Local 703 v. Regions Financial: Investor Class Certified in Securities Fraud Action

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An Alabama federal court has certified a class of investors who allege that they were defrauded by the defendant’s misleading statements regarding the performance of a real estate portfolio.  See Local 703 v. Regions Fin. Corp., No. 10-cv-02847 (N.D. Ala. June 14, 2012) (Memorandum Opinion re certification) (available here).  The plaintiffs claim that the defendant artificially inflated the value of its real estate holdings by misrepresenting tens of millions of dollars in non-accrual loans.  Memorandum Opinion at 21.  The at-issue stock was trading at $23.22 at the beginning of the class period, but plummeted to $4.60 per share by the end of the class period.  Id. at 2. 

Defendant Regions mounted a strong challenge to Rule 23’s “typicality” requirement, arguing that the named plaintiffs did not have claims typical of the rest of the class, since they actually benefited from the alleged fraud by holding some shares for only a short period and then selling them at a profit.  Id. at 8-9.  However, the court found that, since the named plaintiffs did not divest themselves of all holdings during the class period, the typicality requirement was met, notwithstanding plaintiffs’ profits.  Id. at 9.

As to the predominance requirement, Regions argued (1) that plaintiffs failed to establish a presumption of class-wide reliance based on a “fraud-on-the-market” theory, and (2) even if plaintiffs had established such a presumption, Regions rebutted it.  Id. at 19-20.  The defendant reasoned that, since plaintiffs had not proven a link between defendant’s alleged misrepresentations and the drop in stock price, there could be no presumption of reliance.  In a sprawling analysis, Judge Inge Prytz Johnson found loss causation to be a trial issue, agreeing with the plaintiffs and numerous other courts that it was “not a relevant consideration for a court at this juncture.”  Id. at 34.  In so ruling, the court relied considerably on Erica P. John Fund, Inc. v. Halliburton Co., 131 S. Ct. 2179, 2185 (2011).  Judge Johnson concluded that plaintiffs had, in fact, established the presumption of reliance, and that defendants failed to rebut it.  Memorandum Opinion at 31-33, 38-39.  She consequently granted plaintiffs’ certification motion, finding all of the class action prerequisites to be satisfied. The certified action now proceeds to the merits phase.