SCHLEICHER v. WENDT (August 20, 2010)

Conseco was a large financial services company traded on the New York Stock Exchange. It filed for bankruptcy in 2002 and successfully reorganized. This securities-fraud claim was filed against Conseco managers who are alleged to have made false statements prior to the bankruptcy. Then-District Judge Hamilton (S.D. Ind.) certified a class. Defendants appeal.

In their opinion, Chief Judge Easterbrook and Judges Bauer and Rovner affirmed. The Court began by noting that securities-fraud claims are regularly litigated as class actions. Common questions generally include falsehood, intent, causation, and materiality. Individual questions, such as an individual investor's extent of loss, can frequently be addressed mechanically. Prior to 1988, defendants fought class certification by focusing on the reliance element. But the Supreme Court that year, in Basic, concluded that the stock price conveys the same public information to each investor if the stock is frequently traded in an efficient market. The Basic doctrine, called fraud on the market, replaced the reliance element. Here, the defendants argued that the fraud on the market doctrine does not apply because, notwithstanding the alleged false statements, Conseco's stock was falling during the relevant period. The Court found that fact to be irrelevant and concluded that the case met the Basic requirements. The Court also rejected defendants’ arguments that certification was improper because the class included short sellers and because the court failed to determine falsity and materiality. On the former, the Court noted that both long and short sellers are affected by news related to the value of a stock. The fact that short sellers may not realize a loss as a result of a false statement affects computation of damages, not the propriety of a class. On the latter, the Court stated that falsity and materiality are elements to be decide on the merits – not at the class certification stage. In doing so, it specifically expressed its disagreement with the Fifth Circuit’s decision in Oscar Private Equity that reads Basic to allow a tightening of class certification requirements. Congress has spoken on the issue in the Private Securities Litigation Reform Act and the Securities Litigation Uniform Standards Act. The Court declined to legislate other changes.