A 2-1 panel of the Fifth Circuit today bludgeoned a securities fraud class action — probably to death. The court held that plaintiffs seeking class certification in a securities fraud case may not invoke the Basic, Inc. v. Levinson, 485 U.S. 224 (1988), presumption of reliance without first proving "loss causation". (Loss causation usually means that the defendants’ lies inflated a stock’s price and brought it back down when the truth came out, producing losses for people who bought the stock in the meantime.) The court also concluded that the district court abused its discretion in finding that the plaintiff did establish loss causation by a preponderance of the evidence. Oscar Private Equity Investments v. Allegiance Telecom, Inc., No. 05-10791 (5th Cir. May 16, 2007).
Judge Dennis, in eloquent dissent, lamented the majority’s "breathtaking revision of securities class action procedure that eviscerates Basic‘s fraud-on-the-market presumption" of reliance. He pointed out that the Basic presumption related to "transaction causation" — reliance — rather than the separate issue of whether the defendants’ fraud caused the plaintiffs’ loss — loss causation. He also noted that the majority’s analysis shifted the burden of proof under Basic from defendants to plaintiffs. And he allowed that the majority reviewed the evidence of loss causation de novo, with no deference to the district court, instead of for abuse of discretion.
The majority rhetorically endowed class certification with "lethal force" and "in terrorem power". Blawgletter wonders why. The opinion cites no evidence. In our experience, certification merely turns a bad case into a bigger bad case and a good case into a larger good one. It doesn’t scare anyone into settling. Only a trial — after denial of summary judgment — may do that. But doesn’t the scariness in any event depend wholly on the merits at that point? And shouldn’t it?