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Court OKs class certification in Conseco securities-fraud case

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In a securities-fraud case involving the Carmel-based financial and life insurance services company Conseco, a 7th Circuit Court of Appeals panel has refused to significantly alter the class certification rules and throw out the long-established fraud-on-the-market doctrine.

The ruling comes today in Franz Schleicher, et al. v. Gary C. Wendt, et al., No. 09-2154, which stems from several lawsuits that were consolidated in the Southern District of Indiana. The suit alleges that Conseco (now CNO Financial Group) violated the Securities and Exchange Act through misleading statements about Conseco’s financial position that inflated stock prices for investors prior to the company’s bankruptcy.

Early last year, U.S. Judge David F. Hamilton on the trial bench certified a class, but the defendants resisted that certification.

“That’s not surprising, because certification substantially increases the settlement value of a securities suit,” Chief Judge Frank Easterbrook wrote in the ruling today. “What do surprise are the arguments defendants advance, arguments that if accepted would end the use of class certification in securities cases.”

Defendants contend that even a firm as large as Conseco does not qualify for the fraud-on-the-market doctrine, which was established in the 22-year-old case of Basic, Inc. v. Levinson, 485 U.S. 224 (1988) that held securities sellers and purchasers relying on market price integrity are also impacted by any material misrepresentations. Along with that argument, the Conseco defendants also argue that a District judge must determine that contested statements actually caused material stock price changes before granting class certification.

The 5th Circuit Court of Appeals in Oscar Private Equity Investments v. Allegiance Telecom, Inc., 487 F. 3d 261 (5th Cir. 2007) ruled that way, but Chief Judge Easterbrook said that jurisdiction stands alone and the 7th Circuit doesn’t agree with that stance. That court’s position would more than just tighten the class certification rules, it would make that certification virtually impossible in many securities suits.

By holding a hearing to basically determine the merits of a complaint before granting class certification, a court would basically be disregarding the federal rules established more than four decades ago. That review of the merits should be limited, the 7th Circuit ruled.

“That would resurrect the one-way-intervention model that was ditched by the 1966 amendments to Rule 23,” Chief Judge Easterbrook wrote. “Under the current rule, certification is largely independent of the merits… and a certified class can go down in flames on the merits.”

Judge Hamilton assured that the market for Conseco stock was thick enough to transmit defendants’ statements to investors by way of the price, and that finding supports the use of the fraud-on-the-market doctrine as a replacement for individual reading and reliance on the statements. As a result, the 7th Circuit found that he didn’t commit legal error or abuse his discretion.
 

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  4. Law school is social control the goal to produce a social product. As such it began after the Revolution and has nearly ruined us to this day: "“Scarcely any political question arises in the United States which is not resolved, sooner or later, into a judicial question. Hence all parties are obliged to borrow, in their daily controversies, the ideas, and even the language, peculiar to judicial proceedings. As most public men [i.e., politicians] are, or have been, legal practitioners, they introduce the customs and technicalities of their profession into the management of public affairs. The jury extends this habitude to all classes. The language of the law thus becomes, in some measure, a vulgar tongue; the spirit of the law, which is produced in the schools and courts of justice, gradually penetrates beyond their walls into the bosom of society, where it descends to the lowest classes, so that at last the whole people contract the habits and the tastes of the judicial magistrate.” ? Alexis de Tocqueville, Democracy in America

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