Tuesday, May 01, 2012

2nd Circuit: Certification Properly Denied in RMBS Case

The 2nd Circuit, in an unpublished order, did not disturb a lower court’s decision declining to certify a class in a mortgage-backed securities case. The plaintiffs sought relief under Securities Act Section 11, which establishes liability if a registration statement contained material misstatements or omissions. While Section 11 does not require proof of scienter to establish a prima facie case, the statute provides an affirmative defense for defendants if the issuer can prove that at the time of the acquisition that the purchaser knew of the claimed untruth or omission. The district court denied Rule 23(b)(3) class certification, as it found that individual, not common, issues would predominate and that class adjudication would not be superior to individual actions.

The 2nd Circuit noted that while reviewing courts are “noticeably less deferential when the district court has denied class status than when it has certified a class,” there was no abuse of discretion in this case by the trial court. The defendants presented evidence that individual knowledge inquiries might be necessary. In addition, the court noted the “cumbersome” class definitions. The complaint sought recovery for all purchasers from the IPO forward, rather then choosing a narrower class definition focused on this more readily identifiable, homogeneous group, such as purchasers on specified dates. Under the proposed class definitions, the purchasers of each security who purchased at different times would have had available different levels of public information. Because public information could constitute circumstantial evidence of individual purchaser knowledge, the defendants would have stronger or weaker evidence of purchaser knowledge for each defendant based on purchase timing. New Jersey Carpenters Health Fund et al. v. RALI Series 2006-QO1 Trust et al.