Overview
In an opinion today in a securities fraud case, Judge Engelmayer denied a class certification motion that was based on a somewhat novel theory: the plaintiffs allege that insiders of a company called SmartHeat publicly touted a “lockup” restricting their ability to sell shares, but then secretly “unlocked” those shares, thereby causing extra shares to flood the market and depress prices. He ruled that there was insufficient evidence of the plaintiffs’ theorized cause and effect:
Plaintiffs' expert, Dr. Feinstein, opines that it is theoretically possible for the infusion of a large number of shares to affect a stock's price over a long period of time. Perhaps so: Although the Court is quite skeptical that the existence of a discrete number of even large sell orders and/or the availability for purchase and sale on a stock market of larger number of shares would tend to deflate a stock's trading price over a long period of time so as to harm all shareholders, it is not the Court's place on a class-certification motion to find against plaintiffs on this theoretical point. And the Court does not rule out that a colorable showing to this effect could be made, based on a close analysis of trading patterns of a particular security during a particular time period. However, Dr. Feinstein does not undertake a close analysis, or indeed any analysis, of the trading activity at issue in this case to determine if a credible claim can be made, based on actual evidence, that the trading price of SmartHeat shares on NASDAQ over the 27-month class period consistently was reduced by the fact that previously locked-up shares were available for purchase and sale. Instead, his brief discussion of the point is limited to citing research literature supporting the proposition “that sustained large-scale selling generally has a persistent negative impact on the subject stock's price." Id. at 31. But there is no showing in his report that there was "sustained large-scale selling" of the security here throughout the 27-month class period sufficient to create a persistent negative impact on stock price. There is no attempt, for example, to identify the number of large trading orders" or “metaorders" of SmartHeat stock. Nor is there analysis as to the impact of the release into the market on particular dates of particular quantities of previously locked-up shares. There is also no analysis as to the factors that affected how the market came to price SmartHeat stock on the hundreds of individual days comprising the class period. And there is no explanation as to why the volume of shares available for sale (as opposed to a stream of negative news about the company) accounted for the long period of decline in SmartHeat's share price during the class period. Instead, plaintiffs' claim of a 27-month-long artificial depression in SmartHeat share price is cursory and wholly theoretical. Absent a concrete presentation of the evidence on which such a finding could be made in this case, the Court cannot find that price injury to all class members can be established by common proof.
