A California District Court granted certification to a group of SeaWorld investors in a shareholder securities fraud case following the release of the documentary "Blackfish."

First released in July 2013, "Blackfish" chronicles the cruelty of killer whale capture methods, the danger posed by killer whales to trainers, and the physical and psychological strains killer whales experience in captivity. The movie resulted in significant negative publicity for SeaWorld and proposed legislation in California banning killer whale performances. Attendance at SeaWorld theme parks declined.

Between August 29, 2013 and August 12, 2014, SeaWorld's leadership team made several statements indicating "Blackfish" had not caused any "notable impact" on attendance at SeaWorld's parks. SeaWorld attributed its decrease in attendance to other factors such as school holidays and adverse weather conditions. Then, on August 13, 2014, SeaWorld made a statement admitting attendance was impacted by "demand pressures related to recent media attention surrounding proposed legislation in the state of California." On the same day the statement was made, SeaWorld's stock price dropped nearly 33 percent.

Investors who purchased stock between August 29, 2013 and August 12, 2014 brought a securities fraud action and sought class certification under Rule 23(b)(3). SeaWorld's defense centered on the reliance and damages elements of plaintiffs' cause of action. SeaWorld argued that individual issues predominate since plaintiffs lacked a viable class-wide theory of reliance, and failed to show damages could be measured on a class-wide basis.

Pursuant to the "fraud on the market" theory, plaintiffs sought to invoke a presumption of class-wide reliance by demonstrating that SeaWorld stock traded in an efficient market. Often referred to as the Basic presumption established by the United States Supreme Court in 1988, this presumption is triggered when the plaintiff can prove that (1) the alleged misrepresentations were publicly known, (2) the stock traded in an efficient market, and (3) the relevant transaction took place between the time the misrepresentations were made and the time the truth was revealed. The court found that plaintiffs met their initial burden via their expert's event study, an accepted method for evaluating materiality and damages to class of stockholders.

SeaWorld attempted to rebut the Basic presumption with its own expert's event study, which showed that the alleged misrepresentations had no impact on the stock price on the dates of the alleged misrepresentations. Plaintiffs countered by observing that SeaWorld's expert failed to address the stock price drop on August 13, 2014, the date of SeaWorld's corrective disclosure. Under the "price maintenance theory" – that misrepresentations conceal the truth and thus tend to maintain stock prices – price impact can also be quantified by declines in share price when the truth is revealed.

Relying on precedent from the Second, Seventh, and Eleventh Circuits, the court embraced the price maintenance theory and held the presumption of reliance is not rebutted only by evidence that the alleged misrepresentations did not affect the stock price. As such, SeaWorld failed to introduce evidence that "severs the link between the alleged misrepresentation and... the price received (or paid) by plaintiffs."

As to the calculation of damages, the court found that plaintiffs' proposed "out-of-pocket" methodology is routine, commonly used in these kinds of cases and can be applied using a common formula for the entire class. As such, plaintiffs satisfied the predominance requirement of Rule 23(b)(3) for class certification.

Baker v. SeaWorld Entertainment, Inc. et al., 14cv2129-MMA (AGS) (S.D.Cal. Nov 29, 2017).

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