The U.S. District Court for the Southern District of New York
recently denied a motion seeking certification of a class of
purchasers of Freddie Mac's Series Z preferred stock in a suit
against Freddie Mac's former CEO Richard Syron and former CFO
Anthony Piszel. In re Fed. Home Loan Mortg. Corp. Sec. Litig., 2012
WL 1028642 (S.D.N.Y. Mar. 27, 2012). The plaintiff sued Syron and
Piszel after Freddie Mac's stock price fell after it was
publicly called "insolvent" by a former St. Louis Federal
Reserve president, and again after Freddie Mac was moved into
conservatorship. The plaintiff alleged that Syron and Piszel had
misrepresented and omitted material information about Freddie
Mac's underwriting and risk management practices and the
adequacy of its capitalization.
In denying class certification, the court found that plaintiff
could not establish a class-wide presumption of reliance through a
"fraud on the market" theory, without which individual
questions about investor reliance on misrepresentations would
predominate over common questions. The court stated that the most
important factor in determining whether an efficient market exists
is whether there is a "demonstration of a cause-and-effect
relationship between unexpected, material disclosures and changes
in stock prices." The court found that this factor was not met
because neither of the studies conducted by the plaintiff's
expert could prove the necessary cause-and-effect relationship.
Because the plaintiff had failed to show through his expert that
the market for Series Z was efficient, no fraud-on-the-market
presumption of collective reliance applied, and therefore
individual issues predominated over common ones. The court thus
denied the plaintiff's motion for class certification.
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In a recent decision characterizing precedent as a seven decade "aberration," the Supreme Court of California permitted plaintiff loan borrowers to introduce against a defendant banking institution parol evidence directly contradicting the very terms of the parties’ written loan agreement.