Plaintiffs sought to represent a class of investors who purchased common stock in China Integrated Energy between March 31, 2010 and April 21, 2011. A federal court denied Plaintiffs’ motion to certify a class holding that Plaintiffs had not established a rebuttal presumption of reliance. As part of the order, the court excluded the testimony of two Plaintiffs experts. The ruling was a complete Defense victory, marking a rare but successful challenge to class certification in federal securities class actions.
Plaintiffs in this case asserted claims against China Integrated Energy, some of its officers and directors, and its independent auditor based on alleged violations of federal securities laws, including Section 10 and Rule 10b-5. Plaintiffs alleged that China Integrated Energy overstated its revenue and net income in its reported financial results. Plaintiffs also claimed that Defendants prepared two sets of financial statements – an accurate set filed with Chinese regulators, and a false and misleading set filed with the U.S. Securities Exchange Commission. Plaintiffs further asserted that they were entitled to a rebuttable presumption of reliance based on the “fraud-on-the-market” theory and their assertion that China Integrated Energy traded in an efficient market.
In support of their assertion of market efficiency, Plaintiffs proffered two experts. These experts conducted analyses that they referred to as event studies, concluding their analyses demonstrated the requisite cause-and-effect relation. Both experts opined that the existence of statistically significant price reactions on certain (but not all) hand-selected event days indicated market efficiency.
Compass Lexecon’s Dr. Andrew (Drew) Roper, the Head of our new Silicon Valley office, was retained by the Defendants to consider whether Plaintiffs experts’ opinions relied on commonly accepted economic methods. Dr. Roper testified that Plaintiffs experts’ analyses did not meet the requisite standard and were fundamentally flawed for three reasons:
(1) their selection of events (releases of unexpected information) was entirely subjective;
(2) they failed to utilize a pre-specified threshold or known rejection rate; and
(3) they failed to address contradictory evidence.
U.S. District Court Judge Beverly Reid O’Connell agreed with Defendants and Dr. Roper and denied without prejudice Plaintiffs’ motion to certify the class. In so doing, the Court cited Dr. Roper favorably:
“From his background and experience, it is evident to the Court that Roper is well qualified to opine on event studies, market efficiency, and the proper methods for conducting an event study.”
Defendants were successfully represented in the case by Peter Buckley, Joshua Horn, Christine Soares and others at Fox Rothschild LLP, and Eugene Licker and others from Loeb & Loeb LLP.