A biopharmaceutical securities fraud class action has produced a significant ruling on a question courts are increasingly confronting: when a defendant argues that meme-stock dynamics infected its stock price, can a court simply check off the traditional market efficiency factors and certify a class? The Fifth Circuit recently answered no. 

In Bozorgi v. Cassava Sciences, Inc., the court vacated a class certification order and sent the case back to the district court for a more rigorous analysis, one that must account for evidence cutting against market efficiency, not merely evidence supporting it.

What Happened

Investors sued Cassava Sciences and several executives, alleging they made materially false statements about the company's experimental Alzheimer's drug, Simufilam, in violation of federal securities law. The plaintiffs sought class certification, which requires establishing that common questions predominate over individual ones. In securities fraud cases, that inquiry typically focuses on whether plaintiffs can invoke the "fraud-on-the-market" presumption of reliance established in Basic Inc. v. Levinson, which itself depends on proof that the relevant stock traded in an efficient market.

Cassava's experts presented evidence that the company's stock exhibited meme-stock characteristics during the class period, including significant price volatility unconnected to company news, short-selling utilization rates exceeding 93 percent, and borrowing costs peaking near 67 percent. “Meme stocks” gained notoriety over the last few years as groups of retail traders began to communicate on social media platforms like Reddit or Discord to engage collective trading behavior which resulted in driving stock prices in ways “untethered from company fundamentals or broader market trends.” The district court rejected that evidence largely because the defense expert did not expressly conclude that Cassava was a meme stock or that the market was inefficient. The court then worked through the standard Cammer/Krogman market efficiency factors, concluded the market was efficient, and certified the class.

The Fifth Circuit found that approach legally flawed.

What the Fifth Circuit Held

The court reaffirmed that the Cammer/Krogman factors are analytical tools to guide the market efficiency inquiry, not a checklist whose completion ends the analysis. Courts must weigh all evidence, both for and against market efficiency, before determining whether the Basic presumption applies. Dismissing defense evidence because an expert declined to attach a label to his conclusions, while simply adopting plaintiffs' expert without engaging the competing record, does not satisfy that standard. The opinion makes clear that indirect evidence of inefficiency, including price volatility in the absence of news and short-selling constraints, must be addressed and weighed against evidence of efficiency.

Importantly, the Fifth Circuit did not decide whether Cassava's market was actually efficient or inefficient. That factual determination belongs to the district court on remand, conducted under the correct legal framework.

Key Takeaways

• Meme-stock arguments deserve substantive analysis. A district court cannot dismiss evidence of meme-stock dynamics simply because no Fifth Circuit precedent has carved out a special meme-stock exception to the Cammer/Krogman factors. The factors are a means to an end, and indirect evidence of inefficiency must be weighed.
• Expert framing matters, but labels are not required. The Fifth Circuit rejected the district court's reasoning that defense experts failed to expressly call Cassava a "meme stock" or declare the market inefficient. Courts must engage with the substance of expert opinions, not just their conclusions.
• Both sides' evidence must receive meaningful consideration. Adopting one expert's conclusions wholesale, without analyzing competing evidence, is an abuse of discretion. Defense counsel should ensure the evidentiary record on market dynamics is fully developed and explicitly presented.
• Class certification remains genuinely contested in volatile-market cases. For companies facing securities fraud litigation where stock behavior diverged from fundamentals, a thorough and well-supported market efficiency analysis can be a viable path to defeating class certification and limiting litigation exposure.

What to Watch

On remand, the district court must conduct the holistic market efficiency analysis the Fifth Circuit requires. How that court handles the meme-stock evidence, and what weight it assigns to short-selling constraints and news-independent volatility, could influence class certification litigation across the circuit for years. Companies and their counsel navigating securities fraud exposure in cases involving unusual trading patterns should treat market efficiency not as a foregone conclusion, but as a genuine battleground worth contesting early and thoroughly.