The U.S. District Court for the Central District of California recently denied certification of a putative class of stock purchasers seeking damages for alleged securities fraud. In Dean v. China Agritech, 2012 WL 1835708 (C.D. Cal. May 3, 2012), the plaintiffs alleged that the defendant – a holding company publicly traded within the United States after a "reverse merger" in 2005 – materially misstated its revenue and income for fiscal years 2008 and 2009. The plaintiffs sought to certify a class of purchasers of Agritech stock over a 16-month period, asserting that the stock price had been artificially inflated by the alleged misrepresentations in violation of Section 10(b) of the Securities Exchange Act of 1934 and Section 11 of the Securities Act of 1933.
The court denied class certification because common issues did not predominate. Focusing only on the 10(b) claim, the court noted that the plaintiffs would need to show "(1) a material misrepresentation or omission, (2) scienter, (3) a connection with the purchase or sale of a security, (4) reliance, (5) economic loss, and (6) loss causation." The court highlighted reliance as a significant obstacle to certification because reliance typically requires individual evidence that predominates over common issues.
Although the court recognized that reliance is sometimes presumed, it cited Ninth Circuit precedent holding that proving a fraud on the market requires showing that "the securities were traded in an efficient market," which requires the court to consider, among other things, "the number of securities analysts following the security" and "the existence of a cause-effect relationship between unexpected corporate news and a change in the price of the security." After conducting an extensive analysis, the court held that these factors counseled against class certification. Although the plaintiffs' expert had stated that 13 analysts followed the stock, the plaintiff could not show that these individuals were in fact qualified analysts. Further, the plaintiffs' experts could not show a statistically significant correlation between disclosures and price changes. The court therefore held that because there was no efficient market, the plaintiffs could not rely on the fraud-on-the-market theory, and reliance had to be proved on an individualized basis. As a result, the court denied class certification because non-common issues predominated.
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