Attorney: Tamar A. Weinrib
Pomerantz Monitor March/April 2016
The same day as the class cert ruling in Petrobras, February 2, 2016, Judge Scheindlin of the federal district court in the Southern District of New York, after a full evidentiary hearing, granted plaintiffs’ motion to certify a class of allegedly defrauded Barclays investors in the Strougo v. Barclays PLC securities litigation, and appointed Pomerantz as counsel for the class.
The case, which involves claims pursuant to Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, concerns defendants’ concealment of information and misleading statements over a three-year period regarding its management of its “LX” dark pool, a private trading platform where the size and price of the orders are not revealed to other participants. Even though the dark pool was just a tiny part of Barclays’ overall operations, Judge Scheindlin found that defendants’ fraud was highly material to investors because it reflected directly on the integrity of management. The court also found that reliance by class members on defendants’ omissions and misstatements could be presumed on a class-wide basis.
The court held that, under the Supreme Court’s Affiliated Ute doctrine, it was appropriate to presume that investors relied on the alleged material omissions, which involved defendants’ failure to disclose that they were operating their LX dark pool in a manner that did not protect Barclays’ clients’ best interests. Specifically, defendants failed to disclose that Barclays was not adequately protecting LX investors from “toxic” high frequency trading and were disproportionately routing trading orders back to LX. The court held that because LX constitutes a tiny fraction of Barclays’ business, a reasonable investor likely would have found the omitted misconduct far more material than the affirmative misstatements – because it reflected on management’s overall integrity. Indeed, it is for this reason that the court considered the omissions “the heart of this case.”
With respect to defendants’ affirmative misrepresentations, the court held that under the Supreme Court’s Basic “fraud on the market” doctrine, reliance by investors could also be presumed because Barclays’ stock trades in an efficient market. Its stock price would therefore have reflected defendants’ misrepresentations and omissions during the Class Period.
Of particular interest to Section 10(b) class action plaintiffs is the court’s rejection of defendants’ argument that to show market efficiency, plaintiffs must provide so-called “event studies” showing that the market price of the company’s stock price reacted quickly to the disclosure of new material information about the company. As in the Petrobras decision discussed in the previous article, though plaintiffs did in fact proffer an event study, the court held – consistent with a vast body of case law – that no one measure of market efficiency was determinative and that plaintiffs could demonstrate market efficiency through a series of other measures, which plaintiffs also provided here.
In so holding, the court observed that event studies are usually conducted across “a large swath of firms,” but “when the event study is used in a litigation to examine a single firm, the chances of finding statistically significant results decrease dramatically,” thus not providing an accurate assessment of market efficiency. The district court then found, following its extensive analysis, that plaintiffs sufficiently established market efficiency indirectly and thus direct evidence from event studies was unnecessary. Thus, the court went even further than the court in Barclays in downplaying the importance of event studies on class certification motions.
The district court also rejected defendants’ contention that certification should be denied because plaintiffs had supposedly failed to proffer a proper class wide damages model pursuant to the Supreme Court’s decision in Comcast. In rejecting that contention, the court recognized that the “Second Circuit has rejected a broad reading of Comcast” in its Roach v. T.L. Cannon Corp. decision. Indeed, the district court noted the Second Circuit’s finding in Roach that Comcast “did not hold that proponents of class certification must rely upon a classwide damages model to demonstrate predominance...[T]he fact that damages may have to be ascertained on an individual basis is not sufficient to defeat class certification.” The district court held that our expert’s proposal of using an event study and the constant dollar method to calculate damages is consistent with the theory of the case, and one that is typically used in securities class actions. The district court rejected defendants’ contention that plaintiffs should have proffered a model to identify and disaggregate confounding information as irrelevant, given that confoundinginformation would affect all class members the same.