The U.S. Court of Appeals for the Fifth Circuit recently upheld U.S. District Court Judge Sidney A. Fitzwater’s April 2, 2008, ruling that denied class certification in the Belo Corporation securities class action, stating that the plaintiff had failed to show loss causation. During the proposed class period, Belo—a media conglomerate—reported circulation for the Dallas Morning News in monthly press releases and securities filings. In a press release issued August 5, 2004, Belo said that the newspaper would report a decline in circulation for the quarter ending September 2004 due to deteriorating business conditions, a change in how circulation was estimated, and an overstatement of circulation in previous years. The plaintiff alleged that the overstatement of circulation had inflated Belo’s stock price, that the August 2004 press release was corrective, and that the press release caused Belo’s stock price to decline.
Gibson, Dunn & Crutcher, counsel for Belo, retained Cornerstone Research to work with Professor Paul Gompers of the Harvard Business School on his analysis of the plaintiff’s claim that the revelation of the alleged fraud had caused the decline in stock price. Professor Gompers opined that the plaintiff failed to prove that the stock price decline resulted from the correction of the prior alleged fraud and not from the release of other unrelated negative news.
In his decision, Judge Fitzwater stated that the plaintiff had to establish loss causation at the class certification stage using all admissible evidence. In addition, citing Oscar Private Equity Investments v. Allegiance Telecom, Inc., the judge said that:
[W]hen unrelated negative statements are announced contemporaneous of a corrective disclosure, the plaintiff must prove that it is more probable than not that it was this negative statement, and not other unrelated negative statements, that caused a significant amount of the decline.
Judge Fitzwater ruled that the plaintiff had not met its burden of showing loss causation under Oscar stating:
Because not all items of circulation-related news contained in the August 5 announcement are, at least facially, related to the overstatement, the court concludes that this case requires a similar multi-layered loss-causation inquiry as that conducted in Oscar.... Because plaintiff lacks the empirically based showing that targets the corrective disclosure, as required by the Fifth Circuit in Oscar, the court holds that it has failed to establish loss causation by a preponderance of the evidence. And because plaintiff has failed to make this showing, its motion for class certification must be denied.
In upholding Judge Fitzwater’s ruling, the appellate court cited favorably Professor Gompers’s economic analysis of Belo’s disclosures:
By its plain language, the press release consists of three separate pieces of information, and—contrary to plaintiffs and Hakala’s belief—Gompers did not invent that three-part classification.... Ultimately, however, we do not need to examine Gompers’s reply, because his initial study—rather than Hakala’s—discusses the proper way in which to examine Belo’s disclosures.
Martin McNamara, a partner at Gibson, Dunn & Crutcher, stated, “Cornerstone Research provided invaluable insight and rigorous analysis that, combined with Gompers’s testimony, ultimately helped us to achieve this outstanding victory on behalf of our client.”