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In Bricklayers & Trowel Trades Int'l Pension Fund v. Credit Suisse Securities (USA) LLC (Bricklayers), the United States Circuit Court of Appeals for the First Circuit held that the district court properly excluded the testimony of class plaintiffs' expert as unreliable. Since the expert's testimony was the sole basis on which the class relied to establish damages, the court found that they failed to establish loss causation, and summary judgment was thus properly granted in favor of defendants.

The Credit Suisse case arose out of the January 2001 merger between Time Warner Inc. and AOL. A pension fund and other AOL shareholders brought a class action against Credit Suisse First Boston (Credit Suisse) and several of its former analysts, alleging violation of Sections 10(b) and 20(a) of the Securities Exchange Act as well as violations of Rule 10b-5. Specifically, the class plaintiffs alleged that Credit Suisse fraudulently withheld material information in its reporting on the merger and that, as a result of Credit Suisse's intentional omissions and misrepresentations, the class plaintiffs purchased stock in the new company at artificially inflated prices.

Credit Suisse was one of many financial firms reporting on AOL's business at the time of the merger and providing outlook forecasts. The two former analysts named as defendants were in charge of Credit Suisse's coverage of the merger, beginning the day after the merger and continuing through approximately January 2002 (the Coverage Period). During the Coverage Period, Credit Suisse issued 35 reports containing observations about AOL, buy/sell recommendations and price targets. In all 35 reports, Credit Suisse recommended purchasing AOL stock. Credit Suisse initially projected AOL's future stock price at $80, but by September 2001 Credit Suisse revised its projection downward to $45. Nine months later, AOL's stock price was $11 per share. The class plaintiffs alleged that the analysts misrepresented their true opinions about the company in order to maintain a good relationship with AOL and with the hope of winning future business from AOL.

Both the class plaintiffs and the defendants retained experts to show the effect, or lack thereof, of Credit Suisse's omissions on AOL stock prices. The class plaintiffs retained Dr. Scott D. Hakala. Each side subsequently moved to bar the other's expert under Daubert, and the trial court held a Daubert hearing to determine the admissibility of the proffered expert testimony on loss causation. Ultimately, the trial court found Dr. Hakala's testimony unreliable and therefore inadmissible.

In reviewing the district court's decision, the First Circuit discussed event studies and expert testimony, generally noting that, in cases such as this, a plaintiff must show that the stock market reacted to the specific misrepresentation or omission at issue and not to a "tangle of [other] factors."1 In addition, the court noted that the "preferred" method of proving loss causation in securities fraud cases is through an event study. An event study is where an expert determines the extent to which the changes in stock price result from events such as disclosure of negative information about the particular company, and the extent to which those changes result from other factors. In conducting an event study, the expert first "selects the period in which the event could have affected the market price. The expert then attempts to determine the effect on the share price of general market conditions, as opposed to company-specific events, using a multiple regression analysis, a statistical means for explaining the relationship between two or more variables."2 The defendants in Credit Suisse challenged four elements of Dr. Hakala's event study: (i) the selection of event dates; (ii) overuse of dummy variables; (iii) previously disclosed information; and (iv) failure to control for confounding factors.

The district court, in analyzing the four elements set out by the defendants, ultimately concluded that Dr. Hakala's testimony lacked sufficient reliability to be presented to a jury. Specifically, the district court noted that "[h]ad Dr. Hakala's event study suffered from only one of the four methodological defects identified by this Court, or suffered from those flaws jointly but to a lesser degree, today's ruling might have been different."3 Given the extent of Dr. Hakala's errors, however, the district court found that preclusion was necessary.4

The First Circuit engaged in an in-depth analysis of each element of Dr. Hakala's event study and ultimately held that the district court did not abuse its discretion in excluding Dr. Hakala's testimony. In particular, the First Circuit was critical of Dr. Hakala's selection of event dates, many of which bore no relationship to the allegations in the complaint and, in some instances, the court noted that Dr. Hakala "turned the complaint on its head, treating certain events as corrective when the complaint labeled them inflationary."5 The court found that "this complete disconnect between the event study and the complaint nullified the usefulness of Dr. Hakala's work."6

Further, the court affirmed summary judgment in favor of the defendants because, without Dr. Hakala's testimony, the class plaintiffs could not show a genuine dispute as to loss causation.

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1 Bricklayers, No. 12-1750 at 7 (1st Cir. May 14, 2014).
2 Id. at 8.
3 Bricklayers & Trowel Trades Int’l Pension Fund v. Credit Suisse First Boston, 853 F. Supp. 2d 181, 191 (D. Mass. 2012).
4 Id.
5 Bricklayers, No. 12-1750, at 20.
6 Id.



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Rebecca L. Dandy

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