Securities and Derivative Litigation: Report

Meme Stock and Pump-and-Dump Litigation and the Limits of Reliance and Market Efficiency

In the era of social-media-driven market activity, two types of securities fraud litigation have emerged: one involving “meme stocks” (stocks whose prices are pushed up by viral market enthusiasm rather than underlying business metrics) and a growing wave of pump-and-dump cases (where someone artificially inflates a stock’s price through misleading promotion and then sells at the peak, leaving other investors with losses). As more of these cases reach the class certification stage, courts must grapple with how to apply the traditional legal tests for market efficiency to markets where the prices may reflect online sentiment rather than company value.

As practitioners are well aware, to bring a class action, allowing thousands of investors to sue together rather than filing individual cases, plaintiffs must clear the “class certification” procedural threshold. Among other things, plaintiffs in putative securities fraud class actions must demonstrate that the proposed class falls within one of the categories of Rule 23(b)—which, in the securities context, generally means showing that questions of law or fact common to class members predominate over questions affecting discrete members. This predominance requirement often turns on plaintiffs’ ability to show classwide reliance on defendants’ material misrepresentations or omissions.¹  Recognizing the evidentiary burden that requiring direct evidence of reliance would place on plaintiffs in a putative securities fraud class action, the Supreme Court held in Basic Inc. v. Levinson that plaintiffs can invoke a rebuttable presumption of reliance by showing that the alleged misrepresentations were publicly known and material, that the plaintiff traded the stock between the time the misrepresentations were made and when the truth was revealed, and that the stock traded in an efficient market.² This last factor, market efficiency, is the linchpin of the Basic presumption: without it, the stock price cannot function as a reliable proxy for the value of the stock in light of all publicly available information.³ But in meme stock and pump-and-dump cases—where the price of the stock reflects not the value of the company, but the hype it receives online—courts are wrestling with whether the efficient-market assumption can realistically apply.

Early Cases Denying Class Certification

The U.S. District Court for the Southern District of Florida’s 2023 denial of class certification in In re January 2021 Short Squeeze Litig.⁴ provides an early example of how courts have analyzed class certification in the meme stock context. This litigation concerned what may be the most prominent meme stock event: the January 2021 effort by retail investors, fueled by social media, to purchase meme stocks like GameStop and AMC and squeeze institutional investors who held short positions in these stocks.⁵ On behalf of investors in certain “Affected Stocks,” Plaintiffs brought claims under Sections 9(a)(2) and 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 against the Robinhood trading platform, alleging Robinhood manipulated the market by restricting purchases of these stocks and justified that restriction with “half-truths” attributing the restrictions to market volatility, and omitting its own liquidity problems.⁶

At the class certification stage, the central dispute was whether investors could prove classwide reliance on Robinhood’s allegedly deceptive acts, as required by their statutory claims.⁷ The court rejected each of the theories of reliance advanced by Plaintiffs and thus denied class certification.⁸  Most relevant here, the court held that the Plaintiffs failed to establish that GameStop and similar stocks traded in an efficient market such that investors could rely on the Basic presumption of reliance.⁹ First, the court rejected Plaintiffs’ invitation to follow Second Circuit dicta in Fezzani v. Bear, Stearns & Co.¹⁰ and establish a presumption of reliance upon proving trading in a “bona fide” market—a lower standard than market efficiency—reasoning that such a presumption would “swallow the reliance requirement” by only connecting an investor to the market price without connecting the price to the defendant’s manipulative conduct, thereby proving “too much while doing too little.”¹¹ Second, the court found the Basic presumption was unavailable based on Plaintiffs’ own arguments that Robinhood’s restrictions rendered the market inefficient during the class period.¹² The court also declined to adopt a modified version of the presumption that would apply where a defendant directly manipulated a security’s price, although it noted that some jurists had indicated openness to the concept.¹³

The U.S. District Court for the District of Columbia reached a similar result in Bratya SPRL v. Bed Bath and Beyond Corp., et al.¹⁴ In Bratya, Plaintiffs alleged that during a short squeeze of Bed Bath & Beyond stock (“BBBY”), investor Ryan Cohen, a BBBY stockholder, engaged in a “pump and dump scheme” when he retweeted an article critical of the stock and added a moon emoji—an alleged signal to retail investors to take the stock “to the moon.”¹⁵ In the following days, BBBY price and volume skyrocketed before collapsing after it was disclosed that Mr. Cohen had sold his entire position.¹⁶

The court denied class certification, holding that Plaintiffs had failed to muster enough evidence to trigger the Basic presumption because the stock was undergoing a “short squeeze” during the class period with dramatic price increases that did not reflect value-relevant information, indicating market inefficiency.¹⁷ The court recognized that although courts generally accept and apply the factors provided in Cammer v. Bloom¹⁸ and Krogman v. Sterritt¹⁹ to evaluate market efficiency, the short squeeze dynamics undermined the relevance of those factors because the stock had become “so distorted . . . that it no longer efficiently reflect[s] ‘value-relevant’ information.”²⁰ Further, the court credited the defendants’ expert testimony that Mr. Cohen’s tweet did not have a statistically significant impact on BBBY price—rebutting the Basic presumption even if it did apply.²¹ In closing, the court was careful to cabin its holding and caution that “nothing here should suggest that short squeezes offer a green light to market fraudsters to engage in pump-and-dump schemes without fear of class action suits. Nor does the Court hold that Cammer is inapplicable to short squeezes.”²²

Recent Decisions

Subsequent cases have rolled back any hint that meme stock cases, in and of themselves, preclude a finding of market efficiency. For instance, in Shupe v. Rocket Companies, Inc., the District Court for the Eastern District of Michigan rejected the defendants’ argument that a two-day “meme stock” trading frenzy for the stock at issue rendered the market inefficient for the entirety of the two-month class period.²³ The court strictly analyzed the Cammer factors and concluded that even if the stock’s meme stock status “suggested market inefficiency, it would not outweigh the eleven other factors which Plaintiffs have shown suggest the contrary.”²⁴ While the court ultimately denied class certification on other grounds, its holding that “meme stocks and efficient markets are not mutually exclusive” is a significant counterweight to earlier decisions that appeared to treat meme stock activity as presumptively defeating class certification.²⁵

Similarly, in In re Cassava Sciences, Inc. Securities Litig., the U.S. District Court for the Western District of Texas firmly rejected the defendants’ argument that Cassava was a “meme stock” rendering the market inefficient and the Cammer/Krogman factors inapplicable.²⁶ The court certified the class based on a strict application of the Cammer and Krogman market efficiency factors. The case is currently pending on appeal before the Fifth Circuit.

Outlook

The meme-stock and pump-and-dump litigation space is evolving and expanding. At the class certification stage, defendants face increasingly sophisticated expert disputes over market efficiency and price impact further complicated by the inefficiency introduced by meme-stock and social-media-driven dynamics. The conflicting outcomes in various jurisdictions indicate that this tension is nowhere near resolved, although the Fifth Circuit’s decision in Cassava will provide the first judicial guidance at the appellate level. Retaining expert support early and stress-testing both market efficiency and price-impact positions remains essential.

In Re FirstEnergy Corp. Sec. Litig. and In re Boeing Co. Aircraft Sec. Litig. – Ongoing Questions Regarding Damages Proof at Class Certification Stage

In In re Boeing Co. Aircraft Sec. Litig. and In Re FirstEnergy Corp. Sec. Litig., the Fourth and Sixth Circuits respectively have considered arguments regarding the rules courts apply when determining whether a plaintiff has proposed a workable method for calculating investor damages at the class certification stage under Comcast Corp. v. Behrend (which requires plaintiffs to show that damages are capable of classwide measurement and that their damages methodology is consistent with their theory of liability).²⁷

In re Boeing Co. Aircraft Sec. Litig.

In Boeing, the District Court for the Eastern District of Virginia certified a class of investors who purchased or acquired Boeing stock between January 7, 2021 and January 8, 2024, in connection with allegations that Boeing made fraudulent statements and omissions regarding the safety of its aircraft.²⁸ The central dispute on class certification was whether the “out-of-pocket” methodology proffered by Plaintiffs’ expert satisfied Comcast’s requirement that Plaintiffs “furnish evidentiary proof that their classwide damages methodology is consistent with their theory of liability.”²⁹ The court held that Plaintiffs satisfied Comcast, reasoning that the out-of-pocket methodology is “widely accepted as the traditional measure of damages for Rule 10b-5 actions” and fit Plaintiffs’ theory of liability (that investors were damaged by purchasing Boeing stock at inflated prices due to Defendants’ fraud), and that the “vast majority of courts” have interpreted Comcast to permit this standard methodology in securities class actions.³⁰ The court further held that caselaw in the Fourth Circuit does not require plaintiffs to conduct detailed damages modeling to meet Rule 23(b)’s predominance requirement at the class certification stage.³¹

The Fourth Circuit reversed, holding that Plaintiffs had not provided a damages methodology consistent with Comcast’s commands and that the district court had not conducted the “rigorous analysis” Comcast requires.³² The court articulated Comcast’s requirements as imposing five obligations on Plaintiffs. First, plaintiffs must put forth an actual “methodology” that explains how damages will be measured in the specific case, rather than a legal description of what damages are generically or potential options to be decided later.³³ Second, the methodology must demonstrate how damages can be measured on a classwide basis.³⁴ Third, in keeping with Comcast’s requirement that “any model supporting a plaintiff’s damages case must be consistent with its liability case,” Plaintiffs must state “their theory or theories of liability to compare against their identified damages methodology” and then “show that the methodology and the liability theory are sufficiently consistent.”³⁵ Fourth, the methodology must allow “a just and reasonable inference” of damages and cannot be speculative.  Calculations need not be exact, but arbitrary measurements are not acceptable.³⁶ Fifth, plaintiffs must submit “evidentiary proof” of all of the above; quoting Comcast, the Fourth Circuit reminded the parties that “Rule 23 is not a mere pleading standard.”³⁷

Applying these principles, the Fourth Circuit found Plaintiffs’ expert had provided only “a series of ‘maybes,’ ‘perhapses’ and ‘what ifs.’”³⁸ Rather than committing to an approach, Plaintiffs’ expert had only identified possible techniques he might use, without selecting any one in particular. That fell short of what Comcast requires, because without an actual methodology, the district court had no way to evaluate whether damages were measurable classwide, consistent with the liability theory, or reasonable rather than speculative.³⁹

Finally, the Fourth Circuit faulted the district court for characterizing Plaintiffs’ liability theory at “an inappropriately high level of generality”; “having failed to properly identify the two comparators—the damages methodology and the legal liability theory—the district court’s certification order necessarily failed to perform a rigorous consistency comparison.”⁴⁰

In Re FirstEnergy Corp. Sec. Litig.

In March 2023, the District Court for the Southern District of Ohio granted class certification in a securities action bringing claims based on the Securities Act and Exchange Act based on the non-disclosure and subsequent revelation of a fraudulent scheme in which FirstEnergy and its most senior executives paid approximately $60 million to Ohio’s former Speaker of the House and others in exchange for a bailout worth approximately $2 billion to the company.⁴¹ The district court applied the Affiliated Ute presumption of reliance, finding that the communications at issue—failures to disclose the scheme—were primarily omissions-based.⁴² The court also held that Plaintiffs had established predominance with respect to damages on their Exchange Act claims, but only referred back to its arguments on Securities Act damages predominance by way of explanation.⁴³ Defendants appealed.⁴⁴

The Sixth Circuit reversed and granted a limited remand to consider two factors:  first, the district court was not to apply Affiliated Ute; second, the district court was to perform a “rigorous analysis” of the plaintiffs’ damages methodology. As a matter of first impression in the circuit, it held that Affiliated Ute applies only in cases that are “purely or primarily based on omissions.”⁴⁵ In determining whether a case is “primarily based on omissions,” district courts first must “classify each claim or group of claims as alleging either an omission or a misrepresentation,” and second “characterize whether the overall case is primarily based on omissions or on misrepresentations by analyzing” four factors.⁴⁶ If any of the factors are met, the case is “primarily” based on misrepresentations and thus subject to the Basic presumption.⁴⁷ If none are present, the case is based on omissions and thus subject to Affiliated Ute.⁴⁸ Applying this test, the Sixth Circuit held that “the allegations at issue make up a mixed case that is primarily based on misrepresentations,” and thus Basic, not Affiliated Ute, applied.⁴⁹

Second, the Sixth Circuit held that the district court had failed to conduct a “rigorous analysis” of the plaintiffs’ proposed damages model for their Exchange Act claims, as required by Comcast Corp. v. Behrend.⁵⁰ The court criticized the district court’s one-sentence rejection of FirstEnergy’s objections to the plaintiffs’ experts and conclusion, without any additional analysis, “that predominance exists with respect to damages for the same reasons as articulated in the previous section.”⁵¹ The Sixth Circuit vacated class certification to the extent the district court had applied the Affiliated Ute presumption and remanded for the district court to apply Comcast’s required “rigorous analysis” of the plaintiffs’ damages methodology.⁵²

On remand, defendants attempted to reopen the Basic question, arguing that the Sixth Circuit’s opinion had left it for the district court to reconsider. The district court rejected that argument, concluding that the Sixth Circuit’s limited remand did not extend to any further consideration of the Basic presumption, and even if it did, the defendants waived the argument that the challenge statements were too generic to support the Basic presumption of reliance.⁵³

The district court then analyzed Plaintiffs’ damages model, finding their expert had presented a “viable, consistent, and classwide approach to damages.”⁵⁴ The court rejected FirstEnergy’s argument that Plaintiffs’ expert failed to offer proof that he could reliably estimate damages on each of the days of the class period, holding instead that “damages calculations ‘need not be exact’” and indeed that “variations in inflation ‘that can be, but are not currently[ ] accounted for in an out-of-pocket damages model’ do not render such a model unable to satisfy Comcast.”⁵⁵

Notably, the district court’s decision on remand relied in part on a different In re Boeing Co. Aircraft Sec. Litig.,⁵⁶ a district court case from the Northern District of Illinois, which declined to follow the Sixth Circuit’s FirstEnergy opinion and instead “followed the vast majority of district courts” to hold that plaintiffs can satisfy Comcast “by having their expert recite the generally applicable rule for measuring damages for such claims and promise to develop a methodology for applying that rule to the particular facts of the case at a later date.”⁵⁷ That opinion acknowledged that the Fourth Circuit had granted Boeing’s petition to decide that exact issue—which, as discussed above, resulted in the Fourth Circuit holding otherwise and reversing the lower court’s grant of class certification.

FirstEnergy is once again appealing the district court’s decision to the Sixth Circuit. It remains to be seen how the circuit will address FirstEnergy’s arguments regarding proving damages under Comcast:  whether it will join the Fourth Circuit in holding that plaintiffs and district courts must do more than offer a recitation of a standard methodology, or whether it will adopt a less stringent standard more in line with the FirstEnergy and Boeing district courts’ approaches.

Supreme Court Unanimously Rejects Challenge to SEC Disgorgement Power

On June 4, 2026, the Supreme Court released its ruling in Sripetch v. SEC, unanimously holding that the SEC can seek disgorgement without proving investor harm. The decision resolves a circuit split that had emerged on the issue, with the Second Circuit requiring the SEC to submit proof of pecuniary harm to investors to support a claim for disgorgement, while the First and Ninth Circuits required only that the SEC show such gains were ill-gotten. It is the Ninth Circuit decision on the issue that the Court addressed in Sripetch.

Background

The circuit split that had emerged on the issue can be traced back to the Supreme Court’s 2020 decision in Liu v. SEC.⁵⁸ There, addressing another challenge to the SEC’s disgorgement authority, the Court held that disgorgement may not exceed the defendant’s illicit profits and must be awarded “for victims.”⁵⁹

Interpreting this language, the Second Circuit in SEC v. Govil reasoned that a “victim” is “a ‘person harmed by a crime…’” and thus for disgorgement to be awarded “for victims” the SEC must show that particular investors suffered pecuniary harm.⁶⁰  The next year, the First Circuit disagreed.  Addressing the same question in SEC v. Navellier, it reasoned that the purpose of disgorgement is to deprive a wrongdoer of their unlawful profits.⁶¹ And that Liu’s requirement that disgorgement be awarded “for victims” means the SEC “must do more than simply benefit the public at large by virtue of depriving the wrongdoer of ill-gotten gains.”⁶² According to the First Circuit, this requirement was satisfied when the SEC commits to distribute the disgorged funds to the victims, even if those victims have not suffered an identified pecuniary harm.⁶³

Sripetch v. SEC

The case arose out of Defendant Sripetch’s unregistered sale of securities.  Sripetch pleaded guilty, and the SEC subsequently sought disgorgement of more than $2 million that Sripetch pocketed from these sales.⁶⁴ On appeal, the Ninth Circuit agreed with the First Circuit’s holding in Navellier, concluding “that an award of disgorgement does not require a showing that investors experienced pecuniary harm.”⁶⁵ The Supreme Court granted certiorari on January 9, 2026, to resolve the circuit split on the issue.

Decision and Implications

Writing for a unanimous court, Justice Gorsuch affirmed the Ninth Circuit’s decision—holding that “a showing of pecuniary loss is not required” for the SEC to seek disgorgement.⁶⁶ The Court explained that Liu’s requirement that disgorgement be “awarded for victims” was itself drawn from traditional equitable principles that do not require one to suffer pecuniary harm to be considered a “victim.”⁶⁷ Rather, a victim for whom disgorgement can be awarded is merely one who “has suffered an interference with protected interests.”⁶⁸

The immediate impact of this ruling will be felt most acutely in the Second Circuit—which includes jurisdictions with a heavy SEC docket such as the Southern District of New York—where Govil will no longer provide an avenue to attack claims for disgorgement. Companies and individuals facing SEC enforcement actions should be aware, however, that the Court did not address all aspects of Liu’s disgorgement framework. Questions regarding the mechanics of distributing disgorged funds, the feasibility of investor distribution, and applicable limitations periods may continue to present avenues for challenging disgorgement awards even in the Second Circuit.