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In Re Federal Home Loan Mortgage

March 27, 2012


The opinion of the court was delivered by: Cedarbaum, J.


Jerry Jones*fn1 sues defendants Richard Syron, Freddie Mac's former CEO, and Anthony Piszel, Freddie Mac's former CFO, for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) & 78t(a), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5. This is a motion to certify a class, to appoint Jones as lead plaintiff and class representative, and to name Cotchett, Pitre & McCarthy, LLP as class counsel. Defendants oppose the motion on several grounds. Primarily, they contend that Jones has not established that the market for Freddie Mac's Series Z preferred shares ("Series Z") was efficient. Thus, they argue that Jones cannot establish the "fraud on the market" presumption of collective reliance. Nor can he satisfy the predominance requirement of Fed. R. Civ. P. 23(b)(3). Defendants also argue that Jones is not an adequate class representative and that Cotchett, Pitre & McCarthy, LLP is not qualified to serve as class counsel.

Because the parties dispute the efficiency of the market for Series Z, I held an evidentiary hearing to determine whether plaintiffs can rely on the fraud on the market theory.*fn2 Both Jones and defendants moved to exclude the opposing party's expert testimony and related evidence on efficiency.

For the reasons that follow, the motion for class certification is denied. Plaintiff has not shown by a preponderance of the credible evidence that the market for Freddie Mac's Series Z preferred shares was efficient during the class period.


On November 29, 2007, Freddie Mac commenced its Series Z offering. Jones purchased 3,265 Series Z shares on February 26, 2008, at a price of $25.99 per share, and purchased 5,500 additional shares on July 11, 2008, at a price of $17.10 per share.

Jones alleges that from November 2007 through September 2008, defendants misrepresented and omitted material information about Freddie Mac's underwriting and risk management practices, as well as the adequacy of its capitalization. On July 10, 2008, the Wall Street Journal reported that Treasury officials had been meeting for months to discuss plans to bail out Freddie Mac, and former St. Louis Federal Reserve President William Poole told Bloomberg that Freddie Mac was "insolvent" and needed a government bailout. Jones alleges that the stock price fell from $21.98 per share to $17.60 per share on July 10, 2008 as a result of these disclosures. On July 11, 2008, Jones purchased 5500 shares. On Sunday, September 7, 2008, Treasury Secretary Henry Paulson and the Federal Housing Finance Agency announced that the federal government had placed Freddie Mac into conservatorship. On Monday, September 8, 2008, the stock fell from $13.56 per share to $2.87.

Jones has moved to certify a class comprised of:

All persons or entities, other than Defendants, who, between November 29, 2007 and September 6, 2008 ("Class Period"), purchased or acquired Freddie Mac's Series Z preferred stock, either on the secondary market or through an original offering pursuant to an offering circular, and suffered damages thereby (the "Class").

Pls.' Class Cert. Mot. at 3.


I. Legal Standard

The elements of a claim for securities fraud under Section 10(b) and Rule 10b-5 are: (1) a material misrepresentation or omission; (2) scienter; (3) a connection with the purchase or sale of a security; (4) reliance; (5) economic loss; and (6) loss causation. Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341-42, 125 S. Ct. 1627, 1631, 161 L. Ed. 2d 577 (2005).

A. Class Certification

Plaintiff seeks to certify a class pursuant to Fed. R. Civ. P. 23(a) and Fed. R. Civ. P. 23(b)(3). He bears the burden of establishing by a preponderance of the credible evidence that the putative class satisfies each of the requirements of these rules. Teamsters Local 445 Freight Div. Pension Fund v. Bombardier Inc., 546 F.3d 196, 202-03 (2d Cir. 2008). Rule 23(a) provides that one or more members of a class may sue on behalf of all members "only if: (1) the class is so numerous that joinder of all members is impracticable; (2) there are questions of law or fact common to the class; (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and (4) the representative parties will fairly and adequately protect the interests of the class." Rule 23(b)(3) states that certification is appropriate if the court finds that "the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy."

In In re Initial Public Offering Securities Litigation (In re IPO), the Second Circuit clarified that a district court must make a "definitive assessment of Rule 23 requirements, notwithstanding their overlap with merits issues," and that it must resolve the material factual disputes relevant to each Rule 23 requirement. 471 F.3d 24, 41 (2d Cir. 2006); see also Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541, 2551, 180 L. Ed. 2d 374 (2011) ("A party seeking class certification must affirmatively demonstrate his compliance with the Rule -- that is, he must be prepared to prove that there are in fact sufficiently numerous parties, common questions of law or fact, etc."). Both Teamsters and In re IPO contemplated the possibility of a district court's holding of an evidentiary hearing, as the extent of discovery granted on class certification issues is "generally left to the trial court's considerable discretion." Teamsters, 546 F.3d at 204 (quoting Heerwagen v. Clear Channel Commc'ns., 435 F.3d 219, 233 (2d Cir. 2006)); see also In re IPO, 471 F.3d at 41. A trial court must receive enough evidence to be satisfied that each Rule 23 requirement has been met. Teamsters, 546 F.3d at 204. Although defendants contest several of plaintiff's arguments in favor of class certification, the focus of the parties' briefs and expert testimony is on Rule 23(b)(3)'s predominance requirement and the efficiency of the market for Series Z.

B. Rule 23(b)(3): Predominance

Class certification is available only if plaintiff can establish a class-wide presumption of reliance through the "fraud on the market" theory.*fn3 See Basic Inc. v. Levinson, 485 U.S. 224, 241-42, 108 S. Ct. 978, 989, 99 L. Ed. 2d 194 (1988) (recognizing that private securities fraud plaintiffs may be entitled to a presumption of collective reliance). Without this presumption, individual questions about investor reliance on misrepresentations would predominate over common questions, and a class action would not be a superior mechanism for resolving the dispute. See Fed. R. Civ. P. 23(b)(3).

In Basic, the Supreme Court explained that "[t]he fraud on the market theory is based on the hypothesis that, in an open and developed securities market, the price of a company's stock is determined by the available material information regarding the company and its business." 485 U.S. at 241-42 (internal citation omitted). Because in an efficient market, the stock price necessarily reflects any material misrepresentation, and because investors who purchase stock do so in reliance on the integrity of the market, misleading statements will defraud purchasers even if they do not directly rely on the misstatement. Id. at 241-42. In order for the fraud on the market theory to apply, plaintiff must show that defendants have Ed. 2d 741 (1972). For claims involving primarily a failure to disclose, "positive proof of reliance is not a prerequisite to recovery." Id. The claims here are not primarily omission claims, and the presumption does not apply. See, e.g., Starr v. Georgeson S'holder, Inc., 412 F.3d 103, 109 n.5 (2d Cir. 2005) (holding that Affiliated Ute's presumption did not apply because plaintiff focused most heavily on allegedly false and misleading statements).

(1) publicly made (2) a material misrepresentation (3) about stock traded on an efficient market, and (4) that the plaintiff purchased the shares between the time the misrepresentations were made and the time the truth was revealed. In re Salomon Analyst Metromedia Litig., 544 F.3d 474, 481 & n.4 (2d Cir. 2008) (citing Basic, 485 U.S. at 248 n.27). Defendants assert ...

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