Defense counsel retained Cornerstone Research to respond to the analysis offered by the plaintiffs’ expert.
Retained by O’Melveny & Myers
The U.S. District Court for the Central District of California denied the plaintiffs’ motion for class certification in this federal securities class action. The plaintiffs alleged that China Agritech, a Beijing-based fertilizer manufacturer whose stock traded on NASDAQ through a reverse merger, materially misstated its financial statements during the putative class period. The plaintiffs claimed damages resulting from China Agritech’s stock price decline following a published report stating that the company was a fraud. Defense counsel retained Cornerstone Research to respond to the analysis offered by the plaintiffs’ expert, which purportedly demonstrated that the plaintiffs could rely on a fraud-on-the market theory for class certification and damages because China Agritech’s stock traded in an efficient market.
Our expert testified that the plaintiffs’ expert had not provided scientifically reliable evidence to support the assertion of market efficiency. He opined that the event study conducted by the plaintiffs’ expert failed to demonstrate that China Agritech’s stock price responded fully and rapidly to the release of public information when its results were assessed at the commonly accepted level for statistical significance. Our expert also testified that the plaintiffs failed to demonstrate that analysts routinely followed the company throughout the putative class period. The court found that the plaintiffs failed to establish that China Agritech’s stock traded in an efficient market and, therefore, could not rely on the fraud-on-the-market presumption for reliance in their petition for class certification.
In denying class certification, the court stated that the plaintiffs’ expert, “found market efficiency after conducting an event study where he found correlation at a statistically significant level for only one of four events….This fact, alone, leads the Court to find that Plaintiffs have not satisfied their burden to show conclusive evidence of a causal relationship between Agritech’s disclosures and movement in the price of its stock.” The court also concluded that while thirteen individuals published reports related to China Agritech, the plaintiffs failed to provide any evidence that these thirteen individuals were analysts.