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In re Initial Public Offering Securities Litigation

    Brief Fact Summary. In six securities fraud class actions, containing claims of fraud on the part of many of the country’s largest underwriters linked to a series of initial public offerings (IPOs), the district court (Judge Scheindlin) granted class certification. Alleging that Judge Scheindlin failed to apply the proper standard (Judge Scheindlinutilizing a “some showing” standard) in deciding if all the components of Rule 23 of the Federal Rules of Civil Procedure (Rule 23) required for class certification had been met and that applying the proper standard would application of the correct standard would refute class certification due to the condition of predominance of common questions as opposed to individual questions had not been met, the underwriters  moved to dismiss.

    Synopsis of Rule of Law. 1) Prior to a district court being able to certify a class, as opposed to finding “some showing” that each condition has been fulfilled, the court must make a ruling that each condition for class certification of Rule 23 of the Federal Rules of Procedure has been met.
    (2) In constructing a class certification determination, as with any other threshold issue when reviewing evidence, a district court is required to evaluate all the available evidence.
    (3) When a Rule 23 condition overlaps with an aspect of the merits of the proposed class action, or is even the exact same as a merits issue, the standards for determination of a Rule 23 requirement are not diminished.
    (4) Where the plaintiffs’ own accusations and evidence prove that the Rule 23 requirement of predominance of common questionsover individual questions cannot be met, a class may not be certified in a securities fraud action.

    Facts. Thousands of investors(Plaintiff) brought class action suitsclaiming securities fraud in connection with a series of initial public offerings (IPOs),against some of the nation’s principal underwriters (Defendant), issuers, and individual officers and directors of the issuing companies. These suits were moved to the district court (Judge Scheindlin), where the cases were merged into 310 actions and Judge Scheindlinselected six as “focus cases.”Claims essential to all actions were that allocation of shares were conditioned by the underwriters at the offer price on contracts to buy aftermarket shares;made it requisitefor customers who obtained allocations of shares at the offer price to remunerate three forms of “Undisclosed Compensation” to the underwriters; and their analysts were influenced in a multitude of inappropriate ways. It was also purported by these “Master Allegations” that the underwriters’expeditedreception of fast profits by insiders of the issuers and that the issuers partook in and gained from the underwriters’ misbehavior. Claims were filed under §§ 11 and 15 of the Securities Act, and §§ 10(b) and 20(a) of the Securities Exchange Act, as well as Rule 10(b)-5 and the claims related to both primary and secondary offerings. The underwriters moved to dismiss, and Judge Scheindlin denied the motions with a two set claim exception: some of the Rule 10b-5 claims against issuers and individual officers and the § 11 and § 15 claims of investors who had sold shares for more than the offering price. Regarding the six focus cases, JudgeScheindlin granted in part and denied in part the investors’ motions for class certification.  Judge Scheindlinclearly gave thought to the issue of the standard of proof that a plaintiff must fulfill to attain class certification in her order on class certification. The only parameters recognized by the Supreme Court in this regard, she noted, are that a court must conduct a “rigorous analysis” in which it “may be necessary for the court to probe behind the pleadings,” but the court cannot “conduct a preliminary inquiry into the merits of a suit.â€Â  She mentions decisions by other circuit judges recently that recommend the plaintiffs need to fulfill the Rule 23 requirements by a preponderance of the evidence, even if a solution can only be found by a “preliminary inquiry into the merits.” Where the required class certification components are “enmeshed†with the merits, however, she rejected the preponderance standard and instead, the “some showing” standard was adopted. There are many forms the showing may take the form of, some examples being: the opinions of experts, evidence (by document, affidavit, live testimony, or other), or the uncontested claims of the complaint. Judge Scheindlin then determined that the investors had fulfilled the Rule 23 requirements: numerosity, commonality, typicality, and adequacy of representation under Rule 23(a), and the two extra requirements for a (b)(3) class action: predominance (law or fact questions common to the class predominate over questions affecting individual  members), and superiority (a class action is superior to other methods),under the “some showing” standard. Over the underwriters’ protests, she revised the class definition to She revised,over the underwriters’ objections, the class definition to omit the investors who purposefully partook in the purported plan.  With regard to the investors’  § 11 claims, Judge  Scheindlin  agreed  with the underwriters  that when shares that are not traceable enter the market, the individual queries of if an investor could trace his shares to the IPO would predominate, and so she terminated the class periods involving these claims during a period when unregistered share became tradeable. The class certifications were granted subject to the limit on class period for § 11 claims and modified class definition. Then,giving the investors a for sure recovery of one billion dollars, offset by the amount they would recover from the underwriters, the classes settled with the issuers and individual defendants.  The underwriters appealed, arguing, inter alia, that Judge Scheindlinfailed to apply the proper standard in deciding if all the components of Rule 23 required for class certification had been met, class certification would be denied by the application of the proper standard because the requirement of predominance of common questions over individual questions could not be met. The court of appeals granted review.

    Issue. 1) Prior to a district court being able to certify a class, as opposed to finding “some showing” that each condition has been fulfilled, must the court make a ruling that each condition for class certification of Rule 23 of the Federal Rules of Procedure has been met?
    (2) In constructing a class certification determination, as with any other threshold issue when reviewing evidence, is a district court required to evaluate all the available evidence?
    (3) When a Rule 23 condition overlaps with an aspect of the merits of the proposed class action, or is even the exact same as a merits issue, are the standards for determination of a Rule 23 requirement diminished?
    (4) Where the plaintiffs’ own accusations and evidence prove that the Rule 23 requirement of predominance of common questions over individual questions cannot be met, may a class not be certified in a securities fraud action?

    Held. (Newman, J.) (1) Yes. ) Prior to a district court being able to certify a class, as opposed to finding “some showing” that each condition has been fulfilled, the court must make a ruling that each condition for class certification of Rule 23 of the Federal Rules of Procedure has been met. In cases of abuse of discretion, Judge Scheindlin’sfinal decision on class certification and her rulings as to Rule 23 requirements are used for review. United States Supreme Court precedent offers guidance on this issue, with the Supreme Court stating that Rule 23 requirements need to be fulfilled, not merely supported by some evidence. Besides, the certification judgmentnecessitates “rigorous analysis,” and “the class determination generally involves considerations that are enmeshed in the factual and legal issues comprising the plaintiff s cause of action.” As specified by the Supreme Court: “We find nothing in either the language orhistory of Rule 23 that gives a court any authority to conduct a preliminary inquiry into the merits of a suit in order to determine whether it may be maintained as a class action.” Conflicting with prior interpretations within the circuit and also with other jurisdictions interpretations, the statement lacks foundation for thinking that a Rule 23 obligation is not required to be wholly established as a result of it overlap with or concerning an aspect of the merits, seeing as that the statement quoted so often was made in a case where the district judge’s merit query had nothing to do with deciding the requirements for class certification. Rather, the merits were preliminarily evaluated to settle the issue of who should pay for notice to the class. Previous decisions within the circuit have even taken the “no merits inquiry” language out of its context of a merits query not related to a particular Rule 23 class certification obligation and applied it to consideration of the Rule 23 threshold requirements. Judge Scheindlin based her “some showing†standard on a sentence contained in the case Caridad v. Metro-North Commuter Railroad, 191 F.3d 283 (2d Cir. 1999), and which showcased a cautious approach based on the “no merits inquiry” language. “Statistical dueling” amid experts was similarly condemned in Caridad, and ruled that the statements of the plaintiffs’ expert plus circumstantial evidence “satisfies the Class Plaintiffs’ burden of demonstrating commonality for purposes of class certification,” without requiring the district court to have made a clear determination of commonality in light of all the evidence bearing on that issue that had been presented at the class certification stage. A subsequent case upheld a district court’s decision regarding commonality on the lenient basis that the plaintiffs’method of demonstratingcommon questions of fact “was not fatally flawed.” Later cases have moved toward requiring a district court to decide that Rule 23 requirements have been fulfilled and a considerable move away from the “some showing” and “not fatally flawed” language. Weighing evidence associated with Rule 23 determinations was forbidden in those cases, but only to the extent those determinations were effectuallysimilar to merits matters. Lastly, no less than a preponderance of evidence can be shown to be in compliance withRule 23(b)(3)’s predominance requirement, this court stated in one of the later cases. Case law established external to this circuit usually supports a district court’s responsibility to come to a decision that the Rule 23 requirements are fulfilled, and does not plan on consenting to a pathetic “some showing” standard. The thought that a slightly less clear-cut is satisfactory simply because a Rule 23 requirement overlaps with the merits has been explicitly rejected by some circuits. Some of those circuits contend that the findings of a trial judge on a merits issue involving a Rule 23 requirement does not bind the court to rule in favor of the plaintiff on the ultimate merits of an issue than a finding that the plaintiff has demonstrated a likelihood of success for purposes of a  preliminary injunction does. Then, in 2003, Rule 23 was amended. The Advisory Committee reported that “[a] court that is not satisfied that the requirements of Rule 23 have been met should refuse certification until they have been met.†Based on these authorities, considerations and precedents, without making a decision that all requirements of Rule 23 are fulfilled, a district court may not grant class certification.
    (2)Yes. In constructing a class certification determination, as with any other threshold issue when reviewing evidence, a district court is required to evaluate all the available evidence.Fact and law comprise the mixed query that is the ultimate issue regarding each class certification requirement. The district court must often solve underlying factual disputes and, in regards to these disputes, the judge needs to be convinced that the fact at issue has been established.A judge must be given ample evidence, through affidavits, testimony or documents to be secure that each requirement of Rule 23 has been met in order to make these determinations, similar to the way that a judge would solve an argument regarding any other threshold prerequisite for continuing a lawsuit.
    (3) No. When a Rule 23 condition overlaps with an aspect of the merits of the proposed class action, or is even the exact same as a merits issue, the standards for determination of a Rule 23 requirement is not diminished.  Supreme Court precedent is appropriately comprehended to prevent consideration of the merits only when the merits issue is not associated to a Rule 23 requirement, it does not make sense to reduce a district court’s responsibility to make a determination that every requirement of Rule 23 has been fulfilled prior to certifying a class simply due to full or partial overlap of that requirement with a merits concern.  A Rule 23 requirement determination is generated solely for class certification purposes and is not binding on the trier of facts, not even if the class certification judge is the trier. Still, overlap between a merits issue and a Rule 23 requirement validates some alteration in a district court’s class certification stage procedures. A district judge has significant discretion to restrict both discovery and the extent of the hearing on Rule 23 requirements, but even with such restriction, must be given enough evidence to be placated that each Rule 23 requirement has been met to elude the threat that a Rule 23 hearing will extend into a protracted mini-trial.
    (4) Where the plaintiffs’ own accusations and evidence prove that the Rule 23 requirement of predominance of common questions over individual questions cannot be met, a class may not be certified in a securities fraud action. The claims of neither the investors’ nor the evidence demonstrate predominance relating to reliance, lack of knowledge of the scheme, and unidentified compensation amounts.  Regarding reliance, the investors fail to demonstrate the existence of an efficient market, a necessary aspect of being provided the benefit of the rebuttable presumption under the fraud-on-the­ market doctrine that securities buyers relied on price in an efficient market. For starters, the market is not efficient for IPO shares. Second, the claims of the investors’ regarding how slow the market in rectifying the purported price inflation notwithstanding that they also claim widespread knowledge of the scheme signify an efficient markets very antithesis. Lacking the presumption, separatequeries of reliance would predominate over common questions. Regarding demonstratinga lackknowledge, required if the investors were to succeed on some of their claims, the predominance requirement is overcome because common questions of knowledge do not predominate over individual queries. The allegation that lack of knowledge was common to the class is exhaustivelychallenged by the investors’ own claims regarding how prevalent was knowledge of the purported scheme. Obligated to buy in the aftermarket, the original IPO allocants were completely cognizant of the obligation that was purported to have artificially raised share prices; and there were thousands being provided or pursuing allocations. Not only would the entities getting allocations be knowledgeable about the requirements, but also the thousands of employees of the institutional investors, and the requirements were publicized by a SEC Staff Legal Bulletin and by the media. Those who participated in part and those who were required to remain “ready” to buy in the aftermarket are not addressed by redefining the class to exclude full participants plus it fails to comment on the vast extent of knowledge of the scheme all over the community of market watchers and participants. Individual queries regarding the knowledge of each member of the class is precipitated by widespread knowledge, even when redefined. In conclusion, as to the unidentified compensation amounts, to obtain them reputed class members “paid any undisclosed compensation to the allocating underwriter(s)” and would involve individualized resolve, because it would necessitate determination of a buyer’s subjective intentions, or the as it would require determination of a purchaser’s subjective intent, or the difference between what a buyer paid for brokerage commissions and the prices of those commissions traditionally were. Order granting class certifications in all of the six focus cases vacated and remanded for further proceedings.

    Discussion. The decision in this court is reminiscent of the Civil Rules Advisory Committee’s position that even after a valuation of the likeliest outcome on the merits is not formally part of the certification decision, discovery that helpsthe certificationdecision usually incorporates facts needed to ascertain the nature of the issues that will actually be shown at trial. If that is true, it is proper for the district judge to manage controlled discovery into the “meritsâ€, restricted to those portions pertinent to coming to a certification determination on an informed basis. The proposition that a class action defendant will be treated unethically if the class action judge considers the evidence from both sides in making a certification ruling fails to show the realities of class action litigation, as a practical matter, seeing as every class action defendant wishes the proof it has debating Rule 23 requirements considered in hopes of defending against the massive settlement pressure that usually comes from certification.



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