In re the Allstate Corporation Securities Litigation
966 F.3d 595
| N.D. Ill. | 2020Background
- Lead plaintiffs allege Allstate and senior officers made materially misleading statements about auto-claims frequency and the effect of Allstate’s growth (softening underwriting) strategy, while attributing rising claims to external factors; corrective disclosure on August 3, 2015 admitted the strategy contributed to higher claims and Allstate stock fell ~10%.
- Plaintiffs invoke the fraud-on-the-market (Basic) presumption and the inflation-maintenance theory to show market-wide reliance and price inflation; class initially certified, then vacated by the Seventh Circuit and remanded to assess whether defendants rebutted price impact by a preponderance of the evidence.
- The class-certification record was closed and the parties submitted expert reports: plaintiffs’ economist Finnerty linking the August 4 price drop to the corrective disclosures; defendants’ economist Allen concluding no price impact because no post-statement price upticks and because the market already knew Allstate’s growth strategy.
- District court found Allen’s analyses deficient: she misunderstood plaintiffs’ inflation-maintenance theory, failed to perform any disaggregation/event-study to explain the August 4 decline, relied on analyst quotes that echoed Allstate, and effectively advanced a truth-on-the-market defense.
- Applying Seventh Circuit guidance, the court held defendants failed to rebut the Basic presumption by a preponderance of the evidence and therefore granted class certification for purchasers of Allstate common stock from October 29, 2014 through August 3, 2015.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Basic (fraud-on-the-market) presumption applies at class stage | Basic presumption applies because alleged misstatements were public and market was efficient; reliance is presumed | Defendants challenge whether plaintiffs established price impact and argue market already knew the truth | Court: Plaintiffs invoked Basic; Seventh Circuit agreed preliminarily; burden shifts to defendants to rebut price impact |
| Can defendants rebut Basic by showing no price impact? | Price impact shown by 10% stock drop after corrective disclosure; inflation-maintenance theory explains maintenance of prior inflation | Allen says no statistically significant upticks after misstatements and market already priced-in the growth strategy | Court: Defendants must prove by preponderance that corrective-disclosure drop was entirely due to non-fraud factors; Allen failed to do so |
| Adequacy of defendants’ expert evidence (event study/disaggregation) | Plaintiffs: need disaggregation/event study to show alternative causes; Finnerty ties decline to corrective disclosures | Defendants: rely on Allen’s report and analyst commentary, argue disappointing earnings or industry factors caused decline | Court: Allen failed to perform disaggregation/event study or empirically attribute the August 4 drop to other factors; this failure is fatal to rebuttal |
| Proper scope of defenses at class stage (truth-on-the-market / efficiency) | Plaintiffs: truth-on-the-market and loss-causation defenses are for trial, not for defeating Basic at class stage | Defendants: argue market already knew the truth, so statements could not have moved price | Court: Much of defendants’ argument resembles a truth-on-the-market defense and is improper at class stage; even aside from that, Allen’s reliance on market efficiency to negate price impact was inconsistent with Halliburton II and insufficient |
Key Cases Cited
- Basic v. Levinson, 485 U.S. 224 (1988) (establishes fraud-on-the-market presumption of classwide reliance)
- Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. 804 (2011) (Halliburton I) (price-impact definition and Basic framework reaffirmed)
- Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. 258 (2014) (Halliburton II) (defendants may offer price-impact evidence at class stage but with limits)
- Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, 568 U.S. 455 (2013) (limits on merits inquiries—truth-on-the-market issues—at class certification)
- Glickenhaus & Co. v. Household Int’l, Inc., 787 F.3d 408 (7th Cir. 2015) (endorses inflation-maintenance theory)
- In re Allstate Corp. Sec. Litig., 966 F.3d 595 (7th Cir. 2020) (directs district court to resolve price-impact rebuttal on remand)
- Ark. Teachers Ret. Sys. v. Goldman Sachs Grp., Inc., 955 F.3d 254 (2d Cir. 2020) (discusses inflation-maintenance and requires disaggregation to attribute corrective-disclosure drops to non-fraud factors)