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Eleventh Circuit Reaffirms “Flexible” Approach to Securities Class Actions

One of the most powerful tools in investors’ arsenals against securities fraud is the securities class action. In these types of cases, many plaintiffs join together on behalf of themselves and others allegedly harmed. A class action allows plaintiffs to pool litigation resources, and be represented by one or more attorneys, instead of each plaintiff having to bring a separate lawsuit.

Because of the unique attributes of the class action in general—and the securities class action in particular—the law requires such plaintiffs to meet a number of requirements. One such requirement, that of “reliance,” can be complex to show. And, recently, the United States Court of Appeals for the Eleventh Circuit (the federal appeals court that includes the state of Florida) reaffirmed its unique approach to the issue.

Securities Class Actions and Reliance

In Local 703 v. Regions Financial Corporation, decided on August 6, 2014, the Eleventh Circuit was asked to overturn the lower court’s decision to certify the class. Certification, generally, is the process by which a group of plaintiffs is judicially approved to proceed as a class. In order to achieve certification, plaintiffs must show that they all relied on the defendant’s misrepresentation (i.e., the fraud) and acted in some way as a result of that reliance.

Requiring each and every plaintiff in a class action to show reliance would be extraordinarily difficult, if not impossible, in larger class actions. Therefore, the Supreme Court has long recognized what is known as the Basic presumption. Named for a groundbreaking case from the 1980s, this presumption allows courts to assume class-wide reliance when a particular stock is traded on a “well-developed” market. It is assumed that such markets reflect all publicly available information.

Defining an Efficient Market

The question at the heart of the Regions case was how to define a “well-developed” or, more often labeled, an “efficient” market. The defendant in that case wanted the Eleventh Circuit to adopt the “Cammer factors,” which are a set of five elements used by many courts to define an efficient market. Courts that follow the Cammer approach look for (1) a high volume of trading, (2) a large number of analysts paying the stock attention, (3) a large number of market makers, (4) whether the company can file an SEC Form S-3, and (5) established data that shows how new and unpredicted company information becoming public has an immediate effect on the price of the stock.

As noted by the National Law Review, the majority of the federal courts of appeal follow the Cammer approach. The Eleventh Circuit, however, has not been and is still not one of them. Instead, the court reiterated its preference for a flexible approach, one which does not require meeting a pre-defined list of requirements.

“[W]e have given District Courts the flexibility to make the fact-intensive inquiry on a case-by-case basis,” wrote the Eleventh Circuit in Regions. “Beyond that, the flexible approach will allow District Courts in the future to consider new factors yet unknown to this Court that market theorists might consider to indicate market efficiency.”

If you believe that you have been the victim of securities fraud or some other kind of financial exploitation, please contact attorney Gregory Tendrich, P.A. to discuss your legal options today.

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