Local 703, I.B. of T. Grocery and Food Employees Welfare Fund v. Regions Financial Corporation , 762 F.3d 1248 ( 2014 )

Case: 12-14168 Date Filed: 08/06/2014 Page: 1 of 24
[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________
No. 12-14168
________________________
D.C. Docket No. 2:10-cv-02847-IPJ
LOCAL 703, I.B. OF T. GROCERY & FOOD
EMPLOYEES WELFARE FUND,
individually and on behalf of all others similarly situated,
EMPLOYEES’ RETIREMENT SYSTEM OF
THE VIRGIN ISLANDS,
Lead Plaintiff, et al.,
Plaintiffs-Appellees,
PLAINTIFFS’ LIAISON COUNSEL,
Plaintiff,
versus
REGIONS FINANCIAL CORPORATION,
C. DOWD RITTER, et al.,
Defendants-Appellants.
________________________
Appeal from the United States District Court
for the Northern District of Alabama
________________________
(August 6, 2014)
Case: 12-14168 Date Filed: 08/06/2014 Page: 2 of 24
Before PRYOR and MARTIN, Circuit Judges, and HONEYWELL, * District
Judge.
MARTIN, Circuit Judge:
Regions Financial Corporation and the individual defendants (collectively,
“Regions”) appeal from the District Court’s decision to certify a class action based
on alleged misrepresentations about Regions’s financial health before and during
the recent economic recession. Regions argues that the District Court should not
have certified the class, and that the class period is not justified. After careful
review, and with the benefit of oral argument, we affirm the District Court’s well-
reasoned order in nearly all respects. But we vacate and remand for further
proceedings in light of Halliburton Co. v. Erica P. John Fund, Inc. (Halliburton II),
___ U.S. ___, 134 S. Ct. 2398 (2014), to allow consideration of Regions’s
evidence of price impact and for the District Court to review the duration of the
class period.
I. BACKGROUND
According to the plaintiffs’ amended complaint, Regions made a series of
misrepresentations beginning in 2008, in statements to analysts as well as required
financial disclosures, about the value of its assets and its financial stability. More
specifically, the plaintiffs allege that Regions—which was heavily invested in the
*
Honorable Charlene Edwards Honeywell, United States District Judge for the Middle
District of Florida, sitting by designation.
2
Case: 12-14168 Date Filed: 08/06/2014 Page: 3 of 24
real estate market—manipulated the way unhealthy assets were carried on its
books to avoid disclosing significant losses that would compromise the company’s
value. Plaintiffs also allege that senior executives, with full knowledge of
Regions’s impaired and unstable asset portfolio, repeatedly underreported losses
and represented that the company was in good financial health. Plaintiffs say that
the failure to accurately represent the company’s financial situation resulted in
artificially high stock prices for Regions, and allowed it to avoid the precipitous
decline of its stock price that would have resulted during the recession, absent the
misleading disclosures. On January 20, 2009 Regions made a substantial
corrective disclosure, reporting $5.6 billion in losses. That same day, Regions
stock traded at $4.60 per share, compared to $23 per share on the first day of the
proposed class period.
The plaintiffs moved to certify a class comprised of all investors who
purchased Regions stock from February 27, 2008, when Regions filed its first
allegedly misleading financial disclosure, through January 19, 2009, the last
trading day before the corrective disclosure. The District Court found that the
proposed class satisfied all the prerequisites for certification under Federal Rule of
Civil Procedure 23(a): the class is sufficiently numerous, there are questions of law
or fact common to the class, the named representatives have claims and are subject
to defenses typical of the class, and the representatives will fairly and adequately
3
Case: 12-14168 Date Filed: 08/06/2014 Page: 4 of 24
protect the class interests. The District Court allowed the class to proceed under
Rule 23(b)(3), finding that common questions of law or fact would predominate
over individual questions. Based on these findings, the Court certified the class for
the period from February 27, 2008 to January 20, 2009.
Regions argues here that the District Court should not have certified the
class because (1) the plaintiffs did not prove that common questions about reliance,
a required element in securities actions, would predominate over individual ones;
(2) the District Court should have conducted an evidentiary hearing on the expert
evidence supporting the conclusion that common questions predominate; (3)
Regions offered sufficient evidence to rebut the finding of class-wide reliance; (4)
the named representatives are not typical; and (5) the period over which the class is
certified is not justified. 1
II. STANDARD OF REVIEW
We review a District Court’s decision about whether to certify a class for an
abuse of discretion. E.g., Babineau v. Fed. Express Corp., 576 F.3d 1183, 1189
1
Regions also argued, for the first time in supplementary briefing, that class certification
is inappropriate because, in its view, the plaintiffs did not demonstrate that damages are
susceptible to class-wide proof. Regions believes such proof is required by Comcast Corp. v.
Behrend, ___ U.S. ___, 133 S. Ct. 1426 (2013). It is not appropriate for us to pass on that issue
now because Regions did not challenge the class certification on this basis in the District Court.
Access Now, Inc. v. Sw. Airlines Co., 385 F.3d 1324, 1330–35 (11th Cir. 2004) (noting that this
Court will hear an argument raised for the first time on appeal in limited circumstances, which
do not apply in this case); see also United States v. Levy, 416 F.3d 1273, 1275–76, 1280 (11th
Cir. 2005) (per curiam) (describing this Court’s general rule that arguments not raised in the
opening brief are waived).
4
Case: 12-14168 Date Filed: 08/06/2014 Page: 5 of 24
(11th Cir. 2009). We will only find an abuse of discretion if the District Court
applies the wrong legal standard, follows improper procedures in making its
determination, bases its decision on clearly erroneous findings of fact, or applies
the law in an unreasonable or incorrect manner. Klay v. Humana, Inc., 382 F.3d
1241, 1251 (11th Cir. 2004), abrogated in part on other grounds by Bridge v.
Phoenix Bond & Indem. Co., 553 U.S. 639, 128 S. Ct. 2131 (2008).
III. CLASS-WIDE RELIANCE
A. The Basic Presumption
To certify a class under Rule 23(b)(3), the District Court must find “that the
questions of law or fact common to class members predominate over any questions
affecting only individual members.” Fed. R. Civ. P. 23(b)(3). “Considering
whether ‘questions of law or fact common to class members predominate’ begins,
of course, with the elements of the underlying cause of action.” Erica P. John
Fund, Inc. v. Halliburton Co. (Halliburton I), ___ U.S. ___, 131 S. Ct. 2179, 2184
(2011). The elements of a private securities fraud claim are (1) material
misrepresentation or omission by the defendant; (2) scienter; (3) a connection
between the misrepresentation and the purchase or sale of a company’s stock; (4)
reliance on the misrepresentation; (5) economic loss; and (6) loss causation. Id.
“Whether common questions of law or fact predominate in a securities fraud action
often turns on the element of reliance.” Id. This case is no exception.
5
Case: 12-14168 Date Filed: 08/06/2014 Page: 6 of 24
“The traditional (and most direct) way a plaintiff can demonstrate reliance is
by showing that he was aware of a company’s statement and engaged in a relevant
transaction—e.g., purchasing common stock—based on that specific
misrepresentation.” Id. at 2185. However, the Supreme Court has recognized that
requiring such direct proof of reliance in every case “would place an unnecessarily
unrealistic evidentiary burden on the Rule 10b-5 plaintiff who has traded on an
impersonal market.” Basic Inc. v. Levinson, 485 U.S. 224, 245, 108 S. Ct. 978,
990 (1988). And because it would be difficult for individual investors to prove
reliance, the requirement of individualized proof would have the practical effect of
preventing plaintiffs from bringing class actions in securities cases. Id. at 242, 108
S. Ct. at 989; see also Halliburton I, 131 S. Ct. at 2185.
The Supreme Court established what we now call the Basic presumption to
alleviate these concerns. Halliburton I, 131 S. Ct. at 2185. Under the Basic
presumption, plaintiffs may benefit from a rebuttable presumption of class-wide
reliance “based on what is known as the fraud-on-the-market theory.” Id.
(quotation marks omitted). “According to that theory, the market price of shares
traded on well-developed markets reflects all publicly available information, and,
hence, any material misrepresentations.” Id. (quotation marks omitted). The
theory thus allows us to presume “that an investor relies on public misstatements
6
Case: 12-14168 Date Filed: 08/06/2014 Page: 7 of 24
whenever he buys or sells stock at the price set by the market.” Id. (quotation
marks omitted).
But the mere purchase of stocks at a price set by the market does not permit
plaintiffs to take advantage of Basic’s rebuttable presumption of reliance. It is well
settled that “plaintiffs must prove certain things in order to invoke” that
presumption. Id. “It is common ground, for example, that plaintiffs must
demonstrate that the alleged misrepresentations were publicly known . . . , that the
stock traded in an efficient market, and that the relevant transaction took place
between the time the misrepresentations were made and the time the truth was
revealed.” Id. (quotation marks omitted).
The District Court found that these plaintiffs justified invocation of the Basic
presumption. Regions argues that this finding was erroneous because the evidence
was insufficient to conclude that its stock traded on an efficient market. To that
end, Regions makes three arguments: (1) that the District Court should have, but
failed to, apply the analytical framework for analyzing market efficiency set forth
in Cammer v. Bloom, 711 F. Supp. 1264 (D.N.J. 1989); 2 (2) that at the very least,
2
The Cammer factors are: (1) high average trading volume during the class period; (2) a
significant number of analysts following the stock; (3) numerous market makers who react
quickly to, and trade based upon, new information about the company; (4) entitlement to file a
Securities and Exchange Commission (SEC) Form S-3, which has minimum stock and trading
requirements; and (5) empirical facts showing a cause and effect relationship between
unexpected corporate events and an immediate response in the stock price. 711 F. Supp. at
1286–87.
7
Case: 12-14168 Date Filed: 08/06/2014 Page: 8 of 24
the District Court should have required the plaintiffs to offer evidence that the
misrepresentations caused an immediate change in the stock price; 3 and (3) that
these analytical shortcomings contributed to the erroneous application of a per se
rule that the market for every stock listed on a national exchange trades on an
efficient market. None of these arguments compel a result different from that
reached by the District Court. The trial judge properly applied the established law
of our Circuit to analyze the efficiency of the market for Regions stock.
B. Analyzing Market Efficiency
Regions complains that this Court has not established a comprehensive
analytical framework for determining whether the market for a particular stock is
efficient. Regions is right that we have not adopted any sort of mandatory
analytical framework. But we do not see this as a problem. By not setting forth a
mandatory framework, we have given District Courts the flexibility to make the
fact-intensive inquiry on a case-by-case basis. Beyond that, the flexible approach
will allow District Courts in the future to consider new factors yet unknown to this
Court that market theorists might consider to indicate market efficiency.
At the same time, our more flexible approach of leaving the analysis in the
capable hands of District Courts by no means implies that we have given no
3
In light of the intervening case Amgen Inc. v. Connecticut Retirement Plans & Trust
Funds, ___ U.S. ___, 133 S. Ct. 1184 (2013), Regions has wisely retreated from its initial
position that certification was inappropriate because the plaintiffs did not show that the
misrepresentations were material.
8
Case: 12-14168 Date Filed: 08/06/2014 Page: 9 of 24
guidance. Quite the contrary, we identified some major, general characteristics of
an efficient market in FindWhat Investor Group v. FindWhat.com, 658 F.3d 1282,
1310 (11th Cir. 2011). There, we said that the market for a stock is generally
efficient when “millions of shares change hands daily and a critical mass of”
investors and/or analysts who “study the available information and influence the
stock price through trades and recommendations.” 4 Id. (alteration and quotation
marks omitted). So, quite contrary to Regions’s position on appeal that we have
yet to specify factors relevant to the market efficiency inquiry, we have indeed
defined some features of an efficient market: high-volume trading activity
facilitated by people who analyze information about the stock or who make trades
based upon that information. These are factors District Courts therefore know to
look for when analyzing the markets for securities of established companies like
Regions. However, even these general signs of an efficient market may not be
required for a finding of an efficient market in every case. Stocks that trade on a
smaller scale, or that are not widely followed, might trade on an efficient market.
It is up to the District Courts to consider the nature of the market on a case-by-case
4
FindWhat makes reference to “market makers” instead of active investors. 658 F.3d at
1310. “A ‘market maker’ is one who helps establish a market for securities by reporting bid-
and-asked quotations.” Sec. & Exch. Comm’n v. Diversified Corporate Consulting Grp., 378
F.3d 1219, 1222 n.7 (11th Cir. 2004) (alteration and quotation marks omitted). Unlike the
NASDAQ, the national exchange FindWhat’s stock traded on, FindWhat, 658 F.3d at 1293 n.5,
it appears the NYSE does not use market makers in the same way, according to the record in our
case. In our view, informed investors closely watching the value of their investments generally
serve as a good proxy for market makers for those trading platforms that do not or did not rely on
them to facilitate trades in the way alluded to in FindWhat.
9
Case: 12-14168 Date Filed: 08/06/2014 Page: 10 of 24
basis to decide whether the totality of the circumstances supports a finding of
market efficiency.
We reject Regions’s suggestion that we adopt the Cammer factors as the
mandatory analytical framework for market efficiency inquiries. Of course, we
recognize that a number of our sister Circuits have approved the use of those
factors when appropriate. See In re DVI, Inc. Sec. Litig., 639 F.3d 623, 634 n.16
(3d Cir. 2011) (noting that seven of the twelve Circuit Courts have done so). And
we certainly do not suggest that a District Court would be wrong to rely on the
Cammer factors to guide its analysis. Indeed, some of those factors might prove
particularly useful when a District Court considers a stock for which the more
traditional indicia of efficiency set out in FindWhat are not present.
But we do not think it wise to require District Courts to analyze market
efficiency in terms of the Cammer factors in every case. Apparently, neither do
many of our sister Circuits that have applied those factors in their own cases. See
In re PolyMedica Corp. Sec. Litig., 432 F.3d 1, 18 (1st Cir. 2005) (“While we
agree . . . that the [Cammer] factors considered by the district court were relevant
to the issue of market efficiency, these factors are not exhaustive.”); In re DVI, 639
F.3d at 634 n.16 (“We have noted the Cammer factors may be instructive
depending on the circumstances.”); Gariety v. Grant Thornton, LLP, 368 F.3d 356,
368 (4th Cir. 2004) (citing Cammer for the proposition that, “to determine whether
10
Case: 12-14168 Date Filed: 08/06/2014 Page: 11 of 24
a security trades on an efficient market, a court should consider factors such as,
among others, whether the security is actively traded, the volume of trades, and the
extent to which it is followed by market professionals”); Unger v. Amedisys Inc.,
401 F.3d 316, 323 (5th Cir. 2005) (“[T]his list [of eight factors, including the five
Cammer factors,] does not represent an exhaustive list, and in some cases one of
the above factors may be unnecessary . . . .”). As the law stands, District Courts
have a good idea of what they should be looking for in determining market
efficiency, as well as the flexibility to do that analysis in the most sensible way
given the circumstances. We see no reason to upset the balance.
Neither are we persuaded by Regions’s argument that a finding of market
efficiency always requires proof that the alleged misrepresentations had an
immediate effect on the stock price. Although many Circuit Courts have described
cause-and-effect as the most important of the Cammer factors, see, e.g., Teamsters
Local 445 Freight Div. Pension, Fund v. Bombardier Inc., 546 F.3d 196, 207 (2d
Cir. 2008), Regions does not point us to any court that has adopted the unwavering
evidentiary requirement it urges upon us. Nor could it. Even the Cammer court
itself did not establish such a strict evidentiary burden at the class certification
stage. 711 F. Supp. at 1287 (noting that proof of the cause-and-effect factor
“would be helpful” to the efficiency analysis). This case presents a perfect
11
Case: 12-14168 Date Filed: 08/06/2014 Page: 12 of 24
example of why an inflexible requirement would run contrary to the market
principles that motivated the decision in Basic.
The plaintiffs have alleged here that Regions made a number of
confirmatory misrepresentations during the class period. Confirmatory
misrepresentations “confirm” existing information about a stock, rather than
release new and different information that might bring about a negative change in
the stock’s price.5 In other words, Regions’s disclosures were designed to prevent
a more precipitous decline in the stock’s price, not bring about any change to it.
When a company releases expected information, truthful or otherwise, the efficient
market hypothesis underlying Basic predicts that the disclosure will cause no
significant change in the price. See FindWhat, 658 F.3d at 1310 (“A corollary of
the efficient market hypothesis is that disclosure of confirmatory information—or
information already known by the market—will not cause a change in the stock
price. This is so because the market has already digested that information and
incorporated it into the price.”); see also Cammer, 711 F. Supp. at 1287 (noting
5
Regions argues that the District Court erroneously applied the legal standard from
Affiliated Ute Citizens v. United States, 406 U.S. 128, 92 S. Ct. 1456 (1972), which governs
reliance in cases alleging material omissions rather than affirmative misrepresentations. The
District Court wisely accepted the plaintiffs’ argument that a confirmatory misrepresentation is
like an omission, because it is an affirmative representation that omits negative information.
Thus, like we do here, the District Court noted that this type of misrepresentation would likely
yield price stability rather than volatility, just as we would expect with a traditional omission.
All the District Court did in this case was recognize the similarity between two different but
closely related factual scenarios and draw on precedent from both areas to render its decision.
The District Court’s decision to do so evidences good, reasoned judging, not an abuse of
discretion.
12
Case: 12-14168 Date Filed: 08/06/2014 Page: 13 of 24
that the cause-and-effect factor looks to the relationship “between unexpected
corporate events or financial releases and an immediate response in the stock
price” (emphasis added)). Requiring plaintiffs to present evidence that the alleged
misrepresentations immediately moved the market price in these circumstances
would thus place an evidentiary burden upon them which is, at best, elusive.
Neither would it make sense to impose an unwavering requirement for
plaintiffs to identify unexpected disclosures during or around the class period that
had an immediate price impact. In any given case there may be no unexpected
disclosures during the period at all, because the company is withholding that
information. To require plaintiffs to prove a set number of unexpected disclosures
resulting in an immediate price impact would rob District Courts of the flexibility
they need to conduct holistic, fact-sensitive inquiries into the efficiency of the
market for the particular stock before it. The plaintiffs in this case did identify one
unexpected disclosure around the class period—a corrective disclosure on January
20, 2009, which had an immediate negative impact on the stock price. On this
record, the District Court did not abuse its discretion when it refused to require the
plaintiffs to identify more instances of unexpected disclosures and a resulting price
impact before finding the initial burden under Basic satisfied.6
6
We are aware that the Fifth Circuit has criticized a District Court for accepting the
cause-and-effect factor as proven based on only three instances of unexpected disclosures
resulting in a price impact. Unger, 401 F.3d at 324–25. But the Fifth Circuit did not purport to
13
Case: 12-14168 Date Filed: 08/06/2014 Page: 14 of 24
Finally, we turn to Regions’s accusation that the District Court applied an
improper, per se rule that stocks trading on a national exchange always trade on
efficient markets. Another member of our Court has recognized that securities
trading on national exchanges like the NYSE “are often presumed to be traded on
an efficient market,” see Thompson v. RelationServe Media, Inc., 610 F.3d 628,
693–94 (11th Cir. 1010) (Tjoflat, J., concurring in part and dissenting in part),
precisely because the exchanges are generally populated by stocks that are closely
watched by analysts and that trade at a high volume. See In re DVI, 639 F.3d at
634 (“[T]he listing of a security on a major exchange such as the NYSE or the
NASDAQ weighs in favor of a finding of market efficiency.”). Nevertheless, we
share Regions’s resistance to a per se rule of market efficiency for all stocks that
trade on a national exchange, without regard for the particular characteristics of
that stock. See Bell v. Ascendant Solutions, Inc., 422 F.3d 307, 313–14 (5th Cir.
2005) (“[S]ome companies listed on national stock exchanges are relatively
unknown and trade there only because they met the eligibility requirements. While
the particular market for stock trades might be relevant, it is not dispositive of
whether the current price reflects all available information, which, of course, is the
adopt a minimum requirement, and instead cautioned District Courts that the Cammer factors are
no more than an “analytical tool” that must be applied in ways sensitive to the particulars of the
case before it. See id. at 325. Beyond that, the misrepresentations alleged in Unger were not the
sort of confirmatory misrepresentations we have here. Instead, they were affirmative
misrepresentations of profits above what the market would otherwise expect. See id. at 319–20.
14
Case: 12-14168 Date Filed: 08/06/2014 Page: 15 of 24
hallmark of an efficient capital market.” (quotation marks and citations omitted)).
Thus, although trading on a national exchange may be relevant to the inquiry,
District Courts should remain focused on the market for the particular stock before
them, as FindWhat suggests.
At the same time, we do not share Regions’s view that the District Court
applied a per se rule in this case, notwithstanding the language in the order that
might suggest otherwise. The District Court did recognize that not all securities
trading on the NYSE necessarily trade on an efficient market, noting only that the
market could be presumed efficient for “virtually” all securities traded there. And
the District Court said it applied FindWhat to the particular circumstances of the
market for Regions stock, not any sort of per se rule. As the District Court’s
opinion notes, “millions of shares of [Regions] stock are traded on the New York
Stock Exchange daily,” a high trading volume that strongly suggests an efficient
market. See FindWhat, 658 F.3d at 1310. Unfortunately, the District Court’s
order does not point to the other factors in the record that lend even more
credibility to its market efficiency finding. For example, 29 financial analysts
covered Regions stock over the class period. Regions was eligible to file an SEC
Form S-3, one of the Cammer factors. Cammer, 711 F. Supp. at 1286. And the
number of institutional investors holding Regions stock during the class period
ranged from 329 to 425. Cf. In re Xcelera.com Sec. Litig., 430 F.3d 503, 512, 515
15
Case: 12-14168 Date Filed: 08/06/2014 Page: 16 of 24
(1st Cir. 2005) (indicating that the presence of institutional investors can contribute
to a market efficiency finding).
Surely these are the types of facts the District Court had in mind when it said
it was “[a]pplying FindWhat to the facts here.” Certainly these facts undermine
Regions’s claim that the District Court applied a strict per se rule of market
efficiency for all stocks trading on national exchanges. In any event, even if the
District Court did engage in an improper presumption without considering the
specific trading characteristics of Regions stock, the evidence before the District
Court supports a finding of market efficiency in light of FindWhat. See Hubbard
v. BankAtlantic Bancorp, Inc., 688 F.3d 713, 716 (11th Cir. 2012) (“Despite the
District Court’s error, we may affirm for any reason supported by the record.”).
We therefore affirm the District Court’s determination that the plaintiffs justified
application of the Basic presumption.7
7
Regions also complains that the District Court violated Daubert v. Merrell Dow
Pharmaceuticals, Inc., 509 U.S. 579, 113 S. Ct. 2786 (1993), by relying on expert testimony
despite Regions’s motion to strike and request for a hearing. The District Court only relied on
the challenged expert testimony in deciding materiality issues. Given Regions’s concession that
Amgen precludes consideration of materiality at the class certification stage, the Daubert
argument is moot in this respect. And because the District Court did not rely on the challenged
expert evidence to resolve any other issue, there was no need to engage the Daubert analysis
before resolving the class certification motion. See Am. Honda Motor Co. v. Allen, 600 F.3d
813, 815–16 (7th Cir. 2010) (per curiam) (“We hold that when an expert’s report or testimony is
critical to class certification, . . . the district court must perform a full Daubert analysis before
certifying the class . . . .”). Neither have we considered the challenged expert evidence in
resolving Regions’s appeal.
16
Case: 12-14168 Date Filed: 08/06/2014 Page: 17 of 24
IV. REBUTTING THE PRESUMPTION
The Basic inquiry does not end once the presumption of class-wide reliance
has been invoked. As the Supreme Court recently held, defendants may introduce
price impact evidence both to undermine the plaintiff’s case for market efficiency
and to rebut the Basic presumption once it has been established. Halliburton II,
134 S. Ct. at 2414–16. Regions presented evidence that its stock price did not
change in the wake of any of the alleged misrepresentations. The District Court,
relying on the state of the law before Halliburton II, did not fully consider this
evidence. The plaintiffs apparently agree, urging us to “remand for fuller
consideration by the district court of all the price-impact evidence submitted
below.”
In keeping with the suggestion of both parties that the analysis of Regions’s
case rebutting the Basic presumption should be reconsidered in light of Halliburton
II, we remand to the District Court to undertake that review. But we are mindful,
and the District Court is no doubt aware, that its work on remand will be limited in
scope. The Supreme Court only said that defendants “may seek to defeat the Basic
presumption” with evidence that the misrepresentations did not impact the price.
Id. at 2417 (emphasis added). Halliburton II by no means holds that in every case
in which such evidence is presented, the presumption will always be defeated.
Indeed, this Court has recognized the distinct role that confirmatory information
17
Case: 12-14168 Date Filed: 08/06/2014 Page: 18 of 24
may have in this analysis. See FindWhat, 658 F.3d at 1310 (“A corollary of the
efficient market hypothesis is that disclosure of confirmatory information—or
information already known by the market—will not cause a change in the stock
price. This is so because the market has already digested that information and
incorporated it into the price.”). But in any event, because the District Court is in
the best position to review all the facts and conduct the inquiry now required in the
wake of Halliburton II, we vacate and remand this case for that purpose.
V. TYPICALITY OF THE REPRESENTATIVES
Regions next argues that the lead plaintiffs, District No. 9, I.A. of M. &
A.W. Pension Trust (District 9) and Employees’ Retirement System of the Virgin
Islands (Virgin Islands), are not proper class representatives because their claims
are not typical, as Federal Rule of Procedure 23(a) requires. Regions argues that
District 9 is not typical because (1) it benefitted from the alleged
misrepresentations by selling some of its Regions stock at inflated prices during
the class period; and (2) it purchased many shares of Regions stock following the
corrective disclosure. The Virgin Islands also is not typical, in Regions’s view,
because (1) it retained its Regions holdings long after the corrective disclosure; and
(2) it purchased its shares late in the class period. Regions also argues that both are
atypical because they ceded investment authority to outside managers.
18
Case: 12-14168 Date Filed: 08/06/2014 Page: 19 of 24
“The typicality requirement may be satisfied despite substantial factual
differences . . . when there is a strong similarity of legal theories.” Williams v.
Mohawk Indus., Inc., 568 F.3d 1350, 1357 (11th Cir. 2009) (quotation marks
omitted). After careful consideration of Regions’s arguments, we find that the
District Court did not abuse its discretion by finding that both lead plaintiffs meet
the typicality requirement.
That District 9 benefitted to some extent from the alleged fraud by selling
some of its shares during the class period makes no difference here. There is no
evidence that District 9 may be subject to an in pari delicto defense because it is
equally at fault for the misrepresentations. See Pinter v. Dahl, 486 U.S. 622, 633,
108 S. Ct. 2063, 2071 (1988). And while some District Courts have found that an
investor who suffers no net losses thanks to sales during the class period is subject
to an atypical standing defense, see, e.g., In re Comdisco Sec. Litig., 150 F. Supp.
2d 943, 945–46 (N.D. Ill. 2001), those cases are inapposite here. District 9 did
suffer net losses from its purchases of Regions stock, despite some sales during the
class period. The evidence shows that District 9 spent about $933,000 on the
64,500 Regions shares it acquired over the class period, compared to its sale of
25,900 shares over the same period for about $256,000. Regions has not pointed
us to any evidence suggesting that District 9’s gains during the period might
19
Case: 12-14168 Date Filed: 08/06/2014 Page: 20 of 24
arguably offset its losses under any generally accepted accounting method. Its
argument that District 9’s sales render it atypical is thus misguided.
Neither are we persuaded by Regions’s argument that District 9’s post-
disclosure purchases render it atypical. We agree with our colleagues from the
Fifth Circuit that “[r]eliance on the integrity of the market prior to disclosure of
alleged fraud (i.e. during the class period) is unlikely to be defeated by post-
disclosure reliance on the integrity of the market.” Feder v. Elec. Data Sys. Corp.,
429 F.3d 125, 138 (5th Cir. 2005). This is particularly true where, as here, the
post-period purchases are made “after the stock price has been ‘corrected’ by the
market’s assimilation of the new information.” Id. Regions’s briefing does not
identify any unique circumstances in this case that should have persuaded the
District Court to deviate from this general rule. We therefore adhere to it.
That the Virgin Islands purchased its shares late in the class period presents
no reason to consider the District Court’s finding of typicality to be an abuse of
discretion. FindWhat, 658 F.3d at 1315 (“Every investor who purchases at an
inflated price—whether at the beginning, middle, or end of the inflationary
period—is at risk of losing the inflationary component of his investment when the
truth underlying the misrepresentation comes to light.”). Neither does the Virgin
Islands’s retention of its shares long after the corrective disclosure. There is merit
to Regions’s argument that “the longer the time between the purchase and sale, . . .
20
Case: 12-14168 Date Filed: 08/06/2014 Page: 21 of 24
the more likely that other factors [besides the misrepresentations] caused the loss.”
Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 343, 125 S. Ct. 1627, 1632 (2005).
Nevertheless, the District Court’s determination on this record that the Virgin
Islands would not likely be subject to an atypical defense for that reason does not
amount to an abuse of discretion. 8
Finally, neither representative’s use of investment advisers warrants
reversal. Certainly, a large institutional investor is likely to rely on investment
advisers to make investment decisions on its behalf. And yet both Congress and
the courts have recognized that these sorts of investors are generally preferred as
class representatives in securities litigation. See, e.g., 15 U.S.C. § 77z-
1(a)(3)(B)(iii)(I) (directing courts to “adopt a presumption that the most adequate
[lead] plaintiff in any private [securities] action arising under this subchapter is the
person or group of persons that . . . in the determination of the court, has the largest
financial interest in the relief sought by the class”); In re DVI, 639 F.3d at 641
(“[S]ophisticated institutional investors . . . are preferred as class
representatives.”); see also id. at 640 n.25 (acknowledging, while addressing a
different topic, that institutional investors are likely to use outside advisors). Even
sophisticated investment advisers (like those involved in this case) rely on the
8
Of course, if the circumstances have changed since the District Court’s June 2012
certification order such that the representatives are no longer typical or adequate, the District
Court may revisit its initial certification decision. See Gen. Tel. Co. of Sw. v. Falcon, 457 U.S.
147, 160, 102 S. Ct. 2364, 2372 (1982) (“Even after a certification order is entered, the judge
remains free to modify it in the light of subsequent developments in the litigation.”).
21
Case: 12-14168 Date Filed: 08/06/2014 Page: 22 of 24
integrity of the market. This is true even if they do not incorporate particular
informational disclosures into their investment strategies. Blackie v. Barrack, 524
F.2d 891, 907 (9th Cir. 1975) (“A purchaser on the stock exchanges may be either
unaware of a specific false representation, or may not directly rely on it; he may
purchase because of a favorable price trend, price earnings ratio, or some other
factor. Nevertheless, he relies generally on the supposition that the market price is
validly set and that no unsuspected manipulation has artificially inflated the price,
and thus indirectly on the truth of the representations underlying the stock price
whether he is aware of it or not, the price he pays reflects material
misrepresentations.”).
Given all these facts, we cannot conclude that the District Court’s typicality
finding constituted an abuse of its discretion.
VI. CLASS PERIOD
Finally, Regions complains about the duration of the class period. It argues
that the class period cannot begin with the filing of the Form 10-K reflecting
Regions’s financial data for fiscal year 2007 because the plaintiffs do not allege
any wrongdoing in 2007.9 This argument misunderstands the plaintiffs’
allegations. These plaintiffs have alleged that the Form 10-K filed on February 27,
9
Regions’s broader argument that there is no evidence of wrongdoing during the class
period is entirely without merit. The complaint alleges that Regions fraudulently overvalued its
asset portfolio by manipulating loan classifications “throughout 2008, and at least through the
first quarter of 2009.”
22
Case: 12-14168 Date Filed: 08/06/2014 Page: 23 of 24
2008 was misrepresentative because it was the first financial disclosure in which
Regions should have reported losses based on the 2007 decline of the real estate
market. Contrary to Regions’s position in this appeal, this theory of liability in no
way requires the plaintiffs to allege or prove that any fraud took place in 2007. All
of Regions’s conduct in 2007 may be perfectly innocent, but if it misrepresented
the value of its 2007 assets in 2008, then it would have violated the Securities
Exchange Act, and the class period can begin at that time on that basis.
However, Regions’s argument about the end date for the period is well
taken. The plaintiffs requested the class to include all persons or entities who
purchased or otherwise acquired Regions securities “between February 27, 2008
and January 19, 2009.” The District Court’s certification order, however, included
all those who purchased or acquired securities “between February 27, 2008, and
January 20, 2009.” Based on the record here, individuals who purchased their
shares on January 20, 2009 should likely be excluded from the class. This is
because Regions’s corrective disclosure on January 20 was made before the market
opened for trading. We therefore vacate and remand for the District Court to
clarify the end date of the class period.
VII. CONCLUSION
The District Court’s holdings regarding the application of the Basic
presumption, the typicality of the class representatives, and the start date for the
23
Case: 12-14168 Date Filed: 08/06/2014 Page: 24 of 24
class period are due to be affirmed. But we vacate and remand for the District
Court to reconsider, in light of Halliburton II, whether Regions rebutted the Basic
presumption and to clarify the end date of the class period.
AFFIRMED IN PART; VACATED AND REMANDED IN PART.
24