Failure to Launch
Securities class action lawsuits in the U.S. are very much subject to the rules of civil procedure regarding class action certification. In the following guest post, Sarah Abrams, Head of Claims Baleen Specialty, a division of Bowhead Specialty, examines a recent district court class action certification decision and considers its implication. I would like to thank Sarah for allowing me to publish her article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is Sarah’s article.
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The recent voluntary dismissal of a putative securities class action lawsuit (SCA) provides an interesting case study on the likely fatality of a securities case once a court denies class certification for failing to meet certain Federal Rule 23 (Rule 23) prerequisites. As discussed in more detail below, the Eastern District of Michigan District Court (district court or court) found, in part, that there was no predominance and the proposed class representatives did not adequately represent the class.
To appreciate the impact of certain defenses to certifying a class of plaintiff shareholders on D&O underwriting exposure, the following reviews the underlying SCA allegations, denial of class certification, and the broader potential implications for D&O insurers in receipt of similarly tendered claims.
The SCA
In February 2024, shareholders Carl Shupe and the Construction Laborers Pension Trust (plaintiff shareholders) for Southern California filed their Second Amended Securities Class Action Complaint alleging violations of the Securities Exchange Act of 1934 (§10(b), Rule 10b-5, §20(a), and §20A for insider trading against an executive and major shareholder.
The plaintiff shareholders alleged that, during the first quarter of 2021, executives communicated to investors that there was “strong consumer demand” and that rising interest rates would not harm business. However, the company was allegedly experiencing shrinking profit margins. The complaint further asserted that executives had real-time access to internal dashboards and forecasts reflecting this business decline.
A negative financial forecast was reportedly presented at a company board meeting on March 23, 2021, which included a nearly $1 billion revenue drop, an 80% decrease in refinancing volume, and reduced profitability. Within days of that board meeting, an executive allegedly sold 20.2 million shares through a controlled entity for approximately $500 million. Plaintiff shareholders claimed this was the executive’s first public sale of stock and that it was executed outside normal trading windows.
In May 2021, the company issued public guidance, including indications that a key profitability metric had fallen to its lowest level in two years. Plaintiff shareholders alleged that once this negative outlook was disclosed, the company’s stock price fell by 17% and financial analysts issued downgrades citing reduced earnings power and margin compression. The SCA sought certification of one class of investors who purchased shares between February 25 and May 5, 2021, and a subclass of investors who traded contemporaneously with the alleged March 29 insider sale.
The above SCA allegations may sound familiar to D&O underwriters, particularly claims of company misstatements and securities sales by executives. However, the basis for the district court’s order denying class certification may serve as a reminder for D&O carriers that Rule 23 procedural hurdles can quickly end litigation without pressure to settle.
Denial of Class Certification
In September 2024, the district court issued its opinion and order denying the plaintiffs’ renewed motion for class certification. While the court found that the SCA plaintiffs sufficiently demonstrated certain Rule 23 prerequisites, the defendant company and executives successfully rebutted the “fraud-on-the-market” presumption by demonstrating that alleged misstatements by executives had no measurable impact on the stock price.
The district court further found that the putative class action was not the “superior method” of adjudication, that the proposed subclass definition was not ascertainable, and that the named plaintiffs were not adequate representatives due to conflicts and misunderstandings about the claims. The following discusses the reasoning behind each of these prongs.
Predominance and “fraud-on-the-market”
The SCA plaintiff shareholders relied on the Basic v. Levinson presumption of reliance, which allows courts to assume that investors in an efficient market rely on public statements incorporated into the company share price. While the district court agreed that the stock traded in an efficient market, it held that the defendant company and executives successfully rebutted the “fraud-on-the-market” presumption under Halliburton Co. v. Erica P. John Fund, Inc. (Halliburton II), 573 U.S. 258, 279–83 (2014).
As D&O Diary Readers may recall, to prevent class certification in a securities class action, a defendant can rebut the “fraud-on-the-market” presumption by proving that the alleged misrepresentation did not impact a company’s share price. Thus, the defendant has the burden of providing evidence that severs the causal link between the alleged misstatement and the company share price. If the presumption of reliance is rebutted at the class certification stage, the class will likely fail since individual reliance issues predominate.
According to the district court, the SCA’s alleged misstatements by executives regarding “strong consumer demand” had no measurable price impact, which broke the link between the misstatements and market price. Without that causal link, reliance could not be established on a class-wide basis, defeating predominance.
Superiority
Because the presumption of reliance was rebutted, each investor would need to litigate reliance individually. The court emphasized that under Rule 23, common issues must predominate, and a class action must be the “superior” means of adjudication. The absence of class-wide reliance on alleged misstatements meant individual shareholder issues would overwhelm common ones, so the superiority requirement was not satisfied.
Ascertainability of Subclass
In addition, the SCA plaintiffs sought certification of a subclass of investors who traded contemporaneously with the alleged insider sale. The court found that, consistent with precedent, the shareholder plaintiffs had not articulated a reliable method to determine who qualified as “contemporaneous,” and the subclass definition was too vague to be administratively feasible.
Once class certification was denied, only individual claims against the company and executives were left.
Conclusion
In May 2025, the SCA shareholder plaintiffs’ counsel published a nationwide notice inviting new investors to step forward as lead plaintiff for the narrowed insider trading claims. There was no response, not even from the original shareholder plaintiff. In July 2025, both parties to the SCA filed a joint stipulation of voluntary dismissal.
For D&O insurers, denial of the class certification and voluntary dismissal of a securities suit may favorably impact defense expenses and settlement demands. Lessons learned from this recent district court denial under Rule 23 may include requesting defense counsel to engage an expert to provide a pricechange analysis to demonstrate that the company’s share price did not change when the alleged misstatement was made.
In addition, it may be important to consider that the fraud-on-the-market presumption only applies to an efficient market, one where new information quickly changes stock prices. If a defendant company can provide evidence that the market was not efficient, the presumption of reliance falls.
Even where executives’ statements and insider trading look damning, a defendant public company can defeat an SCA class certification by showing a lack of price impact or inadequate representation. As a result, D&O insurers may want to initially consider whether predominance exists as soon as an SCA is filed.
The views expressed in this article are exclusively those of the author, and all of the content in this article has been created solely in the author’s individual capacity. This article is not affiliated with the author’s company, colleagues, or clients. The information contained in this site is provided for informational purposes only, and should not be construed as legal advice on any subject matter.
