(Article from Securities Law Alert, Year in Review 2017)
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Second Circuit: (1) Individual Morrison Determinations May Preclude Class Certification Where the Securities Were Not Traded on a Domestic Exchange; and (2) Ascertainability Does Not Require a Showing of Administrative Feasibility
On July 7, 2017, the Second Circuit relied on Morrison v. National Australia Bank, 561 U.S. 247 (2010)[1] to vacate certification of two classes to the extent they included purchasers of notes that were not traded on a domestic exchange. In re Petrobras Securities, 862 F.3d 250 (2d Cir. 2017). The Second Circuit held that the district court “erred in conducting its predominance analysis without considering the need for individualized Morrison inquiries” as to the “domesticity” of each note purchase.
The Second Circuit explained that “a plaintiff may demonstrate the domesticity of a particular transaction by producing evidence ‘including, but not limited to, facts concerning the formation of the contracts, the placement of purchase orders, the passing of title, or the exchange of money.’” Id. (quoting Absolute Activist Value Master Fund v. Ficeto, 677 F.3d 60 (2d Cir. 2012)). The Second Circuit held that “the potential for variation across putative class members—who sold them the relevant securities, how those transactions were effectuated, and what forms of documentation might be offered in support of domesticity” would likely “generate a set of individualized inquiries that must be considered within the framework of Rule 23(b)(3)’s predominance requirement.”[2]
The Second Circuit further held that Rule 23’s implied ascertainability requirement[3] does not demand “a showing of administrative feasibility at the class certification stage.” The court rejected the Third Circuit’s “heightened” two-part ascertainability test, pursuant to which “plaintiffs must not only show that ‘the class is defined with reference to objective criteria,’ but also that ‘there is a reliable and administratively feasible mechanism for determining whether putative class members fall within the class definition.’” Id. (quoting Byrd v. Aaron’s, 784 F.3d 154 (3d Cir. 2015)). The Second Circuit joined the Sixth, Seventh, Eighth and Ninth Circuits in so holding.
Second Circuit: (1) Affiliated Ute Presumption of Reliance Does Not Apply If Plaintiffs’ Claims Are “Primarily Based on Misstatements,” and (2) Plaintiffs May Be Able to Establish Market Efficiency Without Direct Evidence of Price Impact
On November 6, 2017, the Second Circuit held that the presumption of reliance established in Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972) for omission-based Section 10(b) claims “does not apply” if plaintiffs’ claims “are primarily based on misstatements.”[4] Waggoner v. Barclays, 875 F.3d 79 (2d Cir. 2017). The court underscored that “[t]he Affiliated Ute presumption does not apply to earlier misrepresentations made more misleading by subsequent omissions, or to what has been described as ‘half-truths,’ nor does it apply to misstatements whose only omission is the truth that the statement misrepresents.”
The Second Circuit further held that “direct evidence of price impact is not always necessary to demonstrate market efficiency.” In addition, the court ruled that “defendants seeking to rebut” the presumption of reliance established in Basic v. Levinson, 485 U.S. 224 (1988) “must do so by a preponderance of the evidence.”
[1] Please click here to read our prior discussion of the Supreme Court’s decision in Morrison.
[2] Rule 23(b)(3) requires that “questions of law or fact common to class members predominate over any questions affecting only individual members.”
[3] Rule 23 includes “an implicit threshold requirement that members of a proposed class be readily identifiable, often characterized as an ascertainability requirement.” Petrobras, 862 F.3d 250.
[4] The Second Circuit explained that Affiliated Ute “allows the element of reliance to be presumed in cases involving primarily omissions, rather than affirmative misstatements, because proving reliance in such cases is, in many situations, virtually impossible.” Waggoner, 875 F.3d 79.