11th Circuit in Florida Opts for Flexibility over Predictability in Securities Fraud Class Actions
Securities fraud class actions tend to be battles that come to a head at the class certification stage. If the plaintiff group can certify a class, a large settlement often follows. If class certification fails, the case often dies. As the Eleventh Circuit recognized in its recent decision in Local 307 v. Regions Financial Corp., 25 Fla. L. Weekly Fed. C259a, the class certification question often turns on the question of reliance: has the class properly established reliance on any material misrepresentation? However, the Eleventh Circuit also declined to provide defendants with clarity and predictability. Instead, the court remained in the minority of circuit courts refusing to delineate specific factors for district courts to consider when analyzing the reliance question.
In Basic v. Levinson, the Supreme Court provided a legal shortcut to class certification, allowing for a legal presumption of reliance where the security at issue is traded on an efficient market. This is the fraud-on-the-market theory — itself the subject of great debate — that the Supreme Court reaffirmed in Halliburton II. In order to be entitled to this presumption, the plaintiff must establish that the stock in question trades on an efficient market, among other factors.
It is not nearly as straightforward as it may seem to prove that there is an efficient market. Just because a stock trades on the New York Stock Exchange or NASDAQ, that does not mean the efficient market is established. Instead, the Eleventh Circuit requires an analysis of the particular characteristics of the market for stock at issue. There is a difference between an efficient stock market in general and an efficient market for a particular stock. The latter is what matters for these purposes.
In Regions Financial Corp., the court maintained its rule that an efficient market must be proved, but at the same time, it rejected mandatory use of the so-called Cammer factors. Cammer v. Bloom, 711 F. Supp. 1264 (D.N.J. 1984) sets forth five factors to determine whether there is an efficient market for a specific stock: (1) high trading volume; (2) a significant number of analysts following the stock; (3) numerous market makers; (4) if the company is entitled to file an SEC Form S-3; and (5) data showing unexpected company news causing immediate changes in stock price. The majority of federal circuits have adopted these Cammer factors.
The Eleventh Circuit opted not to require the district court to consider the clearly delineated Cammer factors. Instead, the court held: "It is up to the District Courts to consider the nature of the market on a case-by-case basis to decide whether the totality of the circumstances supports a finding of market efficiency." This is a deliberately flexible inquiry that affords the district court great discretion.
The result is two-fold in creating uncertainty and unpredictability for defendants. First, the existence of an efficient market is to be determined on a case-by-case and stock-by-stock basis. Second, in making this fact-specific determination, the Eleventh Circuit has refused to require any specific facts be analyzed. This means the district courts have great discretion to credit or disregard any specific facts presented to it. Additionally, a district court likely will be able to distinguish factually any cases that would otherwise contradict the court's ultimate conclusion. After all, every stock is different in some way. So every case is distinguishable, even among stocks on the same exchange.