2010 D e c i sion s O p inion s of the U nit e d S t a t e s C our t of Appe al s for the Thir d C ir c uit

8-16-2010 

# J ohn M al a ck v

. BD O S eidm a n
P r e c e de n t i al or N on-P r e c e de n t i al : P r e c e de n t i al D ock e t N o . 09-4475

F o l lo w thi s a nd a dd it ion al w ork s a t : h tt p://d i g it alc ommon s .l a w . v i l l a no v a . e du/thir dc ir c uit_2010

Thi s de c i sion i s br ou gh t t o y ou for f r e e a nd ope n a c c e s s b y the O p inion s of the U nit e d S t a t e s C our t of Appe al s for the Thir d C ir c uit a t V i l l a no v a U niv e r sit y S choo l of L a

w Di g it al R e posit or y

. I t h as be e n a c c e pt e d for inclusion in 2010 D e c i sion s b y a n a uthor i z e d a dmini s tr a t or of V i l l a no v a U niv e r sit y S choo l of L a

w Di g it al R e posit or y

. F or mor e infor m a t ion, p le as e c on t a ct Be n j a min
. C a rl s on@l a

w . v i l l a no v a . e du

. R e c omme nde d C it a t ion

" J o hn M al a ck v

. BD O S eidm a n " (2010). 2010 D e cisio n s . P a pe r 669. h tt p://d i g it alc ommon s .l a

w . v i l l a no v a . e du/thir dc ir c uit_2010/6691 PR EC ED EN TI AL

UN I TE D S TA TE S C OU RT OF AP PE AL S FO R T HE TH IRD C IRCU IT

No. 09- 4475

JO H N A . M A L A C K ; M IC H A E L R . R O S A T I; V IR G IL M A G N O N ; S . S . R A JA R A M , M .D .; H A Y WA R D P E D IA T R IC S , IN C .; HENRY MUNSTER, A p p ellan ts

v. BD O S EI DM AN , LL P

On Ap peal from

the Unite d S tate s Dis tr ic t Cou rt f o r th e E astern D istrict o f

P en n sy lv an ia Di s tr i c t Court No. 2- 08- c v- 00784 Distri ct Judg e: Th e Hon orable Th om as N. O’Neil l, Jr

.

Ar gue d J une 23, 20102 B ef o re: S M IT H , F IS H E R , an dG R E E N B E R G , C ircu it

Judg es ( Fi l e d: Augus t

16, 2010) Todd S. Col l i ns ( a r gue d) El i z abe th W

. Fox Neil F. Mara Be r ge r & Mont a gue 16 22 Lo cust

Stre et Phi l a de l phi a , PA 19103 Co u n sel fo r A

p p ella n ts Ja cob A . Goldb er g Fa r uqi & Fa r uqi 101 Gr e e nwood Ave nue Sui t e 600 J e nki nt own, PA 19046 Co u n sel fo r A

p p ella n ts Ku rt B. Olse n Klaftner , Ols en & Les sner 12 50 Co nn ec ti cut Avenu e, N.W. Sui t e 200 W a s hi ngt on, DC 20035 Co u n sel fo r A

p p ella n ts Jill M . C zesch in Matthew A . Goldb er g Ti m othy E. Hoe ffne r

( a r gue d) DL A P iperTha t pr ovi s i on of the Se c ur i t i e s Exc ha nge Ac t of 1934 1 states: I t s ha l l be u n lawful for

a ny pe r s on, di r e c t l y

or 3 16 50 Market

Stre et One Li be rty

Pl a c e , Sui t e 4900 Phi l a de l phi a , PA 19103 Co un se l f or Ap pell ee

OP I NI ON

S M IT H , Circ uit J

ud ge. This ap p ea l a r i s e s fr om

the de ni a l of c l a s s c e rt i fi c a t i on in a s ec urit ie s fra

ud cl as s a ct ion. John Mala ck pu rc hase d n otes is sued by

Am er ic an Bu si ness Financia l Ser vice s, Inc. ( “ Am e r ican Bus i ne s s ” ) , as ubpr i m e m ort ga ge or i gi na t or , a nd th o s e n o t e s w e r e l a t e r

r e n d e r e dw o rth l e s s d u r i n g th e s u b p r i me m o rt g a g e m e l t d o w n . H e n o w s e e k s c o m p e n s a t i o n f

r om BD O Seidm an L L P (“ BD O”), an ac coun ti ng firm that as si st ed Am er ic an Bu si ness in al le g ed ly defrauding him

and o ther i nve s t or s by pr ovi di ng Am e r i c a n Bus i ne s s c l e a n audi t opi ni ons tha t we r e us e d t o r e gi s t e r

the not e s wi th the Se c ur i t i e s a nd Exc ha nge Comm i s s i on ( “ SEC” )

. Ma l a c k fi l ed aput a t i ve s e c ur i t i e s fr aud c l a s s a c t i on a ga i ns t BDO ba s e d on § 1 0( b) of t he S e c u r i t i e s E x c h a n g e A c t o f 1 9 3 4 a n d Ru l e 1 0 b

- 5

. The 1 2i ndi r e c t l y , b y th e us e of a ny m e a ns or i nstr um e nt a l i ty

of i nt e r s t a t e c omm e r c e or of the m ai ls , or o f any

faci li ty of any nati on al se curi ti es exchange--

. . . ( b) To u s e o r

e m p l o y , i n c o n n e c t i o n w i th the pur c ha s e or

s a l e of a ny

s e c ur i ty r e gi s t e r e d on a na tio n al s e c ur i t i e s e xc ha nge or a ny s e c ur i ty not so re gist er ed, or any

se curi ties -bas ed swap a gr e e m e nt

( a s de fi n ed i n s e c t i on 206B of the Gr amm - Le a c h- Bl iley

Ac t ) , a ny

m a ni pul a t i ve or de c e pt i ve de vi c e or

c ontr i va nc e i n c ontr a ve nt i on of s uc h r ul e s a nd r e gul a t i ons a s the Comm i s s i on m a y p re s c r i be a s ne c e s s a ry or a ppr opr i a t e i n the p u b lic in terest o r f

o r th e p ro tectio n o f

in v esto rs. 15 U.S.C. § 7 8j (b). Ru le 1 0 b -5 states: 2
I t s h a l l b e u n l a w f

u l f o r a n y p e r s o n , d i r e c t l y

or i ndi r e c t l y , b y th e us e of a ny m e a ns or i ns tr um e nt a l i ty

of i nt e r s t a t e c omm e r c e , or of the m ai ls or of any faci li ty of any nati on al se curi ti es exchange, (a ) To em ploy any device , s chem e, or a rt i fi c e t o de fr aud,

4( b) To m a ke a ny untr ue s t a t e m e nt o f a m aterial f

act o r to o m it to state a m aterial f

act n ecessary in o rd er to m a ke the s t a t e m e nt s m a de , in the li gh t of the ci rc um st ance s und er whi c h th ey

we r e m a de , not m i s l e a di ng, or (c ) To eng age in any

ac t, prac ti ce , or course of bu si ness wh ic h o p erates o r w o u ldo p erate as a f rau d o r d e c e it u p o n an y

p erso n , i n c onne c t i on wi th the pur c ha s e or s a l e o f a n y s e c u r i ty. 17 C. F. R. § 240. 10b- 5. Al l r e fe r e nc e s t o “ Rul e 23” ref er to Rul e 23 of the 3 Federa l Rules of

Civil Proce du re . M alac k di d not

s e e k c e rt i fi c a t i on of ac l a s s ba s e d on 4 ac tual re li ance . 5 Distri ct Co urt denie d c la ss ce rt ific at ion, ho lding that Mal ac k di d not s a t i s fy the pr e dom i na nc e r e qui r e m e nt of Rul e 23( b) ( 3) 3 be c aus e he di d not e s t abl i s h a pr e s um pt i on of r e l i a nc e unde r

the fr aud- c r e a t e d- the

- m a rke t the ory . Ma l a c k now a ppe a l s the 4 de ni a l of c l a s s c e rt i fi c a t i on. Thi s c a s e t

urns on the a

ppl i c a t i on v e l

n o n of the fr aud-6 c r e a t e d- the

- m a rke t

the ory of r e l i a nc e . W i thou t

the pr e s um

pt i on o f relian ce af

f o rd ed b y th at th eo ry , M alackcan n o t receiv e class c e r t i f icatio n . T h e th eo ry ’s v alid ity is an issu e o f

f irst im p ressio n f o r th is C o u rt, an do th er C o u rts o f A p p eals are sp lit ove r whe the r i t s houl d be r e c ogni z e d. W e joi n th e S ev en th Circ uit i n rejec ti ng the theory and w il l a ff

ir m the Dis tr ic t Court ’ s de ni a l of c l a s s c e rt i fi c a t i on. I.
T h e D istrict C o u rt h ad j u risd ictio n u n d e r 1 5 U .S .C . § 78a aa nd 28 U. S. C. § 1331. Thi s a pp eal reach es us unde r

28 U. S. C. § 1292( e ) a nd Rul e 23( f)

. A di s tr i c t c ourt ’ s de c i s i on on class certif

icatio n is rev iew ed f

o r an ab u se o f

d iscretio n . In re Hy dr oge n Pe r ox i de Ant i tr us t Li t i g. , 552 F.3d 30 5, 31 2 (3d Cir. 20 08 ). An abuse of d is cr et io n occurs “i f the distri ct court’ s de c i s i on r e s t s upon a c l e a r l y e rr one ous fi ndi ng of fa c t , a n e rr a nt co n clu sio n o f

law o r an im

p ro p er ap p licatio n o f

law to f act.” I d. (i nter nal q uo ta ti on m ar

ks om itte d). “[W]hether an incorre ct le gal s tand ar d h as been us ed is an is sue of law to be revie wed de no vo .” Id

. (i nter

nal quo ta ti on m ar

ks om itte d).
II

. Ma l a c k a nd ot he r i nve s t o rs d irectly

p u rch ased n o tes fr om Am e r i c a n Bus i ne s s be twe e n Oc t obe r 3, 2002, a nd J a nua ry 20, 2 0 0 5

. T h e n o t e s p r o mi s e d t o p a y i n t e r e s t w e l l ab o v e th e p r i me ra te withou t t h e invo lvem ent of u nd er writ er s or brokers , wer e7 non- tr a ns fe rr abl e , c oul d onl y be c a s he d i n a ft e r

the y m a t ur e d, a nd ha d no m a rke t

for r e s a l e . The not e s we r e i s s ue d pur s ua nt to A m erican B u sin ess’s 2 0 0 2 an d 2 0 0 3 reg istratio n statem en ts an d p ro sp ectu ses f

iled w ith th e S E C . B D O p ro v id ed th e au d it opi ni ons ne c e s s a ry

t o c om pl e t e the fi l i ngs wi th the SEC.
On Janu ar

y 21 , 20 05 , Am er ic an Bu si ness file d a Ch apte r 11 peti ti on fo r r eorganiz at ion . O n M ay 17 , 200 5, that proceedi ng was c on vert ed to a C hapter 7 liquidati on . Mal ac k an d th e o th er in v esto rs su f f ered su b stan tial lo sses as a r e s u lt. On Fe br ua ry 15, 2008, Ma l a c k fi l e d a put a t i ve s e c ur i t i e s fr aud cl as s a ct ion again st BD O, al le ging that it s a ud it s of A m er ic an Bus i ne s s we r e de fi c i e nt

. Ac c or di ng t o Ma l a c k, ha d BDO done its j o b p ro p erly , it w o u ldn o t h av e issu ed A m erican B u sin ess cl ean aud it

op inions. Mal ac k fu rther a ll eges that withou t c le an au d it o p in io n s, A m erican B u sin ess w o u ldn o t h av e b een ab le to re gist er the notes with the SEC , the no te s w ou ld no t have bee n m a rke t abl e , a nd Ma l a c k a nd the othe r i nve s t or s woul d not

ha ve pu rc hase d the no te s. Base d on these al le gati on s, M alac k asserted th at B D O v io lated § 1 0 (b ) o f t h e 1 9 3 4 A ct an dRu le 1 0 b -5

. M alackso u g h t class certif icatio n . T h e D i strict C o u rt, a ft e r athor ough a na l y s i s of the p o s s i bl e a ppr oa c he s thr ough w h i c h M a l a c kmi g h t

h a v e o b t a i n e dap r e s u mp t i o n o f r e a s o n ab le re li ance base d o n the fraud-cre at ed-th e- m ar ket theory , denie d hi s r e qu e s t , c on c l ud i ng tha t the pr op os e d c l a s s di d n ot s a t i s fyTh e Dis tr ic t Cou rt’s op inion d il igentl y m ar ched 5 th r o u g h th e r e l e v a n t

f a c t s a n d l a w , p r o p e r l y i d e n t i f yi n g th e k e y, relev an t asp ects o f

th e class certif

icatio n p ro ced u re as set f

o rth i n I n r e Hy d ro ge n Pe r ox i de Ant i tr us t Li t i gat i on . Ma lack

v. BDO Se i dman, LLP , No. 08 -078 4, 20 09 U.S. Dist . LEX IS 67785, a t *7- 9 ( E. D. Pa

. Aug. 3, 2 0 09)

. I n pa rt i c ul a r , the Distri ct Co urt c orre ct ly st at ed that at cl as s c erti fica ti on Mala ck mu s t “ d e mo n s tr a t e th a t

[ e a c h e s s e n t i a l ] e l e me n t [ o f h i s c l a i m]

. . . i s c a pabl e of pr oof a t

tr i a l thr ough e vi de nc e tha t i s c omm on to the cla ss ra ther than individu al to it s m em bers .” I d. a t *11- 12 ( i n t e rn a l q u o t a t i o n m a rk s o m i t t e d )

. A f t e r a d i s c u s s i o n of t he e l e m e nt s of aRul e 10b- 5 c l a i m , i nc l udi ng the e l e m e nt of reaso n ab le r e l i an ce, i d. at * 1 2 -1 5 , th e D istrict C o u rt tu rn ed to wh ether Ma la ck could est abli sh a pre sum ption o f rel iance bas ed o n th e f rau d -created -th e-m ark et th eo ry , i d. at * 1 8 -42. It survey ed the v ar io u s a

pp roac hes t o the theory , a pp li ed ea ch a ppr oa c h t o Ma l a c k’ s c l a i m , a nd c onc l ude d tha t unde r no ap p ro ach co u ldM alackreceiv e a p resu m p tio n o f relian ce. I

d. 8 th e p red o m in an ce req u irem en t o f Ru le 2 3

. M alacktim ely

5 peti ti on ed fo r per

m issi o n to appeal un der Rule 23(f). We grante d that pet it ion and no w mus t c on si der whether t he Distri ct Court e rr e d i n de ny i ng Ma l a c k c l a s s c e rt i fi c a t i on.

II I. Mala ck chal le ng es th e D is tr ic t Cou rt ’s predom inance de t e rm i na t i on.9 Predom i na

nc e “ t e s t s wh e t

he r pr op os e d cla ss es ar e s uf f ic i e nt l y c ohe s i ve t o wa rr a nt

a djudi c a t i on by r e pr e s e nt a t i on [.

. . . ]” “ I s s ue s comm on t o the class m u st p red o m in ate o v er in d iv id u al issu es . . . .” B ecau se th e “n atu re o f th e ev id en ce th at w ill suff ic e to re solve a qu es ti on dete rm ines wh ether th e q uest ion is c om m on or individu al ,” “‘ a dist rict court m ust form ulat e s om e pre dict ion as to h o w sp ecif

ic issu es w ill p lay

o u t in o rd er to dete rm ine whether

comm on or individu al is su es pr e dom i na t e i n agi ve n c a s e [. ]’ ” “ I f pr oof of the es se ntia l e le m ents of the c ause of ac ti on re qu ir es in d iv id u al treatm en t, th en c lass certif icatio n is u n su itab le.” I n r e Hy dr oge n Pe r ox i de Ant i tr us t Li t i g. , 5 5 2 F .3 d a t

310- 11 ( i nt e rna l c i t a t i ons o m it t e d)

. “ Ac c or di ngl y , we e xa m i ne the elem en ts o f [ M alack ’s] claim ‘th ro u g h th e p rism ’ o f

Ru le 2 3 to de t e rm i ne whe the r

the Di s tr i c t

Court p ro p e r l y

[de ni e d] ce rt ifi[ca ti on ] [ of

] the cl as s. ” I

d. at 3 1 1

. A § 1 0 (b ) p riv ate d am ag es actio n h as six elem en ts: ( 1) a m a t e r i a l m i s r e pr e s e nt a t i on ( or om is si on ); ( 2) s c i e nt e r , i

. e . , awr ongful s t a t e of m i nd; (3 ) a co n n ectio n w ith th e p u rch ase10 o r s a l e o f as e c u r i ty; (4 ) relian ce, o f

ten ref erre d t o in ca se s invo lving pub li c sec urit ie s m ark et s ( f

ra u d -o n -t h e- mark et ca se s) as “transac ti on ca

usat ion”; ( 5) e c onom i c l os s ; a nd (6) “ lo ss ca

usat ion,” i .e ., a c ausa l conn ec ti on b etween the m at er ia l m isrep resen tatio n an dth e lo ss. M c C a b e v . E rn s t & Yo u n g, LLP , 4 94 F.3d 41 8, 42 4 (3d Cir. 2007) ( quot i ng D u r a Pharms . , I nc . v . Br oudo , 544 U. S. 336, 34 1-42 (200 5)) ( em

ph as is om itte d). The Distri ct Co urt denie d c l a s s c e rt i fi c a t i on be c aus e Ma l a c k wa s unabl e t o s how tha t the p ro p o sed class w as en titledto a p resu m p tio n o f reaso n ab le relian ce, AES Cor

p. v . Dow Che m. Co. , 325 F. 3d 174, 178 ( 3d Cir. 20 03 ) ( explai ning “r ea sonable r el iance” ). Th e r el iance e l e m e nt “ r e qui r e s a s howi ng of ac aus a l ne xus be twe e n the m isrep resen ta t i o n an dth e p lain tif f’s in j u ry , as w ell as a d em o n stratio n t h a t th e p lain tif f ex ercised th e d ilig en ce th at a r e a s onabl e pe r s on unde r

a ll o f the c i r c um s t a nc e s woul d ha ve exer ci se d to protec t his ow n inter es ts .” I d. Pr ovi ng r e l i a nc e for i n d i v i d u a l c l a s s me mb e r s c a n q u i c k l y b e c o me ac u mb e r s o me endeav or tha t ov e rwh e l m s the “ qu e s t i on s of l a w o r fa ct c omm on” t o the p ropos e d c l a s s , Fe d. R. Ci v. P. 23( b) ( 3) , a nd co u ldp reclu d e class certif icatio n , s e e i d. It is lik ely

th at f o r th is11 re as on , Mal ac k sou gh t t o inv ok e a pres um ption o f rel iance. A.
T h e S u p r e m e C o u rt h a s h e l d th a t a p r e s u m pt i on of r e l i a nc e e xi s t s in two c i r c um s t a nc e s . The fi r s t m e a ns for e s t abl i s hi ng apr e s um

pt i on of r e l i a nc e wa s s e t forth i n Affi li ated Ute C it iz ens o

f U tah v. Un ited States , 40 6 U.S. 12 8 (19 72 ). In tha t de c i s i on, the Supr e m e Court e xpl a i ne d tha t

“ pos i t i ve pr oof of r e l i a nc e i s not

apr e r e qui s i t e t o r e c ove ry ” i n c a s e s “ i nvol vi ng p rima r i l y a f ailu re to d isclo se” m aterial f acts b y d ef en d an ts o b lig ated to d isclo se su ch f a c t s . Id

. at 1 5 3 . “A ll th at is nece ss ar y is that the fac ts withheld be m at er ia l in the se nse that a reaso n ab le in v esto r m ig h t h av e co n sid ered th em im p o rtan t in

. . . m aking . . . th[e] [ investm ent] deci si on .” I d. a t 153- 54.
Se c ond, i n Bas i c I

nc . v . Le v i ns on , 4 85 U.S. 22 4 (19 88 ), the S up re m e C ou rt

re cogn iz ed the fraud-on-the-m ar ket theory as a m eans fo r es ta

blis hing a pres um

ption of rea sonable r el iance in an ef f icien t m ark et:

“ The fr aud on the m a r

ke t the ory i s ba s e d on the hy po thes is that , in an o pen and developed se curi ti es m ar

ket, the pric e of a com

pany ’s st ock is dete rm ined b y th e av ai la b le m at er ia l in f o rm atio n reg ard in g th e co m p an y an dits bu si ness . . . . Misl ea ding st at em ents will ther efore defraud p urchas er s of s t oc k even if the pu rc hase rs12 do not di r e c t l y r e l y on the m i s s t a t e m e nt s . . . . The c aus a l c onne c t i on be twe e n the de fe nda nt s ’ fr aud a nd the pl a i nt i ffs ’ pur c ha s e of s t oc k i n s uc h a ca se is no le ss si gn ific ant than in a c as e of d ir ec t relian ce o n m isrep resen tatio n s.” I d. a t 241- 42 ( quot i ng Peil

v. Sp ei se r , 806 F. 2d 1154, 1160- 61 ( 3d Ci r . 1986) )

. “ [I ]n a n e ffi c i e nt m a rke t [, ] .

. . m i s i nform a t i on di r e c t l y a ffe c t s the s t oc k pr i c e s a t whi c h the i nve s t or tr a de s a nd thus, throug h the inflat ed or deflate d p ri ce , c ause s i nj ury even in the a bsence of dire ct re li ance .” Ne wt on v . Me rrill Ly nc h, Pier ce, F enner & Sm it

h, Inc. , 259 F. 3d 154, 175 ( 3d Ci r . 2001) (i nter nal quo ta ti on m ar

ks om itte d). T here fo re , “ [r]eli ance m ay be pr e s um e d whe n afr audul e nt m i s r e pr e s e nt a t i on or om i s s i on im p airs th e v alu e o f a secu rity trad ed in an ef f i c i e n t mark et.” I d.
Som e Court s of Appe a l s ha ve he l d tha t a pr e s um pt i on of r e l i a nc e m a y

be e s t abl i s he d thr ough athi r d the ory —the fr audcreated -th e-m ark et th eo ry . Compar e, e . g. , Shor e s v . Sk lar , 647 F. 2d 462, 464 ( 5th Ci r . 1981) ( e n ba nc ) ( s e t t i ng forth the fr audcr e ated -th e-m ark et th eo ry), w ith E ckstein v. B a lco r F ilm In vesto rs , 8 F. 3d 1121, 1130- 31 ( 7th Ci r . 1993) ( r e je c t i ng the the ory)

. Ma l a c k s ee ks t o r e l y on thi s the ory

t o e s t abl i s h a p resu m p tio n o f relian ce f

o r th e p ro p o sed class.13 B. The fr aud- c r e a t e d- the

- m a rke t th eory pos i t s tha t

“ [t ]he s e c ur i t i e s l a w s a l l o w a n i n v e s t o r t o r e l y o n th e i n t e g r i ty

o f the m a rke t t o the ex ten t th a t

the s e c ur i t i e s i t

offe r s t o hi m

for pu rc hase ar e e ntit le d to b e i n the m ar ket p la ce.” Sh ores , 647 F.2d at 47 1. A pres um

ption of re li ance is es ta

blis hed w here a p lain tif f “ p r o v e[ s] th at th e d ef

en d an ts co n sp ired to b rin g to m ar ket s ec urit ie s that w er e n ot enti tl ed to be m ar kete d.” A b ell v . P o t o m a c I

n s . Co. , 858 F. 2d 1104, 1121 ( 5th Ci r . 1988) (in tern a l q u o tatio n m ark s o m itted ), v ac at e d on ot he r gr ounds su b n o m . F

rya r v. A b ell , 492 U.S. 91 4 (19 89 ); 4 Th om as Lee Hazen , T

r e at i s e on t he Law of

Se c ur i t i e s Re

gulat i on § 12 .10[ 6] [C ] (6th ed. 20 10 ) (e xp la ining t hat a fraud-cr ea te d-them a rke t c l a i m i nvol ve s “ afr audul e nt

s c he m e de p icting the ex isten ce o f

a m ark et w h ich in f

act w o u l d n o t ex ist u p o n f u ll and accurate disc losure ”)

. I f [the pl a i nt i ff] pr ove s no m or e tha n tha t the [sec uritie s] wo uld h ave been off er ed at a l ow er p rice o r a h ig h er rate, rath er th an th at th ey w o u ld ne ve r ha ve be e n i s s ue d or

m a rke t e d, he c a nnot r e c ove r . . . . Th[e ] the ory i s not that [the pl a i nt i ff] bought

i nfe r i or [s e c ur i t i e s ], but

tha t the [ secu rities] h e boug h t w ere f rau d u len tly m ark eted

. Sh ores , 647 F.2d at

47 0-71 . To b e unm ar

keta ble, the s ec urit ie s m u st b e “so lack in g in b asic req u irem en ts th at [ th ey ] w o u ld14 never have been approv ed by the [iss uing enti ty ] n or pres ente d by the unde rwr i t e r s ha d a ny one o f the pa rt i c i pa nt s i n the sc hem e not ac te d w it

h i ntent to defraud or in re ckle ss disr egar d of wh ether the other defend ants were perpetra ti ng a fra ud .” I d. a t 468. To i nvoke the the ory , apl a i nt i f f mu st a l l e ge tha t

( 1)

“ the e xi s t e nc e of the s e c ur i ty i n the m a rke t pl a c e r e s ul t e d fr om the s uc c e s s ful pe r

pe tr a t i on of afr aud on the i nve s t m e nt c omm uni ty ” a nd ( 2) tha t

s he “ pur c ha s e d i n r e l i a nc e on the m ar ket. ” I d. a t 464. Cr i t i c a l t o the the o ry ’s co he r e nc y i s the as sum ption that i t i s r ea sonable for an investor t o rely “on [ a] [ secu rit y ’ s ] av ailab ility

o n th e m ark et as an in d icatio n o f [ its] apparent genu inenes s[.]” I

d. at 4 7 0

. “[Un ]m ar keta bili ty , as env is ioned b y

the S h o res co u rt, is a n e l us i ve c on c e pt.” Ro s s v . Ba nk So ut h, N. A. , 885 F. 2d 723, 73 5 (11 th Cir. 19 89 ) ( en banc) (Tj of la t, J. , con curr ing). T hree ro u g h categ o ries o f

u n m ark etab ility

h av e em erg e d : leg al, e c onom i c , an d fa c t

ua l

. The l i ne s di s t i ngui s hi ng one fr om the o th er are h azy . L eg al u n m ark etab ility ask s “if , ab sen t f rau d , a re gu la tory agency or the i ss uing m un ic ipal it y wo uld h ave been r e q u i r e d b y l a w t o p r e v e n t o r f o r b i d th e i s s u a n c e of t he se curi ty .” Oc k

e rman v . MayZi ma & Co. , 27 F. 3d 1151, 1160 ( 6th Ci r . 1994)

. Ec onom i c unm a rke t a bi l i ty a s ks i f “ no i nve s t or w o u ldb u y

[ th e secu rity ] b ecau se, assu m in g f u ll d isclo su re, [ it] is pate ntly

wo rthles s. ” I

d. Thi s a

ppr oa c h foc us e s on
“ hy pothe t i c a l [s e c ur ities] tha t c oul d be i s s ue d a t

a ny com binati on of

pric e and inte re st

ra te .” R o ss , 885 F. 2d a t

739 ( Tjofl a t , J

. , c onc urr i ng)

. “ [C]oul d the [s e c ur i t i e s ], b ecau se ofAl though we ha ve y e t t o c ons i de r

the fr aud- c r e a t e d- 6 the- m ar ket theory , the dist

ri ct courts of this Circ uit h ave a pp li ed b o th th e eco n o m ic an df actu al u n m ark etab ility

ap p ro ach es. Compar e, e . g. , G ru b er v. P rice Wa terh o u se , 776 F. Supp. 1044, 1052 ( E. D. Pa

. 1991) ( e ndor s i ng e c onom i c unm a rke t abi l i ty a nd s t a t i ng that th e the ory

“ onl y a ppl i e s whe r e the unde r l y i ng bu si ness is an absolute sham , worth le ss from the beginning ”) , w ith W i l e y v . Hughe s Capi tal

Cor p. , 746 F. Supp. 1264, 1293 (D.N.J . 199 0) (a

pp lying f ac tual un m ar

keta bili ty approach). W e conf ront the f raud -c re at ed-the-m ar

ket theory

head-on— ra ther tha n a s s um i ng, wi thout

de c i di ng, tha t

it i s va l i d—t o pr ovi de f u tu re g u id an ce to th e d istrict co u rts. 15 the e norm ous r i s k of nonpa y m e nt , ha ve be e n br ought

ont o the m a rke t a t a ny c om bi na t i on of pr i c e a nd i nt e r e s t r a t e i f the tr

ue ri sk of no np ay m ent had been kn ow n? ” I d. a t 7 3 6

. F i n a l l y, fa c t ua l unm a rke t abi l i ty

l ooks t o the a c t

ua l s e c ur i t i e s i s s ue d, a nd ask s “w h eth er, in th e ab sen c e o f f rau d , th e [ secu rities] w o u ld have been is sued given th e ac tu al pric e and inte re st ra te at wh ic h they

were is sued.” Id

. at

73 5 (em

ph asis om itte d).

“ Unde r thi s [a ppr oa c h], a[s e c ur i ty ] i s unm a rke t abl e i f, but for the fra ud ulent s chem e, som e ‘ re gu la tory ’ e n tity (whether o f f icial o r u n o f

f icial) w o u ld n o t h av e allo w ed th e [ secu rity ] to com e ont o the m ar

ket a t i ts ac tual pric e and inte re st ra te .” I d. at 73 6 (em ph as is om itte d). 6
I V.
M alackask s u s to emb r ace th e leg al u n m ark etab ility16 approach to the fraud-cr ea te d -the-m ar ket theory . No m atte r wha t a ppr oa c h i s t a ke n, howe ve r , the the ory l a c ks aba s i s i n a ny o f th e accep ted g ro u n d s f

o r creatin g a p resu m

p tio n . “P resu m p tio n s ty p ically ser v e to assist co u rts in m a na gi ng c i r c um s t a nc e s i n whi c h di r e c t pr oof, for

one r e a s on or another, is re n d er ed d ifficult .” Ba si c I nc. , 485 U. S. a t

245 (citin g D

. L o u i sell & C . M u eller, Federal Evi dence 541- 42 ( 1977) )

. “ [C]ons i de r a t i ons of fa i rne s s , publ i c pol i c y , a nd pr obabi l i ty , a s we l l a s judi c i a l e c onomy , ” often u n d e r l i e the cr eatio n o f

p resu m p tio n s. Ba si c I

nc. , 4 8 5 U .S . at 2 4 5 ; Un ited Stat e s De p’ t of J us t i c e v . Landano , 50 8 U.S. 165 , 174 (199 3); Fe d. R. Evi d. 301 a dvi s ory c omm i t t e e ’ s not e . Anothe r r e l e va nt co n cern i n the c r e a t i on of a pr e s um pt i on i s whe the r i t is “c on si st ent with . . . cong re ss ional polic y [.]” Ba s i c I nc. , 485 U .S . at 2 4 5 . “C o mm o n sen se” also p lay s a ro le. I d. a t 246. Co urts m ay also cr ea te pres um ptions “t o correc t an im

balance resu ltin g f

ro m o n e p arty ’s su p erio r access to th e p ro o f ,” Ke nne th S. Br oun, Ge or ge E. Di x, Edwa r d J

. I mwi n k e l r e i d, D .H

. K ay e, R o b ert P

. M o steller & E .F . R o b erts, Mc Cormi c k on Evidence § 3 43 (J oh n W. Str on g ed., 5th ed. 199 9) , where

“ s oc i a l a nd e c onom i c pol icy i nc l i ne the c ourt s t o fa vor one contenti on ,” i d. , or “ to av o id a[] [ fact ual] im pass e, ” i d.

“ Ge ne r a l l y , howe ve r , the m os t i m po rta nt c ons i de r a t i on i n the c r e a t i on of pr e s um

pt i ons i s pr oba

b i l i ty . Mos t

pr e s um pt i ons ha ve c om e i nt o e xi s t en ce pr i m a r i l y be c aus e judge s ha ve be l i e ve d th at p roof of fac t B r e nde r s the i nfe r e nc e of the e xi s t e nc e of fa c t

A s o pr obabl e tha t i t i s s e ns i bl e a nd t i m e s a vi ng17 to assu m e th e tru th o f

f act A u n til th e ad v ersary

d isp ro v es it.” I d.
T h e f

r au d

- c r e a t e d

- th e - m a rk e t th e o ry r e s t s o n t he conj ec ture that

a “[securi ty ’s ] avai la

bili ty on the m ar

ket [i]s an indica ti on of

[its ] app ar ent genuineness [.]” Sh ores , 647 F.2d at 47 0. Mala ck po ints to “c om m on se nse and p robabili ty ” a s s upport for thi s c onje c t

ur e , but ne i the r

of the s e c ons i de r a t i ons bol s t e r s the i de a

tha t s e c ur i t i e s on the m a rke t , by the m e r e vi rt

ue of thei r avail abil it

y fo r purchas e, ar e free from f ra ud . Other co n s i d e r a tio n s relev an t to th e creatio n o f a p resu m

p tio n also c o u n s e l f o r r e j e c t i o n o f th e f r au d

- c r e a t e d

- th e - m a rk e t

th e o ry. A.
“Com m on sen se ,” to the e xtent Mal ac k inv ok es it as supp ort, ca ll s for re

ject ing the prop os ition that a se curi ty ’s a va i l abi l i ty on the m a rke t i s a n i ndi c a t i on of i t s ge nui ne ne s s a nd is w o rth y o f an in v esto r’s relian ce. F o r a secu rity ’s av ailab ility o n th e m ark et to b e an in d icatio n o f its g en u in en ess th ere m

u st b e so m e en tity

in v o lv ed in th e p ro cess o f tak in g th e secu rity

to m ar ket tha t a c t s a s abu l wark a ga i ns t fr aud

. Ye t

the e nt i ti es m os t c omm onl y

i nvol ve d i n br i ngi ng as e c ur i ty t o m a rke t do not im b u e th e secu rity

w ith an y g u aran tee ag ain st f

rau d

. The s e c ur i ty ’ s pr om ot e r

and othe r e nt i t i e s i n v o l v e d

i n the is su ance , s uch as the un derwri te r, the a ud it or, and le gal c ouns e l —the ve ry

e nt i t i e s oft e n c ha r ge d wi th fr aud—c a nnot beOn e could argue that an is suer and r el ated en ti ti es 7

“ be ne fi t whe n [ the y ] de ve l op[] ar e put a t i on for di s c l os i ng accu rate in f

o rm atio n to in v esto rs” a n dth eref o re th ey w o u ld 18 reaso n ab ly

relied u p o n to p rev en t f

rau d

. R o ss , 885 F. 2d a t

739- 41 (Tjo flat , J ., concurri ng ). All of the part ie s i nv olved in an is suance have a si gn ific ant s e l f- i nt e r e s t

i n m a r ke ti ng the s ec urit ie s a t apr i c e gr e a t e r

tha n the i r tru e v al ue . The p ro m o ter/co rp o ratio n an d th e issu er (if a sep arate e nt i ty) ha ve a n obvi ous i nt e r e s t i n m a rke t i ng the se curi ti es re gardle ss of

thei r true fai r m ar

ket va l ue . Li ke wi se, the [l e ga l ] c ouns e l a nd un derwri te r, wh o are of te n ret ai ned u nd er

a co n tin g en cy

f ee co n tract, are in te rested in m a rke t i ng the s e c ur i t i e s a t a n i nfl a t e d pr i c e . The un derwri te r in part ic ular , wh o, li ke an insure r, c a n s pr e a d the r i s k of l oss a m ong m a ny s t oc k or b o n d su b scrip tio n s, h a s a red u ced in cen tiv e to i nvestig a t e thor oughl y

the tr ue va l ue of the secu rities it u n d erw rites. I d. at 74 0. If we were t o cre dit t he fraud-cre at ed-the-m ar ket th eo ry b ased o n th e en tities in v o lv ed in th e issu an ce “w e [ w o u ld ha ve t o] be l i e ve tha t a n i ni t i a l i nve s t or m a y r e a s onabl y r e l y on c l e a r l y s e l f- i nt e r e s t e d (p erha

ps di s hone s t ) pa rt i e s t o m a ke d ecisio n s th at are at least b u rd en so m e an d at m o st eco n o m ically ir ra ti on al .” I

d. Su ch a bel ie f run s c ou nter to comm on se nse. 7ge ne r a l l y s e e k t o d i s c l os e a c c ur at e inf or m a t i on . Ro be rt

A. P ren tice, Th e I

ne v i tab i l i t yof a S tr on g S EC , 91 Cor

ne l l L. Re v. 7 7 5 , 7 8 1 (2 0 0 6 ). Y et recen t eco n o m ic h isto ry u n d erm in es th is arg u m en t. I

d. M an y en tities n o w f

o rg o th e lo n g term

b en ef its o f accu rate d isclo su res f

o r th e p ro sp ect o f sh o rt term g ain

. I d. at 7 8 2 . In d eed , a sig n if

ican t amo u n t o f acad em ic literatu re is devo te d to exam ining t

he fact ors i nf

luenci ng is suer s and re la te d enti ti es to, o n the w ho le , act le ss ho nest ly than we on ce beli eved th ey d id

. See, e . g. , R o n ald J. G ilso n & R ein er K raak m an , The Me c hani s ms of Mar k e t Ef f i c i e nc yTwe nt yY e ar s Lat e r : The Hi nds i ght Bi as , 28 Iowa J. Co rp. L . 7 15 (200 3); J oh n C . Cof fee, Jr., Wh a t C

a u sed E n r o n ? A C

a p su le S o cia l a n d E co n o m ic Hi s t or yof t he 1990s , 89 C ornell L. Rev. 26 9 (20 04 ).

19 T h e S E C l i k ew ise can n o t b e reaso n ab ly relied u p o n to p rev en t f rau d b ecau s e i t d o es n o t co n d u ct “m erit reg u latio n .” Rather , i t s ee ks to conf

ir m that the is suer adequatel y disc lose d i n f o rm a t i o n p e rt a i n i n g t o th e s e c u r i ty: The SEC doe s not

r e vi e w the m e r i t s of the r e g i s tr a t i o n s t a t e m e n t

a n dth e o f

f e r i n g . [ I ]n rev iew in g 1 9 3 3 A ct reg istratio n statem en ts, as is the c a s e wi th SEC r e vi e w of fi l i ngs ge ne r a l l y , the foc us i s on the a d eq u a c y a nd c l a r i ty

of the disc losure . Specifica ll y , the SE C w il l c on si der wh ether the appl ic able disc losure it em s are e xpl a i ne d i n s uffi c i e nt

de t a i l a nd wi th s uffi c i e nt cl ar it y . In additi on to the r evie w o f the adequacy o f t h e d isclo su res, th e S E C w ill ex am in e clarityF o r e xa m pl e , the fe de r a l r e gul a t i on pe rt a i ni ng t o the 8

“ [f]or e pa rt of [a ] [r ]e gi s tr a t i on [s ]t a t e m e nt a nd [the ] [ o ] u t s i de [f]r on t [c ]o ve r [p ]a ge of [a ] [p ]r os pe c t us ” s t a t e s tha t i f a c omm i s s i on l e ge nd i s ne e de d i t m us t “ i ndi c a t e [] tha t

ne i the r the [SEC] nor

a ny s t a t e s e c ur i t i e s c omm i s s i on ha s a ppr ove d or di s a ppr ove d of the s e c u r i t i e s or pa s s e d upon the a c c ur a c y or ad e qua c y of the di s c l os ur e s i n the pr os pe c t us a nd tha t

a ny co n trary rep resen tatio n is a crim in al o f f e n s e . ” 1 7 C .F .R . § 22 9.50 1(b)(7). 20 a nd a l s o wi l l c onduc t

a“ pl a i n Engl i s h” r e vi e w of those porti on s of the re gist ra ti on st at emen t that ar e s ub ject to the SEC ’s plai n En glis h d is cl osure req u irem en ts. 1 Thom a s Le e Ha zen , Treati se on the Law of Securi ti es Re gulat i on § 3 .7 [ 2 ] . “T h e S E C d o es n o t read all o f th e p u b licly a va i l abl e i nform a t i on about a n offe r i ng a nd the n de t e rm i ne the l e gi t i m a t e pr i c e for the s e c ur i ty . . . [n]or doe s [i t ] e ndor s e a ny o f th e d o cu m en ts in v o lv ed in th e issu an ce o f secu rities.” Jose ph v. Wi les , 223 F. 3d 1155, 1165-6 6 ( 10th Ci r . 2000) (i nter nal c it at ion o m itte d). 8
Di s c l os ur e o f

a dve r s e i nform a t i on m a y

l owe r the pr i c e of a s e c ur i ty , but i t wi l l not pr e ve nt tha t s e c ur i ty fr om goi ng to m ark et: The e xi s t e nc e of as e c ur i ty doe s not de pe nd on, or w a rr a n t , th e a d e q u a c y o f d i s c l o s u r e . M a n y a21 se curi ty is on the m ar

ket e ven tho ug h the is suer o r so m e th ird p arty m ad e in co m p lete d isclo su res. F ed eral secu rities law d o es n o t in clu d e “m erit reg u latio n .” F u ll d isclo su r e o f ad v erse i nf o rm ation m a y

l owe r the pr i c e , but

i t doe s not excl ud e the se curi ty

from the m ar ket. Securi ti es o f b a n k r u p t c o r p o r a t i o n s tr a d e f

r e e l y ; s o me m a rke t s sp e c i a l i z e i n pe nny s t oc ks

. Thus the li nc hp i n o f Sh ores —t ha t di sc losi ng bad in f o rm atio n k eep s secu rities o f f th e m ark et, e nt i t l i ng i nve s t or s t o r e l y on th e p res e nc e of the secu rities j u st as th ey

w o u ldrely

o n statem en ts in a prospect

us—is s im

ply fals e. E ckstein , 8 F .3 d at 113 0-31 (i nter nal c it at ions om itte d); Note, T h e F ra u d -o n -th e-M

a rket T h eo ry , 95 Ha rv. L. Re v. 1143, 1158 ( 19 82 ) ( “ [A ]n y

a r gu m e nt abo ut a n e xp e c t a t i on fo s t e r e d by SE C re gu la ti on is se vere ly

un derm ined by

the fact that the SEC do es not vouc h for

e i the r th e su b s t a nt i ve va l ue of a ny i s s ue or the ve r a ci ty of the r e pr e s e nt a t i ons by a ny i s s ue r . ” )

. I n s hort , the

“ fi l [i ng] [of] a m i s l e a di ng doc um e nt w i th [the SEC] doe s not len d an y m o re cred ib ility

o r v eracity

to th e d o cu m en t th an if

[ it] had sim ply [b ee n] given . . . to invest ors. ” J os e ph , 22 3 F.3d at 1 1 6 6

. Ma l a c k a l l but

o u t r i ght c onc e de s tha t

the r e i s no c omm on se nse justi fica ti on fo r the prop osit ion that a se curi ty ’s pres ence on the m ar

ket i s an i nd ic at ion of its genu inenes s upo n w hich an i nve s t or m a y r e a s onabl y r e l y . I n hi s br i e f, he c onc e de d tha t the22 SEC doe s not

c onduc t m e r i t r e gul a t i on. At o ral arg um e nt , he a gr e e d tha t e ve n i f BDO ha d not c omm i t t e d the a l l e ge d fr aud, the not e s s t i l l woul d ha ve pa s s e d SEC r e vi e w a nd woul d ha ve m ad e it to m ark et:
T H E C O U R T : Wh at i f [ B D O ] h a d s a id in a l l c a ndor , we l l , t he com pany here , [ Am er ic an B u sin ess], i s us i ng a di s c ount r a t e tha t

m a y be lo w er than wh at

the m ar ket am o n g s i mi l a r

[ i n t e r est-o n ly strip s] t h a t are b ein g . . . sold across this coun tr y w o u ld in d icate. A n din f

act, the y m a y be unde r s t a t i ng th ei r de fa ul t r a te in co m p ari s o n t o s i mi larly s i t ua t e d i s s ue s . But

ha vi ng said th at, th ese a re th e f

acts whi c h abuy e r

s houl d be aw are o f . A n d th is is, i nde e d, ar i s ky

i nve s t m e nt w h i ch p ay s a h ig h in terest rate.

* * * T H E C O U R T : T h e S E C w o u l d ’ v e said

accep ted , g o ah ead an dsell.Stri pp ed of it s fortuit ou sl y si m il ar nam e—wh ic h m ay 9 ha ve bol s t ered i t s c r e di bi l i ty wi th s om e c ourt s —the fr audcreated -th e-m ark et th eo ry g ain s n o su p p o rt f ro m th e u n iv ersally accep te d f

r a u d -o n -th e-m ark et th eo ry . T h e latter is u ltim ately g ro u n d ed in th e ef

f icien t m ark et h y

p o th esis, w h ich , w h ile im p erf ect, h as a b asis in eco n o m ics. Se e I n r e Bur l i ngt on Coat Fac t or ySe c . Li t i

g. , 1 1 4 F

. 3 d 1 4 1 0 , 1 4 2 5 ( 3 d C i r . 1 9 9 7 )

. The sam e c anno t be s ai d f

or the form er. Th e fraud-cr ea te d-the23 [M AL AC K’S Cert ai nly , i f that dis cl osure COUNSEL]: ha d be e n pr ovi de d i n the

p r o s p e c t u s i n t h e reg istratio n statem en t[ .] Oral Argu m ent Tr. 9:7-9:24 , Jun e 23, 20 10 . I f the Am er ic an Bus i ne s s not e s woul d ha ve gone t o m ark et w i th or wi thout BDO’ s a l l e ge dl y

fr audul e nt

audi t , the n the r e i s no c omm on sen se co n n ectio n b etw een B D O ’s au d it an dM alack ’s ab ility to p u rch ase th e n o tes. T h u s, th ere is n o reaso n to v iew th e n o tes’ p resen ce o n th e m ark et as b ein g in d icativ e o f th eir g en u in en ess. B.
M alack ’s v ag u e in v o catio n o f p ro b ab ility

also f ails to l e nd a ny s upport t o the a s s e rt i on tha t as e c ur i ty ’ s a va i l abi l i ty on the m a rke t i s a n i ndi c a t i on of i t s ge nui ne ne s s . Unl i ke the fr audon -t he-mar k etth eo ry , w h ic h w as su p p o rt ed b y emp ir ic al st

ud ie s an d eco n o m ic th eo ry , se e Basic Inc. , 485 U. S. a t 2 4 6 -4 7 , the fraud-cre at ed -the-m ar

ket theory

has the supp ort of n ei ther

. 9m a rke t the ory ha s no unde r l y i ng e c onom i c jus t i fi c a t i on a nd a ny attem p t to rid e th e co attails o f

th e f rau d -o n -th e-m ark et th eo ry is e a s i l y r e je c t e d. The fr aud- c r e a t e d- the

- m a rke t the ory , a c c or di ng to it s propo nents, m ay

be invo ked f

or any se curi ty —even w hen the m ar ket i s i neff

ic ie nt, s uch a s in the c as e of n ewly is sued secu rities—

b ecau se its ch ief

p rereq u i s i te is th at th e secu rity h av e sim p ly m ad e it to m ark et. Se e R o ss , 885 F. 2d a t 739 ( Tjofl a t , J

. , c onc urri ng) ; J ona tha n R. Ma c e y & Ge offr e y

P. M iller, Good Fi nanc e, Bad E conomi c s : An Anal y s i s of t he F ra u d -o n -th e-M

a rket T h eo ry , 4 2 S tan . L . R ev . 1 0 5 9 , 1 0 6 0 n .5 (des cr ibing the S

h o res de c i s i on a s “ [p]e rha ps the m os t

s tr i ki ng exam ple of the m is ap p li ca ti on of [the efficie nt m ar

ket hy pothe s i s ]” )

. I n i t s m os t

e xpa nsiv e i nc a rna t i on, the fr audc r e a t e d- the

- m a rke t

the ory woul d r e nde r

s upe r fl uous the fr audon- the m a rke t

the ory a dva nc e d i n Ba si c I nc. a nd the pr e s um pt i on of reli a nc e s e t

forth i n A

ffilia ted U te b ecau se it co ul d be i nvoke d i n a ny i ns t a nc e whe r e a s e c ur i ty ha s m a de it to m ark et. 24 Mor eo v er, Ma l a c k doe s not a rt i c ul a t e a ny

r e a s on why p ro b ab ility

su p p o rts h is v iew . If

h is reli a n c e o n p ro b ab ility is b ased o n th e id ea th at alm o st all m ark eted secu rities are, in f act, le gall y m ar k et able , and ther efore we should p re sum e that a ny thi ng offe r ed o n th e m a rke t ha s not be e n s t a i ne d by

fr aud, then Mala ck is advo ca ti ng fo r a kind of invest or insurance that e l i m i na t e s the ne e d for

pr ovi ng r e l i a nc e i n an

y s e c ur i t i e s fr aud case. Any i n v e sto r w h o p u rch ases an y secu rity co u ldp o in t to th e secu rity ’s av ailab ility

o n th e m ark et to satisf

y th e reaso n ab le relian ce elem en t o f

a § 1 0 (b ) claim . S u ch in su ran ce “ex p an d [ s]25 the SEC ’s role bey on d i ts inte nd ed or re al is ti c s cope.” J os e ph , 223 F. 3d a t

1165. The e s t abl i s hm e nt

of i nv e s t or

i ns ur a nc e i s c ontr a ry

t o the g o als o f secu rities law s. See Basic Inc. , 485 U.S. at 25 2 (Whit e, J., co n cu rrin g in p art an dd issen tin g in p art); Fe ne r v . Ope r at i ng Eng’ r s Cons t

. I

ndus

. & Mi

s c e l lane ous Pe ns i on Fund ( Loc al 66) , 5 7 9 F .3 d 4 0 1 , 4 1 1 (5 th C ir. 2 0 0 9 ); Ro bb ins v . Kog er P ro p s. , 1 1 6 F .3 d 1 4 4 1 , 1 4 4 7 (1 1 t h C ir. 1 9 9 7 ); Oc k e rman , 27 F .3 d at 1 1 6 2 ; Gr i

gs byv . CMI

Cor p. , 7 6 5 F .2 d1 3 6 9 , 1 3 7 6 (9 th C ir. 1 9 8 5 ); List

v. Fa shion P ark, Inc. , 340 F. 2d 457, 463 ( 2d Ci r . 1965)

. “ [T]h e secu rit i e s l a ws e na c t e d by Congr e s s i n the 1 9 3 0 s w ere n o t in ten d ed to create a sch em e o f i n v e s to rs’ i ns ur a nc e or

t o r e gul a t e di r e c t l y

the unde r l y i ng m e r i t s of var i ous i nve s t m e nt s . Com

pa r e d t o the c ons um e r - or i e nt e d l e gi s l a t i on of the l at e 196 0s and 1 97 0s, the federa l s ec urit ie s l aws l eave a grea t m any po te ntia l ‘har m s’ (i n the se nse of ec on om ic lo ss es by individu al invest ors) un re m edie d.” Sh ores , 647 F. 2d a t 482 (R an d all, J., d issen tin g ).
Be c aus e Ma l a c k ha s not a rt i c ul a t e d a ny jus t i fi c a t i on for his argum ent that probab il it y supp orts the fra

ud -c re at ed-them ark et th eo ry , an d b ecau se th e mo st o b v io u s p o ssib le ju st ific at ion is flawed, we are com fo rt a bl e s ta ti ng that

the theory is n o t su p p o rted b y

p ro b ab ility an d d eclin e to f u rth er sp ecu late on the i ss ue. C.26 Othe r c ons i de r a t i ons r e l e va nt t o whe the r apr e s um pt i on s houl d be c r e a t e d s im ilarly poi nt t owa r d r e

je c t i ng the fr audc r e a t e d- the

- m a rke t

the ory . Fi r s t , the the ory

doe s not s e rve the se curi ti es laws’ goal of inf orm ing invest ors v ia disc losure s. “I n A ffil i a t e d U te , the Supr e m e Court

de s c r i be d the 1934 Ac t

a nd it s c om panion le gisl at ive e nactm ents (i nclu d in g the Securi ti es A ct o f 1 9 3 3 ) as em

b racin g a ‘f

u n d am en tal p u rp o se to su b stitu te a philo soph y

of fu ll disc losure fo r the ph il osop hy of caveat em p to r an d th u s to ach iev e a h ig h stan d ard o f b u sin ess eth ics in th e s ec urit ie s i nd ustr

y .’ ” I d. ( quot i ng A

ffilia ted U te , 4 0 6 U. S. a t 1 5 1 ); Sa nta F

e I ndus., Inc. v. Gree n , 430 U. S. 462, 477- 78 (1 9 7 7 ) (n o tin g th at th e S u p rem e C o u r t h a s “ rep eated ly

. . . desc ri bed the ‘fun dam enta l purpo se ’ of the [S ec urit ie s E x ch an g e] A ct as im

p lem en tin g a ‘p h ilo so p h y o f f u ll d isclo su re’”); SEC v

. Za n d fo rd , 535 U.S. 81 3, 81 9 (20 02 ); Gus taf s on v . Al l oy d Co. , Inc. , 513 U. S. 561, 571 ( 1995) ( “ The prim ar y inno vati on of the 19 33 Act was the c re at ion o f f eder al du ti es -- fo r the mo st p art, re gist ra ti on and d is cl osure ob li gati on s - - i n con nect ion w it h p ub li c off

er ings.” ).

“ [T]he fe de r al s e c ur i t i e s l a ws a r e i nt e nde d t o put invest ors i nto a po si ti o n from wh ic h they

can h el p them se lves b y rely in g u p o n d isclo su res th at o th ers are o b lig ated to m ak e.” Sh ores , 647 F. 2d a t

483 ( Ra nda l l , J

. , di s s e nt i ng)

. The fr audc r e a t e d- the

- m a rke t

the or y , c on tr a ry

t o thi s go a l , a l l ow s
“ m one t a ry

r e c ove ry [for ] thos e who r e fus e t o l ook out for them se lv es.” Id

. Invest ors nee d n ot exam ine a disc losure beca use, no m atte r what, the se curi ty ’s pres ence on the m ar ket27 wo u ld b e e nough t o s a t i s fy the r e a s onabl e r e l i a nc e e l e m e nt of a § 1 0 (b ) claim

. See i d. In d eed , an in v esto r stan d s to lo se nothi ng by

bl i ndl y pur c ha s i ng s e c ur i t i e s wi thout e xa m i ni ng a ny disc losure beca

use the dam ages awar d f

or a fraud-cr ea te d-them a rke t c l a i m woul d be the s a m e a s the m e a s ur e of da m a ge s for a Rule 10b -5 cl ai m

base d o n act

ual r el iance: [T] he onl y

workabl e m e a s ur e of da m a ge s i n a S h o res a c t i on woul d be the ful l pr i c e pa i d by the pl a i nt i ff for

the ne w i s s ue . Tha t

be i ng so , a S h o res awar d w ou ld si m ply be the pla inti ff ’s out

- of- poc ke t

e xpe ns e s c aus e d by

the fr aud

- - the s a m e m e a s ur e of da m a ge s for as t a nda r d R u le 1 0 b -5 reco v ery b ased u p o n actu al relian ce, se e L. Los s , Funda m e nt a l s of Se c ur i t i e s Re gul a t i on 967 ( 2d e d. 1988) ( out

- of- poc ke t norm a l l y m e ans di ffe r e nc e be twe e n pr i c e pa i d a nd va l ue of se curi ti es ). Th us, und er Sh ores , an y in cen tiv e to re ad disc losure s e ss enti al ly disa pp ears si nce plai ntiffs wo uld r ec ei ve the fu ll pu rc hase pric e fo r their se curi ti es withou t hav in g to re ad d isclo su re in f

o rm atio n . R o ss , 885 F.2d at

74 3 (Tj of

la t, J. , c on curr ing). Moreover, “an in v esto r m ig h t ratio n ally

seekto a v o idread in g d isclo su res in order t o p re se rve a

po ss ible cl ai m

un der Sh ores . ” I

d. a t 744. The l e s s a n i nve s t or

knows about

the s ecu rity , a s i de fr om

the fact that it is on the m ar

ket, the le ss li kely it is that she wil l l earn of info rm at ion that wou ld se ver the li nk betwee n the al le ged28 f rau d an d h er d ecisio n to p u rch ase th e secu rity

. Cf. Basic Inc. , 48 5 U .S. a t 248 (e xp la ining h ow fraud-on -th e- m ar ket pr e s um pt i on m a y

be r e but t e d)

. Di s c our a gi ng i nve s t or s fr om ex am in in g di s c l os ur e s acco m p an y in g secu rities ru n s co n trary to Congr e s s ’ s goa l of e m

powe r i ng i nve s t or s wi th the i nform a t i on th ey n eed to m ak e ed u cated , p ru d en t in v estm en t d ecisio n s. Mala ck ar gu es that

the fra ud -c re at ed-the-m ar

ket theory w o u ldserv e C o n g ress’s g o als o f p r o m o tin g h o n esty an df air d ealin g s in th e secu rities m ark ets. Sh ores , 6 4 7 F .2 dat 4 7 0 ; se e 7 A lb a C o n te & H erb ert N ew b erg , Ne wbe r g on C la ss Ac t i ons § 2 2:1 (4th ed. 20 02 ) ( “[T] he federal se curi ties la w s wer e de s i gne d t o de t e r

futur e wr ongdoi ng i n the s e c ur i t i e s fi e l d a nd p ro m o te th e in teg rity

o f th e secu rities m ark et, an dth e class ac ti on has bee n rec og nize d as an eff ec ti ve m ea n s to rea li ze th ese g o als.”). P ro m o tin g h o n esty an d f air d ealin g s is certain ly an im po rt an t co n ce rn, but it

is al so an excee ding ly

abstra ct concern. If we were gu ided m ai nly by the prom otion o f f ree a nd hone s t

s e c ur i t i e s m a rke t s , the n we woul d s e e k t o e xpa nd § 10 (b) l ia bili ty wh enever po ss ible to prevent fraud. Bu t that has not be e n the a

ppr oa c h t a ke n by

th e fe de r a l c ourt s . The se c ur i t i e s l a ws a r e not

ac a t c ha l l for

a ny fr audul e nt

a c t i v ity c omm i t t e d i n c onne c t i on wi th as e c ur i t i e s offe r i ng . For e xa m pl e , the Supr e m e Court

i n Ce n tr a l B a n k o

f D e n v e r , N. A. v . Fi r s t I nte r s tate Ba nk of

De nv e r , N. A. , 511 U.S. 16 4 (19 94 ), he l d tha t “ apr i va t e pl a i nt i ff m a y

no t m a i nt a i n a n a i di ng a nd abetti ng suit

un der § 10 (b). ” I

d. a t 191. I t

di d s o ove r

adi s s e nt tha t c i t e d the Exc ha nge Ac t ’ s goa l of “ c r ea t i [ng] a nd29 m ai nt[aining]

. . . a post- is suance se curi ti es m ar ket that i s fre e from fraudu le nt prac ti ce s. ” Id

. a t 193 ( St e ve ns , J

. , di s s e nt i ng) (i nter nal quo ta ti on m ar

ks om itte d).
Mor e r e c e nt l y , i n St one r i dge I nv e s t me nt Par t ne r s , LLC v. Scie ntif

ic -Atlan ta, I

nc. , 5 5 2 U

. S

. 1 4 8 ( 2 0 0 8 ) , th e S u p r e me C o u rt cast f

u rth er d o u b t o n th e leg itim a c y o f ex p an siv ely pres uming rel iance t o p rom ote hon es ty and f ai r dea li ng s. In St one r i dge , the Su prem e Co urt noted that , a t l ea st si nce Ce ntr al Bank , Congr e s s ha s a

ppr ove d of na rr owi ng the s c ope of § 10( b) l iabi l i ty . As a l r e a dy

e xpl a i ne d, i n Ce ntr al

Bank , th e S u p r e me Court he l d tha t “ § 10( b) l i abi l i ty di d not e xt e nd t o a i de r s a nd abettors .” St one r i dge , 55 2 U.S. at 15 7. “Th[ at ] dec is ion . . . le d t o c a l l s for Congr e s s t o c r e a t e a n e xpr e s s c aus e of actio n f or ai ding and abett ing w it

hin the Securi ti es Ex change Act.” I d. at 1 5 8

. B u t C o n g ress d eclin ed to d o so . I d. “ I ns t e a d, i n § 104 of the Pri vate Securi ti es Liti gati on Refo rm Act of 1 99 5 (PS LR A), 10 9 S ta t. 75 7, [C on gres s] dire ct ed [that] prosec ution o f aider s and abettors [b e carr ie d o ut] b y the SEC .” I

d. ( c i t i ng 15 U. S. C. § 78t ( e ) )

. The PSLRA a l s o i ns t i t ut e d he i ght e ne d pl e a di ng a nd l os s c aus a t i on r e qui r e m e nt s for “an y pr i va t e a c t i on” a r i s i ng f ro m th e S ecu rities E x ch an g e A ct. St one r i dge , 552 U. S. a t 165- 66 . There fo re , Con gres s’ s a ct ions afte r Ce nt r al Bank w ere in acco rd w ith th e S u p rem e C o u rt’s v iew th at § 1 0 (b ) liab ility sh o u ldrem ain n arro w an dlim itedto its cu rren t c o n t o u rs. See id

. a t 165 ( “ Congr e s s . . . r a t i fi e d the i m pl i e d r i ght

of a c t i on afte r the [S up re m e] Co urt m ov ed aw ay from a broad w illin g n ess t o im

p ly p riv ate rig h ts o f

actio n .”); cf. M

errill30 L yn ch , P ierce, F

en n er & S

m ith In c. v. D a b it , 547 U. S. 71, 80- 82 (200 6) (e xp la ining th at Co ng re ss pass ed the Sec urit ie s Li t i ga t i on Uni form

St a nda r ds Ac t

of 199 8 to stem

the s hi ft of s e c ur i t i e s l i t i g a t i o n f

r o m f e d e r a l t o s t a t e c o u rt s s p a rk e db y the PS LR A); 15 U .S.C. § 78 bb (f)( 1). In additi on , the Ston er idge Co urt e xp la ined that

“ [c ]on cern s wi th the judi c i a l c r e a t i on of apr i va t e c aus e of a c t i on c aut i on a ga i ns t ” the e xpa ns i on of the § 10( b) c aus e of actio n . St one r i dge , 552 U. S. a t 165. Ext e ndin g th e caus e of ac ti on “i s f

or Co ng re ss , n ot fo r [ the cou rt s].” Id

. T h e S u p r e me Court , a ft e r

de scri bi ng the two a c c e pt e d pr e s um pt i ons of r e l i a nc e s e t

forth i n Affi li a te d

U te a nd Ba si c I

nc. , id

. a t 159, s t a t e d une qui voc a l l y

tha t “ the § 10( b) pr i va te ri ght s houl d not be exte nd ed bey o n d it s pre se nt bo un dari es ,” id

. a t 165. Althou gh the Ston er idge Court wa s not s pe c i fi c a l l y c ons i de r i ng the fra ud -c re at ed-the-m ar

ket theory , we v ie w its inst ruct ion as general supp ort for re

ject i ng s uc h n e w p r e s um

ptions of re li ance . Se e i d. at 1 5 9 ; c

f

. De s ai v . De ut

s c he Bank

Se c . Lt d. , 573 F. 3d 931, 942 ( 9th Ci r . 2009) ( pe r c ur i a m )

. Adopt i on of the fr audcr ea te d-the- m ar

ket theory

wo uld e xtend § 10 (b) l ia bili ty far b ey o n d its cu rren t co n to u rs. Pol i c y c onc e rn s als o s upport

r e je c t i on of the fr audcreated -th e-m ark et th eo ry . C o n g ress h as m ad e it clear th at it is h o stile to f

riv o lo u s § 1 0 (b ) litig atio n . E. g. , 1 5 U

. S

. C

. § 7 8 u4( b) ( 2) ( r e qui r i ng p art i c ul a r i ty i n s e c ur i t i e s fr aud c om pl a i nt wh er e “ plai ntiff m ay

re cover m on ey

dam ages on ly

on proo f that31 th e d ef en d an t acted w ith a p articu lar state o f m in d ”); i d. § 78u4( c ) ( pr ovi di ng s a nc t i ons for abus i ve l i t i ga t i on)

. Ye t the fr audc r e a t e d- the

- m a rke t

the ory e nc our a ge s e xa c t l y

s uc h l i t i ga t i on by e s s e nt i a l ly el i m i na t i ng the r e l i a nc e r e qui r e m e nt for a § 10( b) claim . T h is h as at least tw o n eg ativ e im p acts.
F i r s t , Ru l e 1 0 b

- 5 l i t i g a t i o n , b y i t s v e ry n a t u r e , i s c o s t l y. An i nc r e a s e i n fr i vol ous l i t i ga t i on dr i ve s up the ove r a l l c os t s of is suing sec urit ie s, ulti m at el y harm ing every on e i nv olved. In Ce ntra l B a nk , the Su prem e Cou rt no te d that Rule 10b -5 litig atio n p re sen ts a “d an g er o f v ex atio u sn ess d if

f eren t in d eg ree an d in k in d f

ro m th at w h i ch acco m

p an ies litig atio n in general .” Ce ntr al

Bank , 511 U. S. a t 189 ( i nt e rnal q uot a t i on m a r k s o m i t t e d )

. A s s u p p o rt , th e C o u rt p o i n t e dt o S e n a t or Sa nfor d’ s s t a t e m e n t th at “ i n 83% of 10b- 5 c a s e s m a jor acco u n tin g f

irm s p ay $ 8 in leg al f

ees f o r ev ery $ 1 p aid in cl ai m s. ” I

d. ( c i t i ng 138 Cong. R ec. S12605 ( Aug. 12, 1992) ( r e m a rks of Se n. Sa nfor d) )

. Se c onda ry a c t or s , l i ke a c c ount i ng fi rm s , m us t “ e xpe nd l a r ge s um s e ve n for pr e tr i a l de f en se a nd the negotia ti on of

se tt le m ents .” Ce ntr al

Bank , 511 U.S. at 189. T h e s e c o sts in f

ect th e f u n ctio n o f

th e en tire secu rities m ark et, ha rm i ng pr ofe s s i ona l s ( l a wy e r s , a c c ount a nt s , e t c . ) , the co m p an ies th ey

serv e, an din v esto rs: [ N ] ew er an d sm aller co m p an ies m ay

f in dit d if f icu lt to o b tain ad v ice f

ro m p r o f essio n als. A prof es si on al m ay

fear t hat a newer or sm al le r co m p an y m ay n o t su rv iv e an dth at b u sin ess32 f ailu re w o u ldg e n e r a t e s e c u r i t i e s l i t i g a t i o n a g ain st the pr ofe s s i ona l , a m ong othe r s . I n a dditio n , the in creased co sts in cu rred b y p ro f essio n als b ecau se of the li ti gati on and s ettl em ent c osts un der 10b -5 m a y be pa s s e d on t o the i r c l i e nt c om pa ni e s , a nd i n t urn i nc urr e d by

the c om pa ny ’ s inve s t or s , the inte nd ed beneficiari es of

the s ta tute

. I d.
Se c ond , th e p r e s u m p t i o n o f r e l i a n c e i s ap o w e r f

u l t o ol for pl a i nt i ffs s e e ki ng c l a s s c e rt i fi c a t i on a nd c l a s s c e rt i fi c a t i on pu ts pres sure on defen d an ts to se tt le cl ai m s, even if they ar e f riv o lo u s. Se e I

n r e Hy dr oge n Pe r ox i de Ant i tru st Li t i g. , 552 F.3d at 31 0 (no ti ng that “c la ss ce rt ific at ion m ay fo rc e a de fe nda nt to s e t t l e r a the r tha n i nc ur

the c os t s of de fe ndi ng a cl as s a ct ion and run the ri sk of po te ntia ll y

ruinou s l ia

bili ty ”) (in tern al q u o tatio n m ark s o mi t ted ); D a b it , 547 U. S. a t 80 (“E v en w e a k c a s e s br ought unde r . . . Rul e [10b- 5] m a y

ha ve s ubs t a nt i a l s e t t l e m e nt va l ue . . . be c aus e [t ]he ve ry pe nde nc y

of the l awsuit

m ay frustr at e or d el ay

no rm al bu si ness ac ti vity .” ) (in tern al q u o tatio n m ark s o m itted ); In re Co nstar Int’ l Inc. Sec. Li t i g. , 5 8 5 F .3 d 7 7 4 , 7 8 0 (3 dC ir. 2 0 0 9 ) (ex p lain in g th at class certif icatio n is an “esp ecially

serio u s d ecisio n ”); Ne wt on , 259 F .3 d at 1 6 2 (reco g n izin g “th at d e n y in g o r g ran tin g class certif icatio n is o f

ten th e d ef

in in g m o m en t in class actio n s . . . [ b ecau se] it m ay

. . . create u n w arran ted p ressu re to settle nonm e r i t or i ous c l a i m s on the pa rt of de fe nda nt s ” )

. A fr i vol ousTo be c l e a r , our hol di ng r e

je c t i ng the fr aud- c r e a t e d- 10 the

- m a rke t

the ory in i t s e nt i r e ty

i s i n no wa y

we a ke ne d by

the fol l owi ng di s c us s i on. 33 cl as s ac ti on becom es m

uch m ore troub le som e when it i s a ided b y a p resu m p tio n o f relian ce an dd ef

en d an ts m ay

seekto settle e a r l y a nd oft e n t o a voi d l i t i ga t i on c os t s and the r i s k o f g etti ng hi t wi th al a r ge ve r di c t

at tr i a l

. Re wa r di ng fr i vol ous a c t i ons with se tt le m ents is cl earl y un desi ra ble.
V.
As s um i ng, hy

pothe t i c a l l y , tha t

we we r e t o e ndor s e the fraud-cre ated -t h e- mark etth eo ry , a n dth atw e f ollowed M al ac k’s ap p ro ac h to the theory , his appeal wo uld sti ll fail

. Mala ck 10 ur ge s us t o fol l ow the l e ga l unm a rke t abi l i ty t e s t offe r e d i n T.J. Ra ney & So ns, I

nc. v . Fort Co bb , Oklah om a Irr igation F uel A u th o rity , 7 1 7 F .2 d 1 3 3 0 (1 0 th C ir. 1 9 8 3 ). B u t ev en if w e d id s o, he woul d not be abl e t o s uc c e s s ful l y i nvoke apr e s um pt i on of r e a s onabl e r e l i a nc e . I n T. J

. Rane y& Sons , th e T en th C ircu it h eld th at “[ f

] e d e r a l a n dstate reg u latio n o f n ew secu rities at a m i n i m um s houl d pe rm i t

apur c ha s e r

t o a s s um e tha t

the se curi ti es were lawf

ully is sued.” I

d. a t 1 3 3 3 . Im

p o rtan tly , it a dde d tha t its hol di ng “ doe s not i m pl y i n a ny wa y tha t the r e gul a t ory

body c ons i de r s the worth of the s e c ur i ty or the ve r a c i ty of the r e pr e s e nt a t i ons m a de i n the offe r i ng c i r c ul a r nor do es it es ta blis h a sc hem e of inv es tors ’ i nsurance. ” I d. (i nter nal quot a t i on m a rks om i t t e d)

. I ns t e a d, i t e xt e nde d the pr ot e c t i on of34 Ru le 1 0 b -5 to “cases in w h ich th e secu rities w ere n o t leg ally qua l i fi e d t o be i s s ue d” a nd the r e wa s “ as c he m e t o de fr aud or ac t t o d efraud.” Id

. A p p ly in g its leg al u n m ark etab il ity test to th e f acts o f th e case, th e T en th C ircu it o b serv ed th at th e en tity a c c us e d of fr aud wa s found not t o be ava l i d publ i c tr us t dur i ng Ch apte r IX proceedi ng s and ther efore i ts is suance of bo nd s was p ro h ib itedb y

state law

. I

d. Ba s e d on thi s obs e rvation, the Te nth Ci r c ui t

he l d th at the pl a i nt i ff “ r e a s onabl y r e l i e d on the a va i l abi l i ty

of the bonds [for

s a l e ] as i ndi c a t i ng the i r l a wful is suance [.]” I

d.
Th e i nstant ca se do es no t m ee t t he T .J. R a n ey & S

o n s test fo r l egal un m ar

keta bili ty

. Crit ic al to that Co urt’ s re as on ing w as the obs e rva t i on tha t

the r e l e va nt bonds we r e i s s ue d i n vi ol a t i on o f state law b ecau se th e issu er w as n o t a v alid p u b lic tru st. See i d. Be c aus e the i s s uer n ev er h ad the l e ga l r i ght t o i s s ue the bonds a nd the bonds we r e m a rke t e d wi th the i nt e nt t o de fr aud, th e b o n d s w ere leg ally

u n m ark etab le. Se e i d. The r e w as no sim ilar leg al im

p ed im en t to A m erican B u sin ess issu in g n o tes. M alackco n ced ed at o ral arg u m en t th at h ad B D O p ro p erly cond ucte d the audit and disc lose d the defic ie ncie s he argues we r e pr e s e nt

i n the a l l eg edl y

fr audul e nt

audi t , the SEC still w o u ldh av e p erm itted th e n o tes to g o to m ark et. A cco rd in g to th e T enth Circ uit, “[t]here i s a si gn ific ant difference betwee n se c ur i t i e s whi c h s houl

d n o t b e m a rk e t e db e c au s e th e y i nvol ve fr aud, a nd s e c ur i t i e s whi c h ca n n o t be m a rk eted be c aus e the is suer s lac k le gal autho ri ty to of fer them .” J

os e ph , 223 F.3d at 11 65 (e m ph as is added). Mala ck’s ow n argum ents in this appeal35 plac e Am er ic an Bu si ness ’s no te s s qu ar ely into the form er ca te go ry , and such se curi ti es do no t s at is fy the Tenth Circ uit’ s f rau d -created -th e-m ark et test, i d.

VI.
T h e f rau d -created -th e-m ark et th eo ry lac k s a b asis in c omm on s e ns e , pr obabi l i ty , or a ny of the othe r

r e a s ons c omm onl y

pr ovi de d for

the c r e a t i on of a pr e s um

pt i on. As s uc h, we de c l i ne t o r e c ogni z e a pr e s um pt i on of r e l i a nc e ba s e d on the t h e o r y an d w ill af

f irm th e D istrict C o u rt’s d en ial o f class c e rt i fi c a t i on.