## Facts

- A Prudential Securities stockbroker, James Hofman, allegedly told 11 customers over about seven months that Jefferson Savings Bancorp stock was “certain” to be acquired soon at a substantial premium.
- No acquisition was impending, and the statements were allegedly false.
- The customers allegedly traded Jefferson stock believing they were acting on confidential, non-public information.
- West and Eickholz sued under federal securities-fraud theories and sought to represent a class of all purchasers of Jefferson stock during the period of Hofman’s statements.
- The district court certified the broad purchaser class, applying Basic’s fraud-on-the-market theory even though the alleged misstatements were not public.
- Prudential obtained interlocutory review under Federal Rule of Civil Procedure 23(f), limited to the propriety of class certification.

## Issues

1. Whether Basic’s fraud-on-the-market presumption of classwide reliance may be extended from public misrepresentations to private, non-public statements made to a small group of investors.
2. Whether class certification is proper absent a showing that the alleged non-public misstatements affected the stock’s market price.

## Decision

- The Seventh Circuit reversed the district court’s class-certification order and remanded.
- The court held that Basic’s fraud-on-the-market presumption does not apply to non-public statements like Hofman’s alleged tips.
- Because the alleged statements were not public and plaintiffs did not show a causal link between the statements and market price, classwide reliance could not be presumed for investors who never received the statements.

## Legal Principles

- Fraud-on-the-market presumes reliance only when a security’s market price is shown to incorporate public, material misrepresentations.
- Non-public statements to a limited audience, valued precisely because other market participants do not know them, do not support an inference that the market price incorporated the misinformation.
- At class certification, plaintiffs invoking fraud-on-the-market must present a viable theory—and support—for how the alleged misstatements could have distorted the market price; otherwise, individualized reliance issues predominate.

## Conclusion

The Seventh Circuit rejected class certification of all contemporaneous purchasers because the alleged misrepresentations were privately communicated to a small set of customers and were not shown to affect market price, making Basic’s presumption of reliance unavailable.


West v. Prudential Sec., Inc., 282 F.3d 935 (7th Cir. 2002)