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Schleicher v. Wendt

United States Court of Appeals for the Seventh Circuit

September 22, 2009, Argued; August 20, 2010, Decided

No. 09-2154

Opinion

 [*681]  EASTERBROOK, Chief Judge. When a large, public company makes statements that are said to be false, securities-fraud litigation regularly proceeds as a class action. ] Class treatment is appropriate when issues common to class members predominate over those that affect them individually. Fed. R. Civ. P. 23(b)(3). Whether the statements are false is one common question. Whether the false-hoods are intentional (i.e., whether each defendant acted with the required state  [**2] of mind) is another. Whether the false-hoods affected the stock's price is a third. (If investors already know the truth, false statements won't affect the price.) Whether the magnitude of any effect shows that the false information was "material" is a fourth. There will be some person-specific issues, such as when (and how many shares) a given investor purchased or sold. Timing of each person's transactions, in relation to the timing of the supposedly false statements, determines how much a given investor lost (or gained) as a result of the fraud. But these questions can be resolved mechanically. A computer can sort them out using a database of time and quantity information.

] The canonical elements of a claim under § 10(b) of the Securities Exchange  [*682]  Act of 1934, 15 U.S.C. § 78j(b), and the SEC's Rule 10b-5, 17 C.F.R. § 240.10b-5, are falsehood in connection with the purchase or sale of securities, scienter, materiality, reliance, causation, and loss. See Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 341-42, 125 S. Ct. 1627, 161 L. Ed. 2d 577 (2005). Reliance usually shows how the false statements caused the loss. Until Basic Inc. v. Levinson, 485 U.S. 224, 108 S. Ct. 978, 99 L. Ed. 2d 194 (1988), defendants tried to fend off class certification  [**3] by contending that each investor was bound to have received different information about the company, and that many investors would not have read the supposedly false statements at all. Each investor's fund of information differs from every other investor's. But Basic concluded that ] the price of a well-followed and frequently traded stock reflects the public information available about a company.

When someone makes a false (or true) statement that adds to the supply of available information, that news passes to each investor through the price of the stock. And since all stock trades at the same price at any one time, every investor effectively possesses the same supply of information. The price both transmits the information and causes the loss. This approach, dubbed the fraud-on-the-market doctrine, supplants "reliance" as an independent element by establishing a more direct method of causation. See Asher v. Baxter International Inc., 377 F.3d 727, 731 (7th Cir. 2004); Eckstein v. Balcor Film Investors, 8 F.3d 1121, 1129 (7th Cir. 1993). When a company's stock trades in a large and efficient market, the contestable elements of the Rule 10b-5 claim reduce to false-hood, scienter, materiality,  [**4] and loss. Because each investor's loss usually can be established mechanically, common questions predominate and class certification is routine, if a suitable representative steps forward. See In re Mexico Money Transfer Litigation, 267 F.3d 743, 746-47 (7th Cir. 2001); see also Hal S. Scott, The Impact of Class Actions on Rule 10b-5, 38 U. Chi. L. Rev. 337 (1971).

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618 F.3d 679 *; 2010 U.S. App. LEXIS 17367 **; Fed. Sec. L. Rep. (CCH) P95,932

FRANZ SCHLEICHER, et al., Plaintiffs-Appellees, v. GARY C. WENDT, et al., Defendants-Appellants.

Prior History:  [**1] Appeal from the United States District Court for the Southern District of Indiana, Indianapolis Division. No. 1:02-cv-1332-DFH-TAB--David F. Hamilton, Judge.

Schleicher v. Wendt, 2009 U.S. Dist. LEXIS 24810 (S.D. Ind., Mar. 20, 2009)

Disposition:  The district court's certification order was affirmed.

CORE TERMS

investors, stock, merits, false statement, class certification, fraud-on-the-market, certification, causation, prices, announcement, false-hood, traded, securities litigation, shares, class action, securities-fraud, settlement, questions

Civil Procedure, Class Actions, Prerequisites for Class Action, Predominance, Securities Law, Implied Private Rights of Action, Elements of Proof, Causation, Connection Requirement, Materiality, General Overview, Reliance, Scienter, Fraud on the Market, Governments, Courts, Judicial Precedent, Torts, Fraud & Misrepresentation, Actual Fraud, Elements, Special Proceedings, Certification of Classes, Securities Exchange Act of 1934 Actions, Class Actions, Class Members, Civil Liability Considerations, Securities Litigation Reform & Standards, Removal, Postoffering & Secondary Distributions, Heightened Pleading Requirements, Burdens of Proof