Plaintiffs Alleging Securities Fraud Face Difficulty Establishing Prima Facie Case

The Eleventh Circuit Court of Appeals recently issued an opinion addressing what elements a plaintiff in a private securities fraud case must prove in order to establish a prima facie case. In Hubbard v. BankAtlantic Bancorp, Inc., 2012 WL 2985112 (11th Cir. Jul. 23, 2012), the Court held that the plaintiff had to prove loss causation, or that the plaintiff’s loss can be attributed to the defendants’ fraud and not ancillary factors unrelated to the defendant’s actions. The decision highlights the difficulty for most plaintiffs in establishing a prima facie case of securities fraud in a turbulent economic environment.

The lead plaintiff, the State-Boston Retirement System, brought a cause of action in federal court against BankAtlantic Bancorp, Inc. for damages resulting from the plaintiff’s failed investment in commercial real estate loans held by BankAtlantic Bancorp’s subsidiary, BankAtlantic. State-Boston alleged that BankAtlantic Bancorp, Inc. misrepresented the level of risk associated with the loans in paperwork that it filed with the SEC. Specifically, the complaint alleged that BankAtlantic Bancorp Inc. fraudulently misled the public about the deteriorating quality of its commercial real estate portfolio, including land acquisitions and development loans by not identifying the loans as substandard assets. Although BankAtlantic Bancorp Inc. had privately monitored many of these loans on a Loan Watch List, the company allegedly did not publicly reveal the declining credit quality of the loans until the company’s stock price dropped dramatically.

State-Boston sought to prove causation and damages with expert testimony from a financial analyst. The analyst had conducted an “event study,” a statistical technique which measures the effect of new information on market prices for securities. The purpose of the study was to show what kind of damages can be attributed to company disclosures as opposed to other factors in the market.

Applying the test used in Ledford v. Peeples, 657 F. 3d 1222 (11th Cir. 2011), the Court outlined the elements that State-Boston needed to prove in order to make a prima facie case of securities fraud: 1) material misrepresentation or omission; 2) scienter; 3) connection between the misrepresentation or omission with the purchase of a security; 4) reliance upon the misrepresentation or omission; 5) economic loss; and 6) loss causation. To prove loss causation, a plaintiff must show that the fraud was a substantial or significant contributing cause to the security’s decline in value. The Court rejected the evidence offered by the financial analyst as proof of loss causation. Specifically, the Court held that the analyst’s testimony did not account for the effects of the collapse of the Florida real estate market, which would have had an effect on the value of BankAtlantic’s land development loans. Because State-Boston failed to show that their financial loss was directly attributable to BankAtlantic’s malfeasance, it could not make a prima facie case of securities fraud.

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Author(s): Brooke P. Dolara