11th Circuit Delivers Win to Securities Defendants

By Maggie Tamburro
If one needs a reminder about how important expert testimony can be to proving a securities fraud case, look no further than a July 23rd opinion by the 11th Circuit. It’s one that will likely be welcomed as a breath of fresh air by securities defendants – who now have authority for diverting allegations of class action securities fraud by pointing a finger at a flailing economy.

A cautionary word, however:  What’s good for the goose is good for the gander.  The opinion not only gives securities defendants a way out of a securities fraud class action pickle during poor economic times, but also offers what one commentator described as a “tutorial” on precisely how plaintiff shareholders can prove loss causation in such a case.

Included in the tutorial is a chapter seemingly written especially for financial experts retained in such actions – and one that is a must-read for both attorneys and expert witnesses involved in fraud-on-the-market securities actions.

The Case of a Bad Market?

The suit involved a private securities fraud class action against defendants, bank holding company BankAtlantic Bancorp, Inc. and its management, by lead plaintiff and shareholder State-Boston Retirement System.  Plaintiff alleged that the defendants had misrepresented the level of risk in connection with certain commercial real estate loans held by its subsidiary.  Asserting a fraud-on-the-market theory, plaintiff claimed that defendant’s misrepresentations had artificially inflated its stock price and that investors had suffered damages when the price fell in 2007.

Central to the case was the plaintiff’s expert witness, a financial analyst.  On appeal, the 11th Circuit concluded that the evidence presented by the plaintiff’s expert was insufficient to support a finding of loss causation, a required element of the plaintiff’s claim.

Plaintiff’s Financial Expert …What Not To Do

In order to prove loss causation and damages, plaintiff’s expert performed what is known as an event study.  The event study seeks to measure the impact new information has on the market price of a security in order to determine how much a given decline in stock price during a relevant time period is attributable to certain factors (such as defendants' alleged misrepresentations), rather than attributable to general market or industry factors. Thus, the event study was offered to prove a required element of the case – that the decline in stock value was caused by defendants’ misstatements, rather than other market or industry factors.

The plaintiff’s expert attempted to isolate the effect of the misstatements from the market and industry factors by comparing the change in stock price to the S&P 500 and the NASDAQ Bank Index.  However, the 11th Circuit concluded that plaintiff’s expert made a mistake fatal to the case - she failed to take into account the 2007 collapse in the Florida real estate market.

???In affirming the district court’s decision (albeit on different grounds than that which ultimately led to the lower court’s ruling) the 11th Circuit let the defendants off the hook, finding that the evidence presented by plaintiff's expert failed to exclude the possibility that plaintiff's losses resulted not from misstatements, but instead from other market forces.

As a result, the p?anel reasoned, the jury in the lower court lacked a sufficient basis for finding that the alleged fraud was a “substantial contributing factor” in causing the class’s losses. While the plaintiff is not required to show that the alleged fraud was the sole cause of the decline in value, plaintiff must prove that it was a “substantial” or “significant contributing cause.”

11th Circuit Clears the Air

In rendering its opinion, the 11th Circuit issued precedent-setting advice about what constitutes sufficient evidence of loss causation in this type of securities fraud action – and a primer on how the evidence presented by one expert witness failed to prove it.

The opinion is worth noting:  It clearly outlines what is required of a financial expert witness in proving loss causation in a securities fraud-on-the-market case.  While the fraudulent misrepresentation alleged to have caused the loss in value need not be the sole reason for the investment’s decline, the misrepresentation must be a “substantial” or “significant contributing cause” of the decline, and the plaintiff must be able isolate and remove any additional contributing forces.

As stated by the court, “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.”

As to damages, the court continued, “A precise apportionment … is needed only to prove the amount of damages owed to the plaintiff…  But if there are confounding factors that could account for much of the decline in the price of the security, the plaintiff must offer some evidence separating the various causes of the decline in the security’s price even to establish loss causation.”

This plaintiff’s sole financial expert failed to do.

The case is State-Boston Retirement System v. Bankatlantic Bancorp, Inc., No. 11-12410 (11th Cir., July 23, 2012).

Tell us what you think: Do you think defendants should be able to point to a bad market in order to dilute the effects of alleged misstatements in defending a securities fraud case?

Maggie Tamburro

Maggie Tamburro is an attorney and writer who holds a Juris Doctor from The John Marshall Law School and a Bachelor of Arts from the University of Texas. She was admitted to the Illinois Bar in 1994 and Florida Bar in 1999 and has significant experience in legal research, editing, and writing. Maggie is active her in local community, holding various publicly appointed civic board positions.

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