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.”