Rule 23(f) Strikes Again; Second Circuit Makes Class Cert Even Harder; Grubman Grins
Blawgletter likes to fuss about the heightening of hurdles, embiggening of traps, and sharpening of snares along the obstacle course that class litigation has become.
So imagine our delight today upon reading Millowitz v. Citigroup Global Markets, Inc. (In re Salomon Analyst Metromedia Litig.), No. 06-3225-cv (2d Cir. Sept. 30, 2008).
The class of Metromedia Fiber Network stock buyers complained that Salomon Smith Barney stock analyst Jack Grubman wrote misleading research reports about the company in hopes of getting its business for his Citigroup overlords. Part of the securities fraud claim survived a motion to dismiss, and the district court certified a class. Then the Second Circuit stepped in, accepting the defendants' appeal under Rule 23(f) of the Federal Rules of Civil Procedure. Rule 23(f) -- as you well know -- allows but doesn't require appeals courts to review class certification decisions.
The panel upheld U.S. District Judge Gerald E. Lynch's conclusion that the Grubmans of the world don't deserve more protection than securities issuers from claims under Securities and Exchange Commission Rule 10b-5 and section 10(b) of the Securities Exchange Act of 1934. The ruling turned on applicability of the "fraud on the market" presumption of reliance under Basic Inc. v. Levinson, 485 U.S. 224 (1985), to "secondary actors" like stock analysts. The court said it does apply to them.
But the court went on to hold that, during class cert proceedings, defendants must have a "full" opportunity to show that their dissemination of (allegedly) false material information didn't affect the market price of the security in question. Such a rebuttal of the Basic presumption (that all class members relied on the false information) would force each class member to prove individual reliance -- a circumstance that would defeat the requirement for class certification under Rule 23(b)(3) that issues common to all class members "predominate".
So now we'll have mini-trials in securities class actions on whether the (alleged) fraud in fact inflated the market price.
And some people wonder why we have so many fewer actual trials anymore.
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