiently numerous; (2) there are common questions of law or fact; (3) the representative parties’ claims are typical of the class claims; and (4) the representatives could fairly and adequately protect the interests of the class. There is also a “predominance” requirement under Rule 23(b)(3) requiring that “the questions of law or fact common to class members predominate over any questions affecting only individual members.”

The Fraud on the Market Presumption vs. The No Price Impact Rebuttal

Traditionally, securities fraud plaintiffs could only recover in a private lawsuit if they proved that they relied on the defendant’s misrepresentations. However, this requirement for securities class actions would stymie many putative classes before they are started. The Supreme Court recognized that this burden is unworkable for securities class certification. The Court noted “requiring proof of individualized reliance from each member of the proposed plaintiff class effectively would [prevent the putative securities class plaintiffs] from proceeding, since individual issues then would [overwhelm] the common ones.”

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As a result, the Court adopted the “fraud-on-the-market” theory. This allows putative securities classes to satisfy the reliance requirement by allowing it to use a presumption that the price of a security traded in an efficient market accurately reflects all public, material information – including material misstatements. Putative securities class plaintiffs must establish that the misstatements were made publicly and that the security was in an efficient market “to ensure that the questions of law or fact common to the class will ‘predominate.’”

For securities class certification, defendants have the opportunity to rebut this presumption. The Supreme Court in Halliburton Co. v. Erica P. John Fund, Inc., held that the defendants are entitled to use direct evidence to show that the alleged misrepresentation had no “price impact.” The Court reasoned “defendants must be afforded an opportunity before class certification to defeat the presumption through evidence that an alleged misrepresentation did not actually affect the market price of the stock.” This is significant because before Halliburton this sort of no “price impact” defense was not available to defendants until after class certification.

Expert Witnesses’ Event Studies Are Tipping The Scales For Securities Class Certification

Event studies have been referred to as being “ubiquitous in securities fraud litigation” and are “so entrenched in securities litigation that they are viewed as necessary in every case.” Event studies are perhaps the most important factors for securities class certification and can make the difference between winning and losing.

A putative securities class must first establish that the security is traded in an efficient market to establish its entitlement to the “fraud-on-the-market” presumption. Defendants do not always challenge market efficiency, particularly when “heavily-traded or well-known stocks are the target of the suits.” However, when the potential class action involves “small-cap stocks traded in less-organized markets” or other securities not traded on traditional exchanges, defendants are more apt to dispute whether the market is actually efficient. Regardless of whether the defendant mounts a strong defense to this point, putative securities class action plaintiffs are required to prove market efficiency and Courts typically expect expert evidence in this regard. The appropriate expert for market efficiency would be an economist or someone with experience investing, analyzing and otherwise valuating securities in the particular market at issue, particularly if such securities are relatively obscure.

With regard to the no “price impact” rebuttal by the defense, the evidence “will typically be provided in the form of event studies.” Courts have been increasingly reliant on expert witness’s event studies to determine whether or not the defense has established that there was no “price impact.”

For example, in Local 703 v. Regions Fin. Corp. a securities class was certified because of a “concession” in the defendant’s experts’ event study and in Aranaz v. Catalyst Pharm. Partners, class certification was also granted where the defendant’s expert testimony failed to establish that there was an “absence of price impact.” As another example, in In re Petrobras Sec. Litig., the Court went through an in-depth analysis of both sides’ expert evidence but ultimately weighed in favor of plaintiff’s expert and certified the securities class. In the aftermath of the Supreme Court’s ruling in Halliburton, the class certification litigation on remand “became the classic battle of the experts.” The District Court analyzed dueling expert reports that contained event studies on six dates and ultimately concluded that the class could only be certified for one of the six dates. After fourteen years of litigation and the class finally being certified for one of the six dates by the District Court, the parties seems to have reached a settlement.

An Eighth Circuit opinion further establishes the importance of expert witnesses for securities class certification. The putative securities class-plaintiffs accused Best Buy of making false statements about its earnings per share in a press release and subsequent investor call. The lower court granted class certification only for the investor call but not for the press release because the Court found the press release to not be actionable because it was forward-looking. On appeal, the Eighth Circuit reviewed both sides’ experts and their event studies in detail and conclusively agreed with the defendant’s expert and reversed the class certification ruling.

Thus, although there are massive amounts of legal research and cogent legal argument that can and should be made, it is becoming increasingly clear that in the end the Court will side with the expert evidence that it finds most persuasive. Qualified experts for securities class certification have become an absolute necessity. The most typical expert for securities class certification would be an economist, a securities expert, or others who may be able to analyze and opine on the correlation between alleged misstatements and the price of the securities at issue. As some law professors predicted, expert witnesses’ participation in securities fraud litigation “will increase, as proving price impact has become a virtual requirement to successfully invoke the presumption of reliance and secure class certification.”

The importance of both sides’ expert witnesses for securities class certification is perhaps best summed up by the District Judge who ruled upon the famed Halliburton class on remand who wrote that in order for the defendant to defeat class certification it “must ultimately persuade the court that its expert’s event studies are more probative of price impact than the fund’s expert event studies.” Said another way, when it comes to securities class certification, whichever side wins the battle of the experts, wins.


Joseph B. EvansJoseph B. Evans focuses his practice on the defense of Federal and New York State criminal and regulatory inquiries and the prosecution of complex litigation matters. He is an associate at Gage Spencer & Fleming LLP, a trial law firm well known for defending the nation’s most high-profile white-collar criminal cases from inception to verdict.

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