Second Circuit Remands Metromedia Case, Rules that Liability Presumption Now Applies to Stock Analysts as Well

Holding:

In deciding an issue that has not been resolved before by circuit courts, the U.S. Court of Appeals for the Second Circuit held that stock research analysts are now equally liable as stock issuers for claims of misrepresentation under the fraud-on-the-market theory. Based on a court precedent, this theory provides that where a defendant has publicly made a material misrepresentation of information about stock traded on an efficient market, the reliance of individual investors on that misrepresentation can be presumed. Here, plaintiffs-appellees alleged that defendants-appellants Citicorp USA, Inc., Salomon Smith Barney, Inc. (“SSB”), their parent company, Citigroup, Inc. (“Citigroup”), and SSB research analyst Jack Grubman engaged in a scheme to defraud investors in Metromedia Fiber Network, Inc. (“Metromedia”) by issuing and disseminating research analyst reports on Metromedia that contained materially false and misleading information. Affirming the finding of the U.S. District Court for the Southern District of New York, the Second Circuit stated that nothing in the case law limits the application of this liability presumption to issuer statements alone. Nevertheless, the Second Circuit vacated the order of class certification and remanded the case for further proceedings. The district court may have correctly stated that plaintiffs had met their burden for invoking the liability presumption, but case law still allows a defendant the opportunity to rebut that presumption.

Detailed Summary:

In this appeal, the Second Circuit addressed the issue whether plaintiffs alleging securities fraud against research analysts must make a heightened evidentiary showing in order to benefit from the fraud-on-the market presumption of Basic Inc. v. Levinson, 485 U.S. 224 (1988). The Second Circuit was supposed to have resolved this issue in the earlier case of Hevesi v. Citigroup, Inc., 366 F.3d 70, 79 (2d Cir. 2004). Unfortunately, the Second Circuit did not hear that case on the merits.  In the instant case, the Second Circuit now have the chance to provide an answer to this issue.

Plaintiffs-appellees alleged that defendants-appellants…

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