Purple Mountain Trust v. Wells Fargo & Company

Background

This putative securities class action was brought against Wells Fargo & Company and its former chief executive officer, Timothy Sloan. Purple Mountain Trust was no longer in the case, and Construction Laborers Pension Trust for Southern California was the lead plaintiff. The operative complaint asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5.

The court had previously sustained the Section 10(b) and Rule 10b-5 claims based on two alleged misstatements and dismissed the other claims. Construction Laborers asked the court to certify a class under Rule 23(b)(3). Wells Fargo opposed certification only on whether common questions predominated over individual questions concerning reliance and damages.

Class-certification requirements

The court held that the proposed class satisfied Rule 23(a)’s requirements. The numerosity requirement was met because the proposed class involved stockholders in a company whose common stock had billions of shares outstanding and billions of shares traded during the relevant period. Wells Fargo did not contest numerosity.

The court also found that Construction Laborers’s claims were typical of the class and that it could fairly and adequately represent the class. Construction Laborers and its proposed counsel submitted evidence supporting their ability to represent the class, and Wells Fargo did not contest typicality or adequacy.

The court found commonality because the case involved common questions about whether Wells Fargo violated the securities laws, made material misstatements or omissions, acted knowingly or recklessly, inflated its stock price, and caused investors’ losses. The court also found that common questions predominated under Rule 23(b)(3).

Reliance and market efficiency

For a securities-fraud claim under Section 10(b) and Rule 10b-5, the plaintiff must prove a material misrepresentation or omission, scienter, a connection to the purchase or sale of a security, reliance, economic loss, and loss causation. Construction Laborers sought to use the fraud-on-the-market presumption of reliance. That presumption may apply when alleged misstatements were public, the stock traded in an efficient market, and the purchase occurred between the misstatements and the corrective disclosures.

The court found that the first and third requirements were undisputed. It then found, based on evidence from Construction Laborers’s expert, Bjorn Steinholt, that Wells Fargo stock traded in an efficient market. The evidence included substantial trading volume, coverage by more than 30 analyst firms, at least 250 analyst reports during the class period, market makers, eligibility to file a short-form registration statement, and statistically significant stock-price movements following certain company announcements and alleged corrective disclosures.

The court rejected Wells Fargo’s objections to Steinholt’s event study. It concluded that the study used a widely accepted method, that Wells Fargo had not provided evidence showing market inefficiency, and that the alleged shortcomings did not require rejecting the analysis. The court therefore held that Construction Laborers had established market efficiency by a preponderance of the evidence and was entitled to the classwide presumption of reliance.

Damages

The court held that damages were capable of measurement on a classwide basis. Construction Laborers and Steinholt proposed using an event study to estimate the per-share price decline associated with disclosures of the alleged fraud and to calculate out-of-pocket damages.

The court rejected Wells Fargo’s objections that the methodology resembled methods used in other cases and did not adequately separate the effects of dismissed claims, other information, or changing circumstances. The court stated that such issues did not prevent certification and that securities plaintiffs did not need to prove loss causation at the class-certification stage. The court also stated that falsity, materiality, and loss causation were common questions that did not need to be decided before certification.

Superiority and order

The court found that a class action was superior to thousands of individual lawsuits because the proposed class likely included thousands of investors and resolving the dispute in one proceeding would be more efficient. Wells Fargo did not contest superiority.

The court certified a class consisting of persons and entities that purchased or otherwise acquired Wells Fargo common stock from November 2, 2016, through August 3, 2017, inclusive, and were damaged thereby. The order excluded the defendants, Wells Fargo’s present or former executive officers, and their immediate family members. The court appointed Construction Laborers as class representative and Robbins Geller Rudman & Dowd LLP as class counsel. It directed Construction Laborers to submit a proposed notice-distribution plan by September 1, 2022, after the parties met and conferred.