(CN) – The 5th Circuit upheld a lower court’s refusal to extend class-action status to a securities fraud lawsuit over inflated circulation at the Dallas Morning News.
Shareholders accused newspaper owner Belo Corp. of manipulating the paper’s circulation, rigging audits and engaging in other questionable circulation practices, such as contriving a no-return policy to stop distributors from returning any unsold newspapers.
On Aug. 5, 2004, Belo admitted in a press release that it was under investigation for its circulation practices – a revelation that resulted in a 1.5 percent daily paper circulation decline and a 5 percent Sunday decline, according to Belo.
This news, combined with previously announced drops in circulation and lower anticipated sales, caused a total circulation decline of 5 percent for the daily paper and 11.5 percent for the Sunday paper, the press release stated.
When trading opened the next day, Belo’s stock price plummeted from $23.21 a share to $18, at its nadir.
The plaintiffs were investors who bought high, when they say the price was artificially inflated.
Belo argued that the case should not proceed as a class action, because the plaintiffs failed to show that the disclosure of fraud – and not some other factor – caused the stock price to drop.
The plaintiffs’ expert, Dr. Scott Hakala, rejected this claim, saying the decline was “entirely or almost entirely attributable to the revelation of the relevant truth in this case.”
Both the district court and the federal appeals court denied class certification.
The New Orleans-based circuit panel said the plaintiffs’ expert had based his findings on how the stock reacted to the bundle of bad news, rather than to the news about just the fraudulent activity.
“Conceivably, [the Dallas Morning News’] fraudulent practices could have resulted in 90% of the circulation decline, but if the stock price fell because the market was concerned only with the reason for the other 10%, loss causation could not be proven,” Judge Jerry Smith wrote.
“If the fraud did not cause the price of the stock to increase, and its disclosure does not cause the price to go down, no injury has occurred. Thus, regardless of the number of disclosures, plaintiffs must establish the connection between the disclosure and the decline in price.”