On September 30, 2024, the United States District Court for the Eastern District of Michigan denied class certification in a putative class action asserting claims under the Securities Exchange Act of 1934 against a mortgage company and certain of its executives. Shupe v. Rocket Cos. Inc., No. 1:21-cv-11528, slip op. (E.D. Mich. Sept. 30, 2024), ECF No. 227. Plaintiffs alleged that defendants made misrepresentations regarding the financial health of the company. The Court held that class certification was inappropriate for multiple reasons, but critically held that defendants had successfully rebutted the presumption of reliance afforded by Basic Inc.v. Levinson, 485 U.S. 224 (1988)—by demonstrating that the alleged misrepresentations did not impact the company’s stock price—and thus individual issues of reliance would predominate, precluding class certification.
The Court first held that plaintiffs were entitled to invoke the Basic presumption of reliance, concluding that multiple factors supported the conclusion that the company’s stock traded in an efficient market—including because it traded on the New York Stock Exchange, had a high weekly trading volume, was the subject of analyst reports, and was used by a large number of market makers. Slip op. at 20–36. While defendants argued the company’s stock amounted to a “meme” stock and responded to social media investment trends as opposed to market information, the Court concluded that even if the company’s stock responded to social media posts over two days during the proposed class period, that was not enough to show that the stock traded in an inefficient market. Id. at 36–46.
The Court further held, however, that defendants rebutted the Basic presumption by demonstrating that the challenged statements at issue, which were “generic” in nature and expressed optimism about the company’s business and demand for its products, did not artificially inflate the company’s stock price. See id. at 46–47.
Defendants first demonstrated that, at the time of the challenged statements, the company also made an earnings announcement indicating that the number of mortgages the company had closed had generally decreased, and that market analysts gave more emphasis to this announcement than to the challenged statement by the company’s CEO regarding “strong customer demand.” Id. at 47. Moreover, the company’s SEC filings also disclosed the negative impact that rising interest rates would have on its business. And analyst reports referenced key mortgage industry forecasts suggesting that the company’s performance metrics were expected to decline. Id. at 48. The Court also noted that defendants had shown that analyst reports authored before, during, and after the putative class period consistently did not indicate that the at-issue company statements were having a price impact on the stock. Id. In fact, the core statements plaintiffs challenged were not even referenced in these reports. Id.
The Court explained that this was “largely dispositive,” id. at 49, in light of the U.S. Supreme Court’s guidance in Goldman Sachs Grp., Inc. v. Arkansas Tchr. Ret. Sys., that “as a rule of thumb, a more general statement will affect a security’s price less than a more specific one on the same question,” and that courts must carefully assess whether there is a “mismatch” between the challenged statement and alleged corrective disclosure. 594 U.S. 113, 121 (2021). The Court noted that when the Second Circuit applied this ruling most recently in 2023, directing the district court to decertify the class (as discussed in a prior post), the Second Circuit had also assessed similar evidence offered by defendants’ expert (indeed, the same expert was involved in both this case and the case before the Second Circuit) and emphasized the expert had analyzed hundreds of analyst reports which did not mention the challenged statements at issue. Slip op. at 51. The Court held that in this case too, there was a significant mismatch between the generic statements of the company’s CEO about matters like “strong consumer demand” and the specific revelation of the company’s mortgage volume, whereas no analyst report emphasized the statements plaintiffs claimed were false. Id. at 51–52. The Court also held that plaintiffs’ allegations of price maintenance did not make sense based on the generic nature of the challenged statements and the specific nature of the alleged corrective disclosure. Id. at 52–53.
The Court further rejected the suggestion that plaintiffs could invoke a presumption of reliance based on an omission theory under Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972). Slip. op at 53. The Court noted that it had held in other cases that the Affiliated Ute presumption does not apply where the claims primarily involve affirmative misstatements, as was the case here. Id. at 54. The Court also emphasized that plaintiffs’ complaint only used the word “omission” twelve times across 146 pages of pleading, while the complaint repeatedly noted that the case was intended to recover for “false and misleading statements to the market.” Id. The Court concluded that allowing the Affiliated Ute presumption in this case would stray from that case’s purpose of allowing for a presumption of reliance in circumstances where “no positive statements” were made to the market at all. Id.
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