## Facts

- Investors who purchased PolyMedica Corp. stock (Oct. 1998–Aug. 2001) alleged that PolyMedica, its subsidiary Liberty Medical Supply, and certain officers made misstatements that inflated the stock price.
- Liberty generated most of PolyMedica’s revenue, and PolyMedica reported record revenues and earnings during the proposed class period as its stock price rose.
- The complaint alleged inflated reported sales, revenues, and accounts receivable, including false public statements, followed by a sharp stock-price decline when corrective information entered the market.
- Plaintiffs sought class certification under a fraud-on-the-market theory, arguing that reliance could be presumed on a classwide basis if the stock traded in an efficient market.
- The district court certified a class for the full period, finding abundant evidence of market efficiency and treating defendants’ expert challenges as irrelevant for the contested period (Jan.–Aug. 2001).
- Defendants obtained interlocutory review under Rule 23(f), contesting the market-efficiency standard and the district court’s refusal to consider their expert evidence.

## Issues

1. What legal standard defines an “efficient market” for applying the fraud-on-the-market presumption of reliance in a Rule 10b-5 class action?
2. At class certification, may a district court look beyond the pleadings and consider (and, when necessary, weigh) expert evidence bearing on market efficiency and Rule 23(b)(3) predominance?

## Decision

- The First Circuit held that an efficient market, for fraud-on-the-market purposes, is one in which the stock price fully reflects all publicly available information.
- The court ruled that class certification is not limited to allegations; the district court may, and sometimes must, consider evidence and expert submissions that bear on market efficiency because the issue overlaps with Rule 23(b)(3) predominance.
- The court held it was error to deem defendants’ expert evidence irrelevant where it directly addressed whether prices reflected public information.
- The court vacated certification for the contested period (Jan.–Aug. 2001) and remanded for reconsideration under the clarified efficiency standard and evidentiary approach.

## Legal Principles

- Fraud-on-the-market reliance is available only if plaintiffs show the security traded in an efficient market such that public, material misstatements are reflected in the market price.
- “Efficient market” is an information-based concept: the market price must fully reflect publicly available information, consistent with the semi-strong form of the Efficient Capital Market Hypothesis.
- In Rule 23(b)(3) securities cases invoking fraud-on-the-market, courts may need to address factual disputes at certification, including evaluating competing expert evidence tied to market efficiency.
- Evidence bearing on informational efficiency can include limits on arbitrage (such as short-sale constraints), options-based measures (such as put-call parity), and return-pattern analyses (such as serial correlation), where relevant to whether prices incorporate information.

## Conclusion

The First Circuit clarified that fraud-on-the-market class certification requires a rigorous, information-based showing of market efficiency and that district courts must consider relevant evidence—including expert disputes—when efficiency bears on Rule 23(b)(3) predominance; it therefore vacated certification for the contested portion of the class period and remanded.


In re PolyMedica Corp. Securities Litigation, 432 F.3d 1 (1st Cir. 2005)