In its August 20, 2010 opinion in Schleicher v. Wendt, —F.3d—, 2010 WL 3271964 (C.A.7 (Ind.), 2010), the Seventh Circuit affirmed the district court’s certification of a securities fraud class action and, in so doing, provided a withering critique of the Fifth Circuit’s approach to certification in securities cases. Judge Easterbrook began by observing the defendants’ arguments against class certification (including that a company as large and widely followed as corporate defendant Conseco does not qualify for the fraud-on-the-market treatment under Basic v. Levinson) would “end the use of class actions in securities cases.” The panel opinion went on to reject the contentions that, before a class can be certified, the district court must determine that the contested statements actually caused material changes in the stock price and that the plaintiff must prove each element (other than falsity) required to win on the merits.
Defendants had based their argument on the Fifth Circuit’s decision in Oscar Private Equity Investments v. Allegiance Telecom, Inc., 487 F. 3d 261 (5th Cir. 2007). Dismissing the Fifth Circuit’s “go-it-alone” strategy, the court in Schleicher expressly disagreed that proof of loss causation is essential to class certification. The court in Schleicher said that Oscar’s requirement of proof of loss causation — which, in the case of simultaneously made false and truthful statements, means plaintiffs must establish how much of the price movement can be attributed to the false statements — is wrong. While Oscar held that Basic permits each circuit to “tighten” the class certification requirements, the Schleicher court opined that the Oscar approach was at odds with the Federal Rules Committee’s decision in 1966 to separate class certification from a decision on the merits.
This case is important, because it shows that other courts recognize that the 5th Circuit in this Texas case is being an “activist” court seeking to essentially abolish securities class actions.
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