The U.S. District Court for the Southern District of New York recently denied a motion seeking certification of a class of purchasers of Freddie Mac's Series Z preferred stock in a suit against Freddie Mac's former CEO Richard Syron and former CFO Anthony Piszel. In re Fed. Home Loan Mortg. Corp. Sec. Litig., 2012 WL 1028642 (S.D.N.Y. Mar. 27, 2012). The plaintiff sued Syron and Piszel after Freddie Mac's stock price fell after it was publicly called "insolvent" by a former St. Louis Federal Reserve president, and again after Freddie Mac was moved into conservatorship. The plaintiff alleged that Syron and Piszel had misrepresented and omitted material information about Freddie Mac's underwriting and risk management practices and the adequacy of its capitalization.
In denying class certification, the court found that plaintiff could not establish a class-wide presumption of reliance through a "fraud on the market" theory, without which individual questions about investor reliance on misrepresentations would predominate over common questions. The court stated that the most important factor in determining whether an efficient market exists is whether there is a "demonstration of a cause-and-effect relationship between unexpected, material disclosures and changes in stock prices." The court found that this factor was not met because neither of the studies conducted by the plaintiff's expert could prove the necessary cause-and-effect relationship. Because the plaintiff had failed to show through his expert that the market for Series Z was efficient, no fraud-on-the-market presumption of collective reliance applied, and therefore individual issues predominated over common ones. The court thus denied the plaintiff's motion for class certification.
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