Recent Development by John R. Guenard
After three successive quarterly reports showing steady increases in the number of new lines installed, Allegiance Telecom, a national telecommunications provider, revealed in its quarterly report issued February 19, 2002, that previously reported line counts had exceeded the actual number installed by over 10%. The next day the price of Allegiance stock fell by 28%, and on May 14, 2003, Allegiance declared bankruptcy. Six months later, investors filed an action seeking to certify a class composed of all purchasers of Allegiance stock from the period of the first to the fourth quarterly report who had suffered losses following the release of the corrected line-count information. The plaintiffs alleged that by misrepresenting the number of lines installed in the preceding three quarters, Allegiance had violated section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange Commission. The district court certified the class, finding that, under the “fraud-on-the-market” theory, each class member could be presumed to have satisfied the reliance element of the 10b-5 claim.
The United States Court of Appeals for the Fifth Circuit granted interlocutory review of the certification order. In an earlier line of decisions, the Fifth Circuit established the requirement that a plaintiff class seeking a presumption of reliance in a securities action first demonstrate that the misrepresentations by the company had actually affected the share price. Extending this line of reasoning, the Fifth Circuit held that a plaintiff in a securities action must prove loss causation—the connection between the misrepresentations and a subsequent pecuniary loss—in order to trigger the presumption of reliance required for class certification. Oscar Private Equity Investments v. Allegiance Telecom, Inc., 487 F.3d 261, 268-70 (5th Cir. 2007).
About the Author
John R. Guenard. J.D. candidate 2009, Tulane University School of Law; B.A. 2001, University of California, Santa Barbara.
Citation
82 Tul. L. Rev. 2467 (2008)