Bell v. Ascendant Solutions, Inc.

• Citation: 422 F.3d 307
• Decision Date: 23 August 2005
• Docket Number: No. 04-11078.,04-11078.
• Parties: Richard BELL, on Behalf of Himself and All Others Similarly Situated; et al., Plaintiffs, Plutarch, Ltd., Mario Sonzone, Plaintiffs-Appellants, v. ASCENDANT SOLUTIONS, INC.; Norman Charney; Paul Jennings; CCLP, Ltd.; Paul G. Sherer; Alan E. Salzman, Defendants-Appellees. Dennis Hoffman, Individually and on Behalf of Himself and All Others Similarly Situated; et al., Plaintiffs, Plutarch, Ltd., Plaintiff-Appellant, v. Ascendant Solutions, Inc.; Norman Charney; Paul Jennings, Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

422 F.3d 307

Richard BELL, on Behalf of Himself and All Others Similarly Situated; et al., Plaintiffs, Plutarch, Ltd., Mario Sonzone, Plaintiffs-Appellants, v. ASCENDANT SOLUTIONS, INC.; Norman Charney; Paul Jennings; CCLP, Ltd.; Paul G. Sherer; Alan E. Salzman, Defendants-Appellees.

Dennis Hoffman, Individually and on Behalf of Himself and All Others Similarly Situated; et al., Plaintiffs, Plutarch, Ltd., Plaintiff-Appellant, v. Ascendant Solutions, Inc.; Norman Charney; Paul Jennings, Defendants-Appellees.

No. 04-11078.

United States Court of Appeals, Fifth Circuit.

August 23, 2005.

COPYRIGHT MATERIAL OMITTED

James Stuart Notis (argued), Abbey Gardy, New York City, Roger F. Claxton, Robert James Hill, Claxton & Hill, Dallas, TX, for Plaintiffs-Appellants.

Paul R. Bessette (argued), Michael John Biles, Jennifer R. Brannen, Michelle A. Reed, Akin, Gump, Strauss, Hauer & Feld, Austin, TX, for Defendants-Appellees.

Appeal from the United States District Court for the Northern District of Texas.

Before GARWOOD, SMITH and CLEMENT, Circuit Judges.

JERRY E. SMITH, Circuit Judge:

Mario Sonzone and Plutarch, Ltd., an individual investor and a closely-held Liberian corporation, appeal the denial of class certification in a securities fraud suit against Ascendant Solutions, Inc. ("Ascendant"), some of its former executives and directors, and a related entity. Concluding that the district court did not abuse its discretion, we affirm and remand.

I.

Ascendant, a Dallas-based firm founded in 1995, provided electronic order management and customer service solutions to e-commerce and direct marketing firms. It made an initial public offering ("IPO") of five million shares of common stock on November 11, 1999. All the shares were purchased on a firm-commitment basis and at a pre-set price ($8.00 per share) by an underwriting syndicate. After two days of trading on the NASDAQ National Market, both of which were marked by insignificant price declines, Ascendant common stock more than tripled in price within three weeks, closing at $28.00 on November 30, all during the twenty-five-day post-IPO "quiet period." See 17 C.F.R. § 230.174(d).

The good times were short-lived: On January 24, 2000, Ascendant announced that problems with its capacity to provide the requisite software services had caused it to lose three of its seven customers, including one featured in Ascendant's prospectus as a "Select Client Case Stud[y]." The next day, Ascendant's stock price declined almost 30%. By the end of September, it had announced that it would no longer provide order fulfillment and customer-service call-center operations; by May 2001, it had been de-listed from NASDAQ.

II.

Litigation ensued. The district court consolidated five securities fraud class action complaints filed against Ascendant and some of its executives and directors and appointed lead plaintiffs. Plaintiffs filed an amended class action complaint; a motion to dismiss followed, which the district court granted in part and denied in part, winnowing-down some of the plaintiffs' allegations but leaving their basic theory of liability intact: Ascendant and various insiders had made false and misleading statements in connection with the IPO regarding the scope of Ascendant's order management and customer service systems and its success in providing such systems to clients.

Plaintiffs then moved to certify a class, based on Federal Rule of Civil Procedure 23(b)(3), consisting of all persons (except defendants and certain related persons and interests) who purchased Ascendant common stock on the open market between November 11, 1999 (the date of the IPO) and January 24, 2000 (the day Ascendant announced its troubles) and who were damaged by defendants' allegedly false and misleading statements in violation of sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and rule 10b-5 promulgated thereunder.¹

Ascendant responded in opposition to class certification and, in support, submitted an expert report, the rub of which was that Ascendant's common stock did not trade in an efficient market. This being so, Ascendant maintained, the putative class could not invoke the fraud-on-the-market theory recognized in Basic Inc. v. Levinson, 485 U.S. 224, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988), and obtain the benefit of its class-wide presumption of reliance,² leaving plaintiffs' fraud claims dependent on proving individual reliance and thus unsuited for aggregation.³

Plaintiffs responded with an expert report of their own, which included an event study purporting to show that Ascendant common stock did, in fact, trade in an efficient market. But the district court, on Ascendant's motion to exclude under Daubert,⁴ excluded plaintiffs' expert, concluding that his event study was unreliable and purposefully designed to support its market-efficiency conclusion.

The court then determined that plaintiffs, lacking an expert, had otherwise failed to demonstrate that Ascendant common stock traded in an efficient market, so the putative class could not take advantage of the presumption of class-wide reliance permitted under the fraud-on-the-market theory. The fraud claims thus would require proof of individual reliance, so the proposed class does not satisfy the predominance requirement of rule 23(b)(3). Accordingly, the court denied class certification.⁵ Plaintiffs thereafter sought, and we granted, pursuant to Rule 23(f) of the Federal Rules of Civil Procedure, an interlocutory appeal of that denial.

III.

The class certification decision rests within the sound discretion of the district court, so long as that discretion is exercised within the framework of rule 23. See Robinson v. Texas Auto. Dealers Ass'n, 387 F.3d 416, 421 (5th Cir.2004); Castano, 84 F.3d at 740. Thus we review for abuse of discretion the denial of class certification. See In re Monumental Life Ins. Co., 365 F.3d 408, 414 (5th Cir.), cert. denied, ___ U.S. ___, 125 S.Ct. 277, 160 L.Ed.2d 117 (2004).

IV.

Plaintiffs challenge the district court's conclusion that they failed adequately to show that Ascendant common stock traded in an efficient market during the class period. We understand their argument on appeal to contain two primary contentions. First, they claim they need only plead market efficiency at the class certification stage and that the district court, by looking beyond the pleadings, improperly decided an issue going to the merits under Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 94 S.Ct. 2140, 40 L.Ed.2d 732 (1974). Second, they attack the substance of the court's market efficiency determination on the ground that the court failed to give due consideration to various factors relevant to market efficiency.

A.

Plaintiffs claim they are required only to plead market efficiency at the class certification stage and that the district court, by going beyond the pleadings and requiring a threshold showing, improperly decided an issue going to the merits under Eisen. This betrays a misreading of Eisen, which, as we explained in Castano, does not suggest that a court is limited to the pleadings when deciding on class certification. Rather, Eisen "stand[s] for the unremarkable proposition that the strength of a plaintiff's claim should not affect the certification decision." Castano, 84 F.3d at 744.⁶

Eisen therefore offers no support for the view that a district court must accept, on nothing more than pleadings, allegations of elements central to the propriety of class certification under rule 23.⁷ As the Fourth Circuit has cogently explained in rejecting a similar contention,

Eisen's prohibition against assessing plaintiffs' likelihood of success on the merits as part of a Rule 23 certification does not mean that consideration of facts necessary to a Rule 23 determination is foreclosed merely because they are required to be proved as part of the merits. The analysis under Rule 23 must focus on the requirements of the rule, and if findings made in connection with those requirements overlap findings that will have to be made on the merits, such overlap is only coincidental. The findings made for resolving a class action certification motion serve the court only in its determination of whether the requirements of Rule 23 have been demonstrated.

Gariety v. Grant Thornton, LLP, 368 F.3d 356, 366 (4th Cir.2004). Thus, in the market efficiency context, "[a]lthough the court's determination for class certification purposes may be revised (or wholly rejected) by the ultimate factfinder, the court may not merely presume the facts in favor of an efficient market." Unger v. Amedisys, Inc., 401 F.3d 316, 323 (5th Cir.2005).⁸

Indeed, the suggestion that a court must accept mere allegations of market efficiency is demonstrably at odds with Unger and, more fundamentally, with a district court's duty, rooted in the text of rule 23(b)(3), to "find[]" that common issues predominate before certifying a class.⁹ At issue in Unger were "the standards and procedures used by district courts when considering certification of securities class actions dependent on the `fraud on the market' theory," and we held that "a careful certification inquiry is required and findings must be made based on adequate admissible evidence to justify class certification." Unger, 401 F.3d at 319.

In so doing, we stressed the critical link between a threshold showing of market efficiency and a district court's duty to ensure that class members' fraud claims are not predicated on proving individual reliance:

Without an initial demonstration of market efficiency, there is no assurance that the available material information concerning the stock translates into an effect on the market price and supports a classwide presumption of reliance. Absent an efficient market, individual reliance by each plaintiff must be proven, and the proposed class will fail the predominance requirement.

Id. at 322. Accordingly, we joined several of our sister...