[co-author: Patrick McCusker]
On September 30, 2024, the U.S. District Court for the Eastern District of Michigan issued an opinion in Shupe v. Rocket Companies, Inc., et al., denying certification of a putative class of investors in a securities fraud action against Rocket Companies, Inc. (“Rocket”) and several of its alleged control persons. Shupe v. Rocket Companies, Inc., et al., No. 1:21-cv-11528, 2024 WL 4349172 (E.D. Mich. Sep. 30, 2024). The case represents an important development in class certification jurisprudence because it demonstrates that when a company's stock trades in an efficient market, securities defendants can defeat class certification by leveraging expert evidence that rebuts presumed investor reliance on alleged misrepresentations.
In Shupe, Plaintiffs alleged that Rocket’s CEO made several misrepresentations about the company’s strength during a public investor conference call in February 2021. Specifically, Plaintiffs alleged that the CEO made material misrepresentations when he stated, inter alia, that Rocket was “seeing strong consumer demand,” that Rocket did not predict interest rates “having an impact on our business one way or the other,” that Rocket “take[s]” rising interest rates as an “opportunity to grow market share,” and that direct-to-consumer and partner business channels were “all growing.” Shupe, 2024 WL 4349172 at *4–5. Rocket allegedly revealed the falsity of these statements in a May 2021 earnings call when it disclosed that: (i) it was expecting a decrease of $18.5 billion in actual closed loan volume; (ii) its business was negatively impacted by rising interest rates, such that the company was focusing on its less-profitable partner-network channel and new purchase loans, rather than on its direct-to-consumer channel and refinancing loans; and (iii) Rocket had experienced its lowest gain on sale margin since its 2020 initial public offering. Id. at *6.
In denying the motion for class certification, the Court determined that Defendants had successfully proven, by a preponderance of the evidence, that the CEO’s alleged misrepresentations had no impact on the price of Rocket stock, thus rebutting the Basic v. Levinson presumption of investor reliance on purported misstatements when a stock trades in an efficient market throughout a putative class period. 485 U.S. 224 (1988). In reaching its conclusion, the court discussed Goldman Sachs Group, Inc. v. Arkansas Teacher Retirement System, the 2021 U.S. Supreme Court case holding that trial courts must consider whether alleged misstatements are too generic to have artificially inflated a company’s stock price, especially when viewed in relation to corresponding corrective disclosures. 594 U.S. 113, 122–23.
Lower courts have grappled with the implications of the Supreme Court’s Goldman decision. In what appears to be an inflection point, many courts applying Goldman's mandate have denied class certification or limited the scope of proposed investor classes, finding, in several instances, a significant mismatch between the general nature of the alleged misrepresentations and the specific corrective disclosures at issue. See In re Apache Corp. Sec. Litig., No. 4:21-cv-00575, 2024 WL 532315, at *14 (S.D. Tex. Feb. 9, 2024) (limiting proposed class period after finding no price impact associated with fifteen alleged misrepresentations); Kirkland Lake Gold Ltd. Sec. Litig., No. 20-cv-4953, 2024 WL 1342800 at *8–12 (S.D.N.Y. Mar. 29, 2024) (denying class certification in part based “on the substantive mismatch between the alleged misrepresentation and the corrective disclosure”); see also Lase Guar. Tr. on behalf of JPMorgan Chase & Co. v. Bammann, No. 22-cv-01331, 2024 WL 1117043, at *6 (E.D.N.Y. Mar. 14, 2024) (dismissing complaint upon finding that several alleged misstatements presented “a paradigmatic example of that mismatch in specificity”).
Courts' willingness to scrutinize class certification motions in the wake of the Supreme Court's ruling was illustrated on remand in Goldman. There, the Second Circuit decertified a proposed class of investors upon finding that the alleged misrepresentations—which concerned language in the company's annual financial report referring to “extensive procedures and controls” for identifying and addressing conflicts of interest—were too generic to have had any direct impact on the company’s stock price, based on, among other things, the fact that no analysts had referenced those alleged misstatements during the putative class period. Arkansas Tchr. Ret. Sys. v. Goldman Sachs Grp., Inc., 77 F.4th 74, 103–05 (2d Cir. 2023).
The court in Shupe relied on similar reasoning in its decision to reject Plaintiffs' request to certify a class. In reaching its conclusion, the court cited several findings from Defendants’ expert report, including that:
- At the same time Rocket’s CEO made optimistic statements about Rocket’s future, the company released a public earnings announcement that explained the company’s financial performance had decreased relative to the previous quarter;
- Rocket’s SEC filings and risk disclosures made at the time of CEO’s challenged statements discussed how rising interest rates were adverse to its business as a mortgage lender; and
- A review of “at least 50” sell-side analyst reports from 17 different analysts released during the proposed class period contained no mention of the CEO’s comments. Shupe, 2024 WL 4349172 at *24–25.
The court held that these findings were “largely dispositive” because they demonstrated a “considerable mismatch . . . between the generic nature of the alleged misrepresentation and the specific revelation” in the opinion denying class certification. Id. at *25–26. As such, they rebutted the Basic v. Levinson presumption of reliance.
While it remains to be seen how many courts will adopt Shupe's logic, it nonetheless promises to have significant consequences for securities class action litigants. Accordingly, in light of Shupe and Goldman’s other progeny, defense counsel litigating securities class actions should analyze whether allegations brought by putative class plaintiffs are predicated on generic statements about a company’s financial health, and followed by specific “corrective” disclosures about company policy, practices, or finances. If so, defendants may mount a successful challenge to class certification by demonstrating through expert evidence, and potentially analyst commentary, that the alleged misrepresentations had no negative price impact on the company’s stock.
