Belo Corporation Securities Class Action

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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.

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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.

Judge Fitzwater ruled that the plaintiff had not met its burden of showing loss causation under Oscar.

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. Judge Fitzwater ruled that the plaintiff had not met its burden of showing loss causation under Oscar.

In upholding Judge Fitzwater’s ruling, the appellate court cited favorably Professor Gompers’s economic analysis of Belo’s disclosures.

Case Expert

Paul A. Gompers

Eugene Holman Professor of Business Administration,
Harvard Business School,
Harvard University;
Senior Advisor, Cornerstone Research