In a recent decision underscoring the importance of the Supreme Court’s decision in Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 342 (2005), the United States Court of Appeals for the Tenth Circuit affirmed summary judgment because the plaintiffs’ expert could not articulate a reliable theory of loss causation.
In re Williams Securities Litigation-WCG Subclass, No. 07-5119, 2009 WL 388048 (10th Cir. Feb. 18, 2009), involved a shareholder class action against the former parent company of Williams Communications Group (WCG), a telecommunications company based in Tulsa, Oklahoma. WCG’s spin off from its parent was completed on April 23, 2001. Just under a year later, WCG filed for bankruptcy. The plaintiffs’ claims centered on alleged knowingly false statements concerning WCG’s financial condition and its prospects that were made from the time the spin off was announced until several months after WCG became independent. The plaintiffs asserted that the alleged misstatements created a “fraud premium” that drained from the stock price over the course of the class period. Id. at *2.
Despite the district court’s determination that there were triable issues concerning the allegedly false statements, the district court found the plaintiffs’ expert’s theory of loss causation unreliable. Id. The expert proposed essentially two alternative theories of causation. The expert first opined that there was a “leakage” of corrective information throughout the course of the class period. Id. Although agreeing that a gradual leakage was an acceptable methodology, the Tenth Circuit concluded that the expert made no showing that share devaluations were independently linked either to corrective information that in fact leaked out or to allegedly concealed risks that materialized. Id. at *5-*6. As the Tenth Circuit put it, the plaintiffs’ expert “could not explain how the market learned of the fraud” nor did he tie such disclosures to the losses. Id. at *7.
In the plaintiffs’ expert’s alternative theory, he attempted to tie declines in share value to specific disclosures that occurred late in the class period -- in the months just before WCG declared bankruptcy. Id. The Tenth Circuit did not disturb the district court’s determination on this theory either. At bottom, the alternative theory suffered a similar deficiency to the expert’s other theory -- there was no sufficient tie between the alleged corrective disclosures and the alleged misstatements. Id. at *8.
A problem that pervaded both theories and supported the determination that there was an insufficient causal link was the expert’s apparent inability to separate the impact of the alleged corrective disclosures from other market-related factors. Id. at *7, *11. The court pointed to both news about WCG that had nothing to with the allegedly false statements and the overall meltdown in the telecommunications industry as independent factors that were not sufficiently accounted for by the plaintiffs’ expert. Id.
After affirming the district court’s conclusion that the expert’s opinion was too unreliable to be admitted, the Tenth Circuit concluded the same about potentially similar conclusions by a jury. The court held that “[t]hese conclusions . . . would be no less speculative and unreliable if reached by jurors than when reached by [the plaintiffs’ expert].” Id. at *11. Accordingly, the Tenth Circuit affirmed the district court’s grant of summary judgment to the defendants.