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A federal judge has ruled that the fraud-on-the-market doctrine may be applied to misstatements made by securities analysts in a class action suit. Other judges in the Southern District of New York have reached different conclusions on the issue. Judge Gerard E. Lynch’s ruling Wednesday agreed with that of one colleague and differed from another’s. The fraud-on-the-market doctrine has regularly been applied in cases over statements by companies that issue stock. Its applicability to allegedly misleading statements by outside analysts remains a live issue. In a securities case, the fraud-on-the-market doctrine allows plaintiffs to argue that they relied on the allegedly misleading evidence in making their investment decisions. The doctrine relieves plaintiffs of having to show that they actually read the statements in question or were even aware of it. The theory presumes that the stock market operates in an efficient manner in which a stock’s price is determined by all material information regardless of whether plaintiffs relied on the statement under question. Lynch held in DeMarco v. Robertson Stephens Inc., 03 Civ. 590, that this presumption applies not just to alleged misstatements made by issuers of stock but to those made by stock analysts. Plaintiffs in Lynch’s case accused defendants of maintaining a “buy” rating for a company called Corvis Corp. from August 2000 to April 2001 while officers of the analysts’ company were selling their own Corvis shares. The issue before the court involved class certification. To certify a class, a judge must determine whether common questions of law and facts apply to individual class members. In this case, the main issue was the reliance on statements made by Robertson Stephens Inc. and a former analyst, Paul Johnson. The U.S. Supreme Court has ruled that “rather than requiring proof of individual direct reliance in a securities fraud action, a district court could apply a rebuttable presumption of reliance, supported in part by the fraud-on-the-market theory,” Lynch wrote. This presumption permits courts to certify classes of plaintiffs who have not actually seen the misstatement made by issuers. “The parties hotly dispute whether the … presumption properly applies to misstatements by analysts,” Lynch wrote. The argument is “an evolving question in this Court,” he said. Judge Denise Cote applied the presumption to analysts involved in a WorldCom-related securities action in 2003. On appeal, the 2nd Circuit, agreeing to decide the issue before the case advanced further, pointed out that Cote’s decision “marked the first time that the fraud-on-the-market doctrine had been extended to opinions expressed by a research analyst and that, given the novel legal question … immediate review was warranted,” Lynch noted. Before the circuit could decide the issue, however, the parties settled. Judge Jed Rakoff ruled differently in a decision last year, adding to the uncertainty. Lynch acknowledged that plaintiffs’ showing of reliance on defendants’ statements is weak and without more, “plaintiffs may have a slim chance of prevailing on the ultimate merits.” “But, this cannot be the measure of plaintiffs’ entitlement to class certification,” where the merits of the case are not to be litigated, he held. Marc Gross and others at Pomerantz Haudek Block Grossman & Gross along with Joseph Weiss and others at Weiss & Yourman represented plaintiffs. Andrew Frackman of Los Angeles’ O’Melveny & Myers represented defendant Robertson Stephens Inc. Eric Goldstein of Paul, Weiss, Rifkind, Wharton & Garrison represented defendant Paul Johnson.

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