Unreported / Non-Citable
Background
Investors alleged that Cassava Sciences and several executives violated Sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5 by misrepresenting the success of simufilam, Cassava’s experimental Alzheimer’s drug. According to the investors, Cassava promoted ostensibly favorable results while concealing data manipulation, research anomalies, and conflicts of interest, causing its share price to rise before later disclosures prompted declines.
The district court certified a class of purchasers and acquirers of Cassava securities from September 14, 2020, through October 12, 2023. Cassava and the individual defendants obtained interlocutory review under Federal Rule of Civil Procedure 23(f), arguing in part that meme-stock dynamics undermined the conclusion that Cassava’s securities traded in an efficient market. Although the parties reached a proposed class settlement during the appeal, the Fifth Circuit held that the appeal remained live because the settlement required court approval and expressly carved out the appellate proceedings.
The Court’s Holding
The Fifth Circuit vacated the class-certification order and remanded. It held that the district court abused its discretion when evaluating Rule 23(b)(3) predominance because it failed to conduct the required rigorous, holistic assessment of evidence both for and against market efficiency. Market efficiency was central because the investors relied on the rebuttable fraud-on-the-market presumption recognized in Basic Inc. v. Levinson to establish classwide reliance.
The district court worked through the Cammer/Krogman factors but rejected the defendants’ meme-stock argument without adequately engaging evidence that could indicate inefficiency, including unexplained price volatility, high short-interest utilization, and elevated borrowing costs. The Fifth Circuit emphasized that the Cammer/Krogman factors are analytical tools, not an exhaustive test, and that a court must weigh all relevant evidence. It did not decide whether Cassava’s market was actually efficient or inefficient and declined to resolve the parties’ other certification disputes.
Key Takeaways
- A proposed, court-dependent class settlement does not moot a Rule 23(f) appeal before judicial approval.
- Courts assessing the Basic presumption must weigh evidence of both market efficiency and market inefficiency rather than merely tallying the Cammer/Krogman factors.
- Meme-stock dynamics, unexplained volatility, and short-selling constraints may be relevant to whether a security’s price efficiently incorporated public information.
Why It Matters
The decision directs district courts in the Fifth Circuit to look beyond conventional market-efficiency indicators when deciding whether securities plaintiffs may prove reliance on a classwide basis. Evidence that social-media-driven trading or limits on arbitrage disconnected a stock’s price from value-relevant information cannot be dismissed merely because an expert did not expressly label the security a meme stock or declare its market inefficient.
The ruling does not foreclose certification of the Cassava investor class. It requires the district court on remand to reconsider predominance under the correct standard and to weigh the competing expert evidence without the Fifth Circuit prejudging the ultimate market-efficiency determination.