Crediting Professor Stulz’s analysis, the appellate court found that the district court misapplied the predominance standard and vacated and remanded its class certification decision in In re Cassava Sciences Inc. Securities Litigation.
Retained by Gibson, Dunn & Crutcher
Overview
Plaintiffs filed a putative securities class action against Cassava Sciences Inc. in the U.S. District Court for the Western District of Texas alleging that the company made misleading statements about clinical trial results. The district court certified the class, and defendants then appealed to the U.S. Court of Appeals for the Fifth Circuit.
Defense counsel retained Cornerstone Research to support René Stulz of The Ohio State University in analyzing the relevant economic evidence at the class certification stage.
Class Certification Expert Testimony
Defendants advanced several arguments challenging class certification, including that the plaintiffs had not demonstrated that Cassava’s stock traded in an efficient market during the class period because their expert failed to consider whether Cassava’s stock was a “meme stock.”
Professor Stulz provided opinions on the volatility of Cassava’s stock price in the absence of news and in the face of meme-stock dynamics. He also presented evidence on short-selling constraints. Defendants relied on this evidence to argue that Cassava stock did not trade in an efficient market.
Crediting Professor Stulz’s work, the court found that his evidence undermined “Basic’s key premise that the stock was incorporating information efficiently.” The court found that the district court erred by adopting plaintiffs’ expert’s conclusions “without engaging with defendants’ evidence.”
Fifth Circuit Ruling
The Fifth Circuit vacated and remanded the district court’s decision. The court found that the district court “misapplied legal standards while assessing Rule 23(b)(3)’s predominance requirement.” The court faulted the district court for “declining to evaluate defendants’ evidence of market inefficiency in favor of a default application of the Cammer/Krogman factors,” a set of tests courts commonly use to assess market efficiency. The Fifth Circuit described those factors as “merely a tool to that end, not the whole project” and reiterated that courts must assess evidence of both market efficiency and market inefficiency.
Crediting Professor Stulz’s work, the court found that his evidence undermined “Basic’s key premise that the stock was incorporating information efficiently.” The court found that the district court erred by adopting plaintiffs’ expert’s conclusions “without engaging with defendants’ evidence.”