(The news featured below is a selection from the news covered in the Federal Securities Report Letter, which is distributed to subscribers of the Federal Securities Law Reports.)

Reliance Presumption Unavailable in Research Analyst Suit

The U.S. District Court for the Southern District of New York reconsidered its earlier opinion (¶92,816) and concluded that investors were not entitled to a fraud on the market presumption of reliance in their class action against an investment bank based on allegedly fraudulent analyst reports. The court reached this result in light of a decision by the 2nd U.S. Circuit Court of Appeals in Hevesi v. Citigroup Inc. (¶92,815 ) to hear an interlocutory appeal concerning the applicability of the presumption in the research analyst setting.

The district court concluded that the fraud-on-the-market doctrine may in certain limited conditions apply to analyst reports. The court suggested that the questions of the impact of statements by the issuer on one hand and by analysts on the other are very different. Statements of fact emanating from an issuer " are relatively fixed, certain and uncontradicted," noted the court. If those statements turn out to be false, the court stated that the reaction of an efficient market would be " reasonably predictable and ascertainable." An analyst statement, however, "is far more subjective and far less certain, and often appears in tandem with conflicting opinions from other analysts as well as new statements from the issuer." As a result, stated the court, "no automatic impact on the price of a security can be presumed and instead must be proven and measured."

In order for the presumption to apply, the court held that investors must show that the analyst’s statements had both a material and a measurable impact on the market price of the security in question. According to the court, the facts alleged by the investors, including reports from their experts, failed to meet this standard. The expert's methodology was questionable, concluded the court, and the allegations did not indicate any specific market movement related to the particular reports in question.

¨ DeMarco v. Lehman Bros. (SD NY) will be published in a forthcoming REPORT .