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Class Certification and the Use of Event Studies After Comcast

April 1, 2015

Two years ago, the U.S. Supreme Court decided Comcast Corp. v. Behrend, which denied class certification to a proffered plaintiff class in an antitrust case because the plaintiffs had failed to establish that “questions of law or fact common to class members predominate over any questions affecting only individual members.”1 Comcast held that, while damages “[c]alculations need not be exact, [] at the class-certification stage (as at trial), any model supporting a plaintiff’s damages case must be consistent with its liability case . . .”2 Courts across the country have struggled to interpret Comcast, resulting in a wide array of conflicting readings.

In the securities fraud class action arena, however, the decision’s impact has been limited. This is largely because, to the extent Comcast requires that a plaintiff’s theory of damages be tethered to its theory of liability, this test is easily satisfied in securities fraud cases, where “[t]he reliance element ‘ensures that there is a proper connection between a defendant’s misrepresentation and a plaintiff’s injury.’”3 In other words, because, as the Supreme Court has explained, “the price of stock traded in an efficient market reflects all public, material information — including material misstatements,” purchasers of that stock are all damaged in the same manner, i.e., by the artificial inflation in the stock price caused by those misstatements and the precipitous price declines that occur when the fraud is revealed and the inflation comes out of the stock price.4 

Guided by these principles, to calculate damages in securities cases economists and financial analysts use “event studies,” which calculate artificial inflation based upon the abnormal stock drops accompanying the disclosure of the fraud. Event studies therefore enable a measure of damages that is directly linked to a plaintiff’s theory of liability: the measure of the stock price decline when the artificial inflation caused by the fraud exits the stock price — like the air coming out of a balloon. And because the daily (even minute-to-minute) prices for securities traded in efficient markets are readily available, the measure of inflation in a particular security’s price can be determined with reference to these historical prices and can be mechanically applied to every stock purchaser in the class to determine individual damages. 

Thus, in securities fraud class actions, “the fraud-on-the-market doctrine” — which provides a rebuttable presumption of classwide reliance for all purchasers of a security traded in an efficient market — “makes it rather easy for a lead  plaintiff to establish that common questions predominate over individual ones.”5 To that end, district courts hearing securities class actions have almost uniformly held that the standard event study methodology satisfies Comcast.6 By contrast, the few securities cases where certification has been denied on Comcast grounds have all involved unconventional damages methodologies.7 Indeed, in the two years since Comcast was decided, no court has ultimately declined to certify a securities class invoking a standard event study methodology to measure traditional out-of-pocket (or “but for”) damages. This article explores the post-Comcast landscape for securities class actions. 

I.  Comcast 
Comcast was an antitrust case involving a proposed class of over “2 million current and former Comcast subscribers” spanning 16 counties.8 The Comcast plaintiffs alleged that the defendants had engaged in antitrust violations that resulted in four disparate types of “antitrust injury” (or “antitrust impact”) to subscribers in those 16 counties.9 Of the four theories of liability, the district court accepted only one as capable of classwide resolution. The plaintiffs’ proposed damages methodology, however, “assumed the validity of all four theories of antitrust impact initially advanced” and “calculated damages resulting from ‘the alleged anticompetitive conduct as a whole’” rather than “attribut[ing] damages to any one particular theory of anticompetitive impact.”10 

The district court certified the class, reasoning that striking the three theories of antitrust injury did “not impeach [plaintiff’s expert’s] damages model” and the Third Circuit affirmed.11 The Supreme Court, in a 5-4 decision, reversed. Writing for the five-Justice majority, Justice Scalia explained that because the plaintiff’s damages methodology measured damages resulting from all four types of antitrust impact, rather than being tethered to the one type of impact remaining in the case, it “identifie[d] damages that are not the result of the wrong.”12 Further, because the different franchise areas were each damaged in differing combinations and degrees by the four types of impact, the “permutations involving four theories of liability and 2 million subscribers located in 16 counties are nearly endless,” and calculating damages would “require labyrinthine individual calculations.”13 As a result, the Court concluded that “[w]ithout presenting another methodology, respondents cannot show [Federal] Rule [of Civil Procedure] 23(b)(3) predominance: Questions of individual damage calculations will inevitably overwhelm questions common to the class.”14 

The Comcast majority, however, made clear that its decision did not create a new predominance requirement but, rather, “turn[ed] on the straightforward application of class-certification principles.”15 This led Justices Ginsburg and Breyer to clarify, in their dissenting opinion, that Comcast “breaks no new ground on the standard for certifying a class action” and “[i]n the mine run of cases, it remains the ‘black letter rule’ that a class may obtain certification under Rule 23(b)(3) when liability questions common to the class predominate over damages questions unique to class members.”16 

By and large, the circuit courts — perhaps recognizing the unique factual posture of Comcast and, specifically, the fact that the court had dismissed three of the plaintiffs’ four theories of liability — have been reluctant to bring about a full-scale change in class certification jurisprudence since the decision was handed down. For example, the Sixth Circuit has made clear that Comcast does not disturb the “well nigh universal” rule that “individual damages calculations do not preclude class certification under Rule 23(b)(3).”17 The Ninth Circuit has also reiterated that “‘the presence of individualized damages cannot, by itself, defeat class certification under Rule 23(b)(3).’”18 And earlier this year, the Second Circuit held that Comcast does not require that a plaintiff present a classwide damages model that accounts for every class member’s individual injury to establish predominance.19 Rather, “[a]ll that is required at class certification is that the plaintiffs must be able to show that their damages stemmed from the defendant’s actions that created the legal liability.”20 

II.  Application of Comcast to Securities Class Actions
To the extent these recent appellate decisions have construed Comcast to require a nexus between class members’ damages and the conduct giving rise to defendants’ liability, such a requirement is readily met in a traditional securities class action invoking the fraud-on-the-market presumption of reliance.21 

As the Supreme Court explained recently in Halliburton II, the fraud-on-the-market presumption which undergirds the modern securities class action system is based on the premise that “the price of stock traded in an efficient market reflects all public, material information — including material misstatements.”22 In the words of Judge Easterbrook of the Seventh Circuit, “[w]hen someone makes a false (or true) statement that adds to the supply of available information, that news passes to each investor through the price of the stock. And since all stock trades at the same price at any one time, every investor effectively possesses the same supply of information. The price both transmits the information and causes the loss.”23 Thus, in the typical securities case, there is one theory of liability (public misrepresentations) that causes one uniform injury (artificial inflation) to one variable (stock price).24 And when the relevant truth concealed by the misrepresentations is disclosed, the stock price falls, removing the inflation. 

For many years, courts have recognized event studies as “the most prevalent, accepted method to establish loss causation and damages” in securities class actions.25 An event study is “a statistical regression analysis that examines the effect of an event [, such as the disclosure of a corporate fraud,] on a dependent variable, such as a corporation’s stock price.”26 More specifically, the regression analysis identifies dates on which there is an abnormal stock price decline for the subject company when compared to the overall market. Then, more qualitative analysis, including review of market analyst reports and other sources, is performed to determine the actual cause of the decline — i.e., whether the decline was caused by disclosure of the fraud or other, non-fraud-related, company-specific factors. 

Of course, plaintiffs need not prove loss causation at the class certification stage — that inquiry is saved for summary judgment or trial.27 Nor does Comcast “articulate any requirement that a damage calculation be performed” for class treatment.28 But to meet the predominance test of Federal Rule of Civil Procedure 23(b), securities fraud plaintiffs have invoked, and the courts have accepted, the event study methodology as the principal means of estimating damages and a tried method for showing that investors in the same efficiently-traded security are harmed by price inflation in a common (i.e., classwide) manner. These courts have reasoned that, because damages are derived directly from the stock price decline caused by the revelation of the fraud, there is a clear link between the liability theory and the damages methodology, and the event study enables the expert to estimate the price inflation associated with the corrective events.

A.  Groupon
The claims in In re Groupon, Inc. Securities Litigation arose from Groupon’s 2011 initial public offering.29 Plaintiffs moved to certify classes of investors alleging securities fraud claims. Defendants opposed, arguing that individualized damages issues predominated under Comcast. In granting plaintiffs’ motion, Judge Norgle of the Northern District of Illinois explained that “[i]n a securities fraud class action, the fraud-on-the-market doctrine makes it rather easy for a lead plaintiff to establish that common questions predominate over individual ones.”30 Thus, “[e]vidence from a plaintiff’s expert verifying that the company’s stock’s price ‘changed rapidly . . . in response to new information’ will suffice to certify the class because ‘certification is largely independent of the merits’ of the case.” Id. (citing Wendt, 618 F.3d 679). As a result, the court found Comcast “inapposite in a securities fraud class action such as this” and did not accept the defendants’ damages arguments as a basis to deny class treatment.31 

Groupon is in accord with Supreme Court precedent holding that, in a securities action, the critical element for purposes of the predominance inquiry is reliance — not damages. In particular, as the Supreme Court explained four years ago in Halliburton I, “[w]hether common questions of law or fact predominate in a securities fraud action often turns on the element of reliance.”32 Then in Halliburton II, its first post-Comcast securities decision, the Supreme Court reaffirmed that “[i]n securities class action cases, the crucial requirement for class certification will usually be the predominance requirement of Rule 23(b)(3).”33 As the Court explained, “[t]he Basic [fraud-on-the-market] presumption does not relieve plaintiffs of the burden of proving — before class certification — that this requirement is met. Basic [v. Levinson]34 instead establishes that a plaintiff satisfies that burden by proving the prerequisites for invoking the [fraud-on-the-market] presumption . . . .”35 Even Justice Thomas’s concurring opinion (in which Justice Scalia, who penned Comcast, joined) suggested that “Plaintiffs who invoke the presumption of reliance are deemed to have shown predominance as a matter of law. . . .”36

B. Diamond Foods
In In re Diamond Foods Securities Litigation, plaintiffs moved for certification of a class of investors alleging violations of Section 10(b).37 To meet their Comcast burden, plaintiffs asserted that “[d]amages in this matter will be calculated using an event study analysis similar to the event study analysis presented” to establish market efficiency, which “shows that damages are calculable to the class using standard event study methodology.”38 Defendants opposed, arguing that a “conclusory statement” that “damages ‘will be calculated using an event study analysis’” was “a far cry from the evidentiary showing that Comcast requires.”39 

In certifying the class, Judge Alsup of the Northern District of California found that the plaintiff’s event study satisfied Comcast, explaining that “[t]he event study method is an accepted method for the evaluation of materiality damages to a class of stockholders in a defendant corporation.”40 The court also relied on the Ninth Circuit’s previous determination, in a Section 10(b) case, that “the amount of price inflation during the [class] period can be charted and the process of computing individual damages will be virtually a mechanical task.”41 At the end of the day, it found that “[w]hether plaintiff will ultimately prevail in proving damages is not necessary to determine at this stage.”42 The court thus concluded that “plaintiff has sufficiently shown that damages are capable of measurement on a classwide basis such that individual damage calculations do not threaten to overwhelm questions common to the class.”43 

C. Best Buy
IBEW Local 98 Pension Fund v. Best Buy Company also involved claims brought under Section 10(b).44 Defendants challenged plaintiffs’ motion for class certification, arguing that plaintiffs had failed to satisfy Comcast because “a plaintiff in a securities case has an affirmative duty to proffer a damages model that tracks his liability theory, and cannot simply say he will conduct an ‘event study.’”45 Defendants further averred that certain of the alleged misstatements had been dismissed at the pleading stage, and the proposed event study methodology was flawed because it made “no effort to isolate the impact on the share price (and the resultant alleged damages) flowing from the . . . actionable statements in this case.”46 Finally, defendants argued that certain class members, who bought early on the first day of the class period (and, thus, prior to any misstatements) had suffered no damages.47 

Judge Frank of the District of Minnesota found Comcast satisfied, explaining that “[p]laintiffs’ expert . . . performed an event study using methodology for the quantification of damages to show that damages are capable of calculation on a class-wide basis.”48 Like Diamond Foods, the court rejected defendants’ other attacks on the model, reasoning that “[w]hether Plaintiffs will ultimately prevail in proving damages is not an issue presently before the Court.”49 Nor was the court concerned with the potential gap in damages on the first day of the class period, finding that it would not “make the calculation of damages difficult or improper.”50 In so concluding, the court adopted the reasoning of Judge Easterbrook in Wendt51 that questions relating to the “[t]iming of each person’s transactions” “can be resolved mechanically. A computer can sort them out using a database of time and quantity information.”52 The Best Buy court thus held “that Plaintiffs have sufficiently demonstrated that damages are capable of measurement on a class-wide basis such that individual issues of damages calculations will not overwhelm the predominant questions common to the class.”53

D. Intralinks
In Wallace v. Intralinks, plaintiff moved to certify a class of investors bringing claims pursuant to the Exchange Act and a subclass of investors bringing claims pursuant to the Securities Act.54 To satisfy Comcast, plaintiff proposed an event study methodology similar to the event study that it had provided to establish market efficiency.55 Citing heavily to Diamond Foods, plaintiff argued that the event study, which measured inflation based upon corrective disclosure stock drops, was sufficiently tethered to its liability theory because “each [corrective] disclosure . . . directly relates to Lead Plaintiff’s claims. . . .”56 Defendants countered that the relevant truth had been disclosed prior to the class period-ending corrective disclosure, and that plaintiffs had failed to demonstrate predominance for class members who had purchased Intralinks stock after the truth was revealed. 

Judge Griesa of the Southern District of New York disagreed, finding that “[d]efendants’ arguments [] belong more properly to the discussion of damages, not class certification.”57 The court noted that “[p]resumably, if plaintiff prevails, class members who purchased or sold at different times during the class period will be entitled to significantly different recoveries” but “[i]ndividualized calculations of damages do not generally defeat the predominance requirement.”58 Moreover, the court reasoned that damages do “not demand excessive individual inquiry” because “[p]laintiff’s proposed determination of damages by event study appears to be a workable methodology of determining damages on a class-wide basis that conforms to its theory of liability, thus meeting the requirements of [Comcast].”59 

III. Conclusion
When Comcast was issued, courts and practitioners alike grappled with its impact. In the securities class action domain, however, the district courts have not viewed Comcast as a major obstacle to class certification. Rather, because all investors in a fraud-on-the-market case are injured in a common manner — by the artificial inflation in a company’s stock price caused by a defendant’s false statements — the courts have by and large held that common questions of damages predominate over individualized ones. In particular, these courts have found that the traditional event study methodology, which seeks to estimate inflation based upon the abnormal stock price declines following disclosure of the fraud, is sufficiently tethered to a securities fraud plaintiff’s liability theory to satisfy Comcast. Moreover, given the recent opinions by the federal appeals courts in non-securities cases interpreting Comcast’s holding narrowly, this trend appears likely to continue. 

_______________________

1133 S. Ct. 1426 (2013). 

2Id.

3Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398, 2407 (U.S. 2014) (“Halliburton II”) (quoting Amgen Inc. v. Conn. Ret. Plans and Trust Funds, 133 S. Ct. 1184, 1192 (2013)). 

4Halliburton II, 134 S. Ct. at 2405. 

5In re Groupon, Inc. Sec. Litig., 2014 U.S. Dist. LEXIS 137382, at *7-9 (N.D. Ill. 2014).

6See, e.g., In re Diamond Foods, Inc. Sec. Litig., 295 F.R.D. 240, 251-52 (N.D. Cal. 2013) (Comcast satisfied because “[t]he event study method is an accepted method for the evaluation of materiality damages to a class of stockholders in a defendant corporation.”); see also IBEW Local 98 Pension Fund v. Best Buy Co., 2014 U.S. Dist. LEXIS 108409, at *22 (D. Minn. 2014) (“[p]laintiffs’ expert . . . performed an event study using methodology for the quantification of damages to show that damages are capable of calculation on a class-wide basis.”); Wallace v. Intralinks, 302 F.R.D. 310, 318 (S.D.N.Y. 2014) (“[p]laintiff’s proposed determination of damages by event study appears to be a workable methodology of determining damages on a class-wide basis that conforms to its theory of liability, thus meeting the requirements of [Comcast].”

7See, e.g., In re BP p.l.c. Sec. Litig., 2014 U.S. Dist. LEXIS 69900, at *82-89 (S.D. Tex. 2014) (“BP II”) (certifying out-of-pocket subclass but refusing to certify subclass of plaintiffs who “eschew[ed]” the traditional “but for” method); Sicav v. Jun Wang, 2015 U.S. Dist. LEXIS 6815, at *5-8 (S.D.N.Y. 2015) (denying certification where plaintiffs proposed an “unusual theory of classwide injury”).

8133 S. Ct. at 1429-30. 

9 Comcast,133 S. Ct. at 1434-35.

10Id. at 1434. 

11Id. at 1439. 

12Id. at 1434. 

13Id. at 1434-35. 

14Id. at 1433. 

15Id. 

16Id. at 1436-37. 

17In re Whirlpool Corp. Front-Loading Washer Prod. Liab. Litig., 722 F.3d 838, 861 (6th Cir. 2013). 

18Jimenez v. Allstate Ins. Co., 765 F.3d 1161, 1168 (9th Cir. 2014) (quoting Leyva v. Medline Industries Inc., 716 F.3d 510, 514 (9th Cir. 2013) (“‘[T]he amount of damages is invariably an individual question and does not defeat class action treatment.”)). 

19Roach v. T.L. Cannon Corp., 2015 U.S. App. LEXIS 2054, at *14 (2d Cir. 2015) (“Comcast . . . did not hold that a class cannot be certified under Rule 23(b)(3) simply because damages cannot be measured on a classwide basis. Comcast’s holding was narrower[:] . . . a model for determining classwide damages relied upon to certify a class under Rule 23(b)(3) must actually measure damages that result from the class’s asserted theory of injury; but the Court did not hold that proponents of class certification must rely upon a classwide damages model to demonstrate predominance. . . .”). 

20Sykes v. Mel S. Harris & Assocs., LLC, 2015 U.S. App. LEXIS 2057, at *40 (2d Cir. 2015). 

21Leyva, 716 F.3d at 514.

22134 S. Ct. at 2405.  

23Schleicher v. Wendt, 618 F.3d 679, 682 (7th Cir. 2010) (Easterbrook, J.) (emphasis added).

24See, e.g., McIntire v. China MediaExpress Holdings, Inc., 2014 U.S. Dist. LEXIS 113446, at *42 (S.D.N.Y. 2014) (certifying class over Comcast argument, explaining that, “Plaintiffs’ theory of liability is that [defendant’s] misrepresentations caused losses of the same kind: the artificial inflation of [the] share price”). 

25WM High Yield Fund v. O’Hanlon, 2013 U.S. Dist. LEXIS 90323, at *43 n.20 (E.D. Pa. 2013). 

26FindWhat, 658 F.3d at 1313.

27See Erica P. John Fund, Inc. v. Halliburton Co. 131 S. Ct. 2179, 2183 (2011) (“Halliburton I”) (“The question presented in this case is whether securities fraud plaintiffs must also prove loss causation in order to obtain class certification. We hold that they need not.”).

28In re: Cathode Ray Tube (CRT) Antitrust Litig., 2013 U.S. Dist. LEXIS 137945, at *137-38 (N.D. Cal. 2013). 

292014 U.S. Dist. LEXIS 137382 (N.D. Ill. Sept. 23, 2014).

30Id. at *7-9. 

31Id. 

32Halliburton I, 131 S. Ct. at 2184. 

33Halliburton II, 134 S. Ct. at 2412.

34485 U.S. 224, 108 S. Ct. 978 (1988).

35Halliburton II, 134 S. Ct. at 2412. 

36Id. at 2423-24.

37295 F.R.D. 240 (N.D. Cal. 2013).

38See Declaration of Dr. Jay Hartzell in Support of Motion for Class Certification, }}23-24, Diamond Foods 295 F.R.D. 240 (Case No. 11-cv-05386-WHA), Dkt. No. 202-1. 

39Defendant Diamond Foods, Inc.’s Sur-Reply in Opposition to Class Certification at 3, Diamond Foods 295 F.R.D. 240 (Case No. 11-cv-05386-WHA), Dkt. No. 225. 

40Id. at 251-52 (citing In re Credit Indus., Inc. Sec. Litig., 252 F. Supp. 2d 1005, 1014 (C.D. Cal. 2003); In re Apollo Grp. Inc. Sec. Litig., 509 F. Supp. 2d 837, 844 (D. Ariz. 2007); In re Oracle Sec. Litig., 829 F. Supp. 1176, 1181 (N.D. Cal. 1993)). 

41Id. at 251-52 (citing Blackie v. Barrack, 524 F.2d 891, 905 (9th Cir. 1975)). 

42Id. at 252. 

43Id.

442014 U.S. Dist. LEXIS 108409, at *3 (D. Minn. 2014). 

45See Defendants’ Memorandum in Opposition to Lead Plaintiff’s Motion for Class Certification and Appointment of Lead Plaintiff Marion Haynes as Class Representative at 13-14, Best Buy, 2014 U.S. Dist. LEXIS 108409 (Case No. 11–429 (DWF/FLN)), Dkt. No. 156. 

46Id. at 18-19.

47Id. at 28-29.

48Best Buy, 2014 U.S. Dist. LEXIS 108409, at *22. 

49Id. at *24. 

50Id. at *23. 

51618 F.3d at 681.

52Best Buy, 2014 U.S. Dist. LEXIS 108409, at *23 (quoting Wendt, 618 F.3d
at 681).

53Best Buy, 2014 U.S. Dist. LEXIS 108409, at *24.

54302 F.R.D. at 318. 

55Memorandum of Law in Support of Lead Plaintiff’s Motion for Class Certification at 21-22, Intralinks, 302 F.R.D. 310 (Civil Action No. 11-CV-8861), Dkt. No. 71.

56Id. at 22. 

57Id. 

58Id.

59Id.

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