Tuesday, August 14, 2012

2nd Circuit: Absence of "Fraud on the Market" Presumption Did Not Preclude Class Certification for Settlement Purposes

The 2nd Circuit reversed a decision by a lower court to deny certification of a class for settlement purposes. The district court held that the class could not be certified for settlement purposes because it did not satisfy the predominance requirement of Federal Rule of Civil Procedure 23(b)(3). Because the "fraud on the market" presumption did not apply to the claims, the district court found that individual questions of reliance would preclude a finding of Rule 23(b) predominance.

According to the 2nd Circuit, the inability of a class to avail itself of the fraud on the market reliance presumption primarily threatens class certification by creating “intractable management problems” at trial. Because the settlement of the case eliminated the need for a trial, it was not necessary for the class to demonstrate that the fraud-on-the-market presumption applied to its claims in order to satisfy the predominance requirement.

The case arose out of fraud claims against AIG and other companies, including General Reinsurance Corporation ("Gen Re"). As alleged, AIG and Gen Re engaged in a sham $500 million reinsurance transaction designed to mislead the market and artificially increase AIG’s share price.

During the pendency of the litigation, the Supreme Court handed down its Stoneridge decision. In that case, the high court held that the plaintiffs could not have relied on the conduct of third-party suppliers who allegedly participated in sham transactions because “their deceptive acts were not communicated to the public” and “[n]o member of the investment public had knowledge, either actual or presumed, of [the suppliers’] deceptive acts during the relevant times.” Gen Re argued that under Stoneridge, they could not be liable because the company made no public statements about the sham reinsurance transaction.

The district court concluded that the fraud on the market presumption did not apply to a defendant whose “deceptive acts were not communicated to the public” and that individual reliance questions would dominate class-wide ones. The court also concluded that a motion to approve a settlement between Gen Re and the plaintiffs submitted prior to the entry of the denial order was moot.

The settling parties jointly moved for preliminary approval of the settlement, arguing that even if certification of a litigation class was inappropriate, the court could, and should, certify a settlement class. The district court denied the motion, finding no authority that "a court may dispense with the requirement of proving the application of the fraud on the market presumption when certifying a class for settlement purposes.”

The 2nd Circuit, in reversing the district court, stated that other requirements of Rule 23 “designed to protect absentees by blocking unwarranted or overbroad class definitions,” such as the requirement of adequate representation, will “demand undiluted, even heightened, attention” from judges with regard to the decision to certify a class. However, in the context of a settlement class, concerns about whether individual reliance issues in the absence of a presumption “would create `intractable management problems’ at trial drop out of the predominance analysis because the proposal is that there be no trial.”