5th Circuit Gives Pension Funds New Shot at Securities Suit

The court said that because the district court conducted its class certification hearing under an erroneous legal standard for proving loss causation, and it cannot discern the basis of the district court’s holding that some of Flowserve’s statements were confirmatory, it vacates denial of class certification on the funds’ Exchange Act claims and remand for a new class certification hearing.

The 5th Circuit’s opinion noted that Flowserve argued, and the district court agreed, that a plaintiff must show a “fact-for-fact” disclosure of information that fully corrected prior misstatements, implying that a fraud causes

The district court found that because no statistically significant decline in Flowserve’s share price followed disclosures in 2004, when Flowserve restated its earnings and announced that it had not been in compliance with its debt covenants, the disclosures did not cause the Alaska Electrical Pension Fund or the Massachusetts State Carpenters Pension Fund any loss. The district court said the fund failed to establish loss causation, but the 5th Circuit said the district court demanded more of the funds than is required.

According to the appellate court opinion, the district court held that its “loss causation holding in its denial of class certification [was] dispositive of Plaintiffs’ Exchange Act claims as a matter of law.” The appellate court disagreed, saying: “Even if, contrary to our conclusion, we had found no error in the district court’s class-certification decision, its loss causation holdings under Rule 23’s preponderance requirement would not govern the merits of [the pension funds’] claims.”

The 5th Circuit said it was convinced that a genuine fact issue exists on the material element of loss causation under the Exchange Act because a reasonable trier of fact could at the least conclude that an October 2001 statement concerning Flowserve’s FY2002 earnings caused some portion of the pension funds’ losses. It reversed the district court’s grant of summary judgment in favor of Flowserve and other defendants.

In response to financial problems, in 2000 and 2002, Flowserve made several acquisitions financed by a $1.1 billion credit agreement and two public stock offerings. The pension funds claimed that Flowserve and its two top executives allegedly schemed to misrepresent the company’s financial condition by making false statements about Flowserve’s earning forecasts, historical financial performance, costs and savings related to the acquisitions, and its compliance with the debt covenant.

In February 2004, Flowserve announced it would restate its 2002-2003 earnings downward by $11 million. The funds filed a lawsuit asserting 1933 Securities Act and 1934 Securities Exchange Act violations against Flowserve and its two top executives; Banc of America and Credit Suisse First Boston, which were two of the underwriters for the stock offerings; and PricewaterhouseCoopers, which was Flowserve’s auditor during the class period.

The case is Alaska Electrical Pension Funds v. Flowserve Corp., 5th Cir., No. 07-11303.