Client Alert

Ninth Circuit Clarifies Presumptions of Reliance

4/1/1999
The Ninth Circuit yesterday issued a decision in Binder v. Gillespie, 99 C.D.O.S. 2277 (9th Cir. March 30, 1999), clarifying several unresolved technical issues in securities litigation. Although important to some cases, the decision will likely not affect most securities litigation.

First, the court ruled that in a case in which plaintiffs allege that defendants both misrepresented and omitted material information, plaintiffs could not rely on the Affiliated Ute presumption of reliance. Under Affiliated Ute Citizens v. United States, 406 U.S. 128, 153-54 (1972), a plaintiff who alleges that defendants omitted material information is entitled to a presumption that he or she relied on the information not disclosed; otherwise, the plaintiff would be required to prove a "'speculative negative'--that the plaintiff relied on what was not said." The Ninth Circuit thus did not extend the Affiliated Ute presumption to mixed cases of misrepresentation and omission.

Second, the court found that the "fraud on the market" presumption of reliance did not apply to the majority of plaintiffs' proposed class period. The court held that this presumption of reliance applies only when the security involved is "actively traded in an efficient market." In deciding whether a market is efficient, the court endorsed a five-factor test: (1) whether the stock trades at a high weekly volume; (2) whether securities analysts follow the stock; (3) whether the stock has "market makers and arbitrageurs;" (4) whether the company is eligible to use Form S-3, as opposed to Form S-1 or S-2; and (5) whether there are empirical facts showing a cause and effect relationship between unexpected news regarding the company and changes in the company's stock price. Plaintiffs did not establish that the defendant company's securities, which were listed on the pink sheets, traded in an efficient market.

Third, the court affirmed summary judgment for several individual defendants who began working for the defendant company after plaintiff purchased his stock. A securities fraud claim must be based on statements made before the plaintiff purchases stock, according to the court. Plaintiffs cannot bring a claim alleging that defendants' statements caused plaintiffs to retain their shares.

Finally, the court affirmed summary judgment for Deloitte and Touche on claims that it had fraudulently participated in issuance of the company's 10-Q filings. The court found that although Deloitte commented on the company's 10-Qs, this "meager evidence of Deloitte's participation in the reports" did not prevent summary judgment.

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