FOR THE NORTHERN DISTRICT OF TEXAS DALLAS DIVISION...

Case 3:03-cv-02761-K Document 210 Filed 05/12/10 of 17 PageID 6474

IN THE UNITED STATES DISTRICT COURTFOR THE NORTHERN DISTRICT OF TEXAS

DALLAS DIVISION

OSCAR PRIVATE EQUITY §INVESTMENTS, ET AL., §

§Plaintiffs, §

§v. § Civil Action No. 3:03 -CV-2761-K

§ROYCE J. HOLLAND AND §ANTHONY PARELLA, §

§Defendants. §

ORDER REGARDING CLASS CERTIFICATION

Before the court are the parties’ respective supplemental filings regarding the issue of class

certification in this case. The court has reviewed and examined those filings and the record as a

whole, the evidence pertaining to the question of class certification, and the ever-fluctuating state

of the law regarding class treatment of securities fraud cases such as this one. Based upon the factual

record and legal precedent currently before it, the court has determined that Lead Plaintiffs have not

established loss causation, which is now a critical prerequisite to the certification of a class. See

Oscar Private Equity Investments v. Allegiance Telecom, Inc., 487 F.3d 261 (5th Cir. 2007), and

Alaska Electrical Pension Fund v. Flowserve Corp., 572 F.3d 221 (5th Cir. 2009). Thus, the court

must find that Lead Plaintiffs have not carried their burden of establishing that class treatment of this

case is appropriate. Accordingly, their Motion for Class Certification is denied.

I. Factual and Procedural Background

Plaintiff Oscar Private Equity Investments (“Oscar”) filed its original Class Action Complaint

for Breach of Fiduciary Duty and Violations of Federal Securities Laws (“Original Complaint”) on

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November 13, 2003. On January 27, 2004, Oscar and Plaintiffs Brett Messing and Marla Messing

(the “Messings”) filed their motion for appointment as lead plaintiffs and for approval of lead

plaintiffs' selection of counsel. The court appointed Oscar and the Messings as lead plaintiffs and

approved their selection of lead counsel by Order entered February 6, 2004.

Allegiance Telecom (“Allegiance”) was a publicly traded company that provided integrated

telecommunications services to business, government, and other institutional users in major

metropolitan areas across the United States during the Class Period. Allegiance also offered local,

long-distance, broadband/Internet access and Internet-related services, bundled and carrier-oriented

wholesale services, as well as end-user equipment sales and maintenance services to individual

customers and businesses. Defendant Holland was the Chairman and Chief Executive Officer of

Allegiance during the Class Period. Defendant Parella was the Executive Vice President for Sales.

Allegiance Telecom is not named as a defendant in this case because it filed for Chapter 11

bankruptcy.

Plaintiffs assert claims for securities fraud pursuant to § 10(b) of the Securities Exchange Act

of 1934, as amended, and Rule 10b-5 promulgated thereunder, for deceiving the investing public and

causing Lead Plaintiffs and other class members to purchase securities of Allegiance at artificially

inflated prices. Lead Plaintiffs also assert claims for violations of § 20(a) of the Securities Exchange

Act. All of Lead Plaintiffs' claims result from a statement issued by Allegiance on February 19, 2002,

informing the public that Allegiance had overstated its “installed line count”– the number of lines

sold to customers that were being used to provide services. Lead Plaintiffs assert that these line

counts were important measures of Allegiance's performance and prospects, and were relied on by

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the market, because, as a start-up company, Allegiance's success could not be measured by its net

income figures.

Lead Plaintiffs allege that Defendants engaged in several schemes to artificially inflate

Allegiance's line count and thus deceived the market and inflated Allegiance's stock price. Lead

Plaintiffs claim that Defendants recklessly ignored the fact that the billing database would provide

an accurate line count, and instead chose to use the order management system to calculate the line

count. Lead Plaintiffs contend Defendants artificially inflated the line count by engaging in the

following schemes:

1) counting lines sold under obviously forged contracts;

2) staggering termination of customer-cancelled lines for months while continuing toinvoice customers in the interim;

3) designing a data entry system to process line additions automatically while requiringmanual entries in order to terminate a line;

4) counting lines which were on hold until the potential customer passed a credit checkor the line was operational, i.e., installed;

5) counting the same lines twice;

6) purchasing lines from other carriers which did not meet the stated definition of an‘installed line,’ e.g., lines purchased on an ‘as-needed’ basis from SBC solely toperform billing services, for which Allegiance retained only a fraction of the revenue;and

7) acquiring and gutting companies solely to artificially inflate the line count.

Lead Plaintiffs initially alleged that Defendants made six false or misleading statements regarding

the line count that form the basis of the complaint. In its Memorandum Opinion and Order entered

June 10, 2004, the court dismissed Lead Plaintiffs’ claims based upon three of the six alleged

statements. Lead Plaintiffs’ claims based upon three statements made in press releases issued on

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April 24, July 24, and October 23, 2001 survived. Lead Plaintiffs claim that the line counts reported

in those statements were artificially inflated, and thus false and misleading.

Lead Plaintiffs then moved to certify this case as a class action under Fed. R. Civ. P. 23,

asserting that they were entitled to a class-wide presumption of reliance pursuant to the fraud-on-the-

market doctrine because they had shown that Allegiance’s stock traded in an efficient market.

Defendants opposed Lead Plaintiffs’ effort to certify the class, in part because Lead Plaintiffs could

not show “loss causation,” thus they could not establish by a preponderance of the evidence that

class-wide (versus individual) issues of reliance predominate, which under Fed. R. Civ. P. 23(b)(3)

is needed to successfully establish that class treatment of the case is warranted. The court disagreed

with Defendants, holding that issues of loss causation were more appropriately reserved for the

merits stage of this litigation, and finding that a class could be certified without such a showing by

Lead Plaintiffs. Accordingly, the court certified the class in April 2005. Oscar Private Equity Inv.

v. Holland, 2005 WL 877936 (N. D. Tex. 2005).

Defendants appealed the court’s class certification order, winning its reversal in May 2007.

In its opinion, the Fifth Circuit noted widespread confusion as to whether loss causation is

appropriately determined at the class certification stage. Oscar, 487 F.3d at 266. To clarify, the

Fifth Circuit noted that under Greenberg v. Crossroads Sys., Inc., 364 F.3d 657 (5th Cir. 2004), and

Unger v. Amedisys, Inc., 401 F.3d 316 (5th Cir. 2005), “loss causation is a fraud-on-the-market

prerequisite” requiring the district court to “find” the facts favoring class certification. Oscar, 487

F.3d at 268-69. The circuit court went on to hold that loss causation must therefore be established

at the class certification phase, “by a preponderance of all admissible evidence.” Id. at 269. In other

words, to avail themselves of a class-wide presumption of reliance, and qualify for class certification,

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Lead Plaintiffs must show at the class certification stage that Defendants’ alleged misrepresentations

caused their economic loss. Id. at 271.

Because the bulk of the court’s prior order certifying the class was not appealed, these

portions of the district court’s earlier order certifying the class now constitute the law of the case and

are not at issue on remand. See, e.g., Jackson v. FIE Corp., 302 F.3d 515, 521 n.6 (5th Cir. 2002)

(ruling not challenged in prior appeal became law of the case); United States v. Reyna, 2008 WL

5272507, **2 (5t' Cir. 2008) (in subsequent appeal, law of case doctrine precluded consideration of

issue not raised in earlier appeal). However, in the aftermath of Oscar and Flowserve, the court now

re-examines whether it can certify the class in view of the requirement that loss causation be

established by a preponderance of the evidence at the class certification stage, in order to establish

that class-wide issues will predominate over individual issues of reliance. For the reasons stated

herein, it cannot.

II. Summary of Lead Plaintiffs’ Live Claims

As the court has previously noted, very few of Lead Plaintiffs’ fraud claims remain. Briefly

stated, the factual bases for these alleged false statements are as follows:

A. April 24, 2001 Press Release

According to Lead Plaintiffs’ Complaint, Allegiance issued a press release on April 24, 2001

to announce the company’s 1Q01 financial performance. Lead Plaintiffs contend that in that press

release, Allegiance misstated that it had experienced “record” growth in installed lines that quarter,

with new installs of 126,200 lines and new orders of 165,900 lines. The press release also allegedly

was untruthful and misleading in stating that Allegiance’s total lines in service had increased to

733,900. According to the press release, which Lead Plaintiffs claim was false and misleading, these

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new line counts were a 17% increase in new installs over the previous quarter and a 74% increase

compared with its line counts in 1Q00. (Complaint at ¶ 129). Lead Plaintiffs further allege that on

April 24, 2001, Allegiance’s stock price rose 8.8%, although the Complaint does not specify whether

this increase occurred before or after the positive line count information was released. (Id. at ¶ 13 0).

B. July 24, 2001 Press Release

Lead Plaintiffs’ next claim relates to a press release issued by Allegiance on July 24, 2001.

In that press release, Allegiance again touted record growth in lines installed, and also reported that

its new lines had increased from 126,200 in 1Q01 to 135,800 in 2Q01. The press release also

allegedly stated a 45% increase in new line installations from a year earlier. ( Id. at ¶ 137). The

complaint further states that the day after the July 24, 2001 press release, Allegiance’s stock price

rose 20%. (Id. at ¶ 13 8).

C. October 23, 2001 Press Release

Finally, Lead Plaintiffs assert that Defendants made false and misleading statements in a

press release issued October 23, 2001. That press release stated that it had sold 182,000 new lines

in 3Q01 and installed 136,200 lines. The Complaint goes on to state that “[w]ithin one day of

Allegiance’s issuance of this release, the Company’s stock shot up from $5.21 to $6.74 - a rise of

$1.52, or 29% - as a result of this news.” ( Id. at ¶¶ 144-45).

D. February 19, 2002 Announcement

On February 19, 2002 Allegiance announced in a press release and a follow-up conference

call that its revenue forecasts for each of the four quarters of 2002 were extremely close to the

minimum revenue covenants required by its lenders. More specifically, with these newly announced

revenue forecasts, Allegiance’s cushion between projected revenue and the revenue covenants was

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reduced from approximately 25% to less than 5%. This meant that an earnings miss of 5% or more

during 2002 could cause Allegiance’s lenders to push it into bankruptcy. Meeting its revenue

forecasts (and the minimum revenue covenants) would require Allegiance to dramatically increase

its revenue from the previous year from $516 million in FY01 to $790 million in FY02 amid an

atmosphere of financial distress which was then prevalent in the telecom industry.

Allegiance also announced other negative financial information on February 19, 2002.

Among this news was that its previous projection of total revenue for 2002 could be lower by $10

million. Allegiance also reported that it had sustained a net loss per share of $1.09 for 4Q01, which

was 10-30% more per share than analysts had anticipated, and a net loss per share of $3.82 for FY01,

which was about $0.14 to $0.32 per share more than analyst expectations.

Finally, Allegiance also announced that it had completed a database reconciliation project

for the purpose of obtaining a more accurate line count, which caused a line count reduction of

approximately 125,000 lines in the order management system to conform with the line count in the

billing system. The need to undertake a system integration project that would include and affect line

count data had previously been disclosed by Allegiance in its September 30, 2001 10-Q, which it had

filed on November 14, 2001. In pertinent part, that filing stated:

Since our inception, we have also been engaged in developing and integrating ouressential information systems consisting of our billing system, our sales order entrysystem, our customer implementation system and our switch information systems.This is a challenging project because these systems were developed by differentvendors and must be coordinated through custom software and integration processes.Our sales, line count and other core operating and financial data are generated bythese systems and the accuracy of this data depends on the quality and progress of thesystem integration project. Although we have made significant progress in oursystem integration efforts, we have not completed it and we have experienced andexpect to experience negative adjustments to our financial and operating data as wecomplete this effort. These adjustments have not had a material adverse effect on our

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financial or operating data to date but until we complete the entire project we cannotassure you that any such adjustments arising out of our systems integration effortswill not have a material adverse effect in the future.

(Emphasis added). Following the completion of the previously-announced system integration

project, Allegiance stated on February 19 that the impact of the line count reduction on revenues was

minimal, because the line count reduction did not significantly impact the billing system.

Therefore, to establish loss causation, Lead Plaintiffs will have to disentangle the information

regarding Allegiance’s potential debt covenant predicament, lowered revenue expectations, and

higher than expected fourth quarter and FY01 losses from the line count information, while also

showing that the news regarding the line count reduction was not confirmatory. This is a complex

and heavy burden that, for the reasons stated below, Lead Plaintiffs have not carried.

III. Standards for Class Certification

Lead Plaintiffs bear the burden of showing that class certification is appropriate. Unger, 401

F.3d at 320; Berger v. Compaq Computer Corp., 257 F.3d 475, 479 (5t' Cir. 2001). Class

certification is at the discretion of the district court, which has inherent power to manage and control

pending litigation. Vizena v. Union Pacific Railroad Co., 360 F.3d 496, 502-03 (5t' Cir. 2004). The

court’s decision to grant class certification will only be reversed upon a showing of abuse of

discretion, or that the court applied incorrect legal standards in reaching its decision. Id. at 502,

citing Berger, 257 F.3d at 478.

A case may proceed as a class action only if the trial court determines that the party seeking

certification demonstrates that all four requirements of Fed. R. Civ. P. 23 (a) are met, and that at least

one of the three requirements of Fed. R. Civ. P. 23 (b) are met. Id. at 503, citing Amchem Prods., Inc.

v. Windsor, 521 U.S. 591, 614 (1997). The party seeking certification bears the burden of proof.

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Berger, 257 F.3d at 479 n.4, citing Castano v. Am. Tobacco Co., 84 F.3d 734, 740 (5th Cir. 1996).

Although the court does not reach the merits of the case in evaluating whether class treatment is

appropriate, it may look past the pleadings to understand the claims, defenses, relevant facts and

applicable substantive law to make a meaningful decision on class certification. Castano, 84 F.3d

at 744; In re Electronic Data Systems Corp. Securities Litigation, 226 F.R.D. 559, 565 (E.D. Tex.),

aff’d, 429 F.3d 125 (5th Cir. 2005).

In determining the propriety of class treatment, the question is not whether plaintiffs have

stated a cause of action or will prevail on the merits, but rather whether the requirements of Rule 23

are met. Flowserve, 572 F.3d at 229 (citations omitted). The denial of class certification does not

prevent a plaintiff from proceeding individually. And “the court's determination for class

certification purposes may be revised (or wholly rejected) by the ultimate factfinder.” Id., quoting

Unger, 401 F.3d at 323; see also Oscar, 487 F.3d at 269 n. 40 (loss causation, as an element of a

10b-5 claim, may be reexamined at summary judgment).

IV. Rule 23 Analysis

To certify a class, the court must find that Plaintiffs have established that all of Fed. R. Civ.

P. 23 (a)’s requirements are met, and that at least one requirement of Fed. R. Civ. P. 23(b) is also met.

In its prior opinion certifying the class, the court found that Lead Plaintiffs had carried their burden

on all of Rule 23's mandatory elements. As the parties are aware, the Fifth Circuit reversed this

court’s decision only because it did not require Lead Plaintiffs to establish loss causation by a

preponderance of the evidence at the class certification state. 487 F.3d at 271. Therefore, the court

will limit its analysis herein to that issue.

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Lead Plaintiffs contend that the class should be certified again because, in addition to the

requirements of Rule 23(a),they have also met the requirements of Rule 23(b)(3), which states that

a class may be certified where common issues of law or fact “predominate over any question

affecting only individual members, and that a class action is superior to other available methods for

the fair and efficient adjudication of the controversy.” Fed. R. Civ. P. 23(b)(3); Unger, 401 F.3d at

320. These requirements are commonly known as “predominance” and “superiority.” It is under

the “predominance” prong of this test that the loss causation requirement comes into play.

A. Predominance Element, Fraud on the Market Theory, and LossCausation

Before granting class certification, the district court must determine that the individual class

members’ fraud claims are not dependent upon proving individual reliance. Unger, 401 F.3d at 321.

As is stated above, the party seeking class certification has the burden of proof. Berger, 257 F.3d

at 479 n.4. If the circumstances of each plaintiff’s alleged reliance on fraudulent representations

differ, then each individual plaintiff will have to prove reliance and the proposed class does not meet

Fed. R. Civ. P. 23(b)(3)’s predominance requirement. Unger, 401 F.3d at 321-22, citing Castano,

84 F.3d at 745. However, a proposed class in a securities fraud class action such as this case may

establish predominance by availing itself of the class-wide presumption of reliance permitted by the

fraud-on-the-market theory recognized in Basic Inc. v. Levinson, 485 U.S. 224(1988). Bell v.

Ascendant Solutions, Inc., 422 F.3d 307, 310 (5 th Cir. 2005).

The fraud on the market theory permits investors who cannot satisfy the traditional

requirement of proving actual reliance on a fraudulent representation (i.e., those investors who did

not read the documents or hear the statements alleged to contain the fraudulent representations) to

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Case 3:03-cv-02761-K Document 210 Filed 05/12/10 Page 1 1 of 17 PageID 6484

maintain their fraud claims by ‘“interpreting the reliance requirement to mean reliance on the

integrity of the market price rather than reliance on the challenged disclosure.”’ Id. at 422 F.3d at

310 n.2, quoting Daniel R. Fischel, Efficient Capital Markets, the Crash, and the Fraud on the

Market Theory, 74 Cornell L. Rev. 907, 908 (1989). To rely on the fraud-on-the-market

presumption, the plaintiffs must show that 1) the defendant made public material misrepresentations;

2) the defendant’s shares were traded in an efficient market; and 3) the plaintiffs traded shares

between the time the misrepresentations were made and the time the truth was revealed. Greenberg,

364 F.3d at 661, citing Basic, 485 U.S. at 248 n.27. When considering class certification based upon

a fraud-on-the-market theory, the court “must engage in thorough analysis, weigh the relevant

factors, require both parties to justify their allegations, and base its ruling on admissible evidence.”

Bell, 422 F.3d at 313 n.11, citing Unger, 401 F.3d at 325. However, after Oscar, it is clear that there

is now a fourth element added to the above three requirements. Lead Plaintiffs must show not only

that the market was efficient, but that the alleged misrepresentations actually caused their losses.

This requirement includes an evidentiary burden that this mandatory showing of loss causation be

made by a preponderance of all admissible evidence. Archdiocese of Milwaukee Supporting Fund,

Inc. v. Halliburton Co., 597 F.3d 330, 335 (5th Cir. 2010); Oscar, 487 F.3d at 269.

In Oscar, the Fifth Circuit expressed its view that it had “tighten[ed]” the requirements for

plaintiffs seeking a presumption of reliance, by requiring not only proof of a material misstatement,

but further proof that the alleged misstatement actually moved the market. Oscar, 487 F.3d at 265

(emphasis in original); see also Flowserve, 572 F.3d at 228 (most notably, plaintiff must prove that

the defendant’s non-disclosure materially affected the security’s market price) (citation omitted).

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The court further stated that “essentially, we require plaintiffs to establish loss causation in order to

trigger the fraud-on-the-market presumption.” Id.; see also Flowserve, 572 F.3d at 228.

The court emphasized that the loss causation question is not reserved exclusively for the

merits stage of a case, noting that the efficient market doctrine permits “an extraordinary aggregation

of claims” that justifies advancing Lead Plaintiffs’ evidentiary burden to the class certification stage.

Id. at 266-67. Believing that an order for class certification bestows upon plaintiffs extraordinary

leverage, the court rejected the plaintiffs’ contention that at the class certification stage, it was

inappropriate to address loss causation beyond a generalized inquiry into whether the alleged

misrepresentation moved the stock. Id. at 267-69. Rather, it determined that the court must “find”

rather than assume certain facts supporting class certification, and those facts must support a finding

of loss causation by a preponderance of admissible evidence. Id.; Flowserve, 572 F.3d at 228.

To establish loss causation, Lead Plaintiffs can show that an alleged misrepresentation

actually affected the market in one of two ways: 1) demonstrating an increase in the stock price after

the release of false positive news; or 2) demonstrating a decrease in price following a corrective

disclosure. When relying on a decrease in stock price, as Lead Plaintiffs do here, they must

demonstrate that the stock price declined due to the revelation of the truth and not the release of

other unrelated negative information. Id.

More specifically, Lead Plaintiffs must show that 1) the negative “truthful” information

causing the decrease in price is related to an allegedly false, non-confirmatory positive statement

made earlier; and 2) that it is more probable than not that it was this negative statement, and not

other unrelated negative statements, that caused a significant amount of the decline. Id. at 266

(emphasis added); Flowserve, 572 F.3d at 228, citing Greenberg, 364 F.3d at 666. The loss must

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occur because this new truth emerged in the marketplace, not as a result of “changed economic

circumstances, changed investor expectations, new industry-specific or firm-specific facts,

conditions,” or other reasons unrelated to the alleged fraud. Flowserve, 572 F.3d at 229, citing Dura

Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 342-43 (2005); Halliburton, 597 F.3d at 336.

Similarly, if a company releases multiple items of negative information on the same day, the plaintiff

must establish a reasonable likelihood that a subsequent decline in stock price is due to the revelation

of the truth of the earlier misstatement rather than to the release of the unrelated negative

information. Halliburton, 597 F.3d at 336.

Lead Plaintiffs must satisfy the court that their losses likely resulted from the specific

correction of the purported fraud and not because of some independent reason. A subsequent

disclosure that does not correct and reveal the truth of the previously misleading statement is

insufficient to establish loss causation. Halliburton, 597 F.3d at 336. Causation therefore requires

the plaintiffs to demonstrate the joinder between an earlier false or deceptive statement, for which

the defendant was responsible, and a subsequent corrective disclosure that reveals the truth of the

matter, and that the subsequent loss could not otherwise be explained by some additional factors

revealed then to the market. Id. This requirement that the corrective disclosure reveal something

about the deceptive nature of the original false statement is consistent with liability in a securities

fraud action, where it is those who affirmatively misrepresent a material fact affecting the stock price

that are held responsible for losses. Id. at 336-37.

As stated above, securities fraud plaintiffs who choose to rely on stock price to establish

class-wide reliance must show that the initial false statement causing the stock price to increase and

the later corrective disclosure causing the decrease were factually related. Greenberg, 364 F.3d at

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665; Oscar, 487 F.3d at 266. A sudden and significant drop in stock price alone will not suffice to

show that the purported fraudulent statements actually moved the market price of a defendant’s

stock. Fener v. Belo Corp., 579 F.3d 401, 410 (5th Cir. 2009). “‘[T]o be corrective, [a] disclosure

need not precisely mirror [an] earlier misrepresentation.’” Flowserve, 572 F.3d at 230, quoting In

re Williams Sec. Litig. – WCG Subclass, 558 F.3d 1130, 1140 (10th Cir. 2009). “Fact for fact”

disclosure is not required. Flowserve, 527 F.3d at 230. However, a “‘loss caused solely by a general

impression in the market that something is wrong’” does not establish loss causation. Id. at 232,

quoting Williams, 558 F.3d at 1138.

In Halliburton, the Fifth Circuit recently summarized Lead Plaintiffs’ loss causation burden

by stating that they must show “1) that an alleged corrective disclosure causing the decrease in price

is related to the false, non-confirmatory positive statement made earlier, and 2) that it is more

probable than not that it was this related corrective disclosure, and not any other unrelated negative

statement, that caused the stock price decline.” 597 F.3d at 337. The court will therefore apply this

standard to Lead Plaintiffs’ loss causation evidence.

B. Lead Plaintiffs’ Loss Causation Evidence and Analysis

The Fifth Circuit’s opinion did not disturb the district court’s findings in its initial order

certifying a class that the first three elements of the predominance inquiry were met. Those elements

are that the alleged misrepresentations were made, that Allegiance’s stock traded in an efficient

market, and that Lead Plaintiffs traded shares between the time the misrepresentations were made

and the time of the revelatory statements immediately preceding a drop in stock price. However, the

appellate court instructed that on remand, Lead Plaintiffs also must sufficiently prove by a

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preponderance of the evidence that Defendants’ alleged misstatements regarding Allegiance’s line

count actually caused their losses.

Lead Plaintiffs rely primarily upon the expert testimony of Candace Preston (“Preston”) to

establish loss causation. Preston posits that the majority ($0.83 per share) of the stock price drop

on February 20, 2002 was caused by the previous day’s line count adjustment. Preston arrived at this

figure by using a metric of enterprise value per line installed, beginning with a calculation of the

EV/line count just prior to the February 19, 2002 announcement of reduced line count. Preston’s

calculation of this EV/line count was $754. After the line count reduction, Preston determined that

based upon the reduced number of lines, Allegiance lost $95 million in EV, which on a per-share

basis amounted to a loss of $0.83/share.

Preston cites to various analyst reports for support of her analysis and conclusions. Although

Preston asserts in her report that analysts considered the EV/line count metric central to their

assessment of Allegiance’s future revenue growth, she relies on an analyst report by Stephens dated

September 27, 2001 to support that proposition. Subsequent reports issued closer to and

immediately around the time of the February 2002 stock price drop relied on a discounted cash flow

(“DCF”) model, including a February 20, 2002 Stephens report stating that the EV/line count

numbers were “losing their relevance” due to the line count reduction at issue here. That same

Stephens report stated that it had stopped using the EV/line count methodology to value Allegiance

as of October 24, 2001, and as of February 20, 2002 Stephens was using a DCF model to value

Allegiance.

Further, Defendants’ expert James Malernee (“Malernee”) disagrees with Preston’s

contention that because Allegiance’s fourth quarter results were “essentially in line with

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expectations,” the line count reduction must have been the primary cause of the drop in the

company’s stock price. As Malernee points out, numerous analyst reports cited by Preston in support

of her theory that the line count reconciliation caused the loss in Allegiance’s stock value actually

stated that Allegiance’s fourth quarter financial results were lower than anticipated. Finally, he

remarks that “of the 22 analyst reports published on February 19 and February 20 that she [Preston]

provided as back-up, not one analyst attributed the change in stock price on February 20 to the line

count reconciliation.” (Emphasis in original).

Moreover, Preston’s analysis ignores Allegiance’s disclosure in its September 30, 2001 10Q

(filed November 14, 2001, well prior to the February 19, 2002 announcement) that specifically

referred to its need to integrate the various systems it used for tracking core operational and

financial data, including line count. That form 10Q specifically states that “negative adjustments”

to Allegiance’s operating data were expected going forward, as a byproduct of the system integration

project. Based upon this disclosure, the court must find that the market did not learn the “truth”

about the line count adjustment on February 19, 2002. Rather, the market was aware that Allegiance

would likely experience some sort of downward adjustment to its line count as early as November

14, 2001. Hearing that news again on February 19, 2002 was merely a repetition of the earlier-

released line count- related warnings. It is well established that this type of confirmatory information

cannot be a basis for a finding of loss causation. Halliburton, 597 F.3d at 337; see also Oscar, 487

F.3d at 266 (negative “truthful” information causing loss must be non-confirmatory).

While it does appear that if an EV/line count measurement is applied one could arrive at the

conclusion that the line count reduction announced by Allegiance on February 19 may have been the

culprit, these contingencies are not well-supported, and do not lead the court to a finding that Lead

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Plaintiffs have established loss causation by a preponderance of the evidence. Viewing the record

as a whole, the court is compelled to find that the weight of the evidence presented does not

conclusively show that the market gave line count any significant weight in its valuation of

Allegiance shares on February 20, especially in light of the confirmatory nature of the line count

information, and all of the negative or somewhat negative debt covenant and earnings news

Allegiance concurrently provided. Therefore, the court must conclude that Lead Plaintiffs have not

established loss causation by a preponderance of the evidence. Under applicable law, this case

cannot be certified as a class action.

V. Conclusion

For the reasons stated herein, Lead Plaintiffs’ motion for class certification is denied.

SO ORDERED.

Signed May 12, 2010.

Z ED KINKEADEUNITED STATES DISTRICT JUDGE

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