United States: Central District Of California Certifies Class In Securities Stock Drop Action Against Restaurant Chain, Finding Insider Trades With Private Counterparty Did Not Preclude Certification Under Section 20a

On July 3, 2018, Judge David O. Carter of the United States District Court for the Central District of California granted plaintiffs' motion to certify a class in a securities fraud action against Tex-Mex restaurant chain El Pollo Loco Holdings, Inc. (the "Company") and certain of its officers and directors. Turocy, et al. v. El Pollo Loco Holdings Inc. et al., No. 8:15-cv-01343 (C.D. Cal. July 3, 2018). Plaintiffs allege that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act") by making false and misleading statements that allegedly buried the impact of new menu changes on sales and restaurant traffic and propped up the restaurant's stock price, resulting in a 20 percent stock drop when the Company later disclosed lower sales growth. Plaintiffs further allege that certain individual defendants violated Section 20A of the Exchange Act through insider sales of over $129 million in the Company's stock while in possession of non-public information concerning the Company's sale trends. We previously wrote about the Court's decision last summer denying defendants' motion to dismiss. See Shearman & Sterling LLP, Central District of California Denies Motion To Dismiss Putative Securities Class Action Against El Pollo Loco Restaurant Chain, Finding Plaintiffs' Allegations Purportedly Based On Confidential Witnesses Taken Together Raised Strong Inference Of Scienter, Need-To-Know Litigation Weekly, Aug. 15, 2017.

On December 8, 2017, plaintiffs filed their class certification motion in which they sought to (i) certify the action as a class action pursuant to Federal Rules of Civil Procedure ("FRCP") Rule 23(a) and Rule 23(b)(3), (ii) appoint certain plaintiffs as class representatives, and (iii) appoint class counsel. Defendants opposed the motion for class certification only as to the appointment of certain proposed class representatives and as to plaintiffs' claims of insider trading under Section 20A. Accordingly, the Court granted at the outset plaintiffs' class certification motion for the proposed class for the Sections 10(b) and 20(a) claims.

The Court then evaluated the class certification motion for the Section 20A claim. Section 20A of the Exchange Act provides a private right of action to any person who traded "securities of the same class" "contemporaneously" with an insider trader, and the claim must be predicated on a separate violation of the securities laws and regulations. In opposing plaintiffs' motion, defendants argued that plaintiffs could not meet the "numerosity" requirement of Rule 23(a) because the Section 20A defendants allegedly sold their stock directly to a global investment banking firm in a private Rule 144A transaction. In particular, defendants argued that plaintiffs could not have traded "contemporaneously" with those defendants, as required under Section 20A, and therefore did not suffer any economic injury because they were not parties to the private transaction. The Court rejected defendants' argument, holding that in the class certification context, "plaintiffs asserting a Section 20A claim predicated on a Section 10(b) violation, 'need [not] allege or show more than purchase(s) of a security that is actively traded in an efficient market made contemporaneous with a sale by an insider in possession of material, non-public information.'" While observing that "[t]here is no law binding on this Court as to what constitutes 'contemporaneous' trading," the Court found that the contemporaneous trading requirement is "temporal,"—which means "existing, occurring or originating during the same time"—and further "is not restricted based on the manner in which a defendant decides to structure its insider trades," including private transactions. The Court further found that "there is no binding authority suggesting that Congress, in enacting Section 20A, restricted the availability of Section 20A to those investors who could have possibly traded with an insider." The Court then noted that here, plaintiffs sufficiently alleged contemporaneous trading for purposes of certifying a class by alleging that proposed class representatives purchased the Company's common stock, that the common stock was actively traded in an efficient market, that the Section 20A defendants made their alleged insider trades on the same day that putative class members made stock purchases, and that those defendants possessed and failed to disclose information about the cause of the Company's declining sales trends. Accordingly, the Court concluded that plaintiffs had sufficiently alleged the minimum of what is required to demonstrate contemporaneous trading for the purposes of certifying a class, and held that plaintiffs satisfied all of the Rule 23 elements as to their Section 20A claim.

The Court then considered defendants' argument that two of the proposed lead plaintiffs were atypical because they had unique defenses that would become the focus of the litigation. Specifically, defendants argued that these two individuals, based on responses during their respective depositions, expressed a view that the Company's stock price was still inflated following the Company's corrective disclosure, and that they also made "unusual" purchases of the Company's stock after the date of the corrective disclosure. These facts, according to defendants, subjected those two proposed lead plaintiffs to unique loss causation and materiality defenses that would not be typical of putative class members. But the Court agreed with plaintiffs' argument that those individuals are typical of the class and that, as laypersons with no expert knowledge concerning stock price inflation as it relates to loss causation, plaintiffs will rely on experts during trial to determine these issues. The Court also agreed that it was unreasonable to expect those individuals to determine in the middle of a deposition whether the stock was artificially inflated because loss causation is often a highly contentious and complicated issue. Additionally, the Court found that although post-disclosure purchases may present typicality issues, the stock purchases at issue were not unusual because one of these individuals purchased additional shares to lower his average cost while the other purchased shares hoping the stock would perform better after the decline in price. As such, the Court found that these two proposed lead plaintiffs met the typicality requirement under Rule 23(a) and approved their appointment as class representatives.

Finally, the Court addressed defendants' argument that a third proposed class representative would not be an adequate class representative because he works 50-60 hours per week as a practicing and teaching physician and medical researcher and stated that he would need six months' lead time to attend litigation proceedings in California. The Court found that working 50-60 hours per week is not an unusual or disqualifying responsibility for a lead plaintiff, and also found that this individual has already demonstrated that he is available and engaged to "vigorously litigate the action" through to the end.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions