Alaska Elec. Pension Fund v. Flowserve Corp.
Fifth Circuit Revives Plaintiffs’ Claims in Flowserve
Robbins Geller obtained a successful appellate ruling from the Fifth Circuit Court of Appeals that vacated the lower court’s denial of class certification, reversed the court’s grant of summary judgment and issued an important decision on the issue of loss causation in securities litigation. The panel included Sandra Day O’Connor, Associate Justice of the United States Supreme Court (Ret.) sitting by designation.
Robbins Geller represented lead plaintiff Alaska Electrical Pension Fund and named plaintiff Massachusetts State Carpenters Pension Fund (now known as New England Carpenters Pension Fund) in this securities class action that was pending in the Northern District of Texas. Plaintiffs alleged violations of the Securities Act of 1933 and Securities Exchange Act of 1934 on behalf of a class of purchasers of Flowserve Corp. securities during the February 6, 2001 through September 27, 2002 class period. As alleged in the complaint, to mask the chaos caused by Flowserve’s massive acquisitions, defendants misrepresented the company’s financial condition by making related false statements concerning earnings forecasts, historical past performance, past and future integration costs and savings, and debt-covenant compliance.
The district court denied class certification and entered summary judgment based on defendants’ arguments regarding loss causation. Specifically, the defendants in Flowserve, like defendants in many securities cases, argued that to demonstrate loss causation, plaintiffs must show that the company’s subsequent announcements explicitly revealed the fraud that plaintiffs allege. Essentially, defendants asserted that to be liable, they had to confess to their own fraud for plaintiffs to establish loss causation.
Plaintiffs appealed the district court’s ruling to the Fifth Circuit. After considering plaintiffs’ appellate arguments, the Fifth Circuit rejected the district court’s loss causation test that required a fact-for-fact disclosure of information that fully corrected prior misstatements. The Fifth Circuit’s decision was very important to the case specifically and to securities actions in general. The Fifth Circuit held that “[i]f a fact-for-fact disclosure were required to establish loss causation, a defendant could defeat liability by refusing to admit the falsity of its prior misstatements.” The decision is significant because it repudiates an argument frequently used by defendants in securities cases in an attempt to evade liability for their fraudulent conduct. Significantly, the Fifth Circuit panel noted that “[t]o be successful, a securities class-action plaintiff must thread the eye of a needle made smaller and smaller over the years by judicial decree and congressional action. Those ever higher hurdles are not, however, intended to prevent viable securities actions from being brought.”
Commented former Robbins Geller partner Sanford Svetcov (who briefed and argued the appeal): “Plaintiffs are obviously pleased that the Fifth Circuit agreed with us that there is no fact-for-fact or mirror-image test for proving loss causation. The decision is a great win for the plaintiffs and the putative class of investors.”
Alaska Elec. Pension Fund v. Flowserve Corp., 572 F.3d 221 (5th Cir. 2009).