Class Certification In Securities Fraud Actions: A View From The Second Circuit


It has been said that "consensus holds that allegations of securities fraud are particularly suitable for class action treatment" under Federal Rule of Civil Procedure 23. Kermit Roosevelt III, Defeating Class Certification in Sec. Fraud Actions, 22 REV. LITIG. 405, 406 (2003), accord, Biben v. Card, 1986 WL 1199, at *12 (W.D. Mo. 1986) ("Securities fraud cases are uniquely suited to class action treatment.") (citation and quotations omitted). Nevertheless, there are various issues that arise at the class certification stage in federal securities fraud litigation that must be resolved through rigorous analysis before the matter may proceed on a class basis. This article presents a current overview of many of those issues, primarily from the perspective of courts within the Second Circuit.


    1. Rule 23 Requirements Generally

      In determining whether class certification is appropriate under Rule 23, a district court must first ascertain whether the proposed class representative meets the preconditions of Rule 23(a) – numerosity, commonality, typicality, and adequacy – and whether the proposed class action is maintainable by satisfying one of the subsections of Rule 23(b). In the context of securities fraud class actions, the relevant subsection is 23(b)(3), which requires that "[t]he questions of law or fact common to the members of the class predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fair[ly] and efficient[ly] adjudicat[ing] of the controversy." Fed.R.Civ.P. 23(b)(3) (2009). If the district court determines that the claim meets these requirements of 23(a) and 23(b), it may grant class certification.

    2. Burden of Proof

      The party moving for class certification bears the burden of demonstrating that each of the Rule 23 prerequisites is met. See, e.g., Newman v. RCN Telecom Servs., Inc., 238 F.R.D. 57, 72 (S.D.N.Y. 2006) ("In order to pass muster, plaintiffs–who have the burden of proof at class certification–must make 'some showing' [that the class comports with Rule 23]. That showing may take the form of, for example, expert opinions, evidence (by document, affidavit, live testimony, or otherwise), or the uncontested allegations of the complaint.") (citations omitted). Moreover, the district court must find that the Rule 23 requirements are met by a "preponderance of the evidence." Teamsters Local 445 Freight Div. Pension Fund v. Bombardier Inc., 546 F.3d 196, 202 (2d Cir. 2008), accord, In re Dynex Capital, Inc. Sec. Litig., No. 05 Civ. 1897(HB), 2011 WL 781215, at *1 (S.D.N.Y. March 7, 2011).

    3. Standard of Determination

      Rule 23 is given liberal rather than restrictive construction, and "courts are to adopt a standard of flexibility." In re Sadia, S.A. Sec. Litig., 269 F.R.D. 298, 304 (S.D.N.Y. 2010) (granting motion for class certification); see also, Gary Plastic Packaging Corp. v. Merrill Lynch, 903 F.2d 176, 179 (2d Cir. 1990), cert. denied, 902 F.2d 176 (2d Cir. 1991) ("In light of the importance of the class action device in securities fraud suits, [Rule 23] these factors are to be construed liberally.") (citations omitted). That said, "[t]he class-action device was designed as an exception to the usual rule that litigation is conducted by and on behalf of the individual named parties only." Gen. Tel. Co. of Sw. v. Falcon, 457 U.S. 147, 155 (1982) (internal quotations omitted), accord, In re Visa Check/Mastermoney Antitrust Litig., 192 F.R.D. 68, 78 (E.D.N.Y. 2000), aff'd, 280 F.3d 124 (2d Cir. 2001). Therefore, [a]pproving a party to represent (and, upon final judgment, bind) absent class members ought not be taken lightly. Nor should subjecting defendants to the enhanced potential liability that comes with a certified class." In re Countrywide Fin. Corp. Sec. Litig., 273 F.R.D. 586, 595 (C.D. Cal. 2009).

      The Second Circuit has summarized its standard of determination for class certification as follows:

      (1) a district judge may certify a class only after making determinations that each of the Rule 23 requirements has been met; (2) such determinations can be made only if the judge resolves factual disputes relevant to each Rule 23 requirement and finds that whatever underlying facts are relevant to a particular Rule 23 requirement have been established and is persuaded to rule, based on the relevant facts and the applicable legal standard, that the requirement is met; (3) the obligation to make such determinations is not lessened by overlap between a Rule 23 requirement and a merits issue, even a merits issue that is identical with a Rule 23 requirement; [and] (4) in making such determination, a district judge should not assess any aspect of the merits unrelated to a Rule 23 requirement.

      In re Initial Pub. Offering (IPO) Sec. Litig., 471 F.3d 24, 41 (2d Cir. 2006). Thus, rather than accepting "some showing" by the plaintiffs that the claim satisfies the requirements of Rule 23, the district court must make a clear "ruling" or "determination" that each requirement is met before granting class certification even if there is an overlap with an issue on the merits. Id. at 40, accord, Lapin v. Goldman Sachs & Co., 254 F.R.D. 168, 174 (S.D.N.Y. 2008). Notably, "the district judge must receive enough evidence, by affidavits, documents, or testimony, to be satisfied that each Rule 23 requirement has been met." In re IPO Sec. Litig., 471 F.3d at 41 (emphasis added). In this regard, a district judge must assess all relevant evidence, including expert testimony, to make this determination, "just as the judge would resolve a dispute about any other threshold prerequisite for continuing a lawsuit." Id., accord, In re Sadia, S.A. Sec. Litig., 269 F.R.D. at 307; Fogarazzo v. Lehman Bros., Inc., 263 F.R.D. 90, 98 (S.D.N.Y. 2009).1

      Although expert testimony is not explicitly required to support a motion for class certification, Plaintiffs will likely have to produce an expert who can demonstrate that injury can be proven on a classwide basis with common proof. Indeed, plaintiffs and defendants routinely present expert testimony at the class certification phase, and failure to do so can have severe consequences. For example, the Eighth Circuit affirmed an order denying class certification for lack of expert evidence presented by plaintiff, holding, "a court may be required to resolve disputes concerning the factual setting of the case. This extends to the resolution of expert disputes concerning the import of evidence concerning the factual setting – such as economic evidence as to business operations or market transactions." Blades v. Monsanto Co., 400 F.3d 562, 575 (8th Cir. 2005). This inquiry should be limited to whether, "if [plaintiff's] basic allegations were true, common evidence could suffice, given the factual setting of the case, to show classwide injury." Id.2


    To be certified, a putative class must initially meet all four prerequisites set forth in Rule 23(a), commonly referred to as numerosity, commonality, typicality, and adequacy. In re Salomon Analyst Metromedia Litig. v. Citigroup Global Mkts., Inc., 544 F.3d 474, 478 (2d Cir. 2008).

    1. Numerosity

      First, the proposed class must be so numerous that the joinder of all members is impractical. Fed.R.Civ.P. 23(a)(1). However, joinder need not be impossible. "[J]oinder may merely be difficult or inconvenient, rendering use of a class action the most efficient method to resolve plaintiffs' claims." In re Sadia, S.A. Sec. Litig., 269 F.R.D. at 304; Fogarazzo, 263 F.R.D. at 96.

      In the context of securities fraud litigation, this requirement is fairly straightforward. "In securities fraud class actions relating to publicly owned and nationally listed corporations, the numerosity requirement may be satisfied by a showing that a large number of shares were outstanding and traded during the relevant period." In re IMAX Sec. Litig., 272 F.R.D. 138, 146 (S.D.N.Y. 2010) (quoting In re Vivendi Universal, S.A. Sec. Litig., 242 F.R.D. 76, 84 (S.D.N.Y. 2007)); see also, Cheney v. Cyberguard Corp., 213 F.R.D. 484, 490 (S.D. Fla. 2003) ("[C]ourts generally assume that the numerosity prong has been met where a class action involves nationally traded securities.") (citation omitted). Moreover, "numerosity is presumed when a class consists of 40 members" or more. Consol. Rail Corp. v. Town of Hyde Park, 47 F.3d 473, 483 (2d Cir. 1995).

    2. Commonality

      Second, there must be questions of law and fact that are common to all class members. Fed.R.Civ.P. 23(a)(2). However, it is not necessary that all class members make identical claims and arguments. As long as "common questions ... predominate, differences among the questions raised by individual members will not defeat commonality." In re Sadia, S.A. Sec. Litig., 269 F.R.D. at 304; Fogarazzo, 263 F.R.D. at 96. Commonality often merges with the Rule 23(a)(3) requirement of typicality, discussed below, because "'both serve as guideposts for determining whether . . . the named plaintiff's claim and the class claims are so interrelated that the interests of the class members will be fairly and adequately protected in their absence.'" In re IMAX Sec. Litig., 272 F.R.D. at 146 (quoting Gen. Tele. Co. of Sw., 457 U.S. at 158 n. 13).

      Like numerosity, "[t]he commonality requirement has been applied permissively in securities fraud [class] litigation." In re Initial Public Offering Sec. Litig., 227 F.R.D. 65, 87, (S.D.N.Y. 2004), vacated on other grounds, 471 F.3d 24 (2d Cir. 2006) (footnotes omitted). "In general, where putative class members have been injured by similar material misrepresentations and omissions, the commonality requirement is satisfied." Id. Furthermore, because a party seeking certification for a securities fraud class action must also satisfy the more demanding "predominance" requirement of 23(b)(3); the Supreme...

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