33, 34 Act Claimants Not Incompatible, but In-and-Out Traders Are--Out

A class including investors making claims under the Exchange Act as well as Securities Act claimants was properly certified, concluded a 2nd Circuit panel. However, the district judge improperly included "in-and-out" traders who sold their shares before any corrective disclosures were made (In re Flag Telecom Holdings, Ltd. Securities Litigation).

The defendants claimed that the Securities Act claims of loss based on false and misleading statements in the prospectus and the Exchange Act claims of damages resulting from fraudulent periodic reports and public statements by corporate officers. The company reasoned that a showing of losses caused by the 34 Act claimants would support the "negative causation" affirmative defense available under the Securities Act.

The district court rejected this argument, holding that the two sets of claims were not antagonistic to each other because proof of one did not negate an essential element of the other. The 2nd Circuit agreed, as it recognized that securities class actions involving more than one misstatement are far from unusual. In addition, noted the court, "in every litigation of this type, the pool of money available for each individual class member’s recovery is limited to the loss that the individual actually incurred."

The in and out traders could not be included in the class, however. In light of the Supreme Court's Dura holding, in which the high court rejected the view that an inflated purchase price is sufficient to plead loss causation in 10(b) claims, the 2nd Circuit panel concluded that the plaintiffs "have not presented sufficient evidence to demonstrate that the in-and-out traders will even `conceivably' be able to prove loss causation as a matter of law, and that they therefore should not have been included in the certified class."

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