Commercial Litigation and Arbitration

Securities — Loss Causation Need Not Be Shown at Certification Stage to Invoke the Basic Presumption and Establish Predominance — Court Split

Judge Richard J. Sullivan, in Lapin v. Goldman, Sachs & Co., 2008 U.S. Dist. LEXIS 69574 (S.D.N.Y. Sept. 15, 2008), followed the majority of decisions in the Southern District of New York, and rejected the rule of the Fifth Circuit, in holding that loss causation need not be established by the plaintiff in order to invoke the fraud on the market presumption of Basic, Inc. v. Levinson, 485 U.S. 224 (1988) and thereby satisfy the predominance requirement in a securities fraud class action:

There is no dispute that loss causation, which is defined as a "causal connection between the material misrepresentation and the loss," is an element of a Section 10(b) claim and must be proven by a plaintiff in order to succeed on that claim on the merits. Dura Pharms., 544 U.S. at 342 (citation omitted). The parties' dispute instead centers around whether a plaintiff must prove loss causation at the class certification stage in order to invoke the Basic presumption and satisfy the predominance requirement. In support of its argument that loss causation must be proven at this stage of the litigation, GS relies heavily on the Fifth Circuit's 2007 decision in Oscar [Private Equity Investments v. Allegiance Telecom, Inc., 487 F.3d 261 (5th Cir. 2007)]. In Oscar, the Fifth Circuit stated that "Basic allows each of the circuits room to develop its own fraud-on-the-market rules" and that the Fifth Circuit "has used this room . . . to tighten the requirements for plaintiffs seeking a presumption of reliance." Oscar, 487 F.3d at 264-65 (citations omitted). Accordingly, the court held that, in the Fifth Circuit, the law "require[s] plaintiffs to establish loss causation in order to trigger the fraud-on-the-market presumption." Id. at 265 (citations omitted). The court found that "the trial court erred in ruling that the class certification stage is not the proper time for defendants to rebut lead Plaintiffs' fraud-on-the-market presumption." Id. at 270. ****

Several courts in this District have expressly addressed the Fifth Circuit's decision in Oscar, and all have rejected the notion that a showing of loss causation is a requirement at the class certification stage. For example, in Darquea v. Jarden Corp., No. 06 Civ. 722 (CLB), 2008 WL 622811, at *4 (S.D.N.Y. Mar. 6, 2008), the court held that the standard set forth in Oscar was "limited to the Fifth Circuit," and that "a [p]laintiff in the Second Circuit may benefit from the fraud-on-the-market presumption of reliance at the certification stage based solely on a showing that they made purchases or sales in an efficient market, and need not show that they specifically relied on the allegedly fraudulent conduct, as reliance -- an element of a 10(b) [claim] -- is presumed." Likewise, in Wagner v. Barrick Gold Corp., Nos. 03 Civ. 4302 et al. (RMB), 2008 WL 465115, at *6 (S.D.N.Y. Feb. 15, 2008), the court found that proof of loss causation is not a prerequisite for certification of a class, and specifically cited Oscar as a "drastic" departure from the principles articulated in Basic. Finally, in the recent case of In re Alstom SA Sec. Litig., F. Supp. 2d , No. 03 Civ. 6595 (VM), 2008 WL 4053361, at *10 (S.D.N.Y. Aug. 26, 2008), the defendants argued that the plaintiffs could not establish reliance by way of the Basic presumption because the plaintiffs could not prove loss causation. The Court rejected this argument, finding that loss causation "relates to the merits of Plaintiffs' case and Defendants have not sufficiently established how [loss causation] is related to any necessary element of Rule 23." Id. (citing Darquea, Wagner, and In re Credit Suisse). Other courts have agreed that loss causation need not be proven at the class certification stage. See, e.g., Ross v. Abercrombie & Fitch Co., Nos. 05 Civ. 819 et al. (TPK), 2008 WL 4059873, at *3 (S.D. Ohio Aug. 26, 2008) ("No other Court of Appeals, and no district court outside the Fifth Circuit, appears to have followed Oscar."); In re Micron Tech., Inc. Sec. Litig., 247 F.R.D. 627, 634 (D. Idaho 2007) ("It is unlikely that [Oscar] would be adopted in this Circuit because it misreads Basic.").

Held, “Oscar should be rejected as a misreading of Basic. *** Nothing in Basic or any Second Circuit precedent requires that Plaintiff prove loss causation by a preponderance of the evidence in order to invoke the Basic presumption and satisfy the requirements of Rule 23.”

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