Glickenhaus v. Household Int'l, Inc.

• Decision Date: 21 May 2015
• Docket Number: No. 13–3532.,13–3532.
• Citation: 787 F.3d 408
• Parties: GLICKENHAUS & COMPANY, et al., on behalf of themselves and all others similarly situated, Plaintiffs–Appellees, v. HOUSEHOLD INTERNATIONAL, INC., et al., Defendants–Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

787 F.3d 408

GLICKENHAUS & COMPANY, et al., on behalf of themselves and all others similarly situated, Plaintiffs–Appellees

v.HOUSEHOLD INTERNATIONAL, INC., et al., Defendants–Appellants.

No. 13–3532.

United States Court of Appeals, Seventh Circuit.

Argued May 29, 2014.

Decided May 21, 2015.

Rehearing Denied July 1, 2015.

Michael J. Dowd, Spencer Alan Burkholz, Joseph D. Daley, Eric A. Isaacson, Attorney, Robbins Geller Rudman & Dowd LLP, San Diego, CA, for Plaintiffs–Appellees.

Paul D. Clement, David Zachary Hudson, William Ranney Levi, Attorney, Bancroft PLLC, Washington, DC, Jason M. Hall, Attorney, Cahill, Gordon & Reindel, New York, N.Y., R. Ryan Stoll, Attorney, Skadden, Arps, Slate, Meagher & Flom LLP, Chicago, IL, for Defendants–Appellants.

Before BAUER, KANNE, and SYKES, Circuit Judges.

Opinion

SYKES, Circuit Judge.

This securities-fraud class action was tried to a jury and produced an enormous judgment for the plaintiffs—$2.46 billion, apparently one of the largest to date.¹ The defendants are Household International, Inc., and three of its top executives.² They challenge the judgment on many grounds, but their primary contention is that the plaintiffs failed to prove loss causation. Proving this element takes sophisticated expert testimony, and the plaintiffs hired one of the best in the field.

The defendants broadly attack the expert's loss-causation model. They also make the more modest claim that his testimony did not adequately address whether firm-specific, nonfraud factors contributed to the collapse in Household's stock price during the relevant time period. This latter argument has merit, as we explain below.

The defendants also raise a claim of instructional error under Janus Capital Group, Inc. v. First Derivative Traders, ––– U.S. ––––, 131 S.Ct. 2296, 180 L.Ed.2d 166 (2011), which clarified what it means to “make” a false statement in connection with the purchase or sale of a security. This claim too has merit, but only for the three executives and only for some of the false statements found by the jury. Household itself “made” all the false statements, as Janus defined that term.

The remaining challenges fail. A new trial is warranted on these two issues only. We remand for further proceedings consistent with this opinion.

I. Background

This case is complex and has a lengthy procedural history dating to 2002; retracing it would require a tome. To simplify, we'll start with the view from 10,000 feet and add details relevant to particular issues as needed.

Household's business centered on consumer lending—mortgages, home-equity loans, auto financing, and credit-card loans. In 1999 company executives implemented an aggressive growth strategy in pursuit of a higher stock price. Over the next two years, the stock price rose dramatically, but the company's growth was driven by predatory lending practices. This in turn increased the delinquency rate of Household's loans, which the executives then tried to mask with creative accounting. Their technique was to “re-age” delinquent loans to distort a popular metric that investors use to gauge the quality of loan portfolios: the percentage of loans that are two or more months delinquent. Household also improperly recorded the revenue from four credit-card agreements, though it ultimately issued corrections in August 2002.

Between the summers of 1999 and 2001, Household's stock rose from around $40 per share to the mid $60s, and by July of 2001 was trading as high as $69. But the reality of Household's situation eventually caught up with its stock price. The truth came to light over a period of about a year through a series of disclosures that began when California sued Household over its predatory lending. Other states also launched investigations and eventually collaborated in multi-state litigation. The so-called “disclosure period” culminated when Household settled the multi-state litigation for $484 million. Between the filing of California's suit on November 15, 2001, and the multistate settlement on October 11, 2002, Household's stock dropped 54%, from $60.90 to $28.20. Comparatively, declines in the S & P 500 and S & P Financials indexes during this period were 25% and 21%, respectively.

In 2002 the plaintiffs filed this securities-fraud class action under § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and the Securities and Exchange Commission's Rule 10b–5, 17 C.F.R. § 240.10b–5, alleging that on numerous occasions Household and its executives misrepresented its lending practices, delinquency rates, and earnings from credit-card agreements. The parties stipulated to class certification, and most issues were tried to a jury over a period of more than three weeks. Jurors were given 40 separate statements that the plaintiffs claimed were actionable misrepresentations. For each statement they were asked to determine:

(1) whether the statement was actionable (that is, was it false or misleading, material, and caused loss); (2) who among the four defendants was liable for it; (3) which of the three bad practices the statement related to; and (4) whether the particular statement was made knowingly or recklessly by each defendant. Of the 40 possibilities, the jury found 17 actionable misrepresentations and answered the remaining questions.

The jury was also asked to determine how much Household's stock was overpriced due to the misrepresentations. The plaintiffs' expert presented two models for measuring stock-price inflation. Each model generated a table that estimated inflation on any given day during the class period. The jury adopted one of the two models and used the figures from the corresponding table to complete the special verdict. (We will have more to say about the loss-causation models later.)

This concluded Phase I of the proceedings. In Phase II the parties addressed reliance issues and calculated damages for individual class members. In the meantime, the defendants challenged the jury's verdict in a motion for judgment as a matter of law, or alternatively, for a new trial. See Fed.R.Civ.P. 50(b). The district court denied the motions.

Some individual claims have yet to be resolved, but the district court entered final judgment on claims totaling $2.46 billion, finding no just reason for delay. See Fed. R. Civ. P. 54(b). This appeal followed.

II. Discussion

The basic elements of a Rule 10b–5 claim are familiar. The plaintiffs had to prove “(1) a material misrepresentation or omission by the defendant [s]; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.” Halliburton Co. v. Erica P. John Fund, Inc., ––– U.S. ––––, 134 S.Ct. 2398, 2407, 189 L.Ed.2d 339 (2014) (internal quotation marks omitted).

The issues on appeal cluster around three elements. First, and most prominently, the defendants attack the evidence of loss causation. This argument has several layers, but in general the defendants claim that the plaintiffs' evidence of loss causation was legally insufficient, entitling them to judgment as a matter of law, or at the very least a new trial. Second, they argue that the district court incorrectly instructed the jury on what it means to “make” a false statement in violation of Rule 10b–5, also warranting a new trial. Finally, they contend that discovery rulings during the Phase II proceedings deprived them of a meaningful opportunity to prove that class members did not rely on the misrepresentations.

Different standards of review apply. We review de novo the denial of a motion for judgment as a matter of law; we will reverse only if the evidence was legally insufficient for the jury to have found as it did. Venson v. Altamirano, 749 F.3d 641, 646 (7th Cir.2014) ; Fed.R.Civ.P. 50(a)(1). We review the denial of a motion for a new trial for abuse of discretion. Venson, 749 F.3d at 656. “A new trial is appropriate if the jury's verdict is against the manifest weight of the evidence or if the trial was in some way unfair to the moving party.” Id. Jury instructions are reviewed de novo to test whether they fairly and accurately stated the law; a new trial is warranted only if an instructional error caused prejudice. Burzlaff v. Thoroughbred Motorsports, Inc., 758 F.3d 841, 846–47 (7th Cir.2014). We review discovery rulings for abuse of discretion. Thermal Design, Inc. v. Am. Soc'y of Heating, Refrigerating & Air–Conditioning Eng'rs, Inc.,

755 F.3d 832, 837 (7th Cir.2012).

A. Loss Causation

We begin, as the defendants do, with loss causation. To prove this element of the claim, the plaintiffs had the burden to establish that the price of the securities they purchased was “inflated”—that is, it was higher than it would have been without the false statements—and that it declined once the truth was revealed. See Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 342–44, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005) ; Ray v. Citigroup Global Mkts., Inc., 482 F.3d 991, 995 (7th Cir.2007) (“[P]laintiffs must show both that the defendants' alleged misrepresentations artificially inflated the price of the stock and that the value of the stock declined once the market learned of the deception.”). A plaintiff's causal losses are measured by the amount the share price was inflated when he bought the stock minus the amount it was inflated when he sold it. See Dura Pharm., 544 U.S. at 342–44, 125 S.Ct. 1627.

It's very difficult to know exactly how much stock-price inflation a false statement causes because it requires knowing a counterfactual: what the price would have been without the false statement. It's tempting to think that inflation can be measured by observing what happens to the stock immediately after a false statement is made. But that assumption is often wrong. For example, say the president of a company lies to the public about earnings (“We made $200 million more than we predicted this year!”)...