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Bowe v. PolyMedica Corp. (In re PolyMedica Corp. Sec. Litig.)

United States Court of Appeals for the First Circuit

December 13, 2005, Decided

No. 05-1220

Opinion

 [*2]  LIPEZ, Circuit Judge. In this appeal pursuant to Rule 23(f) of the Federal Rules of Civil Procedure from an order certifying a class in a securities [**2]  fraud case, we must decide an issue of first impression in this Circuit: the standard for determining whether a market was "efficient" when applying the fraud-on-the-market presumption of investor reliance. We also address the level of inquiry that a district court may pursue at the class-certification stage when making that efficiency determination. Defendants-Appellants PolyMedica Corporation, Liberty Medical Supply, Inc. ("Liberty"), and various officers of both companies (collectively, "PolyMedica" 1 ) argue that the district court erred in finding that common questions predominated under Rule 23(b)(3) of the Federal Rules of Civil Procedure, by determining that the market was efficient for eight months of the class period, from January 2001 through August 2001 (the "Contested Time Period"), and deeming PolyMedica's expert evidence irrelevant to that determination. For the reasons set forth below, we vacate the district court's order certifying the class for the Contested Time Period, and remand for further proceedings.

 [**3] I.

Thomas Thuma ("Plaintiff") is a purchaser of PolyMedica stock, who seeks to represent a class of all purchasers of PolyMedica stock from October 1998 through August 2001. 2 [**5]  PolyMedica is the parent  [*3]  company of Liberty, a seller of diabetic testing supplies. According to Plaintiff, PolyMedica reported record revenues and earnings during the class period based primarily on the growth of Liberty's diabetic supplies business, which accounted for up to 80% of PolyMedica's revenues. As a result of these increases in revenue and earnings, the price of PolyMedica's stock, which traded on the NASDAQ 3 and the American Stock Exchange during the class period, increased substantially. In the consolidated complaint, filed on October 9, 2001, Plaintiff alleges that PolyMedica artificially inflated the market price of its stock by misrepresenting sales, revenues, and accounts receivable, and by issuing false press releases, causing Plaintiff and other members of the class to purchase stock at artificially inflated prices. Plaintiff further alleges that when the truth of this fraud became known, PolyMedica's stock lost more than 80% of its value. Plaintiff seeks damages under Section 10(b)  [**4]  of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (the "Exchange Act") and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, and Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a).

On January 28, 2004, following several years of litigation, Plaintiff moved for class certification pursuant to Fed. R. Civ. P. 23(a) 4 and (b)(3) 5 [**7] , asserting that common questions of law and fact predominated, based on the "fraud-on-the-market" theory. As we explain in greater detail below, ] under the Supreme Court's plurality decision in  Basic, Inc. v. Levinson, 485 U.S. 224, 108 S. Ct. 978, 99 L. Ed. 2d 194 (1988), 6 this theory obviates the need for a plaintiff to demonstrate individualized reliance on a defendant's misstatement by permitting a class-wide rebuttable presumption of reliance,  [**6]  thereby enabling a securities fraud class action to meet Rule 23(b)(3)'s commonality requirement. PolyMedica opposed the motion, arguing that the fraud-  [*4]  on-the-market presumption of reliance was inapplicable for the Contested Time Period 7 because the market for PolyMedica stock was not "efficient" (a prerequisite for application of the presumption). Both sides submitted expert testimony in support of their respective positions.

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432 F.3d 1 *; 2005 U.S. App. LEXIS 27173 **; Fed. Sec. L. Rep. (CCH) P93,603

In re POLYMEDICA CORP. SECURITIES LITIGATION; RICHARD BOWE, SEP-IRA, on behalf of himself and all others similarly situated; JOHN T. MUHA; THOMAS THUMA; LAWRENCE STOREY; JIANWEI XU; HOWARD HOFFMAN, Appellees, v. POLYMEDICA CORP.; LIBERTY MEDICAL SUPPLY, INC.; ERIC G. WALTERS; WARREN K. TROWBRIDGE; STEVEN J. LEE, Appellants.

Subsequent History: Companion case at Stuebler v. Xcelera.com (In re Xcelera.com Sec. Litig.), 430 F.3d 503, 2005 U.S. App. LEXIS 27174 (1st Cir. Mass., 2005)

Motion granted by, in part, Motion denied by, in part Thuma v. PolyMedica Corp. Liberty Med. Supply, Inc. (In re PolyMedica Corp. Sec. Litig.), 235 F.R.D. 28, 2006 U.S. Dist. LEXIS 16934 (D. Mass., 2006)

Prior History:  [**1]  APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS. [Hon. Robert E. Keeton, Senior U.S. District Judge].

In re Polymedica Corp. Secs. Litig., 224 F.R.D. 27, 2004 U.S. Dist. LEXIS 17985 (D. Mass., 2004)

CORE TERMS

stock, district court, market price, fraud-on-the-market, available information, investor, publicly, fundamental value, class-certification, reflects, trading, factors, stock price, prevailing, prices, courts, certifying, class certification, new information, argues, misstatement, quotation, markets, marks, announced, questions, profits, rapidly, merits, cases

Civil Procedure, Class Actions, Prerequisites for Class Action, General Overview, Evidence, Inferences & Presumptions, Presumptions, Securities Law, Securities Exchange Act of 1934 Actions, Implied Private Rights of Action, Class Actions, Elements of Proof, Reliance, Fraud on the Market, Appeals, Appellate Jurisdiction, Interlocutory Orders, Standards of Review, Abuse of Discretion, Special Proceedings, Clearly Erroneous Review, De Novo Review, Presumptions, Rebuttal of Presumptions