Securities Regulation Daily Wrap Up, FRAUD AND MANIPULATION—E.D. Pa.: Court certifies plaintiffs fraud class action case, (Aug 5, 2026)

By Jay Fishman, J.D.

Plaintiffs successfully invoked the rebuttable presumption of reliance under Basic v. Levinson.

Pennsylvania’s Eastern District Court granted the plaintiffs class action certification in a case against the defendants for Exchange Act Section 10(b) fraud, following the plaintiffs having partly survived a motion to dismiss. The court determined the class met all of Federal Civil Procedure Rule 23’s certification requirements but especially a predominance requirement and a presumption of reliance that the defendants failed to rebut (Himes v. Five Below, Inc., No. 2:24-cv-03638-GAM (E.D. Pa. Aug. 3, 2026)).

Plaintiffs partly survived a motion to dismiss. The Pennsylvania district court partly dismissed a putative class action brought by all shareholders of the retail store chain Five Below who purchased or owned stock in the company between December 1, 2022, and July 16, 2024, against Five Below, Inc. and two of its executives, but left untouched the shareholders’ remaining allegations. The plaintiffs contended Five Below issued a series of false or misleading statements during the class period related to its trend-right strategy and execution, inventory loss referred to as “shrink,” and Five Below’s “triple-double” plan to double earnings and triple the number of stores. Led by the retirement systems for certain public employees in Arkansas, the plaintiffs stating the truth about the company’s financial condition was finally revealed to investors through corrective disclosures that were made in 2024. The value of Five Below stock then fell as a result. The plaintiffs, relying on a fraud-on-the-market-theory, asserted that Five Below’s stock was kept at an artificially high price during the class period because of Five Below’s false and misleading statements, leading to a securities fraud claim under Sections 10(b) and 20(a) of the Securities Exchange Act. The court found the plaintiffs met their burden on some, but not all, of the allegedly false or misleading statements. Accordingly, the court granted defendants’ motion to dismiss in part and denied it in part (In Re Five Below, Inc., Securities Litigation, No. 2:24-cv-03638-GAM (E.D. Pa. Aug. 25, 2025)).

Primary dispute over class certification. Now, the parties’ primary dispute involves whether the plaintiffs met Federal Civil Procedure Rule 23(b)’s predominance requirement for class certification. But to first determine certification, a class must satisfy the following Rule 23(a) requirements by a preponderance of the evidence: (1) numerosity; (2) commonality; (3) typicality; and (4) adequacy of representation. More specifically, the plaintiffs must affirmatively show “there are in fact sufficiently numerous parties and common questions of law or fact to warrant class certification. Then--and this is the chief issue in dispute--Rule 23(b)(3) explicitly requires the “common questions,” that is, questions common to the entire class, to “predominate over any questions affecting only individual members.” The predominance inquiry tests whether proposed classes are sufficiently cohesive to warrant adjudication by representation but does not require that those questions be answered on the merits to favor the class. Lastly, the court cited precedent stating that plaintiffs typically meet the predominance element in securities fraud class actions.

Predominance and Basic’s presumption of reliance. Having determined that the plaintiffs met Rule 23(a)’s four abovementioned certification elements, the court spent the bulk of the opinion discussing the disputed predominance element and the United States Supreme Court’s presumption of reliance from the Basic v Levinson case. The court began by stating that whether questions of law or fact common to class members predominate starts with the elements of the underlying cause of action. In securities class actions where, as here, the plaintiffs allege a fraud-on-the-market theory, the analysis often turns on the element of reliance—the plaintiffs having relied on the defendants’ misrepresentations—which directly caused the plaintiffs financial injury. But relevant here, the court proclaimed: “recognizing that it would be difficult for plaintiffs to establish this causal connection via direct, individualized proof of reliance from each class member, the Supreme Court held that plaintiffs may also invoke a rebuttable presumption of indirect reliance based on the fraud-on-the market theory.”

The parties did not dispute the part of the presumption that requires proof that the alleged misrepresentation was made publicly or that the plaintiffs traded the stock between the time the misrepresentation was made and when the truth was revealed. Instead, the parties disputed the presumption’s remaining prong, namely whether the plaintiffs traded the securities in an efficient market. By showing the securities were traded in an efficient market, the court proclaimed, plaintiffs could prove that “information important to reasonable investors... is immediately incorporated into stock prices.”

The court then remarked on the Third Circuit’s having identified certain factors in the 1989 case Cammer v. Bloom that help determine market efficiency. From there, the court pointed out parties’ reliance on various “event studies” that use a certain regression analysis “to show that the market price of the defendant’s stock tends to respond to pertinent publicly reported events.” In this case, the court reviewed the report of a plaintiff expert who applied the Cammer guidelines and found that Five Below’s stock traded in an efficient market. The court, noting that the defendants’ expert did not contest the plaintiff expert’s evaluation, discuss market efficiency in her opposition report, or conduct her own event study, concluded the Plaintiffs: (a) met their initial burden under Basic to prove market efficiency; and (b) successfully invoked the rebuttable presumption of reliance.

Defendant fails to rebut the Basic presumption, among other failures. Following the plaintiffs successful win on the Basic presumption, the defendants failed to rebut the presumption. Specifically, they failed to overcome it through “[a]ny showing that severs the link between the alleged misrepresentation and either the price received (or paid) by the plaintiff, or the plaintiffs’ decision to trade at a fair market price.” Thereafter, they were unable to sway the court on price impact or inflation theories, failing to provide evidence that the disclosure of the truth did not cause a price drop.

Misrepresentations artificially inflate stock price; corrective disclosures. The final straw that awarded the plaintiffs class certification was their successful showing of two sets of defendant misrepresentations that artificially inflated Five Below’s stock price. Additionally, the plaintiffs' complaint provided the dates of various defendant corrective disclosures that “revealed underlying issues executing its [Five Below’s] core trend-right strategy as a key factor driving poor financial results—not just shrink (which it defined only as theft).” Essentially, the corrective disclosures revealed to investors that, contrary to claims that Five Below could “quickly execute” on trends to bring trending product into stores, the company’s weak performance was self-inflicted and driven by execution failures rather than macroeconomic factors. And the analysts’ reports, moreover, reflected that the market connected Five Below’s “self-inflicted” execution issues to its earlier misrepresentations which blamed its poor performance only on external issues like shrink. The July 16 disclosure, for example, contained “new information ‘that need only relate to, concern, or be linked to a specific alleged misrepresentation.’”

The case is No. 2:24-cv-03638-GAM.

Judge: McHugh, G.

Attorneys: David M. Klauder (Bielli & Klauder) for Tyler Himes and David Felton. Jay A. Dubow (Troutman Pepper Locke) for Five Below, Inc.

Companies: Five Below, Inc.

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