D&O Liability - Court Denies Class Certification for Failure to Prove Loss Causation
On April 2, 2008, in Fener v. Belo Corp., No. 3:04-CV-1836-D (N.D. Tex.), the United States District Court for the Northern District of Texas, Chief Judge Sidney A. Fitzwater, denied lead plaintiff’s motion for class
certification on the ground that plaintiff had failed to establish loss causation by a preponderance of the evidence. Specifically, plaintiff had not shown that the corrective disclosure – as opposed to other negative statements
made at the same time – had caused a significant amount of the stock price decline.
The Fener action is a consolidated putative securities class action brought on behalf of purchasers of Belo Corporation common stock between May 12, 2003 and August 6, 2004. Belo is a media company that owns, among other
things, the newspaper The Dallas Morning News (“DMN”). On August 5, 2004, Belo announced that certain “questionable circulation practices” at DMN had resulted in an overstatement of its circulation, and
it estimated that the decline in circulation related to the matter was approximately 1.5% daily and 5% Sunday. In the same press release, Belo also announced that this decline, coupled with (i) a previously announced reduction in
state circulation of approximately 2.5% daily and 3.5% Sunday, and (ii) an anticipated lower circulation volume for the six-month period ending September 30, 2004, would result in a total circulation decline of approximately 5% daily
and 11.5% Sunday when compared with September 2003 figures. The following day, Belo’s stock price declined by 5.47%.
In their opposition to the class certification motion, defendants argued that the August 5 press release contained three pieces of negative information, only the first of which related to the alleged fraud, and that plaintiff had
failed to prove that the stock price decline was caused by the fraud-related disclosure. Plaintiff’s expert, Scott Hakala, opined that the announcement could not be parsed as such, that the statement was a single piece of
negative news, and that all of the reported decline in circulation was related to the alleged circulation inflation scheme. The court rejected plaintiff’s position, finding instead that the August 5 announcement was composed
of various news pieces. Because not all of the pieces were, at least facially, related to the overstatement, the court determined that the case required a multi-layered loss causation inquiry, similar to that used in Oscar Private Equity Invs. v. Allegiance Telecom, Inc., 487 F.3d 261 (5th Cir. 2007). Specifically, in Oscar, the Fifth Circuit required the plaintiffs to prove that: (1) the negative “truthful” information
causing the decrease in price is related to an allegedly false, non-confirmatory positive statement made earlier, and (2) it is more probable than not that it was this negative statement, and not other unrelated negative statements, that caused a significant amount of the decline. Applying this analysis, the court concluded that plaintiff had not established that the second and third announced causes of circulation decline were related to
the overstatement and that it was more probable than not that the overstatement-related negative news – not any other unrelated negative news – caused a significant amount of the stock price decline.
Additionally, Dr. Hakala argued that the stock price drop could not be attributed to the news of a circulation decline resulting from a change in methodology for computing circulation (the second piece of negative news announced
on August 5) because that information had been announced previously and, therefore, already had been incorporated by the market into the share price. The court rejected this argument, observing that the earlier announcement had not
quantified the amount of the decline in circulation that was expected to result from the change in methodology. Moreover, under Oscar, where there is more than one negative disclosure, the plaintiff must show “loss
causation that targets the corrective disclosure appearing among other negative disclosures made at the same time.” Showing the market’s reaction to a bundle of news pieces, without targeting the corrective
disclosure at issue, is insufficient for the purpose of establishing loss causation.