Luman v. Anderson et al
ORDER granting in part and denying in part 66 plaintiffs' motion to certify class. ORDER denying 111 defendants' motion to strike. The Court approves Building Trades United Pension Trust Fund as a class representative for the following class: All persons or entities who purchased or otherwise acquired publicly traded securities of FCStone Group, Inc. (FCStone) on or after November 3, 2008 and who sold those securities on or after February 24, 2009, except for (i) the defendants i n this case, (ii) members of any defendants immediate family, (iii) any entity in which a defendant has or had a controlling interest, (iv) officers and directors of FCStone, and (v) the legal representatives, heirs, successors or assigns of any such excluded party.The Court appoints the law firm of Robbins Geller Rudman & Dowd LLP as Lead Counsel for the Class, and the law firm of Yonke & Pottenger LLC as Liaison Counsel for the Class. Within thirty days, Lead Counsel shall propose an appropriate form of Notice to be distributed to class members as well as a proposed method of distribution. Signed on 02/10/12 by District Judge Howard F. Sachs. (Duer, Tina)
IN THE UNITED STATES DISTRICT COURT FOR THE
WESTERN DISTRICT OF MISSOURI
PAUL LUMEN, et al.,
PAUL G. ANDERSON, et al.,
Case No. 08-0514-CV-W-HFS
ORDER AND OPINION (1) GRANTING IN PART AND DENYING IN PART
PLAINTIFFS’ MOTION TO CERTIFY CLASS AND (2) DENYING MOTION TO STRIKE
Pending is Plaintiffs’ Motion to Certify Class. Also pending – although not fully
briefed – is Defendants’ Motion to Strike. For the following reasons, latter motion (Doc.
# 114) is denied and the former motion (Doc. # 66) is granted in part and denied in part.
This case alleges violations of the Securities Exchange Act on the part of
FCStone and certain of its officers and directors. A Consolidated Complaint was filed
on September 25, 2009. In my November 2010 Order I addressed the three claims
presented at that time: (1) false reassurances in April 2008 about a hedging
arrangement, (2) failure to reveal the Cotton bad debt expense in March 2008, and (3)
misstatements and concealments involving the Scott Adams account. Only the third of
these claims was held to satisfy the Private Security Litigation Reform Act’s (“PSLRA’s”)
pleading requirements. Specifically, I held the case could proceed on the theory that
“the Adams bad debt situation was willfully minimized on November 3 and 4, 2008,” and
in a footnote “reserve[d] a final ruling on whether actionable misrepresentation before
November is alleged regarding” the Adams debt. I am now required to consider this
issue because Plaintiffs are asking that the class period commence on April 14, 2008.
Specifically, Plaintiffs suggest the following class definition:
All persons or entities who purchased or otherwise acquired publicly
traded securities of FCStone Group, Inc. from April 14, 2008 through
February 24, 2009, inclusive.1
Plaintiffs’ proposed definition is not binding, and I am free to modify it if I deem it
necessary to do so. E.g., In re Monumental Life Ins. Co., 365 F.3d 408, 414 & n.7 (5th
Cir.), cert. denied, 543 U.S. 870 (2004) (citing cases).
A. Class Definition and the PSLRA
The class definition must be ascertained before addressing Rule 23's
requirements, and ascertaining the class definition requires consideration of the PSLRA.
I previously held the statements made on November 3 and November 4, 2008, satisfied
the pleading requirements. The statements made on that date announced FCStone’s
exposure on the Adams account but understated the extent of that exposure. I noted a
more accurate – but still incomplete – statement was made on February 24, 2009.
Plaintiffs propose February 24, 2009, as the date upon which corrective information was
disclosed, and this is acceptable – but Plaintiffs also propose a beginning date that is
well before the date when incorrect information was publicized. Plaintiffs justify this
approach based on public statements made in April and July 2008 – statements that
were not specifically pled as connected to the Adams debt until after I issued the
November 2010 ruling. Therefore, unlike the November 2008 statements I have already
considered, the April and June statements have not been held to be sufficient to
maintain a cause of action. Plaintiffs insist the length of the class period is a merits
question, but (1) before it can be a merits question it must be properly pled, (2) the class
period cannot begin before an actionable statement or concealment occurs, and (3) I
Certain customary exclusions have been specified, including defendants,
officers and directors.
must make a preliminary inquiry to ascertain the class period to determine whether a
class can even be certified and to insure that proper notices can be distributed.
The PSLRA “dictates a modified analysis due to its special heightened pleading
rules.” Kushner v. Beverly Enterprises, Inc., 317 F.3d 820, 824 (8th Cir. 2003). The
heightened pleading standard is intended to eliminate abusive securities litigation and
put an end to the practice of pleading “fraud by hindsight.” In re K-Tel Int’l, Inc. Sec.
Litig., 300 F.3d 881, 889 (8th Cir. 2002). The PSLRA requires plaintiffs “to specify each
misleading statement or omission and specify why the statement or omission was
misleading.” Kushner, 317 F.3d at 826 (citing 15 U.S.C. § 78u-4(b)(1)). “The PSLRA
requires that the complaint state ‘with particularity’ facts giving rise to a ‘strong
inference’ that the defendants acted with the scienter required for the cause of action.”
In re Navarre Corp. Sec. Litig., 299 F.3d 735, 745 (8th Cir. 2002) (quoting 15 U.S.C. §
78u-4(b)(2)). “Scienter can be established in three ways: (1) from facts demonstrating a
mental state embracing an intent to deceive, manipulate, or defraud; (2) from conduct
which rises to the level of severe recklessness; or (3) from allegations of motive and
opportunity.” Cornelia I. Crowell GST Trust v. Possis Medical, Inc., 519 F.3d 778, 782
(8th Cir. 2008).
I conclude the class period cannot commence in April or June 2008. Plaintiffs
allege that on April 14, 2008, FCStone filed with the SEC a Form 10-Q describing the
company’s business. The Form 10-Q explained that “[a]s a clearing broker, we act on
behalf of our customers for all trades consummated on exchanges. Accordingly, we are
responsible for our customers’ obligations with respect to these transactions. We
attempt to mitigate our credit risk by requiring sufficient margining or security deposits.”
Similar statements were made in next quarter’s Form 10-Q, filed on July 15. Nothing
about these statements suggests an intent to defraud, and Plaintiffs have failed to
suggest any basis for believing an intent to defraud exists. All Plaintiffs have done is (1)
identify a general statement about business operations, (2) allege the efforts described
as an “attempt to mitigate risk” failed, and (3) conclude that this constitutes fraud. The
allegations fall short of what is necessary under the law. “Congress did not merely
require plaintiffs to provide a factual basis for their scienter allegations, i.e., to allege
facts from which an inference of scienter rationally could be drawn. Instead, Congress
required plaintiffs to plead with particularity facts that give rise to a strong - i.e., a
powerful or cogent - inference.” Tellabs, 551 U.S. at 310 (internal citations and
quotations omitted). The Court must determine “‘whether all of the facts, taken
collectively, give rise to” an inference of scienter that is “‘cogent and at least as
compelling as any opposing inference one could draw from the facts alleged.’” In re
NVE Corp. Sec. Litig., 527 F.3d 749, 752 (8th Cir. 2008) (quoting Tellabs, 551 U.S. at
321-24). At most, Plaintiffs allege Defendants’ hope that they had adequately protected
FCStone from risk proved incorrect – but bad business decisions do not constitute
securities fraud. K-Tel Int’l, 300 F.3d at 891; see also Santa Fe Indus. v. Green, 430
U.S. 462, 474-80 (1977).
I conclude no inference of scienter has been created with respect to statements
made before November 2008, so the class period cannot commence before then. The
class period commences on November 3, 2008, when the first incorrect statement about
the Adams account was made. In this regard, it is important to note that November 3 is
the beginning date not because the stock price dropped precipitously on this day, but
rather because this is the day that false statements about the extent of FCStone’s
exposure were made. A drop in stock price is not automatically the product of fraud;
here the price dropped significantly because some quantum of bad news was
disseminated, but arguably the price did not fall “enough” because complete and truthful
information was not disseminated.
There is another flaw in the class definition: it includes individuals who will not
have damages. The Supreme Court has held a plaintiff cannot prevail if all they do is
establish the stock’s price was inflated due to fraudulent conduct. When the fraud on
the market theory is employed (as Plaintiffs attempt here, and as will be discussed later
in this Order), “an inflated purchase price will not itself constitute or proximately cause
the relevant economic loss.” Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 342
(2005). No loss is incurred at the moment of purchase; loss can be incurred only upon
the sale of the security. Thus, if an investor purchases stock before the fraud occurs
and sells after the fraud occurs (but before the truth is revealed), the investor cannot
have been harmed by the fraud. Similarly, if an investor both buys and sells the stock
after the fraud occurs and before the truth is revealed, any fluctuation in the stock price
cannot be attributed to the fraud. Id. at 342-43; Glaser v. Enzo Biochem, Inc., 464 F.3d
474, 478-79 (4th Cir. 2006), cert. denied, 549 U.S. 1304 (2007); see also FindWhat
Investor Group v. FindWhat.com, 658 F.3d 1282, 1312 n.29 (11th Cir. 2011). This
means that the only people who have suffered legally cognizable damage are those
who (1) purchased stock after the fraudulent statement was made on November 3, 2008
and (2) still held their stock when truthful corrective information was communicated on
February 24, 2009.2 The class definition must be modified accordingly, and the
modified definition is the one that will be considered.
B. Rule 23's Requirements
Federal Rules of Civil Procedure 23(a) requires the moving party, as a
prerequisite applicable to all class actions, to show: (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 of 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. In addition to meeting the prerequisites of
23(a), the class must qualify under one of the provisions of Rule 23(b). Plaintiffs
contend they have satisfied Rule 23(b)(3), which requires that “the questions of law or
fact common to the members of the class predominated over any questions affecting
only the individual members, and that a class action is superior to other available
methods for the fair and efficient adjudication of the controversy.”
1. Rule 23(a)’s Requirements
Of course, this assumes the announcement of corrective information on
February 24, 2009, caused a drop in the stock price. This issue is not presently before
Rule 23(a)(1) requires the proposed class be “so numerous that joinder of all
members is impracticable.” The Record establishes good reason to believe this
requirement has been satisfied even for the shortened class period described above
and there is no dispute among the parties on this issue. Nothing more needs to be said
The commonality requirement of Rule 23(a)(2) and the typicality requirement of
Rule 23(a)(3) are separate requirements, but they “tend to merge” and are often
discussed together. General Tele. Co. of the Southwest v. Falcon, 457 U.S. 147, 157
n.13 (1982). The adequacy requirement of Rule 23(a)(4) also merges with typicality.
Amchem Products, Inc. v. Windsor, 521 U.S. 591, 626 n.20 (1997). While these three
components are distinct, the discussion may overlap.
Commonality exists when the “legal question linking the class members is
substantially related to the resolution of the litigation.” DeBoer v. Mellon Mortgage Co.,
64 F.3d 1171, 1174 (8th Cir. 1995). Commonality “does not require that every question
of law or fact be common to every member of the class, and may be satisfied, for
example, where the question of law linking the class members is substantially related to
the resolution of the litigation even though the individuals are not identically situated.”
Paxton v. Union Nat’l Bank, 688 F.2d 552, 561 (8th Cir. 1982), cert. denied, 460 U.S.
1083 (1983) (quotation omitted). The link is sufficient if the class members have
suffered the same injury, and a question is common if it will generate an answer that
applies equally to all of the class members. Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct.
2541, 2551-52 (2011). There is no serious dispute that common issues exist; the
common issues include the nature of the public statements made, the extent to which
those statements were false, and Defendants’ knowledge of (or reckless disregard for)
Unlike commonality (which focuses on the class members), typicality and
adequacy focus on the class representatives. Typicality requires the would-be
representative have the same or similar grievances as the members of the class.
Alpern v. UtiliCorp United, Inc., 84 F. 3d 1525, 1540 (8th Cir. 1996). The burden of
demonstrating typicality is fairly easy to meet so long as other class members have
claims similar to the named plaintiff. DeBoer, 64 F. 3d at 1174. “Factual variations in
the individual claims will not normally preclude class certification if the claim arises from
the same event or course of conduct as the class claims, and gives rise to the same
legal or remedial theory.” Alpern, 84 F.3d at 1540. Adequacy generally requires “(1)
that the plaintiff’s attorney is qualified, experienced, and will competently and vigorously
prosecute the suit, and (2) that the interest of representative is not antagonistic to or in
conflict with other members of the class.” Griffin v. Carlin, 755 F. 2d 1516, 1533 (11th
Defendants posit a series of arguments regarding the two proffered class
representatives – Bruce Wells (“Wells”) and Building Trades United Pension Trust Fund
(“Building Trades”) – that could apply equally to either typicality or adequacy. They first
contend Wells is not an appropriate representative, and I agree because Wells is not a
member of the class. Wells’ transactions are summarized as follows:
450 shares purchased in May 2008
2000 shares purchased in June 2009
all 2,450 shares sold on July 8, 2009
Wells did not purchase stock while the market was affected by Defendants’ allegedly
fraudulent statements. He is not a member of the class, so his claims are not typical
and he cannot adequately represent the class.
Building Trades does not suffer from the same problem as Wells. Building
Trades’ transactions are summarized as follows:
38,900 shares purchased between July 2008 and September 2008
10,900 shares purchased on November 4, 2008
10,200 shares purchased on November 5, 2008
all 60,000 shares sold between February 24 and February 26, 2009
While the initial purchases between July 2008 and September 2008 do not place
Building Trades in the class, the purchases on November 4 and 5 do. Building Trades
There are no arguments regarding the adequacy of counsel, so nothing more
needs to be said about this issue.
also sold those 21,100 shares after Plaintiffs allege the truth was revealed, so Building
Trades can claim to have suffered damage. Its claims are typical of other class
members and Building Trades can adequately represent the interests of the class
Defendants argue Building Trades is not typical because it has been involved in
other securities fraud cases, which will expose it to unique defenses that other class
members will not have to face. I reject this argument because Defendants have not
identified any defenses that will be uniquely applicable to Building Trades, and under
Alpern this factual difference is of no legal consequence. Defendants also contend that
Building Trades is involved in so many suits that it is “overstretched” and cannot give
proper attention to this lawsuit. I am simply unpersuaded by this argument. Nothing in
the Record suggests Building Trades is less capable than any other class
representative. The fact that Building Trades may rely heavily on Class Counsel is not
a negative factor, as I would expect any class representative to rely on the advice of
counsel in making decisions for the benefit of the class.
C. Rule 23(b)(3)’s Requirements
Plaintiff seeks certification under 23(b)(3), which requires that questions of law or
fact predominate over any individual questions and that a class action is superior to
other available methods for the fair and efficient adjudication of the controversy.
Amchem Products, Inc., 521 U.S. at 622. The predominance inquiry tests whether the
proposed classes are sufficiently cohesive to warrant adjudication by representation. Id.
at 623. Predominance is a test readily met in certain cases alleging securities fraud. Id.
at 625. This is so because the plaintiffs usually do not need to prove actual reliance on
the fraudulent statement (as would be necessary in a case involving common-law
fraud). As the Supreme Court explained, “[a]n investor who buys or sells stock at the
price set by the market does so in reliance on the integrity of that price. Because most
publicly available information is reflected in market price, an investor’s reliance on any
public material misrepresentations, therefore, may be presumed . . . .” Basic Inc. v.
Levinson, 485 U.S. 224, 247 (1988). Consequently, “where materially misleading
statements have been disseminated into an impersonal, well-developed market for
securities, the reliance of individual plaintiffs on the integrity of the market price may be
presumed.” Id. As explained by the Seventh Circuit,
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. When a company's stock trades in a large and efficient market,
the contestable elements of the Rule 10b–5 claim reduce to falsehood,
scienter, materiality, 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.
Schleicher v. Wendt, 618 F.3d 679, 682 (7th Cir. 2010) (internal citations omitted).
If the fraud on the market theory is employed, then individual class members
need not demonstrate reliance. In that event, the only individual issues would relate to
damages, and the common issues would predominate over the individual issues. On
the other hand, if the fraud on the market theory is not employed, each class member
must demonstrate reliance on the misstatements on November 3 – thereby preventing
the common issues from predominating over the individual issues. The critical question,
then, is: can Plaintiffs employ the fraud on the market theory?
Defendants argue the “fraud on the market” theory is inapplicable because
FCStone’s stock did not trade on an efficient market. They makes this argument even
though FCStone’s stock traded on the NASDAQ: one of the two largest stock
exchanges in the United States, the largest electronic-equity securities trading market in
the United States, and one of the largest stock exchanges in the world. It would be
remarkable for a court to conclude NASDAQ is not an efficient market4 – which is why
“[s]ecurities traded on NASDAQ are often presumed to be traded on an efficient
market.” Thompson v. RelationServe Media, Inc., 610 F.3d 628, 694 (11th Cir. 2010)
(Tjoflat, J., concurring in part and dissenting in part); see also In re DVI, Inc. Sec. Litig.,
639 F.3d 623, 634 (3d Cir. 2011) (listing “on a major exchange such as the NYSE or the
NASDAQ weighs in favor of a finding of market efficiency”); In re Moody’s Corp. Sec.
Litig., 274 F.R.D. 480, 489 n.3 (S.D.N.Y. 2011) (discussing NYSE); In re Juniper
Networks, Inc. Sec. Litig., 264 F.R.D. 584, 591 (N.D. Cal. 2009) (“Plaintiffs made a
prima facie showing that the fraud-on-the-market presumption of reliance applied
because . . . Juniper’s stock was actively traded on an efficient market – the
NASDAQ.”); In re HealthSouth Corp. Sec. Litig., 261 F.R.D. 616, 635 (N.D. Ala. 2009)
(discussing NYSE); Wagner v. Barrick Gold Corp., 251 F.R.D. 112, 119 (S.D.N.Y.
2008).5 Indeed, Basic itself recognized the NYSE as an efficient market, 485 U.S. 249
n.29 – and there is no material difference between NYSE and NASDAQ.
Nonetheless, Defendants contend the requirements of an efficient market are not
satisfied. They rely on requirements derived from the District Court of New Jersey’s
decision in Cammer v. Bloom, 711 F. Supp. 1264 (D.N.J. 1989), which have been
adopted by many courts (but, interestingly, not the Eighth Circuit). Both parties invite
me to consider the Cammer factors, and so I shall. However, in applying the Cammer
factors it is important to note that even if the NASDAQ is not to be automatically
accepted as an efficient market, the aforementioned cases (and others too numerous to
cite) establish the NYSE and NASDAQ are at least entitled to a presumption of
efficiency – making it incumbent upon Defendants to rebut the presumption.
This does not necessarily apply to stocks that trade over the counter or on the
“Pink Sheets” – markets that typically have less volume, less market makers, and less
analyst coverage than the NASDAQ’s “main exchange.”
The Eighth Circuit’s decision in In re NationsMart Corp. Securities Litig., 130
F.3d 309 (8th Cir. 1997), cert. denied, 524 U.S. 927 (1998) is not determinative. That
case involved allegedly fraudulent statements made in connection with an IPO of stock
that was going to trade on the NASDAQ in the future, not statements made in
connection with stock that was already trading on the NASDAQ.
As explained by various courts, the Cammer factors are:
The average weekly trading volume;
The number of security analysts following and reporting on the stock;
The extent to which market makers trade in the stock;
Whether an SEC registration Form S-3 has been filed; and
Whether there is a relationship between material disclosures and the
E.g., DVI, Inc., 639 F.3d at 633 n.14; Teamsters Local 445 Freight Div. Pension Fund v.
Bombardier Inc., 546 F.3d 196, 200 (2d Cir. 2008). These items are not a checklist, but
rather are factors to be considered. E.g., Unger v. Amedisys Inc., 401 F.3d 316, 323
(5th Cir. 2005). Of the five factors, the fifth is the most important. E.g., Teamsters Local
445, 546 F.3d at 208.
Defendants do not contest the first four factors, but because they are factors they
must be addressed (albeit briefly) so they can be properly considered with the fifth
factor. During the relevant time period, FCStone had approximately 28 million shares
outstanding and the average daily trading volume was approximately 700,000 shares.
Between seventy and 140 institutional investors were shareholders, owning between
eight and twenty million shares. Fifteen analysts covered FCStone stock during the
class period, and there were twelve market makers. Finally, FCStone filed an SEC
Form S-3 during the class period. I note that less-favorable facts have been found to
substantiate an efficient market. Inasmuch as Defendants do not contest the issue,
there is no need to belabor the point with detailed case citations or analysis.
The crux of Defendants’ argument is that FCStone’s stock price does not
assimilate and react to public information because
the price moved on days where no company-specific news was announced,
such movements occurred on days as frequently as days when news about
FCStone was disseminated to the market,
stock returns were predictable.
There are several problems with Defendants’ arguments. First, they rely on
factors that are not legally relevant. This does not mean that Defendants (or their
expert, Paul Gompers) are incorrect in what they say – it means that Defendants (and
their expert) often describe a different conception of an efficient market than is used by
There are three versions of the efficient capital market hypothesis:
weak, semi-strong, and strong. The weak version is that prices
incorporate information in a way that prevents the historical pattern of
prices from being used to predict changes in price. . . . The semi-strong
version adds that the value of new information is itself reflected in prices
quickly after release, so that only the first recipient of this information (or
someone with inside information) makes a profit; everyone else might as
well ignore the information and rely on the prices. The strong version
adds a claim that the price set in this way is right, in the sense that it
accurately reflects the firm's value.
Many economists think that the strong form of the hypothesis has
been refuted, but the weak and semi-strong forms are widely accepted.
And the fraud-on-the-market doctrine rests on the semi-strong form.
Schleicher, 618 F.3d at 684-85 (internal citations omitted). Defendants contend (and
their expert opines) the market for FCStone stock was inefficient because the stock
price was not accurately valued. This implicates the “strong” form of efficient market,
which is not the sort of market needed to support the fraud on the market described in
Basic. “[T]he fraud-on-the-market presumption of reliance does not depend on the
accuracy of the market price, and whether it mirrors the best possible estimates, in light
of all available information, of the actual economic values of securities in terms of their
expected risks and returns.” In re Xcelera.com Sec. Litig., 430 F.3d 503, 510 (1st Cir.
2005) (internal quotations omitted). The only question is whether the market rapidly
assimilates public information – not whether it behaves in a manner that is completely
rational or accurate.
Second, Defendants argue that the market is inefficient because FCStone’s stock
experienced “statistically significant” price changes when there was no companyspecific news. Gompers concluded that, for the time period examined, 35% of the days
on which FCStone exhibited statistically significant price changes there was no
company-specific news.6 Of course, this means that 65% of the time FCStone’s
statistically significant stock price moves are related to company-specific news. The
expert also concluded FCStone’s stock was approximately one-and-a-half to two times
as likely to experience a change in stock price on days when company-specific news
was announced than on days when it was not. However, for legal purposes, the critical
question is whether the price quickly absorbs and reflects news about the company
because this is what allows the legal presumption that (1) the price incorporates public
information and (2) the investor relied on the price as the repository of that public
information. Gompers’ report establishes that when news about the company is made
public, the company’s stock price immediately incorporates the information. This is the
essence of an efficient market – perhaps not for an economist’s purposes, but for
purposes of Basic.
Gompers indicated FCStone’s stock did not incorporate public information, but I
find his conclusion and explanation wanting. His conclusion is based on only two days
on which FCStone experienced no significant change in stock price despite the
announcement of important news. From this, he concludes the market was inefficient.
However, there is no comparison to the number of times there were significant price
changes following important news. What if the price changed significantly on important
news fifty times and failed to do so only twice? Knowing that the price did not move on
two occasions does not mean anything out of context.
More importantly, the facts suggest Defendants have placed undue emphasis on
these two occasions. Gompers notes that “on November 13, 2008, FCStone released
earnings results for the fourth quarter and overall fiscal year of 2008, missing market
consensus forecasts by a large margin. . . . Despite the disappointing result, there was
not a statistically significant decline in FCStone’s stock price on that day.” Of course,
this announcement came ten days after FCStone provided the bad (and allegedly
incomplete) news about the Adams account. The stock price incorporated the news
The effects of industry or general economic news was accounted for in this
about unexpected losses on November 3 – meaning the subsequent “news” that
FCStone would miss earnings expectations was already incorporated in the stock’s
price when the formal announcement was made on November 13.
The second alleged instance of inefficiency occurred on December 17, 2008,
when “BMO Capital Markets ‘dramatically’ lowered its earnings forecasts for FCStone,
but FCStone’s stock price increased, although not significantly.” However, as pointed
out by Plaintiffs’ expert (Bjorn Steinholt), BMO Capital took this action based on its
assessment of industry-wide events, not company-specific information. Inasmuch as
Gompers recognized the need to control for industry or market news in order to
examine the correlation between “FCStone news” and FCStone’s stock price, this event
is of no consequence.
Defendants have asked me to strike Plaintiffs’ expert’s report. I view this request
unfavorably and see no reason to delay a ruling on the Motion to Certify to allow the
Motion to Strike to be fully briefed. The briefing process for Plaintiffs’ Motion to Certify
was longer than usual, as both sides were permitted to file one additional brief after
Plaintiffs’ Reply Suggestions were filed. Defendants filed their Motion to Strike after all
the briefing was completed. I see this as a delaying tactic: all of the arguments
presented in the Motion to Strike could have been presented while addressing the
Motion to Certify – and some of them were.7
I also note that Plaintiffs’ expert’s opinion is helpful, but not critical, to some of the
conclusions reached herein. However, Steinholt’s opinion was not germane to a great
many of my conclusions. The NASDAQ is probably properly considered to be a per se
I also note that many of Defendants’ arguments are simply unavailing. They
complain that Steinholt provided legal opinions (an ironic complaint, given that he did
nothing that Gompers did not do), but I have not relied on Steinholt for any legal
evaluations. They contend he did not evaluate whether the markets were efficient, but
without passing judgment on this argument I note the critical part of Steinholt’s opinion
identifies deficiencies in Gompers’ opinion.
efficient market. Even if it is not, the NASDAQ is entitled to a presumption of efficiency
that Defendants have not rebutted. In this regard the crucial issue is whether the stock
price reacts to publicly communicated news, and much of Defendants’ argument relies
on unrelated considerations. Only two instances of a failure to incorporate news were
suggested, but one of those is readily discounted on the facts (and two instances of
failure do not demonstrate the market is inefficient). Steinholt’s report was helpful in
that it (1) confirmed my conclusion that the stock price’s failure to move on November
13 was attributable to the previous dissemination of “bad news” on November 3 and (2)
countered Gompers’ suggestion that the events of December 17 indicate inefficiency. (I
note that none of Defendants’ arguments regarding Steinholt apply to these aspects of
his report). In short, Steinholt’s report is not necessary to most of my rulings, and at
most it merely confirms my conclusions.8
The only remaining issue under Rule 23(b)(3) is whether a class action is
superior to other available methods for adjudicating the controversy. As noted earlier,
courts readily agree that class actions are a superior method for resolving security fraud
claims for publicly traded stocks. There is little interest in individual investors controlling
their own claims, and a class action is more efficient than entertaining a multitude of
suits. Finally, Defendants have presented no arguments suggesting the superiority
requirement is not satisfied.
It is also worth mentioning that the concern about unreliable expert opinions is at
its height when considering evidence presented to the jury, and the cases governing
admission of expert opinions have less force when presented to the court on issues
related to class certification. See In re Zurn Pex Plumbing Products Liability Litig., 644
F.3d 604, 612-14 (8th Cir. 2011).
Defendants’ Motion to Strike is denied. Plaintiffs’ Motion to Certify Class is
granted in part and denied in part. The Court approves Building Trades United Pension
Trust Fund as a class representative for the following class:
All persons or entities who purchased or otherwise acquired publicly
traded securities of FCStone Group, Inc. (“FCStone”) on or after
November 3, 2008 and who sold those securities on or after February 24,
2009, except for (i) the defendants in this case, (ii) members of any
defendant’s immediate family, (iii) any entity in which a defendant has or
had a controlling interest, (iv) officers and directors of FCStone, and (v)
the legal representatives, heirs, successors or assigns of any such
I also appoint the law firm of Robbins Geller Rudman & Dowd LLP as Lead Counsel for
the Class, and the law firm of Yonke & Pottenger LLC as Liaison Counsel for the Class.
Within thirty days, Lead Counsel shall propose an appropriate form of Notice to be
distributed to class members as well as a proposed method of distribution.
IT IS SO ORDERED.
/s/ Howard F. Sachs
HOWARD F. SACHS, SENIOR JUDGE
UNITED STATES DISTRICT COURT
February 10 , 2012
Kansas City, MO
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