In Miles v. Merrill Lynch,1 the U.S. Court of Appeals for the Second Circuit clarified that a district court is required to make a “definitive assessment of Rule 23 requirements” including the resolution of any material factual disputes in order to conclude that each Rule 23 requirement has been met by a preponderance of the evidence.2 In the context of a plaintiff’s invocation of the fraud-on-the-market presumption of reliance to demonstrate the Rule 23(b) requirement that common questions of law or fact predominate, one issue often faced by district courts is determining whether the security at issue trades in an efficient market.

Recently, Judge Miriam G. Cedarbaum declined to certify a class of stockholders of Freddie Mac preferred stock listed on the New York Stock Exchange, finding that plaintiffs could not avail themselves of the fraud-on-the-market presumption to establish class-wide reliance since they were unable to demonstrate that the stock traded in an efficient market. In re Fed. Home Loan Mortg. Corp. (Freddie Mac) Sec. Litig., No. 09-832, slip op. at 24 (S.D.N.Y. March 27, 2012). While that decision was not unusual, Judge Cedarbaum departed from the majority of cases, which have found that the market for stocks listed on a national exchange is presumptively efficient, and minimized the significance of some other accepted indicia of efficiency. Her decision brings into focus the necessity of expert evidence to demonstrate a “cause and effect” relationship between unexpected news and the market price of the restricted stock.3

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