Securities Litigation Update

Fifth Circuit Issues Important Opinion in Securities Fraud Class Action

The Fifth Circuit recently issued an important opinion in a securities fraud class action, Alaska Electrical Pension Fund v. Flowserve Corporation, -- F.3d -- (5th Cir. 2009). The plaintiff alleged that Flowserve and its directors, underwriters and auditor violated Rule 10b-5 of the Securities Exchange Act of 1934 and Section 11 of the Securities Act of 1933 by issuing fraudulent earnings guidance and a defective registration statement. The district court denied the plaintiff’s motion to certify the case as a class action and granted defendants summary judgment on all claims because the plaintiff had failed to prove loss causation—a causal connection between an alleged misstatement and the plaintiff’s losses. In a per curiam opinion, a Fifth Circuit panel that included Hon. Sandra Day O’Connor sitting by designation reversed and remanded the case.

The court observed 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.” Op. at 17. Coming from a panel with a former Supreme Court justice, those words are being interpreted by some practitioners as a warning that the Fifth Circuit has perhaps been too inhospitable to securities fraud claims.

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