On August 21, the U.S. Court of Appeals for the 6th Circuit reversed in part and vacated in part several district court orders in a securities fraud class action stemming from the 2008 financial crisis, remanding the action for further proceedings. The 6th Circuit found that Freddie Mac’s stock traded in an efficient market and revived claims alleging that Freddie Mac and its former officers made materially false statements about their “subprime” and “Alt-A” mortgage exposure. As previously covered by InfoBytes, the U.S. District Court for the Northern District of Ohio had granted summary judgment to the defendants, finding that a state pension fund failed to establish that Freddie Mac made false statements about its subprime loan exposure, and had separately denied class certification on the ground that the fund could not demonstrate a presumption of reliance on the alleged misrepresentations because it could not establish market efficiency. The 6th Circuit reversed, holding that the district court erred by rejecting the plaintiff’s “price-maintenance” theory, which posits that misrepresentations can artificially maintain a company’s stock price, even without causing a price increase, if truthful disclosures would have caused the price to fall.

Relatedly, the 6th Circuit held that the District Court improperly elevated one factor in determining market efficiency (i.e., a history of immediate stock price movement in response to news) over the structural evidence of market efficiency, noting that reliance on this factor is “particularly problematic” in cases invoking the price-maintenance theory. The appellate court found that the undisputed structural indicators — high trading volume on a national exchange, extensive analyst coverage, numerous market makers, high market capitalization, high float, and a narrow bid-ask spread — were sufficient to establish that the stock traded in an efficient market, particularly in a price-maintenance theory case.

As to whether the plaintiffs presented evidence of materially false statements by defendants, the court found that genuine disputes of material fact existed as to whether defendants made materially false statements about subprime and Alt-A exposure. The court noted that, although defendants expressly disclaimed subprime exposure in public, defendants’ internal reports reflected significant increases in exposure to subprime or “subprime-like” loan holdings, precluding summary judgment against plaintiffs. The court also found sufficient evidence of scienter by defendants, citing the divergence between internal reports and external statements, and finding that plaintiffs had produced sufficient evidence for a reasonable juror to find that defendants were aware of the discrepancies between the internal data and public statements.

The 6th Circuit, however, did not revive claims concerning credit risk exposure or underwriting standards, finding the at-issue statements constituted “non-actionable puffery” or were adequately qualified by existing disclosures. The court remanded for reconsideration of plaintiffs’ motion for class certification, in light of the 6th Circuit’s opinion, including to reassess plaintiffs’ price-maintenance theory and to reconsider the exclusion of certain expert evidence, following the district court’s rejection of that theory. In a concurrence, one judge expressed dismay that the case had lasted for 18 years and urged that the case not “last another 18 years,” suggesting litigants and courts consider ways to move cases along expediently.