Defeating Class Certification in Securities Fraud Actions

I. INTRODUCTION A court may certify a class action under Federal Rule Civil Procedure 23(b)(3) if it is satisfied, after a rigorous analysis,1 that plaintiffs met Rule 23(a) requirements numerosity, commonality, typicality, and adequacy, and also shown that the [common] questions law or fact . . . predominate over any questions affecting individual members and that a class action is superior to other available methods for a fair and efficient adjudication controversy.2 The text Rule might seem to erect formidable barriers, but for years it has been received wisdom in legal community that degree difficulty in getting a class certified depends in large part on substantive theory recovery.3 In particular, consensus holds that allegations securities fraud are particularly suitable for class action treatment.4 Basic v. Levinson5 cut individualized issue reliance out securities and Exchange Commission's standard Rule 10b-5 cause action,6 replacing it with common issues materiality and market efficiency, and rest is history.7 In Amchem Products, Inc. v. Windsor,8 Supreme Court notably failed to shake up this settled understanding, commenting that [p]redominance is a test readily met in certain cases alleging consumer or securities fraud.9 Securities class actions now typically follow what one court has called an too familiar path:10 motions practice and discovery of massive proportions,11 followed by settlement on eve trial.12 How familiar is this pattern? A recent empirical survey class actions in four federal districts over a two-year period found that a (b)(3) class was certified in 94% to 100% securities cases ....13 Such data caused one commentator to opine that securities class action is no longer best understood as a lawsuit at all.14 Instead, he argues, these suits have more in common with business deals than they do with traditional adversarial litigation, and the attorneys' activities are primarily business-oriented, not legal, in nature.15 This Article is written in conviction that things are not quite as bad as all that (or quite as good, depending on which side case caption you are on). In many cases, class certification is not a foregone conclusion, and defense counsel would be well advised to oppose it vigorously. The purpose this Article is to explore situations in which such opposition has best chance success. Part II examines easiest case for class certification. Part III discusses ways in which allegations securities fraud may depart from that paradigm case. Next, Part IV examines a recent decision Third Circuit that illustrates correct approach to certification analysis. Finally, Part V sketches most promising arguments with which to oppose motions for class certification in securities fraud context. Revisiting these issues is particularly timely given 1998 adoption Federal Rule Civil Procedure 23(f), which allows, at circuit court's discretion, immediate appeal class certification rulings.16 Prior to adoption Rule 23(f), district court's decision on class certification frequently ended case, one way or other, as a practical matter: defendants would settle if class was certified, and plaintiffs would give up if it was not.17 With appellate review unavailable, most development Rule 23(b)(3) standards took place at district court level. Rule 23(f) has allowed appellate courts back into process, and they given every indication that they intend to take an active role. As Judge Easterbrook put it recently, district courts for too long been forced to rely on only decisions from other district judges, most in cases later settled and thus not subject to appellate consideration. By granting review now, we can consider whether these cases correctly understood applicable principles. …