T Grocery and Food Employees Welfare Fund v. Regions Financial Corporation et al
MEMORANDUM OPINION. Signed by Judge Inge P Johnson on 6/14/12. (ASL)
2012 Jun-14 AM 10:02
U.S. DISTRICT COURT
N.D. OF ALABAMA
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ALABAMA
LOCAL 703, I.B. OF T. GROCERY
AND FOOD EMPLOYEES WELFARE
FUND, et al.,
CASE NO. CV 10-J-2847-S
REGIONS FINANCIAL CORPORATION,
Pending before the court are the plaintiffs’ motion for class certification,
memorandum, affidavit and exhibits in support of said motion (docs. 94-96),
defendants’ evidentiary submissions and opposition to said motion (docs. 102-104),
the plaintiffs’ reply and evidence in support of the reply (docs. 107 and 108), the
defendants’ sur-reply and evidence in support of the sur-reply (docs. 137 and 138),
and the plaintiffs’ response to the defendants’ sur-reply (doc. 142). Also pending
before the court is the defendants’ motion for class certification hearing (doc. 140).
Having considered the foregoing, the court finds as follows:
The plaintiffs allege that investors in defendant Regions’ stock were harmed
by defendants’ fraudulent statements and reports concerning the performance of
Regions’ investments, and specifically investments in real estate. The named
plaintiffs seek to represent a class of all persons or entities who purchased or
otherwise acquired the securities of Regions during the class period and were
damaged thereby. Based on this set of facts, the plaintiffs assert claims for violations
of § 10(b) of the Securities and Exchange Act, which requires: (1) the existence of a
material misrepresentation (or omission), (2) made with scienter (i.e., “a wrongful
state of mind”), (3) in connection with the purchase or sale of any security, (4) on
which the plaintiff relied, and (5) which was causally connected to (6) the plaintiffs’
economic loss. Thompson v. RelationServe Media, Inc., 610 F.3d 628, 633 (11th Cir.
The price of Regions shares, traded on the New York Stock Exchange, were
$23.22 per share on February 27, 2008, the first day of the proposed class period, and
$4.60 per share on January 20, 2009, the last day of the proposed class period. The
defendants dispute that the decline was caused by fraud or other misdeeds on their
part, instead offering that the 78.8% decrease in value was due to market factors
unrelated to the plaintiffs’ allegations.1
For a detailed opinion concerning the facts of this case as the court has previously found
them to be, see Memorandum Opinion and Order of June 7, 2011 (docs. 52 and 53).
Standard for Class Certification
For a district court to certify a class action, the named plaintiffs must have
standing and the putative class must meet each of the requirements specified in
Federal Rule of Civil Procedure 23(a), as well as at least one of the requirements set
forth in Rule 23(b). City of Hialeah v. Rojas, 311 F.3d 1096, 1101 (11th Cir.2002);
Turner v. Beneficial Corp., 242 F.3d 1023, 1025 (11th Cir.2001). See also Klay v.
Humana, Inc., 382 F.3d 1241, 1250-1251 (11th Cir.2004).
In reviewing a motion for class certification, the court generally is bound to
take the substantive allegations of the complaint as true. Moreno-Espinosa v. J & J
AG Prods., Inc., 247 F.R.D. 686, 687 (S.D.Fla.2007). However, the court may look
beyond the pleadings to determine whether the requirements of Rule 23 have been
met. Vega v. T-Mobile USA, Inc., 564 F.3d 1256, 1266 (11th Cir.2009).
Federal Rule of Civil Procedure 23(a) states:
Prerequisites to a Class Action. One or more members of a class may
sue or be sued as representative parties on behalf of all only if (1) the
class is so numerous that joinder of all members is impracticable, (2)
there are questions of law or fact common to the class, (3) the claims or
defenses of the representative parties are typical of the claims or
defenses of the class, and (4) the representative parties will fairly and
adequately protect the interests of the class.
Rule 23(a), Fed.R.Civ.Pro. Federal Rule of Civil Procedure 23(b) states:
Class Actions Maintainable. An action may be maintained as a class
action if the prerequisites of subdivision (a) are satisfied, and in
(3) the court finds that the questions of law or fact common to class
members predominate over any questions affecting only individual
members, and that a class action is superior to other available methods
for fairly and efficiently adjudicating the controversy. The matters
pertinent to these findings include: (A) the class members’ interests in
individually controlling the prosecution or defense of separate actions;
(B) the extent and nature of any litigation concerning the controversy
already begun by or against class members; (C) the desirability or
undesirability of concentrating the litigation of the claims in the
particular forum; and (D) the likely difficulties in managing a class
A district court may certify a class only if, after “rigorous analysis,” it
determines that the party seeking certification has met its burden by a preponderance
of the evidence. Gen. Tel. Co. of the Sw. v. Falcon, 457 U.S. 147, 158–61, 102 S.Ct.
2364, 72 L.Ed.2d 740 (1982). See also Teamsters Local 445 Freight Div. Pension
Fund v. Bombardier, Inc., 546 F.3d 196, 202-04 (2nd Cir.2008) (requiring plaintiffs
to meet burden by a preponderance of the evidence). “The burden of proof to
establish the propriety of class certification rests with the advocate of the class.”
Busby v. JRHBW Realty, Inc., 513 F.3d 1314, 1322 (11th Cir.2008) (quoting Valley
Drug Co. v. Geneva Pharm., Inc., 350 F.3d 1181, 1187 (11th Cir.2003).
The court considers each of the requirements for class certification in turn,
It is inescapable that in some cases there will be overlap between the
demands of [Rule] 23(a) and (b) and the question of whether [a] plaintiff
can succeed on the merits." Huff v. N.D. Cass Co. of Ala., 485 F.2d 710,
714 (5th Cir.1973) (en banc). Thus, the principle that district courts
should not evaluate the merits of plaintiffs’ claims “should not be
talismanically invoked to artific[i]ally limit a trial court's examination
of the factors necessary to a reasoned determination of whether a
plaintiff has met her burden of establishing each of the Rule 23 class
action requirements.” Love v. Turlington, 733 F.2d 1562, 1564 (11th
Babineau v. Fed. Express Corp., 576 F.3d 1183, 1190 (11th Cir.2009) (footnote and
A. Rule 23(a) inquiry
The court is satisfied that the putative class is sufficiently numerous. The
proposed class definition includes individuals and entities who “purchased or
otherwise acquired” Regions’ stock during an eleven month period. The court takes
judicial notice of the fact that millions of shares of this stock are traded on the New
York Stock Exchange daily.2 See In re HealthSouth Corp. Securities Litigation, 257
According to the Form 10-K for the year ending December 31, 2011, defendant Regions had
1,260,114,608 issued and outstanding shares of stock. See exhibit 3 to doc. 108.
F.R.D. 260, 274 (N.D.Ala.2009) (“The court ... makes a ‘common sense assumption’
that the proposed Stockholder class meets the numerosity requirement...”).
Defendants do not challenge class certification on numerosity grounds, and the court
finds this element satisfied.
To satisfy this requirement, the plaintiffs must show that class members share
common questions of law or fact. Fed.R.Civ.P. 23(a)(2). Commonality is satisfied
where the plaintiffs establish issues of law or fact common to all members of the
putative class, although all questions of law or fact need not be common to the class.
See e.g. Cooper v. Southern Co., 390 F.3d 695, 714 (11th Cir.2004), citing Murray
v. Auslander, 244 F.3d 807, 811 (11th Cir.2001); Prado-Steinman ex rel. Prado v.
Bush, 221 F.3d 1266, 1279 n. 14 (11th Cir.2000) (“the requirements may be satisfied
even if some factual differences exist between the claims of the named representatives
and the claims of the class at large”); Hudson v. Delta Air Lines, Inc., 90 F.3d 451,
456 (11th Cir.1996); Cox v. Am. Cast Iron Pipe Co., 784 F.2d 1546, 1557 (11th
Cir.1986), cert. denied, 479 U.S. 883, 107 S.Ct. 274, 93 L.Ed.2d 250 (1986).
The court finds questions of law and fact common to the class members. The
proposed class has been defined as “[a]ll persons or entities who, between February
27, 2008, and January 19, 2009 ... purchased or otherwise acquired the securities of
Regions... and were damaged thereby.” The plaintiffs allege a single scheme which
violated federal securities law. Such allegations, susceptible to class-wide proof,
have been held to meet the commonality requirements of Rule 23(a). See e.g.,
Cooper, 390 F.3d at 713; In re HealthSouth Corp. Securities Litigation, 261 F.R.D.
616, 626 (N.D.Ala.2009)(with respect to “a class of purchasers allegedly defrauded
over a period of time by similar misrepresentations, courts have taken the common
sense approach that the class is united by a common interest in determining whether
a defendant’s course of conduct is in its broad outlines actionable”); In re Recoton
Corp. Securities Litigation, 248 F.R.D. 606, 618 (M.D.Fla.2006) (where a “common
scheme of deceptive conduct” has been alleged, the commonality requirement should
Therefore, the court finds this prong of Rule 23 is satisfied.
This element for class certification requires that a class representative’s claims
must be typical of the claims of the class. Fed.R.Civ.P. 23(a)(3). Typicality subsumes
the concept that the class representative must “possess the same interest and suffer
the same injury as the class members.” Cooper, 390 F.3d at 713. This is related to
the element of commonality, but focuses on the “individual characteristics of the
named plaintiff in relation to the class.” Prado–Steiman, 221 F.3d at 1279. Both
requirements are designed to assure that the claims of the named plaintiff and the
claims of the class are sufficiently related. A representative’s claim is typical if there
is a “nexus between the class representative’s claims or defenses and the common
questions of fact or law which unite the class.” Kornberg v. Carnival Cruise Lines,
Inc., 741 F.2d 1332, 1337 (11th Cir.1984). However, typicality does not require
identical claims or defenses, and minor factual variations will not render a class
representative’s claim atypical. Id.
The defendants assert this prong of Rule 23 is not satisfied by the
representative plaintiffs for a variety of reasons. Defendants object to District No. 9,
I.A. of M. & A.W. Pension Trust (“District 9”) on the basis that it sold “thousands of
shares” during the class period and thus benefitted from any alleged fraud that
occurred. Defendants’ opposition (doc. 103), at 40. According to defendants,
District 9 purchased shares, held them for short periods of time, and then sold them
for a profit. Defendants’ opposition at 45 n. 29. See also defendants’ exhibit B to
Affidavit of Justin Wright (submitted as exhibit C to doc. 104). As for each listed
sale District 9 made a profit on its investment, the court agrees with defendants that
such named plaintiff would not be a proper class representative, as it can have
suffered no loss.3 Should District 9 have divested itself of all such holdings during
the Class Period, then clearly its claims would not be typical of the other class
members. However, based on the allegations of the third amended complaint, the
court finds that District 9 does assert it suffered damages from its investment in
The court also disagrees with the defendants that the Employees’ Retirement
System of the Government of the Virgin Islands (“Virgin Islands”), is a similarly
inappropriate class representative. Just as defendants assert District 9 did not hold
its stock long enough, defendants complain that Virgin Islands has held its stock for
Because Virgin Islands purchased the shares it holds in October 2008, and the
allegations include that the value per share has not been higher than it was in October
2008 at any time since January 2009, the court cannot at this time find that by
retaining the stock, Virgin Islands’ loss was caused by “other factors.” Defendants’
opposition at 42, citing Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 343,
125 S.Ct. 1627, 1631-1632 (2005).4 At any moment since January 2009, should
The plaintiffs agree that District 9 sold “some” of its holdings during the Class Period.
Plaintiffs’ reply (doc. 107) at 12.
Dura states in relevant part:
For one thing, as a matter of pure logic, at the moment the transaction takes place, the
plaintiff has suffered no loss; the inflated purchase payment is offset by ownership of
Virgin Islands have sold its shares, it would necessarily have entailed a loss. Should
Virgin Islands, as a class representative, establish it paid a higher price in October
2008 due to the alleged misrepresentations, then the fact it has retained its shares does
not diminish its injury. As the Eleventh Circuit has explained, “defendants can be
liable for knowingly and intentionally causing a stock price to remain inflated by
preventing preexisting inflation from dissipating from the stock price.” FindWhat
Investor Group v. FindWhat.com, 658 F.3d 1282, 1315 (11th Cir.2011)(emphasis in
original), citing Schleicher, 618 F.3d at 683–84 (“[Defendants are liable for securities
fraud regardless of whether their] false statements (or ... material omissions) propel
a share that at that instant possesses equivalent value. Moreover, the logical link
between the inflated share purchase price and any later economic loss is not invariably
strong. Shares are normally purchased with an eye toward a later sale. But if, say, the
purchaser sells the shares quickly before the relevant truth begins to leak out, the
misrepresentation will not have led to any loss. If the purchaser sells later after the
truth makes its way into the marketplace, an initially inflated purchase price might
mean a later loss. But that is far from inevitably so. When the purchaser subsequently
resells such shares, even at a lower price, that lower price may reflect, not the earlier
misrepresentation, but changed economic circumstances, changed investor
expectations, new industry-specific or firm-specific facts, conditions, or other events,
which taken separately or together account for some or all of that lower price. (The
same is true in respect to a claim that a share's higher price is lower than it would
otherwise have been-a claim we do not consider here.) Other things being equal, the
longer the time between purchase and sale, the more likely that this is so, i.e., the
more likely that other factors caused the loss.
Given the tangle of factors affecting price, the most logic alone permits us to say is
that the higher purchase price will sometimes play a role in bringing about a future
loss. It may prove to be a necessary condition of any such loss, and in that sense one
might say that the inflated purchase price suggests that the misrepresentation (using
language the Ninth Circuit used) “touches upon” a later economic loss. Ibid. But, even
if that is so, it is insufficient. To “touch upon” a loss is not to cause a loss, and it is the
latter that the law requires. 15 U.S.C. § 78u-4(b)(4).
Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 342-343, 125 S.Ct. 1627, 1631-1632 (2005).
the stock’s price upward ... [or] were designed to slow the rate of fall.”).
Similarly, the court finds that the defendants’ arguments concerning the amount
of information “entering the market through 2008” does not invalidate the lead
plaintiffs’ claims of injury. See defendants’ opposition, at 45. In holding that
“confirmatory information that wrongfully prolongs a period of inflation—even
without increasing the level of inflation—may be actionable under the securities
laws,” the Eleventh Circuit specifically rejected the approach of the Fifth Circuit,
which ruled that because confirmatory information is already known to the market,
it will not affect stock price.”5 FindWhat Investor Group, 658 F.3d at 1314 n. 33. In
contrast, in this Circuit, taking actions to cause the stock to remain inflated is
actionable. Id., at 1315.
Similarly, the court rejects defendants’ arguments that Virgin Islands purchased
their shares of stock too late in the class period to be “typical.”6 The defendants
continued to make “corrective statements” up to and through January 20, 2009. As
such, the court finds Virgin Islands purchased the shares during the applicable class
The Eleventh Circuit also noted that the Fifth Circuit rule (that confirmatory information is
not actionable) appeared to conflict with the Fifth Circuit's own recognition in Nathenson v. Zonagen
Inc., 267 F.3d 400 (5th Cir.2001), that fraudulent information that confirms what the market already
believes is actionable if it prevents the stock price from dropping to the level the market would set if
the truth were revealed. FindWhat Investor Group, 658 F.3d at 1315 n. 33.
According to Glenville Henderson, an investment analyst for the Virgin Islands, Virgin
Islands purchased 41,805 shares at $10.91 per share on October 7, 2008. Henderson depo. at 90-91,
exhibit F (doc. 104) to defendants’ opposition.
period, and suffered harm that will be typical of the class.
Defendants also assert that neither of the named plaintiffs’ claims are typical
because their investments were made by money managers who used strategies “that
did not rely on markets at all.” Defendants’ opposition at 43, n. 26. However,
whether using “mathematical theorem” or “stocks that are ‘beaten up and
undervalued,’” defendants’ alleged prior misrepresentations impacted the price of the
stock, and thus the named plaintiffs, as purchasers, suffered the same injury as any
individual who sought undervalued stocks.7 Similarly, whether purchase decisions
were made through money managers or by an individual, the alleged harm remains
the same. See e.g. Retsky Family Ltd. Partnership v. Price Waterhouse LLP, 1999
WL 543209, 6 (N.D.Ill.1999)(This court nevertheless respectfully declines to follow
the Caremark court in finding inadequate those investors who rely on others to make
the investment decisions. As pointed out by Plaintiff, relying on an investment
advisor to make decisions about investments is commonplace.”). On behalf of
Defendants object to District 9 because its money manager used a “mathematical theorem
that attempts to capitalize on the random nature of stock price movements, which itself suggests that
INTECH may not have considered the price of Regions stock at all.” Defendants’ opposition at 43, n.
26. See affidavit of Justin Wright, filed as exhibit C (doc. 104) to defendants’ opposition. Wright
states INTECH did not analyze goodwill calculations or loan loss provisions when making investment
decisions on behalf of District 9. Id., at ¶¶ 12-13. Such a statement is vastly different from one that
had INTECH known those numbers were manipulated, it would not have considered that to be
INTECH has since been terminated by District 9 because of its performance. Tony Rippeto
depo. at 43-44 (submitted as exhibit E to defendants’ opposition). Rippeto is the Director of District
9 and a trustee of the District 9 fund. Rippeto depo. at 16, 25.
District 9, Tony Rippeto testified that it hires money managers to pick stocks that out
perform the market, and that they rely on those managers to do so. Rippeto depo. at
106-107. Similarly, Henderson testified that Virgin Islands also uses investment
managers and relies on those managers to select specific stocks. Henderson depo. at
31, 75-76. Relinquishing day to day control of investment decisions to a manager
does not alter the effect on the price of a stock of fraudulent information. The court
finds the defendants’ attempted distinction on this basis to be without meaning.
For the reasons set forth supra, the court finds the typicality prong of Rule
23(a) to be satisfied.
4. Adequacy of representation
Rule 23(a)(4) requires that “the representative parties will fairly and adequately
protect the interests of the class.” The underlying purpose behind this requirement
is to assure that the legal rights of absent class members are protected. Kirkpatrick v.
J.C. Bradford & Co., 827 F.2d 718, 726 (11th Cir.1987). Similarly, under the PSLRA,
the court must “appoint as lead plaintiff the member or members of the purported
plaintiff class that the court determines to be most capable of adequately representing
the interests of class members.” 15 U.S.C. § 77z–1(a)(3)(B)(i).
The adequacy requirement has two different prongs: “‘(1) whether any
substantial conflicts of interest exist between the representatives and the class; and
(2) whether the representatives will adequately prosecute the action.’” Valley Drug,
350 F.3d at 1189 (quoting In re HealthSouth Corp. Sec. Litig., 213 F.R.D. 447,
460–461 (N.D.Ala.2003)); see also Griffin v. Carlin, 755 F.2d 1516, 1533 (11th
Cir.1985) (“The adequate representation requirement involves questions of whether
plaintiffs’ counsel are qualified, experienced, and generally able to conduct the
proposed litigation, and of whether plaintiffs have interests antagonistic to those of
the rest of the class.”).
Defendants object both to the adequacy of the named plaintiffs and the
adequacy of counsel. Defendants’ opposition (doc. 103) at 46-49. Defendants
complain that both lead plaintiffs have extensive, ongoing business relationships with
the proposed lead counsel’s law firm, Robbins, Geller. Defendants’ opposition, at 46.
That firm has a portfolio monitoring agreement with both named plaintiffs, by which
Robbins, Geller monitors the named plaintiffs’ investments, looking for potential
securities fraud claims. See e.g., Rippeto depo. at 70-71. Should such a claim be
identified, and should plaintiffs desire to pursue the same, then Robbins, Geller files
an action on their behalf. Rippeto depo. at 74, 85; Henderson depo. at 117.
According to defendants, this has resulted in multiple class actions filed by one or the
other of the named plaintiffs, and in which Robbins, Geller is class counsel.
Defendants’ opposition, at 47.
This concern is not without merit. Numerous courts have held that class
certification should be denied “when a class representative is closely associated with
class counsel” because “he or she may permit a settlement less favorable to the
interests of absent class members.” In re IMAX Sec. Litig., 272 F.R.D. 138, 155–56
(S.D.N.Y.2010). See also Iron Workers Local No. 25 Pension Fund v. Credit-Based
Asset Servicing and Securitization, LLC, 616 F.Supp.2d 461, 463 (S.D.N.Y.,2009)
(recognizing that “the lead plaintiff provisions of the PSLRA were intended to curtail
the vice of ‘lawyer-driven’ litigation, i.e., lawsuits that, because of the huge potential
fees available in contingent securities fraud class actions, were initiated and
controlled by the lawyers and appeared to be litigated more for their benefit than for
the benefit of the shareholders they ostensibly represented.”). Other courts have not
found such arrangements as troubling. See e.g., Ross v. Abercrombie & Fitch Co.,
257 F.R.D. 435, 450-451 (S.D.Ohio2009); United Food and Commercial Workers
Union v. Chesapeake Energy Corp., 2012 WL 1072249, 11 (W.D.Okla.2012)(“Lead
Plaintiff has selected highly qualified counsel with extensive experience in securities
litigation, including numerous class action securities lawsuits. The knowledge and
experience of Robbins Geller is not only reflected in its firm resume, but has been
previously recognized by a federal court which described it as ‘one of the most
successful law firms in securities class actions, if not the preeminent one, in the
country.’ In re Enron Corp. Securities Litig., 586 F.Supp.2d 732, 789–90, 797
Considering the adequacy of class representation under the Eleventh Circuit
standard, the court considers only whether plaintiffs’ counsel are qualified,
experienced and generally able to conduct the litigation. In re Theragenics Corp.
Securities Litigation, 205 F.R.D. 687, 696 (N.D.Ga.2002), citing Kirkpatrick, 827
F.2d at 726; Griffin v. Carlin, 755 F.2d 1516, 1532 (11th Cir.1985). As noted above,
other courts have referred to plaintiffs’ chosen counsel, Robbins, Geller, as “one of
the most successful law firms in the securities class actions... in the country.” In re
Enron Corp. Securities Litig., 586 F.Supp.2d at 797. Defendants do not challenge the
qualifications, experience, or ability of Robbins, Geller, nor do defendants challenge
the adequacy of plaintiffs’ other named counsel.
Based on the foregoing, the court finds the relationship between the named
plaintiffs and lead counsel is not without question. However, the court also notes that
nothing in such a relationship per se impacts quality of representation that the absent
class members will receive. Instead, the nature of the ongoing relationship between
lead plaintiffs and lead counsel carries with it that lead counsel will pursue the claims
with vigor, as their future relationship with named plaintiffs depends on the same.8
Defendants also assert that lead plaintiffs’ ignorance of various factual issues
before this court makes these plaintiffs inadequate class representatives.9 Defendants’
In Kirkpatrick v. J.C. Bradford & Co., 827 F.2d 718 (11th Cir.1987), the Eleventh Circuit
[A]dequate class representation generally does not require that the named plaintiffs
demonstrate to any particular degree that individually they will pursue with vigor the
legal claims of the class. Although the interests of the plaintiff class certainly would
be better served if the named plaintiffs fully participate in the litigation, see, e.g., In re
Goldchip Funding Co., 61 F.R.D. 592, 594–95 (M.D.Pa.1974), the economics of the
class action suit often are such that counsel have a greater financial incentive for
obtaining a successful resolution of a class suit than do the individual class members.
See Deposit Guaranty Nat. Bank v. Roper, 445 U.S. 326, 338–39, 100 S.Ct. 1166,
1174, 63 L.Ed.2d 427 (1980) (plurality opinion). It is not surprising, then, that the
subjective desire to vigorously prosecute a class action, which the district court here
found missing in the named plaintiffs, quite often is supplied more by counsel than by
the class members themselves. Obviously this creates a potential for abuse. See id. at
339, 100 S.Ct. at 1174. Yet the financial incentives offered by the class suit serve both
the public interests in the private enforcement of various regulatory schemes,
particularly those governing the securities markets, and the private interests of the
class members in obtaining redress of legal grievances that might not feasibly be
remedied “within the framework of a multiplicity of small individual suits for
Id., at 727. See also In re Vesta Insurance. Group Inc., Securities Litigation, 1999 WL 34831474, 2
(N.D.Ala.1999); Morris v. Transouth Financial Corp., 175 F.R.D. 694, 697-698 (M.D.Ala.1997).
The court finds this argument puzzling, as the designated representative for Virgin Islands
had a clear grasp of the purpose of this action. When asked for his understanding of the allegations of
the complaint, he replied
My understanding is for the period in question, Regions Corp. along with key
executives misled, basically lied to shareholders in terms of $6 billion goodwill that
was placed on their balance sheets which came about from the acquisition of
Amsouth; also, the misleading of shareholders in terms of loan reserves that was part
of the acquisition of Amsouth; and just basically negligence on their part with the lack
of proper internal controls in, if you want to say managing or recording those
transactions that basically caused the stock price – which is what the shareholders are
most concerned about – to plummet from where it was at the time.
Henderson depo. at 140. He added that specifically, “after the declaration came out that they had to
write down $6 billion in goodwill, that basically caused the stock to tank.” Id. Later, when asked
whether he knew of anything specific defendant Ritter did, Henderson replied
opposition (doc. 103) at 48. However, the law does not demand a class representative
understand or even have specific knowledge of claims and issues before the court.
Rather, class representatives may rely on their chosen counsel to litigate the case
without such reliance making them inadequate. See e.g., Morris v. Transouth
Financial Corp., 175 F.R.D. 694, 698 (M.D.Ala.1997); citing Surowitz v. Hilton
Hotels Corp., 383 U.S. 363, 86 S.Ct. 845, 15 L.Ed.2d 807 (1966).
Thus, the court concludes that class counsel and the named plaintiffs are
adequate representatives for purposes of class certification.
B. Rule 23(b) requirements
The plaintiffs assert this case is appropriate for certification under Rule
23(b)(3), Fed.R.Civ.Pro. Numerous courts have recognized that securities fraud cases
are particularly appropriate candidates for treatment under Rule 23(b)(3) since the
elements of the cause of action generally relate to the acts or omissions of the
defendants. See e.g., In re Scientific-Atlanta, Inc. Securities Litigation, 571 F.Supp.2d
Other than the fact of covering up what was or what had to be known as a company
that was in trouble and basically coming out speaking to shareholders as if everything
was okay and the company was in good shape, that’s about – I don’t know of anything
Id. at 153. When questioned about the financial condition of other banks during the same time
period, Henderson commented, “I think the fact or the misleading statements and actions by Regions
Corp. made their drop or their drop in stock prices a little more egregious.” Id. at 154. While
recognizing other banks had greater losses, Henderson continued, “... a loss is a loss, and especially if
it’s a loss that we feel was just based out of lies and misleading, misconceptions. I’ll take a 30
percent drop in Citi versus a 14 percent drop in Regions any day in that situation.” Id. at 154.
1315, 1343 (N.D.Ga.2007) (citing In re BearingPoint, Inc. Securities Litigation, 232
F.R.D. 534, 542 (E.D.Va.2006); Amchem Products, Inc. v. Windsor, 521 U.S. 591,
625, 117 S.Ct. 2231, 138 L.Ed.2d 689 (1997)(“predominance is a test readily met in
certain cases alleging ... securities fraud.” )). As previously set forth, for certification
under Rule 23(b)(3), the court must find (1) that the questions of law or fact common
to the members of the class predominate over any questions affecting only individual
members, and (2) that a class action is superior to other available methods for the fair
and efficient adjudication of the controversy.
To satisfy the predominance requirement, the plaintiffs must establish that “the
issues in the class action that are subject to generalized proof, and thus applicable to
the class as a whole ... predominate over those issues that are subject only to
individualized proof.” Jackson v. Motel 6 Multipurpose, Inc., 130 F.3d 999, 1005
(11th Cir.1997) (citations and quotation marks omitted). Although related, the
predominance criterion under Rule 23(b)(3) is far more demanding that Rule 23(a)’s
requirement of commonality. Amchem Prods., Inc. v. Windsor, 521 U.S. 591,
623–24, 117 S.Ct. 2231, 2250, 138 L.Ed.2d 689 (1997).
Defendants assert the plaintiffs cannot establish the “predominance”
requirement for two reasons: (1) the plaintiffs have not successfully invoked the fraud
-on-the-market presumption for class wide proof of reliance and (2) even if the
plaintiffs have done so, defendant Regions has successfully rebutted it. Defendants’
opposition (doc. 103), at 7.
The fraud-on-the-market theory incorporates the presumption that “the market
price of shares traded on well-developed markets reflects all publicly available
information, and, hence, any material misrepresentations.” Erica P. John Fund, Inc.
v. Halliburton Co., 131 S.Ct. 2179, 2185 (2011)(quoting Basic., at 246, 108 S.Ct.
978). “Misleading statements will therefore defraud purchasers of stock even if the
purchasers do not directly rely on the misstatements....” Basic., at 241–42, 108 S.Ct.
978 (quoting Peil v. Speiser, 806 F.2d 1154, 1160–61 (3rd Cir.1986)). The Supreme
Court explained that
[b]ecause the market “transmits information to the investor in the
processed form of a market price,” we can assume ... that an investor
relies on public misstatements whenever he “buys or sells stock at the
price set by the market.” Id., at 244, 247, 108 S.Ct. 978 (internal
quotation marks omitted); see also Stoneridge, supra, at 159, 128 S.Ct.
761; Dura Pharmaceuticals, 544 U.S., at 341–342, 125 S.Ct. 1627.
Erica P. John Fund, Inc. v. Halliburton Co., 131 S.Ct. 2179, 2185 (2011). The
Halliburton Court further noted that securities fraud plaintiffs must prove certain
things in order to invoke the fraud-on-the-market rebuttable presumption of reliance.
Id. at 2185. These include that the alleged misrepresentations were publicly known,
that the stock traded in an efficient market,10 and that the relevant transactions took
place between the time the misrepresentations were made and the time the truth was
revealed.11 Id., citing Basic Inc. v. Levinson, 458 U.S. 224, 248, n. 27 (1998).
The court has previously found that the plaintiffs allege that the defendants
misrepresented millions of dollars in non-accrual loans to keep the value of goodwill,
as reflected in quarterly reports, artificially high. See e.g, Memorandum Opinion of
June 7, 2011 (doc. 52), at 10. Defendant Regions represented that the value attached
The importance of an efficient market has been explained as
if a company trades in an efficient market, plaintiffs would be relieved of the
substantial discovery and proof burdens concerning direct reliance—which could add
months of trial preparation to this dispute. See § 21.33 of the MCL 2d (“conducting a
separate trial under Fed.R.Civ.P. 42(b) of issues that may render unnecessary or
substantially alter the scope of further discovery or trial”).
Cammer v. Bloom 711 F.Supp. 1264, 1292 n. 49 (D.N.J.1989).
In FindWhat Investor Group v. FindWhat.com,the Eleventh Circuit explained the theory
behind this concept as follows:
Because “millions of shares chang[e] hands daily,” id. at 243, 108 S.Ct. 978, and a
critical mass of “market makers” study the available information and influence the
stock price through trades and recommendations, id. at 248, 108 S.Ct. 978, an
efficient capital market rapidly and efficiently digests all available information
and translates that information into “the processed form of a market price,” id. at
244, 108 S.Ct. 978. A corollary of the efficient market hypothesis is that
disclosure of confirmatory information—or information already known by the
market—will not cause a change in the stock price. This is so because the market
has already digested that information and incorporated it into the price. See
Greenberg v. Crossroads Sys., Inc., 364 F.3d 657, 665–66 (5th Cir.2004)
(“[C]onfirmatory information has already been digested by the market and will not
cause a change in stock price.”).
In FindWhat Investor Group v. FindWhat.com, 658 F.3d 1282, 1310 (11th Cir.2011); citing Basic,
485 U.S. at 241, 108 S.Ct. 978 (quoting Peil v. Speiser, 806 F.2d 1154, 1160 (3d Cir.1986)).
to the company’s goodwill was repeatedly tested during 2007 and 2008, and properly
calculated, even though the value of its real estate investments was spiraling
downward. These assurances were placed in SEC filings, press releases and other
documents designed for public distribution, thus they were “publicly known” for
purposes of establishing fraud-on-the-market.
The New York Stock Exchange can be presumed to be an “efficient market”
for virtually all securities traded there. See Cammer v. Bloom, 711 F.Supp. 1264,
1292 (D.N.J.1989)(quoting 4 Securities Fraud and Commodities Fraud, § 8.6
(Aug.1988))(“certain markets are developed and efficient for virtually all the
securities traded there: the New York ... Stock Exchange....”). As noted by the
Securities markets like the NYSE and the NASDAQ are “open and
developed,” see Oran v. Stafford, 226 F.3d 275, 282 (3rd Cir.2000), and
are therefore “well suited for application of the fraud on the market
theory,” Freeman v. Laventhol & Horwath, 915 F.2d 193, 199 (6th
Cir.1990). Accordingly, the listing of a security on a major exchange
such as the NYSE or the NASDAQ weighs in favor of a finding of
market efficiency. See Oran, 226 F.3d at 282; see also Schleicher, 618
F.3d at 682; Freeman, 915 F.2d at 199.
In re DVI, Inc. Securities Litigation, 639 F.3d 623, 634 (3rd Cir.2011).
The court also finds that the relevant transactions took place “between the time
the misrepresentations were made and the time the truth was revealed.” Halliburton
Co., 131 S.Ct. at 2185. Based on the foregoing set of facts, the court concludes that
“the market price of [Regions] shares traded on well-developed markets reflects all
publicly available information, and, hence, [the] material misrepresentations”
concerning non-impairment to its goodwill. See Halliburton, 131 S.Ct. at 2185.
The defendants do not contest the foregoing in any meaningful manner.
Rather, the defendants dispute that the alleged misrepresentations and the subsequent
corrective statements had any effect on the market, in support of their arguments in
rebuttal to the fraud-on-the-market presumption.12 The defendants assert that the
plaintiffs have failed to “prove materiality, and instead just assume it.” Defendants’
opposition, at 10 (emphasis omitted); defendants’ sur-reply (doc. 137) at 3.
Once the presumption of reliance is successfully invoked, the court
presumes “(1) that the market price of the security actually incorporated
the alleged misrepresentations, (2) that the plaintiff actually relied on the
market price of the security as an indicator of its value, and (3) that the
plaintiff acted reasonably in relying on the market price of the security.”
Semerenko, 223 F.3d at 178–79. But a defendant may rebut the
presumption of reliance by “[a]ny showing that severs the link between
the alleged misrepresentation and either the price received (or paid) by
the plaintiff, or his decision to trade at a fair market price....” Basic, 485
U.S. at 248, 108 S.Ct. 978; see also Semerenko, 223 F.3d at 179 (“The
fraud on the market theory of reliance ... creates only a presumption,
which a defendant may rebut by raising any defense to actual reliance.”).
In re DVI, Inc., 639 F.3d at 631-632. Here, the defendants attempt to rebut the
The defendants blame much of Regions’ stock volatility on the downward spiraling market,
especially for banks. See e.g., defendant exhibits 1, 3, 4, 5 (doc. 102). Clearly, many stocks lost value
during the time frame identified by the plaintiffs as the Class Period. However, as the court
understands the plaintiffs’ claims, they allege Regions shares would not have suffered as greatly had
the alleged misrepresentations not been in place prior to the Fall of 2008.
presumption of reliance by asserting the withholding of information, producing
fraudulent information, and then producing previously withheld correct information,
was not material because it did not impact the price of Regions stock at anytime
during the class period, as defined by the plaintiffs. In their sur-reply, defendants
refine this argument to an assertion that the plaintiffs have failed to establish the
“cause and effect” factor from Cammer v. Bloom, 711 F.Supp.1264, 1285-87 (D.N.J.
1989 (listing five factors to consider in determining market “efficiency” and holding
“it would be helpful to a plaintiff seeking to allege an efficient market to allege
empirical facts showing a cause and effect relationship between unexpected corporate
events or financial releases and an immediate response in the stock price. This, after
all, is the essence of an efficient market and the foundation for the fraud on the
market theory.”). The court does not delve into the Cammer factors other than noting
that even among courts which have applied them literally, there has been no
requirement that a plaintiff show the existence of each of the five factors.13 See e.g.,
AAL High Yield Bond Fund v. Ruttenberg, 229 F.R.D. 676, 683 (N.D.Ala.2005) (“A
The purpose of the Cammer factors is solely to aid a court in determining market efficiency.
However, after suggesting the five considerations set forth in Cammer, that court held “the New York
Stock Exchange can be presumed to be an ‘efficient market’ for virtually all securities traded there.”
Cammer, 711 F.Supp. at 1292(quoting 4 Securities Fraud and Commodities Fraud, § 8.6
(Aug.1988))(“certain markets are developed and efficient for virtually all the securities traded there:
the New York ... Stock Exchange....”). Given that the NYSE is recognized as the epitome of market
efficiency, the court does not set forth here the five factors meant to help guide a court’s
determination regarding market efficiency.
plaintiff is not required to show the existence of each of these factors”); Simpson v.
Specialty Retail Concepts, 823 F.Supp. 353, 355 (M.D.N.C.1993).
Thus the court turns to the issue of whether the plaintiffs must, at this juncture,
establish a cause and effect relationship between defendant Regions’ financial
releases and an immediate response in the stock price. Plaintiffs respond to
defendants’ argument that cause and effect is absent by asserting that they do not
have to prove “loss causation” at the class certification stage.
As the Eleventh Circuit recently so eloquently explained:
Just as an efficient market translates all available truthful information
into the stock price, the market processes the publicly disseminated
falsehood and prices it into the stock as well. See id. at 241–42, 243–44,
246–47, 108 S.Ct. 978. The market price of the stock will then include
an artificial “inflationary” value—the amount that the market mistakenly
attributes to the stock based on the fraudulent misinformation. So long
as the falsehood remains uncorrected, it will continue to taint the total
mix of available public information, and the market will continue to
attribute the artificial inflation to the stock, day after day. If and when
the misinformation is finally corrected by the release of truthful
information (often called a “corrective disclosure”), the market will
recalibrate the stock price to account for this change in information,
eliminating whatever artificial value it had attributed to the price. That
is, the inflation within the stock price will “dissipate.”
In a fraud-on-the-market case, the Supreme Court allows the reliance
element of a Rule 10b-5 claim to be rebuttably presumed, so long as the
defendant’s fraudulent misstatement was material and the market was
informationally efficient. See id. at 247, 108 S.Ct. 978 (“Because most
publicly available information is reflected in market price, an investor’s
reliance on any public material misrepresentations ... may be presumed
for purposes of a Rule 10b–5 action.”). This presumption follows
directly from the efficient market hypothesis. Because an
informationally efficient market rapidly and efficiently translates public
information into the security’s price, the market price will reflect the
defendant’s fraudulent statement, and everyone who relies on the market
price as a reflection of the stock’s value in effect relies on the
defendant’s misrepresentation. Id. at 241, 108 S.Ct. 978; see also Peil,
806 F.2d at 1161. “Misleading statements will therefore defraud
purchasers of stock even if the purchasers do not directly rely on the
misstatements.” Basic, 485 U.S. at 241-42, 108 S.Ct. 978 (quoting Peil,
806 F.2d at 1160).
FindWhat Investor Group v. FindWhat.com , 658 F.3d at 1310-1311 (emphasis is
Applying FindWhat to the facts here, the court finds the market was
“informationally efficient.” Of greater concern to the court is whether the plaintiffs
have shown any misstatements which were “material.” Material facts include those
“which affect the probable future of the company and those which may affect the
desire of investors to buy, sell, or hold the company's securities.”They include any
fact “which in reasonable and objective contemplation might affect the value of the
corporation's stock or securities.” SEC v. Mayhew, 121 F.3d 44, 52 (2nd Cir.1997)
(quoting SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 849 (2nd Cir.1968) (en banc)).
Defendants allege that the misrepresentations in question had no effect on the
price per share of Regions’ stock, that the market “knew” Regions would increase its
loan loss reserves and write down its goodwill, and the market viewed goodwill as
“immaterial.” Defendants’ opposition (doc. 103) at 12. See also exhibits 2, 6, 7, 9,
12-15, 17-19. The court addresses each of these contentions in turn.
1. The misrepresentations had no effect on the price per
share of Regions stock:
2. The misrepresentations were not material because their
disclosure had no price impact:14
The defendants assert that the plaintiffs have no evidence to support their
allegations that the release of the information in question – that defendant Regions
was writing off $6 million in goodwill – “changed the total mix of information
available to investors...”15 Report of Christopher James, Ph.D., submitted as exhibit
A of defendants’ evidentiary submissions (doc. 102) at 3. The plaintiffs respond that
prior to the time of the write off, the market could not react to false statements
because these statements were in the nature of omissions, and an omission of
information cannot cause stock price movement. Plaintiffs’ reply (doc. 107) at 4.
“[T]he mere absence of a statistically significant increase in the share price in
response to fraudulent information does not ‘sever the link’ between the material
misstatements and the price of the stock. Rather, price stability may just as likely
The court finds these arguments intertwined and thus discusses them together.
Indeed, Regions' own website has a press announcement on January 20, 2009, notes "[k]ey
points for the quarter include: ... [l]oss of $9.01 per diluted share for the quarter ended December 31,
2008 was largely driven by a $6 billion non-cash charge for impairment of goodwill. Excluding
goodwill impairment, Regions' loss totals 35 cents per diluted share per quarter...."
demonstrate the market consequence of fraud where the alleged fraudulent statement
conveys that the company has met market expectations, when in fact it has not.” In
re HealthSouth Corp., 257 F.R.D. at 282 (emphasis in original), quoting In re
Scientific–Atlanta, Inc. Sec. Litig., 571 F.Supp.2d 1315, 1340–41 (N.D.Ga.2007). See
also Matrixx Initiatives, Inc. v. Siracusano, – U.S. – , 131 S.Ct. 1309, 1318 (2011).
The plaintiffs produced evidence that following Regions’ January 20, 2009,
announcement of a net loss of $5.6 billion for the fourth quarter of 2008 (driven by
the net loss of $6 billion charge for the impairment of good will), Regions stock fell
to $4.60, a drop of $1.47. See Brown declaration, ex 9 at 6. However, defendants’
expert sets forth evidence that on that same date, January 20, 2009, Wells Fargo stock
fell 23.89 percent, BB&T stock fell 11.09 percent, and Huntington Bancshares fell
16.45 percent. Dr. James’ declaration, ¶ 63, and exhibit 9 thereto. See also Dr.
James’ declaration at ¶¶ 64-66. Thus, defendants argue plaintiffs have failed to show
the cause and effect requirement of Cammer, supra.
Rather than meeting this evidence head on, the plaintiffs respond that the
question of materiality is a “merits issue” and is thus unrelated to Rule 23’s
requirements. Plaintiffs’ reply (doc. 107) at 2-3. The court disagrees.16 See
As discussed infra at 31 ff, “materiality” is not synonymous with “loss causation.” “Loss
causation” is an issue which goes to the merits of the plaintiffs’ claims.
FindWhat Investor Group v. FindWhat.com, 658 F.3d at 1310 (“In a fraud-on-themarket case, the Supreme Court allows the reliance element of a Rule 10b-5 claim to
be rebuttably presumed, so long as the defendant’s fraudulent misstatement was
material and the market was informationally efficient....” (emphasis added).
Plaintiffs allege that the defendants’ expert recognized that the stock price increased
on two of the dates defendant Regions released false statements. Plaintiffs’ reply
(doc. 107) at 4. However, the information immediately predating the September 2,
2008, increase concerned Regions’ purchase of Integrity Bank, which had been
closed by the FDIC. See James declaration, ¶¶ 69-70. Plaintiffs’ expert responds that
the misrepresentation made by defendants on September 2, 2008, unrelated to
Regions’ purchase of Integrity Bank, is unreflected in the price change, because the
misrepresentation involved the omission of information. See Steinholt declaration,
¶¶ 65-66 (“To the extent the misrepresentations involved omissions, no change in the
stock price would be expected from such omissions at the time of the omission as the
market cannot react to what it does not know.”)
Defendants rely on the August 29, 2008, purchase of Integrity Bank to explain
the increase in the stock price on September 2, 2008.17 In contrast, when a negative
August 29, 2008, was a Friday. The following Monday was Labor Day, hence the next day
the market was open was September 2, 2008, a Tuesday.
press release was given on October 21, 2008 (a Tuesday), defendants confine their
discussion of the price impact to just that date. Although plaintiffs point out Regions
stock declined 20% in the three days immediately thereafter, (compare James
declaration at ¶¶ 49-51, with Steinholt report at ¶¶ 70-71), allowing the plaintiffs the
presumption of an efficient market requires that material information be digested by
the market and effect the price immediately. This is the plaintiffs’ burden to
establish. See e.g., In re Federal Home Loan Mortgage Corp. (Freddie Mac)
Securities Litigation, – F.R.D. –, 2012 WL 1028642, 7 (S.D.N.Y.2012).
The Eleventh Circuit defines the “test of materiality in the securities fraud
context” as “whether a reasonable man would attach importance to the fact
misrepresented or omitted in determining his course of action.” SEC v. Gobel, 2012
WL 1918819, 4 (11th Cir. May 29, 2012)(quoting SEC v. Merchant Capital, LLC,
483 F.3d 747, 766 (11th Cir.2007). A fact stated or omitted is considered material
when there is a substantial likelihood that a reasonable purchaser or seller of a
security would consider the fact important in deciding whether to buy or sell. See
Gobel, 2012 WL 1918819, citing SEC v. Pirate Investor LLC, 580 F.3d 233, 240 (4th
Cir.2009) (other citations omitted). The court finds as a matter of common sense that
misstating loan loss reserves and/or the goodwill of a publicly traded company are
both considerations that a reasonable buyer or seller would find important in deciding
whether to invest in a stock or divest of the same.18
The defendants assert other events could have caused the decrease in stock
price, and direct the court to Dura Pharmaceuticals in support of their argument that
the plaintiffs have failed to establish “price impact.” Defendants’ opposition at
12-15 and n. 10 (doc. 103) . A lack of market impact may indicate the misstatements
were immaterial—a distinct basis for rebuttal. See Semerenko, 223 F.3d at 179 n. 7.
Given an efficient market, information that does not impact a security’s price is
immaterial. See Burlington, 114 F.3d at 1425; Oran, 226 F.3d at 283; Merck, 432
F.3d at 269. Thus, the failure of a corrective disclosure to affect the market price may
serve as a rebuttal to the presumption of reliance. Although the plaintiffs assert in
their response to defendants’ sur-reply that this is a “merits issue, one that will
ultimately be decided by the finder of fact on a class-wide basis” (doc. 142, at 2), the
court disagrees. The plaintiff must give an indication of the materiality of the
misstatements in response to the defendants’ rebuttal arguments that the information
releases in question had no impact on the market.
Discussing the difference between “price impact” and “loss causation” in
Halliburton, the Supreme Court held that such a requirement, i.e., that the plaintiffs
Indeed, one industry analyst reported on January 21, 2009, that “Regions took a goodwill
impairment in 4Q08, driving a high GAAP loss per share of $9.01. The goodwill impairment
accounted for $8.66 of the loss.” See doc.102-3, exhibit 28.
show a causal link between the alleged falsehood and the losses in order to invoke the
fraud on the market presumption, “is not justified by Basic or its logic.” Halliburton,
131 S.Ct. at 2185. The Court continued
To begin, we have never before mentioned loss causation as a
precondition for invoking Basic’s rebuttable presumption of reliance.
The term “loss causation” does not even appear in our Basic opinion.
And for good reason: Loss causation addresses a matter different from
whether an investor relied on a misrepresentation, presumptively or
otherwise, when buying or selling a stock.
Halliburton, 131 S.Ct. at 2186. The fraud-on-the-market presumption of reliance is
different from “loss causation.” At this juncture, plaintiffs do not bear the burden of
showing an impact on the price. In re Salomon Analyst, 544 F.3d at 483 (“the
Plaintiffs do not bear the burden of showing impact in price. The point of Basic is
that the effect on the market price is presumed based on the materiality of the
information and a well-developed market’s ability to readily incorporate that
information into the price of securities.” (emphasis in original).
The court has evidence before it that, despite Regions’ repeated assurances to
the marketplace, Regions reported a $5.6 billion net loss for the fourth quarter of
2008 due mainly to “a $6 billion non-cash charge for impairment of goodwill.” Based
on this announcement, Regions shares fell significantly.19 Clearly, representing
Regions asserts throughout its opposition that any misrepresentations regarding its goodwill,
predating its announcement of the $6 billion impairment to its goodwill were not “material.” See
defendants’ opposition, at 8-10. As quoted by the plaintiffs, one article, titled “Regions Financial
Regions had assets that it did not would and could keep the value of its stock trading
at an artificially high level.20 Just as clearly, anyone who purchased shares during the
relevant time period would have paid that inflated price, believing those shares to be
worth that price.
As aptly pointed out by the Third Circuit,
[l]oss causation is different from reliance, and requires “a causal
connection between the material misrepresentation and the loss.” Dura
Pharms., Inc. v. Broudo, 544 U.S. 336, 342, 125 S.Ct. 1627, 161
L.Ed.2d 577 (2005); see also 15 U.S.C. § 78u–4(b)(4) (requiring a
plaintiff in a private securities action to “prov[e] that the act or omission
of the defendant alleged to violate [a federal securities law] caused the
loss for which the plaintiff seeks to recover damages”). Although a drop
in a security’s price may be a result of the correction of a previous
misrepresentation, it may also have been caused by “changed economic
circumstances, changed investor expectations, new industry-specific or
Must Think We’re All Stoned,”(October 23, 2008)(submitted by defendants as exhibit 21 to doc. 102)
It all comes down to that pneumatic, intangible asset known as goodwill, which is
about as valuable as the air in a paper sack. As of Sept. 30 , according to
Regions, the bank’s goodwill was worth $11.5 billion, slightly more than the quarter
before. That’s about 59 percent of Regions’ book value, and $4.1 billion more than
what the stock market says the entire company is worth....
There’s a bigger problem here, though. By sticking to that goodwill valuation,
Regions executives might as well be telling us we can’t trust a single number of their
Irrational goodwill isn’t the only thing weird about Regions’ accounting either...
Common sense tells you a bank’s loan-loss allowance, in an economic decline, should
be rising as a percentage of nonperforming assets....
Such a statement is different from defendants’ expert’s statistics which support a lack of
evidence that Regions’ stock price increased from the misrepresentations. See Exhibit 10 to Exhibit A
to Declaration of James (doc. 102). Using misrepresentations to maintain a stock price is no less of a
fraud than use of the same to artificially increase the price.
firm-specific facts, conditions, or other events.” Dura, 544 U.S. at 343,
125 S.Ct. 1627. Therefore, at trial plaintiffs must “show that the
revelation of th[e] misrepresentation or omission was a substantial
factor in causing a decline in the security’s price, thus creating an
actual economic loss for the plaintiff.” McCabe v. Ernst & Young, LLP,
494 F.3d 418, 425–26 (3rd Cir.2007). The requirement ensures “that the
individual allegedly responsible for the misrepresentation or omission
does not become an insurer against all the risks associated with the
investment.” Id. at 425 n. 3.
In re DVI, Inc. Securities Litigation, 639 F.3d 623, 632 (3rd Cir.2011)(emphasis
added). Thus, loss causation is a trial issue. The court agrees with the plaintiffs that
the same is not a relevant consideration for a court at this juncture. See In re Salmon
Analyst, 544 F.3d at 483 (“the plaintiffs do not bear the burden of showing an impact
in the price.”).
b. Have the Defendants Rebutted Plaintiffs’ Invocation of Fraud
on the Market Presumption?21
Even though loss causation is not an issue at the class certification state, the
Basic presumption is rebuttable. Defendants assert none of the misrepresentations
identified by the plaintiffs were, in fact, material, because the market was already
aware that the statements were false. Defendants’ opposition (doc. 103), at 21.
Defendants assert that Regions publically announced that its loan loss provision
would be incrementally increased through 2008, and in fact its Form 8-K, released
The court finds defendants’ argument at section a.3 of its brief, entitled “The market
already knew” is subsumed within the discussion of whether defendants have rebutted the fraud
on the market presumption.
April 15, 2008, and Form 10-Q, released May 7, 2008, showed an increase in loan
loss reserves from $1.327 billion to $1.432 billion. The Form 8-K released July 22,
2008, and Form 10-Q, released August 7, 2008,again showed an increase in the loan
loss reserves to $1.536 billion. Similarly, the Form 8-K released October 21, 2008,
again increased loan loss reserves to $1.546 billion. The January 20, 2009, Form 8-K,
for the last quarter of 2008, increased loan loss reserves to $1.9 billion. Based on
these disclosures, defendants assert any misrepresentations were immaterial, because
the market was aware the loan loss reserves were going to increase. Defendants’
response, at 21-27.
The plaintiffs respond that they do not allege that investors were unaware that
Regions planned to increase its loan loss provision or even write down its good will.
Plaintiffs’ response (doc. 107), at 34. Rather, plaintiffs allege that the loan loss
reserves were false and misleading, and that goodwill was overstated, false and
misleading, and that the defendants intentionally misrepresented these to suggest a
financial situation that was not true. Plaintiffs’ response (doc. 107), at 34, see also
defendants’ opposition (doc. 103) at 28 (stating on July 1, 2008, Regions publicly
disclosed that the SEC questioned Regions’ assertion its goodwill was not
Given the evidence that Regions’ statements of goodwill and loan loss reserves
were known by the market to be inflated, long before public corrections were made,
is more troubling for the plaintiffs. If the market was already aware that Regions’
statements of financial condition were false, then there could be no injury from these
statements, or the later official corrective statements. While the court finds, and
common sense dictates, that market knowledge that numbers will change is not the
same as market knowledge that the numbers provided are false, or intentionally
misleading, the misleading statements must have some effect on the market to be
material. Providing false information already known to be false cannot supply the
Thus, while the court finds that defendants may be correct in their assumption
that the market knew Regions’ loan loss provision was understated in any particular
quarter, or that goodwill was overstated, this is not tantamount to knowledge that
Regions was intentionally and falsely overstating its position to appear more
financially secure than was in fact true. However, without some indication that harm
resulted from such misstatements, plaintiffs lose the fraud-on-the-market presumption
Regions was accused of “insult[ing] the public’s intelligence by publishing asset values that
defy logic. Saying Regions’ goodwill is worth $11.5 million would be like a hen bragging that her
unlaid egg weighs more than she does.” Defendants’ opposition (doc. 103), at 28.
of reliance. Therefore, assuming that plaintiffs have indeed shown entitlement to the
fraud-on-the-market presumption, the court next examines whether the defendants
have successfully rebutted the same.
The law is clear that reliance by investors on alleged material omissions may
be presumed. In re Dynex Capital, Inc. Securities Litigation, 2011 WL 781215, 7
(S.D.N.Y.2011), citing Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128,
153 (1972); In re Merrill Lynch Auction Rate Sec. Litig., 704 F.Supp.2d 378, 397
(S.D.N.Y.2010). Less clear is the law on how that presumption may be rebutted.
Trying to coalesce Halliburton and Basic, has lead to varied results across the
Circuits. Compare Connecticut Retirement Plans and Trust Funds v. Amgen Inc.,
660 F.3d 1170, 1177 (9th Cir.2011)23 (“a plaintiff need not prove materiality at the
class certification stage to invoke the presumption; materiality is a merits issue to be
reached at trial or by summary judgment motion if the facts are uncontested. The only
elements a plaintiff must prove at the class certification stage are whether the market
for the stock was efficient and whether the alleged misrepresentations were public”)
with In re Salomon Analyst Metromedia Litigation, 544 F.3d 474, 483 (2nd
Cir.2008)(“[t]he burden of showing that there was a price impact is properly placed
On June 11, 2012, the United States Supreme Court granted the petition for a writ of
certiorari in Amgen, Inc. v. Connecticut Retirement Plans. See id., --- S.Ct. ----, 2012 WL
692881, 1 (2012).
on the defendants at the rebuttal stage ... Basic made clear that defendants could
‘rebut proof of the elements giving rise to the presumption, or show that the
misrepresentation in fact did not lead to a distortion of price....’ 485 U.S. at 248, 108
S.Ct. 978 .”); Pennsylvania Ave. Funds v. Inyx Inc., 2011 WL 2732544, 8
(S.D.N.Y.2011)(“One way to “sever the link” is to demonstrate that the alleged
misrepresentations were immaterial because they did not lead to a distortion in price.
Basic, 485 U.S. at 248–49.”).
Defendants’ expert, Christopher M. James, Ph.D., asserts that the alleged
misrepresentations “did not change the total mix of public information that was
known to the market. Because the alleged misrepresentations did not change the total
mix of information available on the market, investors could not have relied on them
when making their purchase (or sale) decisions.” See defendants’ ex. A to doc. 102,
¶ 20. Thus, Dr. James concludes that plaintiffs’ claim that the stock price reacted to
the “news events” is inconsistent with the claim that the stock traded in an efficient
market. Id. He uses quotes from analysts to demonstrate that “book value is inflated
due to goodwill associated with the acquisition of AmSouth” was common
knowledge during the class period. Id., ¶ 28.
The Court of Appeals for the Second Circuit interpreted Basic to mean “that
a successful rebuttal defeats certification by defeating the Rule 23(b)(3)
predominance requirement. Hence, the court must permit defendants to present their
rebuttal arguments before certifying a class....” Salomon, 544 F.3d at 485 (quotation
and citation omitted). Applying Salomon, the Third Circuit adopted the Second
Circuit’s holding that defendants have the burden “to show that the allegedly false or
misleading material statements did not measurably impact the market price of the
security,” In re DVI, Inc. Securities Litigation 639 F.3d 623, 637-638 (3rd Cir.2011),
citing In re Salomon Analyst Metromedia Litigation, 544 F.3d 474, 486 n. 9 (2nd
Cir.2008). The Salomon court further ruled that “Any showing that severs the link
between the alleged misrepresentation and ... the price ... will be sufficient to rebut
the presumption of reliance.” Id., at 484. The Third Circuit ultimately disagreed with
the Second Circuit’s insistence that loss causation was thus a necessary step to
prevent rebuttal of the presumption. See In re DVI, Inc. Securities Litigation 639
F.3d 623, 636-637 (3rd Cir.2011).
Defendants make the same erroneous arguments here. In their opposition, the
defendants repeatedly assert that none of the misrepresentations were material
because the marked price never reflected the misrepresentations. Defendants mix
price impact and loss causation. Proof of the cause of plaintiffs’ losses as a result of
the defendants’ misrepresentations is not before the court at this time. Such a
discussion is in the realm of “loss causation” and reserved for a trial on the merits.
As another court has found
To demonstrate materiality at the class certification stage, plaintiffs need
not submit evidence that misstatements and omissions artificially
inflated the price of Sadia’s ADRs at the time they were made or
throughout the class period. Such a requirement would unfairly and
unnecessarily heighten plaintiffs’ burden at this stage. Instead, plaintiffs
need only meet the “total mix” standard adopted in Basic and routinely
applied by courts throughout the country.
In re Sadia, S.A. Securities Litigation, 269 F.R.D. 298, 313-314 (S.D.N.Y.2010).
There is no burden on the plaintiffs to prove the alleged misrepresentations “‘moved
the market,’ i.e., had a measurable effect on the stock price.” Salomon Analyst, 544
F.3d at 482. By adopting the “total mix” standard of materiality, the Basic Court
“fram[ed] the question of materiality in terms of how the information would be
viewed by a reasonable investor, rather than in terms of actual impact on market
price.” Salomon Analyst, 544 F.3d at 482.
The defendants argue that the plaintiffs have not shown that the price decrease
on January 20, 2009, was due to the particular announcement the plaintiffs claim
because Regions released other information unrelated to the plaintiffs’ allegations at
the same time. See James report, ¶ 60. However, the entire purpose of the
presumption is to avoid turning a class certification motion into a trial on the merits
in the issue of reliance. See e.g, Schleicher v. Wendt 618 F.3d 679, 685 (7th
Cir.2010)(“ Defendants say that, before certifying a class, a court must determine
whether false statements materially affected the price. But whether statements were
false, or whether the effects were large enough to be called material, are questions on
The court finds that the plaintiffs have satisfied their burden to establish that
the questions of law or fact common to the members of the class predominate over
any questions affecting only individual members, for purposes of Rule 23(b)(3),
2. Is a class action superior to other available methods for the fair and
efficient adjudication of the controversy?
Superiority is determined by comparing the efficiency and fairness of all
available methods of adjudicating the matter. Relevant considerations include (a) the
class members’ interests in individually controlling separate actions; (b) the extent
and nature of any litigation already begun; (c) the desirability of concentrating the
litigation in this particular forum; and (d) the likely difficulties in managing a class
action. See Rule 23(b)(3)(A)-(C), Fed.R.Civ.Pro.
The court finds that a class action for the pursuit of these claims is superior to
potentially thousands of individual claims against Regions, each of which will require
extensive expert testimony and discovery concerning the effects of the alleged
misrepresentations on the value of the stock at different points in time. In fact, should
any plaintiff prove the impact of the alleged misrepresentations on the value of a
share in Regions, then calculating damages for every single stockholder becomes a
mere mathematical exercise, in need of no further evidence. The court agrees with
plaintiffs that the sheer number of potential plaintiffs numbers in at least the
A finding that common issues predominate over individual issues leads to an
inescapable conclusion that a class action presents the more desirable vehicle for
adjudicating the plaintiffs' claims. In re HealthSouth Corp. Securities Litigation, 261
F.R.D. 616, 646 (N.D.Ala.2009) (“...Defendants’ common course of deceptive
conduct injured the Bondholder Plaintiffs and every other member of the Class in the
same manner. Because these claims involve many common questions of law and fact
applicable to the claims of a large number of purchasers of HealthSouth bonds, a class
action will be superior to other available methods for fairly and efficiently
adjudicating this controversy.”)..). “As a general rule, class action treatment presents
a superior method for the fair and efficient resolution of securities fraud cases.” In re
Netbank, Inc. Securities Litigation 259 F.R.D. 656, 676 (N.D.Ga.2009); citing In re
HealthSouth, 257 F.R.D. at 284. See also Bruhl v. Price Waterhousecoopers Intern.,
257 F.R.D. 684, 699 (S.D.Fla.2008); In re Scientific-Atlanta, Inc. Securities
Litigation, 571 F.Supp.2d 1315 (N.D.Ga.2007).
Turning to the other factors, the court is unaware of any other litigation already
begun against defendant Regions on the basis of § 10-b of the Securities and
Exchange Act. This particular forum is a logical location for such litigation as
defendant Regions is headquartered here. The court anticipates no likely difficulties
in managing a class action.
The defendants do not address the above issues, but rather challenge the
proposed class period. Defendants’ opposition, at 34. Specifically, the defendants
assert there is no basis for selecting February 27, 2008, as the date to begin a “class
period.” Id., at 34-35. Although defendant Regions filed its 2007 Form 10-K that
day, that 10-K concerned events for the fiscal year which ended December 31, 2007.
Defendants rely on Wal-Mart Stores, Inc., v. Dukes, 131 S.Ct. 2541 (2011), to
support their position that “plaintiffs cannot just plead a post-Class Period example
of loan mishandling, then plead a bunch of general facts about how it was also
happening in 2008, and hope to make an entire class period based on them.”
Defendants’ opposition (doc. 103), at 37. However, Wal-Mart does not provide the
support for defendants argument that defendants believe it does. That case had
nothing to do with stock, stockholders, securities litigation, or even appropriate class
periods. Rather, the quote defendants’ rely on actually states: “A party seeking class
certification must affirmatively demonstrate his compliance with the Rule—that is,
he must be prepared to prove that there are in fact sufficiently numerous parties,
common questions of law or fact, etc.” Wal-Mart Stores, 131 S.Ct. at 2551 (emphasis
in original). As set forth above, the court finds this burden has been met.
Plaintiffs respond that the Class Period should properly commence on the date
of filing of the 2007 Form 10-K, February 20, 2008, as that was the date that Regions
made its first public filing in which allegedly “goodwill was overstated, loan loss
reserves were understated and defendants included statements falsely describing the
Special Assets Group....” Plaintiff’s reply (doc. 107) at 48-49, n. 32. The court finds
this is a logical date on which to allege the Class Period began. Should the
defendants disagree, they may prove at trial that such a date does not embody the
allegedly first fraudulent public statement of goodwill and loan loss reserves.
Having considered the foregoing, and being of the opinion that the motion for
class certification is due to be granted;
It is therefore ORDERED by the court that plaintiffs’ motion for class
certification (doc. 94) be and hereby is GRANTED. The court ORDERS the
following class be certified, with the plaintiffs to bear the burden and costs of
preparing the notices and notifying class members:
All persons or entities who, between February 27, 2008, and January 20,
2009 (the “Class Period”), purchased or otherwise acquired the
securities of Regions Financial Corporation (“Regions”), and were
damaged thereby. Excluded from the Class are current and former
defendants, members of the immediate family of any current or former
defendants, the directors, officers, subsidiaries and affiliates of Regions,
any person, firm, trust, corporation, officer, director, or other individual
or entity in which any current or former defendant has a controlling
interest, and the legal representatives, affiliates, heirs, successors-ininterest or assigns of any such excluded party.
Counsel are directed to confer and to prepare and submit to the court a proposed
notice to class members for the above described class within fifteen (15) days of
The court’s previous Order appointing class counsel and class representatives
It is further ORDERED by the court that, having found that a hearing on the
motion for class certification would not be of substantial assistance, defendants’
motion for a class certification hearing (doc. 140) is DENIED.
DONE and ORDERED this the 14th day of June, 2012.
INGE PRYTZ JOHNSON
U.S. DISTRICT JUDGE
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