11th Circuit: Stock drop doesn’t prove losses were tied to fraud

July 25, 2012

It is the rare securities fraud class action that goes to trial. Typically, once shareholders have survived a motion to dismiss and won certification of a class, defendants pull out their wallets. Settlements may not come until summary judgment motions are decided and a mediator has entered the case, but they are a near certainty for class actions that get past the preliminaries. Only a vanishingly small number of securities fraud cases go to trial.

So every time an appeals court considers a trial verdict in a class action, it’s news. On Monday, the 11th Circuit Court of Appeals ruled that a jury verdict against BankAtlantic cannot stand, but not because of the inconsistent verdict sheet responses that led U.S. District Judge Ursula Ungaro to grant the bank’s post-trial motion for judgment as a matter of law. Instead, the 11th Circuit panel offered a tutorial on how shareholders should link their losses to the defendants’ misstatements – and concluded that, in this case, plaintiffs’ counsel at Labaton Sucharow and Kessler Topaz Meltzer & Check failed to untangle losses due to the alleged fraud from losses attributable to Florida’s collapsing real estate market.

The ruling, written by 11th Circuit Judge Gerald Tjoflat for a panel that also included Judge William Pryor and Senior Judge Peter Fay, comes too late for all of the securities class action defendants that have tried and failed to blame the economic crisis for declines in their share price. But going forward, it’s sure to be cited whenever defendants argue that shareholders must be able to distinguish losses caused by a corporation’s misstatements from losses due to the economy’s decline. In that regard, the 11th Circuit has reinterpreted the U.S. Supreme Court’s landmark 2005 loss causation ruling, Dura Pharmaceuticals v. Broudo, for the post-recession age.

The appellate decision vindicates an argument that BankAtlantic’s lawyers at Stearns Weaver Miller Weissler Alhadeff & Sitterson have been making since the Florida bank was originally sued in 2007. The plaintiffs asserted that BankAtlantic hid ballooning losses in its commercial real estate portfolio from shareholders. According to shareholders, when the bank finally disclosed its exposure, first in a Securities and Exchange Commission filing in April 2007 and more completely in October 2007 filings, its share price plunged: from $10.55 to $9.99 in April and from $7.65 to $4.72 in October. But BankAtlantic has said all along that the losses were the result of its exposure to Florida’s real estate market, not of an alleged coverup.

If anything, BankAtlantic lead counsel Eugene Stearns told me Tuesday, the bank should have been hailed for keeping shareholders informed about looming losses. “The whole case was Alice in Wonderland,” he said. “Of all the companies that should not have been sued, this was the one.”

The 11th Circuit didn’t go that far, but it faulted the methodology of the plaintiffs’ lone expert on loss causation, a financial analyst who tried to distinguish BankAtlantic’s performance from the market as a whole by performing a statistical “event study,” comparing BankAtlantic to the S&P 500 and the Nasdaq bank index. That wasn’t good enough for the appellate panel. “To succeed in a fraud-on-the-market case, it is not enough to point to a decline in the security’s price after the truth of the misrepresented matter was revealed to the public,” the opinion said. “The plaintiff must also offer evidence sufficient to allow the jury to separate portions of the price decline attributable to causes unrelated to the fraud, leaving only the part of the price decline attributable to the dissipation of the fraud-induced inflation.” The lead plaintiff, State-Boston Retirement System, didn’t make the necessary distinction, the court said, because it “failed to adequately separate losses caused by fraud from those caused by the 2007 collapse of the Florida real estate market. The jury therefore did not have a sufficient evidentiary basis to conclude that the fraud was a substantial contributing factor in bringing about the class’s losses.”

I left a phone message for class counsel Mark Arisohn of Labaton, who argued for shareholders before the 11th Circuit on March 21. He didn’t get back to me.


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