2001 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

10-16-2001

Newton v. Merrill Lynch

Precedential or Non-Precedential:

Docket 00-1586

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Recommended Citation

"Newton v. Merrill Lynch" (2001). 2001 Decisions. Paper 237.

http://digitalcommons.law.villanova.edu/thirdcircuit_2001/237
Filed August 6, 2001 

UNITED STATES COURT OF APPEALS 

FOR THE THIRD CIRCUIT 

No. 00-1586 

KENNETH E. NEWTON; MLPF&S CUST. FPO, 

BRUCE ZAKHEIM IRA FBO BRUCE ZAKHEIM 

v. 

MERRILL LYNCH, PIERCE, FENNER & SMITH, INC.; 

PAINEWEBBER, INC. 

(D.C. No. 94-cv-5343) 

JEFFREY PHILLIP KRAVITZ 

v. 

DEAN WITTER REYNOLDS, INC. 

(D.C. No. 95-cv-213) 

 MLPF&S Cust. FPO, Bruce Zakheim IRA 

 FBO Bruce Zakheim, Jeffrey Phillip Kravitz, 

 Gloria Binder, 

 Appellants 

On Appeal from the United States District Court 

for the District of New Jersey 

D.C. Civil Action Nos. 94-cv-05343 & 95-cv-00213 

(Honorable Dickinson R. Debevoise) 

Argued: December 14, 2000 

Before: SCIRICA, FUENTES and GARTH, Circuit Ju dges

(Filed: August 6, 2001) 
 KAREN L. MORRIS, ESQUIRE 

 (ARGUED) 

 Morris & Morris 

 1105 North Market Street, 

 Suite 1600 

 Wilmington, Delaware 19801 

 Attorney for Appellants 

 STEPHEN M. SHAPIRO, ESQUIRE 

 (ARGUED) 

 Mayer, Brown & Platt 

 190 South LaSalle Street 

 Chicago, Illinois 60603 

 Attorney for Appellees, 

 Merrill Lynch, Pierce, Fenner & 

 Smith, Inc., PaineWebber, Inc., 

 and Dean Witter Reynolds, Inc. 

 DAVID A. BROWNLEE, ESQUIRE 

 Kirkpatrick & Lockhart 

 Henry W. Oliver Building 

 535 Smithfield Street 

 Pittsburgh, Pennsylvania 15222 

 Attorney for Appellee, 

 Merrill Lynch, Pierce, Fenner & 

 Smith, Inc. 

 PAUL J. FISHMAN, ESQUIRE 

 Friedman, Kaplan & Seiler 

 One Gateway Center, 25th Floor 

 Newark, New Jersey 07102 

 ROBERT B. McCAW, ESQUIRE 

 Wilmer, Cutler & Pickering 

 520 Madison Avenue 

 New York, New York 10022 

 Attorneys for Appellee, 

 PaineWebber, Inc. 

 2 
 WILLIAM H. PRATT, ESQUIRE 

 Kirkland & Ellis 

 Citigroup Center 

 153 East 53rd Street 

 New York, New York 10022 

 Attorney for Appellee, 

 Dean Witter Reynolds, Inc. 

 KARL A. GROSKAUFMANIS, 

 ESQUIRE 

 Fried, Frank, Harris, Shriver & 

 Jacobson 

 1001 Pennsylvania Avenue, N.W., 

 Suite 800 

 Washington, D.C. 20004 

 Attorney for Amicus Curiae- 

 Appellees, Securities Industry 

 Association 

OPINION OF THE COURT 

SCIRICA, Circuit Judge. 

In this putative class action under S 10(b) of the 

Securities Exchange Act of 1934 and Rule 10b-5, 

thousands of investors sued their broker-dealers, who 

traded on the National Association of Securities Dealers 

Automated Quotation System (NASDAQ), for breaching 

their duty of best execution. Despite the broker-dealers' 

duty to execute trades under the most "favorable terms 

reasonably available," the investors charge the defendants 

executed orders at the price offered on the central National 

Best Bid and Offer system (NBBO), failing to investigate 

other feasible alternatives that potentially offered better 

prices. With hundreds of thousands of investors in the 

putative class, this alleged practice affected hundreds of 

millions of transactions. 

The crux of this interlocutory appeal under Fed. R. Civ. 

P. 23(f) is whether plaintiffs' securities fraud claims satisfy 

the requirements for class certification under Fed. R. Civ. P. 

 3 
23. The District Court denied plaintiffs' petition for class 

certification. We will affirm. 

I. 

The District Court had jurisdiction over the federal claims 

arising under the Securities Exchange Act of 1934, 15 

U.S.C. S 78j(b), and 28 U.S.C. S 1331, as well as 

supplemental jurisdiction over the state law claims under 

28 U.S.C. S 1367. Plaintiffs filed a petition for permission to 

appeal the denial of class certification under Fed. R. Civ. P. 

23(f) which we granted. As an interlocutory appeal, we have 

jurisdiction under 28 U.S.C. S 1292(e). 

II. 

In 1998, the Supreme Court responded to the risk of

improvident and largely unreviewable class certification 

decisions by amending Fed. R. Civ. P. 23 to provide for 

interlocutory appeal by permission of the court of appeals.1 

Recognizing that denying or granting class certification is 

often the defining moment in class actions (for it may 

sound the "death knell" of the litigation on the part of 

plaintiffs, or create unwarranted pressure to settle 

nonmeritorious claims on the part of defendants), the Rule 

acknowledges the extraordinary nature of class actions and 

permits the appellate courts to develop a coherent body of 

jurisprudence in this area.2 

_________________________________________________________________ 

1. The permissive interlocutory appeal provision was adopted under the 

power conferred by 28 U.S.C. S 1292(e). 

2. Before Rule 23(f) was promulgated, the Supreme Court rejected the 

"death knell" doctrine as a justification for circumventing the federalappellate-jurisdiction precondition that a district court decision " `end[ 

] 

the litigation on the merits and leave[ ] nothing for the court to do but 

execute the judgment.' " Coopers & Lybrand v. Livesay, 437 U.S. 463, 

467 (1978) (quoting Catlin v. United States, 324 U.S. 229, 233 (1945)). In 

these instances, appellate jurisdiction was limited by 28 U.S.C. S 1291, 

which provided that the "courts of appeals shall have jurisdiction of 

appeals from all decisions of the district courts of the United States . . 

. 

except where a direct review may be had in the Supreme Court." 28 

U.S.C. S 1291 (1978). Because plaintiffs had the opportunity to pursue 

 4 
The new Rule provides that "[a] court of appeals may in 

its discretion permit an appeal from an order of a district 

court granting or denying class action certification under 

this rule if application is made to it within ten days after 

entry of the order." Fed. R. Civ. P. 23(f). Before its adoption, 

courts were hesitant to invoke an alternative grant of 

appellate jurisdictional authority under 28 U.S.C.S 2072(c), 

which enabled the Supreme Court by rule to "define when 

a ruling of a district court is final for the purposes of appeal 

under section 1291." 28 U.S.C. S 2072(c); see also Blair v. 

Equifax Checking Servs., Inc., 181 F.3d 832, 833 (7th Cir. 

1999) (noting this authority "had gone unused, in part 

because it invites the question whether a particular rule 

truly `defines' or instead expands appellate jurisdiction"); 

7B Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, 

Federal Practice and Procedure S 1802, pp. 105-06 (West 

Supp. 2000) (hereinafter Wright, Miller & Kane) ("[Rule 

23(f)] is modelled on Section 1292(b), but differs in 

significant respects from that device in that it requires only 

appellate court approval of the appeal and it does not 

require that the district court's decision involve`a 

controlling question of law' about which the courts are 

divided."). On occasion, courts granted writs of mandamus 

to review certification decisions but with an uneasiness that 

their actions stretched the writ's traditionally restrictive 

parameters. See 5 James Wm. Moore et al., Moore's Federal 

Practice S 23.61[9][c] (discussing standard and cases); see 

also, e.g., In re Rhone-Poulenc Rorer Inc. , 51 F.3d 1293 (7th 

Cir. 1995) (granting order of mandamus to rescind class 

_________________________________________________________________ 

litigation individually if class certification was denied, a district 

court 

decision decertifying a putative class did not constitute a final decision 

under 28 U.S.C. S 1291. Livesay, 437 U.S. at 467. At the time, there 

existed no special rules on appealing class certification decisions. 

Reasoning that a "death knell" exception would have to apply with equal 

force to all forms of litigation, the Court rejected this proposition. 

While 

the Court recognized several policy arguments in favor of permitting 

appeals of certification decisions which effectively put an end to 

litigation, without legislative guidance or authority, it ultimately found 

the arguments against such a rule more persuasive. Id. at 470-77. The 

new Rule 23(f) provides the authority as well as the guidance for these 

appeals which was previously wanting. 

 5 
certification). Although we have issued rulings on Rule 23(f) 

motions, we have yet to articulate standards for granting or 

denying permission to appeal.3 

The Committee Note is always a good starting point. It 

emphasizes that "[t]he court of appeals is given unfettered 

discretion whether to permit the [interlocutory] appeal, akin 

to the discretion exercised by the Supreme Court in acting 

on a petition for certiorari." Comm. Note, Fed. R. Civ. P. 

23(f). The Note also sketches a rough outline of the types of 

cases courts of appeals should review: "Permission is most 

likely to be granted when the certification decision turns on 

a novel or unsettled question of law, or when, as a practical 

matter, the decision of certification is likely dispositive of 

the litigation."4 Id.; see also 5 Moore's Federal Practice 

S 23.61[9][b]. To provide further guidance on how to 

separate the wheat from the chaff, the Note instructs that 

 several concerns justify expansion of present 

 opportunities to appeal. An order denying certification 

 may confront the plaintiff with a situation in which the 

 only sure path to appellate review is by proceeding to 

 final judgment on the merits of an individual claim 

 that, standing alone, is far smaller than the costs of 

 litigation. An order granting certification, on the other 

 hand, may force a defendant to settle rather than incur 

 the costs of defending a class action and run the risk 

 of potentially ruinous liability. 

Comm. Note, Fed. R. Civ. P. 23(f). We can glean from the 

Note, therefore, at least three principles to guide the 

appellate courts in their exercise of discretionary

jurisdiction: (1) when denial of certification effectively 

_________________________________________________________________ 

3. Fortunately, four of our sister circuits have written thoughtful 

opinions on the new rule. Lienhart v. Dryvit Sys., Inc., No. 00-908, 2001 

WL 715773, at *2-5 (4th Cir. June 26, 2001); Prado-Steiman v. Bush, 

221 F.3d 1266, 1271-77 (11th Cir. 2000); Waste Mgmt. Holdings, Inc. v. 

Mowbray, 208 F.3d 288, 292-95 (1st Cir. 2000); Blair v. Equifax 

Checking Servs., Inc., 181 F.3d 832, 833-36 (7th Cir. 1999). 

4. In effect, the Rule authorizes appellate courts to "restore equilibrium 

when a doubtful class certification ruling would virtually compel a party 

to abandon a potentially meritorious claim or defense before trial." 

Mowbray, 208 F.3d at 293. 

 6 
terminates the litigation because the value of each

plaintiff 's claim is outweighed by the costs of stand-alone 

litigation; (2) when class certification places inordinate or 

hydraulic pressure on defendants to settle, avoiding the 

risk, however small, of potentially ruinous liability; and (3) 

when an appeal implicates novel or unsettled questions of 

law; in this situation, early resolution through interlocutory 

appeal may facilitate the orderly development of the law.5 

But interlocutory review is not cabined by these 

circumstances. The Note signals that the new Rule gives 

_________________________________________________________________ 

5. Other courts of appeals have adopted a taxonomy based on these 

principles. In the first case examining the standards for interlocutory 

appeal, Blair v. Equifax Checking Servs., Inc. , 181 F.3d 832, 833-36 (7th 

Cir. 1999), the Court of Appeals for the Seventh Circuit provided an indepth description of the three examples mentioned above that would 

merit exercise of interlocutory review. Taking its cue from the Committee 

Note, the court held that cases where certification tolled the "death 

knell" 

of litigation for plaintiffs or placed irresistible pressure to settle on 

defendants presented circumstances ripe for review. The court also held 

that appeals which would help develop the law similarly invited the 

exercise of this review. In Waste Mgmt. Holdings, Inc. v. Mowbray, 208 

F.3d 288, 292-95 (1st Cir. 2000), the Court of Appeals for the First 

Circuit largely adopted the Seventh Circuit's methodology with one 

restriction. To prevent fecund legal minds from framing every legal issue 

as an important question of fundamental law, the court narrowed this 

review to cases in which "an appeal will permit the resolution of an 

unsettled legal issue that is important to the particular litigation as 

well 

as important in itself and likely to escape effective review if left 

hanging 

until the end of the case." Id. at 294. Thereafter, the Court of Appeals 

for 

the Eleventh Circuit discussed the standards for reviewing petitions in 

Prado-Steiman v. Bush, 221 F.3d 1266, 1271-77 (11th Cir. 2000). Adding 

other factors, the court elaborated on the principles set forth previously 

by the Court of Appeals for the Seventh Circuit. In addition to those 

already mentioned, the court looked to (1) whether the certification 

decision is likely dispositive of the litigation; (2) whether the decision 

involved a novel or unsettled legal question; (3) the strength of the 

district court's reasoning; (4) the status of the case before the district 

court; and (5) the "likelihood that future events may make immediate 

appellate review more or less appropriate." Id. at 1276. Recently, the 

Court of Appeals for the Fourth Circuit reviewed the standards for 

granting a motion under Fed. R. Civ. P. 23(f) and adopted the analysis 

enunciated in Prado-Steiman. Lienhart v. Dryvit Sys., Inc., No. 00-908, 

2001 WL 715773, at *2-5 (4th Cir. June 26, 2001). 

 7 
appellate courts broad discretion. For example, an error in 

the class certification decision that does not implicate novel 

or unsettled legal questions may still merit interlocutory 

review given the consequences likely to ensue. To put it 

another way, if the appellant demonstrates that the ruling 

on class certification is likely erroneous, " `taking into 

account the discretion the district judge possesses in 

implementing Rule 23, and the correspondingly deferential 

standard of appellate review,' " Mowbray , 208 F.3d at 293 

(quoting Blair, 181 F.3d at 835), interlocutory review may 

be proper. 

Furthermore, as explained in the Note, interlocutory 

review is not constrained by the potentially limiting 

requirement of 28 U.S.C. S 1292(b) that the district court 

order "involve[ ] a controlling question of law as to which 

there is a substantial ground for difference of opinion and 

that an immediate appeal from the order may materially 

advance the ultimate termination of the litigation." Yet if 

allowing the litigation to follow its natural course would 

provide the moving party with an adequate remedy, 

interlocutory review will generally prove unnecessary. In the 

end, however, the courts of appeals are afforded wide 

latitude as "[p]ermission to appeal may be granted or 

denied on the basis of any consideration that the courts of 

appeals finds persuasive." Comm. Note, Fed. R. Civ. P. 

23(f). 

We believe these principles provide a useful template for 

courts to work from when evaluating petitions under Rule 

23(f). It is, of course, difficult to foresee all the 

permutations to which this rule will apply, and courts will 

have the task of exercising their best judgment in making 

these decisions. See Lienhart, 2001 WL 715773, at *4 

(rejecting "stringent standards" for review of Rule 23(f) 

petitions); Blair, 181 F.3d at 834 ("[I]t would be a mistake 

for us to draw up a list that determines how the power 

under Rule 23(f) [should] be exercised. Neither a bright-line 

approach nor a catalog of factors would serve well-- 

especially at the outset, when courts necessarily must 

experiment with the new class of appeal."); see also Comm. 

Note, Fed. R. Civ. P. 23(f) ("The courts of appeals will 

develop standards for granting review that reflect the 

 8 
changing areas of uncertainty in class litigation."). Further, 

as the Committee Note mentions, class certification

decisions often involve "familiar and almost routine issues" 

that do not necessitate interlocutory appeal. If granting the 

appeal, however, would permit us to address (1) the

possible case-ending effect of an imprudent class 

certification decision (the decision is likely dispositive of the 

litigation); (2) an erroneous ruling; or (3) facilitate 

development of the law on class certification, then granting 

the motion would be appropriate. But these instances 

should not circumscribe our discretion; there may also be 

other valid reasons for the exercise of interlocutory review. 

Again, we emphasize that the courts of appeals have been 

afforded the authority to grant or deny these petitions "on 

the basis of any consideration that the court of appeals 

finds persuasive."6 Comm. Note, Fed. R. Civ. P. 23(f). 

The claims here touch on several reasons justifying

interlocutory appeal. On the one hand, some of the 

securities claims pressed by the putative class members 

may be too small to survive as individual claims. On the 

other, certifying the class may place unwarranted or 

hydraulic pressure to settle on defendants. Either way, an 

adverse certification decision will likely have a dispositive 

impact on the course and outcome of the litigation.

Moreover, this case raises fundamental questions about 

what type of private securities claims merit class 

certification. For these reasons, the motion was properly 

granted. 

III. 

We review a decision granting or denying class 

certification for abuse of discretion. In re LifeUSA Holding 

Inc., 242 F.3d 136, 143 (3d Cir. 2001); Holmes v. Pension 

Plan of Bethlehem Steel Corp., 213 F.3d 124, 136 (3d Cir. 

2000). The district court abused its discretion if its decision 

_________________________________________________________________ 

6. As set forth in the Note, the district courts"having walked through the 

certification decision, can provide cogent advice on the factors" 

animating their decisions. Comm. Note, Fed. R. Civ. P. 23(f). 

Furthermore, because permission to appeal does not stay trial court 

proceedings, any stay should be sought first from the trial court. Id. 

 9 
" `rests upon a clearly erroneous finding of fact, an errant 

conclusion of law or an improper application of law to fact.' "7 

In re General Motors Corp. Pick-Up Truck Fuel Tank Prods. 

Liab. Litig., 55 F.3d 768, 783 (3d Cir. 1995) (hereinafter 

"G.M. Trucks") (quoting Int'l Union, UAW v. Mack Trucks, 

Inc., 820 F.2d 91, 95 (3d Cir. 1987)). A class certification 

decision requires a thorough examination of the factual and 

legal allegations. Barnes v. Am. Tobacco Co., 161 F.3d 127, 

140 (3d Cir. 1998), cert. denied, 526 U.S. 1114 (1999). For 

this purpose, "it may be necessary for the court to probe 

behind the pleadings before coming to rest on the 

certification question." General Tel. Co. of Southwest v. 

Falcon, 457 U.S. 147, 160 (1982); see also Amchem Prods., 

Inc. v. Windsor, 521 U.S. 591, 634-35 (1997) (Breyer, J., 

concurring in part and dissenting in part); 7B Wright, 

Miller & Kane, S 1785, p. 16 (West Supp. 2000). "Before 

deciding whether to allow a case to proceed as a class 

_________________________________________________________________ 

7. In its amicus brief, the Securities Industry Association contends we 

should be wary of extending class certification to cases where the court 

will in effect set market standards (such as "best execution") and, by 

doing so, affect the certainty of capital markets. Generally, it is 

desirable 

for these types of changes to occur through rule making by the 

appropriate agency. But courts should not hesitate to provide remedies 

for litigants injured by unlawful conduct that may not clearly violate 

regulatory standards. Newton v. Merrill Lynch, Pierce, Fenner & Smith, 

Inc., 135 F.3d 266, 274 (3d Cir. 1998) (en banc) ("[T]here is no statute, 

rule, regulation, or interpretation, by the SEC or by a court, that 

authoritatively establishes that, for all trades, the NBBO exhausted the 

category of `reasonably available prices' during the class period. This 

absence of precedent did not, however, absolve the district court of the 

duty to resolve the plaintiffs' securities fraud claim once it was 

presented 

in this suit."); see also Deposit Guaranty Nat'l Bank v. Roper, 445 U.S. 

326, 339 (1980) ("The aggregation of individual claims in the context of 

a classwide suit is an evolutionary response to the existence of injuries 

unremedied by the regulatory action of government."). 

Even the Securities and Exchange Commission has argued that "the 

mere fact that the [Securities and Exchange] Commission was 

considering (and has now adopted) rules that prospectively affect . . . 

broker-dealers' order handling obligations would not make it appropriate 

for the court to abstain from deciding whether the defendants committed 

fraud with respect to [their duty of best execution] as it existed during 

the period at issue in this case." Br. of Amicus Curiae the Securities and 

Exchange Commission, at 12 n.14, in Newton, 135 F.3d 266. 

 10 
action, . . . [courts] should make whatever factual and legal 

inquiries are necessary under Rule 23." Szabo v. Bridgeport 

Machs. Inc., 249 F.3d 672, 676 (7th Cir. 2001); see also 5 

Moore's Federal Practice S 23.46[4] ("[B]ecause the

determination of a certification request invariably involves 

some examination of factual and legal issues underlying the 

plaintiffs' cause of action, a court may consider the 

substantive elements of the plaintiffs' case in order to 

envision the form that a trial on those issues would take.") 

(footnotes omitted). 

Over twenty-five years ago in Eisen v. Carlisle & 

Jacquelin, the Supreme Court cautioned against going 

beyond the pleadings in class certification decisions. 417 

U.S. 156, 177 (1974) ("[N]othing in either the language or 

history of Rule 23 . . . gives a court any authority to 

conduct a preliminary inquiry into the merits of a suit in 

order to determine whether it may be maintained as a class 

action."). But this admonition must be examined in context. 

At the time, it was ancillary to the principal issue of 

whether Fed. R. Civ. P. 23 required a class representative 

in a securities class action to provide notice to all class 

members. With a claim that amounted to no more than

seventy dollars, the plaintiff in Eisen sought to shift his 

notice burden to the defendant because providing notice to 

the 2.25 million potential class members was 

extraordinarily costly (roughly $225,000). The district court 

held that the defendant should bear 90% of the cost, 

because the plaintiff was "more than likely" to "prevail on 

his claims." Holding this burden could not be shifted, the 

Supreme Court affirmed the reversal by the court of

appeals. 

Not long after Eisen, the Court stepped away from this 

bright-line declaration in Coopers & Lybrand v. Livesay, 

when it held that 

 [e]valuation of many of the questions entering into 

 determination of class action questions is intimately 

 involved with the merits of the claims. The typicality of 

 the representative's claims or defenses, the adequacy of 

 the representative, and the presence of common 

 questions of law or fact are obvious examples. The 

 more complex determinations required in Rule 23(b)(3) 

 11 
 class actions entail even greater entanglement with the 

 merits . . . . 

437 U.S. 463, 469 n.12 (1978) (quotation and citation 

omitted). Subsequently, in General Tel. Co. of Southwest v. 

Falcon, the Court appeared to move even further away from 

Eisen, recognizing that 

 [s]ometimes the issues are plain enough from the 

 pleadings to determine whether the interests of the 

 absent parties are fairly encompassed within the 

 named plaintiff 's claim, and sometimes it may be 

 necessary for the court to probe behind the pleadings 

 before coming to rest on the certification question . . . . 

 [A]ctual, not presumed conformance with Rule 23(a) 

 remains . . . indispensable. 

Falcon, 457 U.S. at 160. This reasoning applies with equal 

force to certification questions surrounding Fed. R. Civ. P. 

23(b)(3). Szabo, 249 F.3d at 677. As the Court concluded in 

Livesay, class certification may require courts to answer 

questions that are often " `enmeshed in the factual and legal 

issues comprising the plaintiff 's cause of action.' " 437 U.S. 

at 469 (quoting Mercantile Nat'l Bank v. Langdeau, 371 U.S. 

555, 558 (1963)). To address these questions, courts may 

"delve beyond the pleadings to determine whether the 

requirements for class certification are satisfied." 5 Moore's 

Federal Practice S 23.61[5]; Szabo, 249 F.3d at 677 (holding 

courts may "look[ ] beneath the surface of a complaint" to 

"make a preliminary inquiry into the merits"); see also 

Amchem, 521 U.S. at 615 (Fed. R. Civ. P. 23(b)(3) invites a 

"close look" before determining class certification); 7B 

Wright, Miller & Kane, S 1785, p.16 (West Supp. 2000) 

(courts not precluded from "necessary inquiry into the 

underlying elements of the case in order to evaluate 

whether Rule 23 has been met"); Moore's Federal Practice, 

Manual For Complex Litigation (Third) S 30.1 ("The decision 

on whether or not to certify a class, therefore, can be as 

important as decisions on the merits of the action and 

should be made only after consideration of all relevant 

evidence and arguments presented by the parties.").

Since Eisen was decided, the nature of class actions and 

how they are litigated have undergone a sea change.

 12 
Irrespective of the merits, certification decisions may have 

a decisive effect on litigation. As mentioned, if individual 

claims are small, then plaintiffs may not have the incentive 

or resources to pursue their claims if certification is denied 

--sounding the "death knell" to the litigation.8 On the other 

hand, granting certification may generate unwarranted 

pressure to settle nonmeritorious or marginal claims. 

Rhone-Poulenc, 51 F.3d at 1299-1300 (granting order of 

_________________________________________________________________ 

8. Trial of plaintiffs' claims here touches on concerns raised by the 

Court 

of Appeals for the Seventh Circuit in In re Rhone-Poulenc Rorer Inc., 51 

F.3d 1293 (7th Cir. 1995). In Rhone-Poulenc, the court granted a writ of 

mandamus to reverse the certification of a class of hemophiliacs who 

received blood contaminated with HIV. The class involved only a few 

hundred parties, but each individual had claims possibly worth millions 

of dollars. The court reasoned that the enormous size of the potential 

liability would impose an "intense pressure to settle," id. at 1298, 

because "[t]he risk of facing an all-or-nothing verdict presents too high 

a risk, even when the probability of an adverse judgment is low." 

Castano v. Am. Tobacco Co., 84 F.3d 734, 746 (5th Cir. 1996) (citing 

Rhone-Poulenc, 51 F.3d at 1298). It considered settlements forcibly 

induced by the small probability of an immense judgment "blackmail 

settlements." Rhone-Poulenc, 51 F.3d at 1298; see also Castano, 84 F.3d 

at 746; G.M. Trucks, 55 F.3d at 784-85. Although finding the hydraulic 

pressure to settle should not dispositively affect a certification 

decision, 

the court suggested that it should be balanced against the benefits of a 

class action. Rhone-Poulenc, 51 F.3d at 1299 ("We do not want to be 

misunderstood as saying that class actions are bad because they place 

pressure on defendants to settle. That pressure is a reality, but it must 

be balanced against the undoubted benefits of the class action that have 

made it an authorized procedure for employment by federal courts."); see 

also Kline v. Coldwell, Banker & Co. 508 F.2d 226, 238 (9th Cir. 1974) 

("I doubt that plaintiffs' counsel expect the immense and unmanageable 

case that they seek to create to be tried. What they seek to create will 

become (whether they intend this result or not) an overwhelmingly costly 

and potent engine for the compulsion of settlements, whether just or 

unjust.") (Duniway, J., concurring). The Supreme Court has also 

recognized the dynamic pressure certification sets in motion. The Court 

has observed that "[c]ertification of a large class may so increase the 

defendant's potential damages liability and litigation costs that he may 

find it economically prudent to settle and to abandon a meritorious 

defense." Livesay, 437 U.S. at 476. Certifying this class raises a similar 

concern because the size of the class and number of claims may place 

acute and unwarranted pressure on defendants to settle. It is a factor we 

weigh in our certification calculus. 

 13 
mandamus to rescind certification based in part on the "the 

demonstrated great likelihood that the plaintiffs' claims, 

despite their human appeal, lack legal merit"); see also G.M. 

Trucks, 55 F.3d at 784-85 (vacating class certification for 

settlement and remanding for further development on the 

record). In a similar vein, the Court of Appeals for the Fifth 

Circuit has concluded that "[g]oing beyond the pleadings is 

necessary, as a court must understand the claims, 

defenses, relevant facts, and applicable substantive law in 

order to make a meaningful determination of the 

certification issues." Castano, 84 F.3d at 744 (decertifying 

class that sued tobacco manufacturers for nicotine 

addiction). In Castano, the court held that 

 a mass tort cannot be properly certified without a prior 

 track record of trials from which the district court can 

 draw the information necessary to make the 

 predominance and superiority analysis required by rule 

 23. This is because certification of an immature tort 

 results in a higher than normal risk that the class 

 action may not be superior to individual adjudication. 

Id. at 747. Other courts have followed similar approaches. 

Szabo, 249 F.3d at 675-78; see also Rutstein v. Avis Rent-ACar Sys., Inc., 211 F.3d 1228, 1234 (11th Cir. 2000); Hanon 

v. Dataproducts Corp., 976 F.2d 497, 508-09 (9th Cir. 

1992). 

In reviewing a motion for class certification, a preliminary 

inquiry into the merits is sometimes necessary to determine 

whether the alleged claims can be properly resolved as a 

class action.9 This is such an instance. We must probe 

beyond the surface of plaintiffs' allegations in performing 

our review to assess whether plaintiffs' securities claims 

satisfy Fed. R. Civ. P. 23's requirements.) 

_________________________________________________________________ 

9. See Geoffrey C. Hazard, Jr., Class Certification Based on Merits of the 

Claims, 69 Tenn. L. Rev. (forthcoming Fall 2001). 

 14 
IV. 

A. 

This case is before us for the second time. We have

already provided a succinct description of the facts, 

including the operation of the NASDAQ market and 

defendants' role.10 Newton v. Merrill Lynch, Pierce, Fenner & 

Smith, Inc., 135 F.3d 266 (3d Cir. 1998) (en banc) 

(hereinafter "Newton"). 

 Plaintiff-Appellants are investors who purchased and 

 sold securities on the NASDAQ market, the major 

 electronic market for "over-the-counter" securities, 

 during the . . . period from November 4, 1992 to 

 [August 28, 1996] ("the class period"). The defendants 

 are NASDAQ market makers. NASDAQ is a self- 

 regulating market owned by the National Association of 

 Securities Dealers ("NASD"), subject to oversight by the 

 Securities and Exchange Commission ("SEC"). 

 An "over-the-counter" market like NASDAQ differs in 

 important respects from the more familiar auction 

 markets, like the New York and American Stock 

 Exchanges. The NYSE and AMEX markets are 

 distinguished by a physical exchange floor where buy 

 and sell orders actually "meet," with prices set by the 

 interaction of those orders under the supervision of a 

 market "specialist." In a dealer market like NASDAQ, 

 the market exists electronically, in the form of a 

 communications system which constantly receives and 

 reports the prices at which geographically dispersed 

 market makers are willing to buy and sell different 

 securities. These market makers compete with one 

 another to buy and sell the same securities using the 

_________________________________________________________________ 

10. The defendants who executed the plaintiffs' orders are Merrill Lynch, 

Pierce, Fenner & Smith, Inc.; Dean Witter Reynolds, Inc.; and 

PaineWebber, Inc. Each defendant is an "integrated broker/dealer" 

brokerage company that executed trades both as an agent and a 

principal. For certification, plaintiffs are divided into three 

subclasses. 

Each subclass consists of all the class members that placed market 

orders with a particular defendant. 

 15 
 electronic system; NASDAQ is, then, an electronic 

 inter-dealer quotation system. 

 In a dealer market, market makers create liquidity by 

 being continuously willing to buy and sell the security 

 in which they are making a market. In this way, an 

 individual who wishes to buy or sell a security does not 

 have to wait until someone is found who wishes to take 

 the opposite side in the desired transaction. To account 

 for the effort and risk required to maintain liquidity, 

 market makers are allowed to set the prices at which 

 they are prepared to buy and sell a particular security; 

 the difference between the listed "ask" and"bid" prices 

 is the "spread" that market makers capture as 

 compensation. 

 The electronic quotation system ties together the 

 numerous market makers for all over-the-counter 

 securities available on NASDAQ. All NASDAQ market 

 makers are required to input their bid and offer prices 

 to the NASD computer, which collects the information 

 and transmits, for each security, the highest bid price 

 and lowest ask price currently available. These prices 

 are called the "National Best Bid and Offer," or NBBO. 

 The NASD computer, publicly available to all NASDAQ 

 market makers, brokers and dealers, displays and 

 continuously updates the NBBO for each offered 

 security. 

 Plaintiffs allege that technological advances made it 

 feasible during the class period for the defendant 

 market makers to execute orders at prices quoted on 

 private on-line services like SelectNet and Instinet and 

 that those prices were frequently more favorable to 

 their investor clients than the NBBO price. According 

 to plaintiffs, the defendants regularly used these 

 services and knew that prices better than NBBO were 

 often available through them. Even though they knew 

 that their investor clients expected them to secure the 

 best reasonably available price, plaintiffs say, the 

 defendants executed plaintiffs' orders at the NBBO 

 price when they knew that price was inferior and when 

 they, at the same time, were trading at the more 

 favorable price for their own accounts. In this way, 

 16 
 they were able to inflate their own profit margins at the 

 expense of their investor clients. This practice is 

 alleged to violate section 10 of the Securities 

 [Exchange] Act of 1934, 15 U.S.C. S 78j, and Rule 10b- 

 5 promulgated thereunder, 17 C.F.R. S 240.10b-5. 

 The plaintiffs also charge defendants with two other 

 violations of section 10 and Rule 10b-5. Market makers 

 who simultaneously hold a market order for both sides 

 of a transaction may obtain more favorable prices than 

 the NBBO by "crossing" these in-house orders. 

 Transactions handled in this way are executed within 

 the spread, giving both the purchaser and the seller a 

 better price. Similarly, a customer order can be 

 matched by a market maker with an in-house limit 

 order on the other side of the transaction. Since a limit 

 order specifies a particular price at which to execute a 

 transaction, matching another customer order at that 

 price may beat the currently displayed NBBO quote for 

 that security. Plaintiffs allege that the failure of the 

 defendants to execute orders of their clients in these 

 ways when feasible constitutes a fraudulent practice 

 because, by executing at the NBBO rather than 

 matching customer orders, the defendants capture the 

 full market "spread" as a fee for their services without 

 incurring any actual risk in the transaction.11 

Newton, 135 F.3d at 268-69.12 

Since the initiation of this action, the Securities and 

Exchange Commission has promulgated new rules that 

effectively end the alleged improper practice by the 

defendants. See Order Execution Obligations, Exchange Act. 

Rel. No. 34-37619A, 61 Fed. Reg. 48290, 48306-16, 48322- 

23 (Sept. 12, 1996) ("While in the past quote-based

_________________________________________________________________ 

11. For a more detailed description of the alternative avenues for 

executing trades on the NASDAQ (e.g., Instinet, SelectNet) see the 

district court opinion granting defendants summary judgment, In re 

Merrill Lynch, et al. Sec. Litig., 911 F. Supp. 745, 759-60 (E.D. Pa. 

1995), 

rev'd, Newton, 135 F.3d 266. 

12. Defendants' duty to provide best execution remained consistent 

whether they were acting as agents of the trade or principals. Newton, 

135 F.3d at 270 n.1. 

 17 
executions in OTC [over the counter] securities were 

generally recognized as satisfying best execution 

obligations, the development of efficient new facilities has 

altered what broker dealers must consider in seeking 

execution of customer orders."); see also Newton, 135 F.3d 

at 271. The new regulations require the NBBO to 

incorporate prices displayed on Instinet and SelectNet as 

well as other sources of liquidity. See 17 C.F.R. 

SS 240.11Ac1-1 to -4 (2000). 

B. 

Defendants initially moved to dismiss this action under 

Fed. R. Civ. P. 12(b)(6) for failure to state a claim upon 

which relief could be granted. At the request of the District 

Court, defendants converted their motion into one for 

summary judgment which was subsequently granted. The 

District Court held that plaintiffs' claims failed to satisfy 

two requirements necessary to maintain a Rule 10b-5

securities violation--misrepresentation or omission of a 

material fact, and scienter--because defendants'"duty of 

best execution" remained ill-defined during the class period. 

In re Merrill Lynch, et al. Sec. Litig., 911 F. Supp. at 769-71. 

Without a clear standard to apply against defendants' 

employment of an industry-wide practice, the court found 

the nondisclosure of their trading execution practice, along 

with their implied representation to obtain best execution, 

did not constitute a misrepresentation or omission of 

material fact. Id. Even if the practice constituted a material 

misrepresentation, the district court held defendants had 

not formed the requisite scienter, or intent to deceive, 

because they were not aware their practice actually violated 

the securities laws. Id. at 771-72. 

On appeal, a divided panel of this court affirmed. We 

granted rehearing en banc. The en banc court unanimously 

reversed the district court and remanded, holding the 

execution of trades at the NBBO, albeit the industry 

standard, could still be considered fraudulent behavior 

violating the standards of Rule 10b-5. Newton , 135 F.3d at 

274. Noting this practice could constitute a material 

misrepresentation with scienter when better prices were 

reasonably available, we expressed no opinion on 

 18 
defendants' liability, only whether defendants' practice 

could be actionable under Rule 10b-5. Id. at 272-74. On 

remand, plaintiffs amended their complaint, extending the 

class period to the time new securities regulations took 

effect outlawing the defendants' alleged tortious practice. 

Plaintiffs then moved for class certification which the 

District Court denied. An interlocutory appeal under Fed. 

R. Civ. P. 23(f) was then granted. 

C. 

Plaintiffs contend defendants' behavior in this case was 

unvarying, alleging it was their established practice to 

execute trades at prices displayed solely on the NBBO 

without investigating other sources. They claim this 

"common scheme" provides a uniform course of unlawful 

conduct well-suited for adjudication as a class action. 

Plaintiffs also argue that during the class period defendants 

capitalized on their access to alternative trading sources to 

find better prices when trading on their own accounts. As 

noted in Newton, an SEC study reported that a "two-tiered 

market" existed during the class period where market 

makers exploited these services to garner better prices for 

themselves while simultaneously denying them to their 

customers.13 Id. at 273. For their part, defendants argue 

_________________________________________________________________ 

13. As noted in Newton, a three month study of prices within the class 

period indicated that "85% of the bids and offers displayed by market 

makers on Instinet and 90% of the bids and offers displayed on 

SelectNet were at better prices than those posted publicly on NASDAQ." 

135 F.3d at 272 (citing Order Execution Obligations, Exchange Act. Rel. 

No. 34-37619A, 61 Fed. Reg. 48290, 48307-08 (Sept. 12, 1996)). These 

apparently incriminating percentages may be mitigated, however, by the 

fact that during a full year of the class period (1993), for example, the 

electronic communication networks (including services like SelectNet and 

Instinet) "accounted for only 13% of share volume in Nasdaq securities 

and only 1.4% of listed share volume." Securities and Exchange 

Commission, Div. of Market Regulation, Electronic Communication 

Networks and After-Hours Trading 6 (June 2000) (citing Market 

2000 Report: Study II, Structure of the U.S. Equity Markets, 1994 

SEC Lexis 133, at *43-44 (Jan. 1994)), available at

http://www.sec.gov.news/studies/ecnafter.htm. Based on these figures, 

defendants contend plaintiffs' trades could have been executed at 

superior prices from alternative sources only about 30% of the time 

during the class period. See Br. of Appellees at 8 n.7. 

 19 
that without examining each transaction, their past ability 

to obtain a better price for a particular trade is purely 

speculative. On appeal, the availability of better prices 

remains hotly contested. 

In this interlocutory appeal, we do not decide whether 

defendants' alleged practice constitutes a Rule 10b-5 

securities violation with respect to each individual member 

of the putative class. Our inquiry only addresses whether 

the federal securities claims alleged by the investors satisfy 

the requirements demanded by Fed. R. Civ. P. 23. 

V. 

To determine whether the claims alleged by the putative 

class meet the requirements for class certification, we must 

first examine the underlying cause of action--in this case, 

a Rule 10b-5 private securities fraud claim. See Barnes, 

161 F.3d at 138; McCarthy v. Kleindienst, 741 F.2d 1406, 

1412 (D.C. Cir. 1984). This analysis is critical because 

class certification under Fed. R. Civ. P. 23(b)(3) is 

permissible only when "questions of law or fact common to 

the members of the class predominate over any questions 

affecting only individual members." Fed. R. Civ. P. 23(b)(3). 

For the elements of the Rule 10b-5 claim which remain in 

dispute, "[r]equiring proof of individualized reliance [and 

injury] from each member of the proposed plaintiff class 

effectively would . . . prevent[ ] [plaintiffs] from proceeding 

with a class action, since individual issues then would . . . 

overwhelm[ ] the common ones." Basic Inc. v. Levinson, 485 

U.S. 224, 242 (1988). On the other hand, presuming these 

elements would resolve "the problem of balancing the 

substantive requirement of proof of reliance [and injury] in 

securities cases against the procedural requisites of 

[Federal Rule of Civil Procedure] 23." Id. (quotation and 

citation omitted); see also Peil v. Speiser, 806 F.2d 1154 (3d 

Cir. 1986) (upholding presumption of reliance in Rule 10b5 claims based on fraud-on-the-market theory); Hoxworth v. 

Blinder, Robinson & Co., 980 F.2d 912 (3d Cir. 1992) 

(affirming class certification where reliance presumed) 

(hereinafter "Hoxworth II"); William Rubenstein, A 

Transnational Model of Adjudication, 89 Geo. L.J. 371, 391- 

92 (2001) (discussing effect of presuming reliance in 

 20 
securities class actions). If proof of the essential elements of 

the cause of action requires individual treatment, then 

class certification is unsuitable. See Binder v. Gillespie, 184 

F.3d 1059, 1063-66 (9th Cir. 1999) (upholding class

decertification where presumption of reliance and loss 

unavailable), cert. denied, 528 U.S. 1154 (2000). 

Under Rule 10b-5 causation is two-pronged. Huddleston 

v. Herman & MacLean, 640 F.2d 534, 549 n.24 (5th Cir. 

1981), aff 'd in part, rev'd in part on other grounds, 459 U.S. 

375 (1983); see also James D. Cox, Robert W. Hillman & 

Donald C. Langevoort, Securities Regulation: Cases and 

Materials 769-71 (3d ed. 2001); 5 A. Jacobs, The Impact of 

Rule 10b-5 S 64.01[a], at 3-221 to 3-222 (Supp. 1980). 

Reliance, or transaction causation, establishes that but for 

the fraudulent misrepresentation, the investor would not 

have purchased or sold the security. Suez Equity Investors, 

L.P. and SEI Assocs. v. Toronto-Dominion Bank, 250 F.3d 

87, 95-96 (2d Cir. 2001); Weiner v. Quaker Oats Co., 129 

F.3d 310, 315 (3d Cir. 1997); Robbins v. Koger Props., Inc., 

116 F.3d 1441, 1447 (11th Cir. 1997). Loss causation 

demonstrates that the fraudulent misrepresentation 

actually caused the loss suffered. Suez Equity Investors, 

250 F.3d at 95-96; EP MedSystems, Inc. v. EchoCath, Inc., 

235 F.3d 865, 883-84 (3d Cir. 2000). We must first address 

whether plaintiffs' claims are entitled to class-wide 

presumptions of reliance and economic loss before turning 

to the requirements for certification under Fed. R. Civ. P. 

23(b)(3). 

A. 

Section 10(b) of the Securities Exchange Act of 1934 

makes it unlawful "[t]o use or employ, in connection with 

the purchase or sale of any security registered on a 

national securities exchange . . . any manipulative or 

deceptive device or contrivance in contravention of such 

rules and regulations as the [Securities and Exchange] 

Commission may prescribe." 15 U.S.C. S 78j(b). Under this 

statute, the Securities and Exchange Commission 

promulgated Rule 10b-5 which provides: 

 It shall be unlawful for any person, directly or 

 indirectly, by the use of any means or instrumentality 

 21 
 of interstate commerce, or of the mails or of any facility 

 of any national securities exchange, 

 (a) to employ any device, scheme, or artifice to defraud, 

 (b) to make any untrue statement of a material fact or 

 to omit to state a material fact necessary in order to 

 make the statements made, in the light of the 

 circumstances under which they were made, not 

 misleading, or 

 (c) To engage in any act, practice, or course of business 

 which operates or would operate as a fraud or deceit 

 upon any person, in connection with the purchase or 

 sale of any security. 

17 C.F.R. S 240.10b-5. In Newton, we set forth the 

necessary elements of a Rule 10b-5 violation: 

 To state a claim for securities fraud under S 10 of the 

 Securities [Exchange] Act of 1934 and Rule 10b-5, 

 plaintiffs must demonstrate: (1) a misrepresentation or 

 omission of a material fact in connection with the 

 purchase or sale of a security; (2) scienter on the part 

 of the defendant; (3) reliance on the misrepresentation; 

 and (4) damage resulting from the misrepresentation. 

Newton, 135 F.3d at 269; see also Semerenko v. Cendant 

Corp., 223 F.3d 165, 174 (3d Cir. 2000). 

It is important to recognize that the facts of this case do 

not resonate with those typical of securities violations 

under Rule 10b-5. Customarily those claims involve a 

fraudulent material misrepresentation or omission that 

affects a security's value. See EchoCath, 235 F.3d at 884 

(citing typical cases: Semerenko, 223 F.3d at 171 (financial 

statement); Weiner, 129 F.3d at 311-12 (corporation's 

financial condition); In re Burlington Coat Factory Sec. Litig., 

114 F.3d 1410, 1415-17 (3d Cir. 1997) (projected future 

earnings); In re Westinghouse Sec. Litig., 90 F.3d 696, 700- 

01 (3d Cir. 1996) (fraudulent representation of company's 

state of affairs)). 

The alleged material nondisclosure here consisted of a 

broker-dealer accepting an investor's order under the 

implied representation of the duty of best execution. This 

 22 
duty requires a broker-dealer to "use reasonable efforts to 

maximize the economic benefit to the client in each

transaction." Newton, 135 F.3d at 270. A broker-dealer who 

"accepts such an order while intending to breach that duty 

makes a misrepresentation that is material to the purchase 

or sale [of a security]." Id. at 269. If the order was executed 

in a manner inconsistent with this duty, it was also 

performed with scienter. Id. at 273-74. Despite defendants' 

claim that execution at the NBBO price represented an 

acceptable industry-wide practice, we held in Newton that 

plaintiffs had alleged a claim that at least satisfied Rule 

10b-5's material misrepresentation and scienter 

requirements. Id. at 274-75. We did not examine the other 

elements of a Rule 10b-5 claim--specifically, reliance and 

loss causation--because these elements were not relevant 

to the duty of best execution. On remand, the District 

Court picked up where we left off. Although the court found 

no issues affecting misrepresentation and scienter that 

would preclude class certification, it held that individual 

questions on reliance and economic loss presented 

formidable obstacles to class certification. 

The parties disagree whether evidence of reliance and 

economic loss are consistent with each trade or would 

require individual treatment at trial. Defendants argue that 

reliance and economic loss cannot be presumed across the 

class for the hundreds of millions of trades at issue. 

Because only class members who detrimentally relied on a 

defendants' execution practice would have a cause of 

action, they maintain the individual inquiry necessary to 

establish reliance and economic loss renders plaintiffs' 

claims unfit for class certification. Whether proof of reliance 

and economic loss are unique to each investor, 

necessitating a trade-by-trade examination, remains

contested. 

B. Reliance 

In Rule 10b-5 securities class actions, a plaintiff must 

prove reliance on a fraudulent material misrepresentation 

or omission. Kline v. First W. Gov't Sec., Inc. , 24 F.3d 480, 

487 88 (3d Cir. 1994); Peil, 806 F.2d at 1160 (discussing 

reliance). "It is axiomatic that a private action for securities 

 23 
fraud must be dismissed when a plaintiff fails to plead that 

he or she reasonably and justifiably relied on an alleged 

misrepresentation." Semerenko, 223 F.3d at 178 (citing 

Weiner, 129 F.3d at 315; In re Burlington Coat Factory, 114 

F.3d at 1417). This burden requires a plaintiff to 

demonstrate that defendants' conduct caused him" `to 

engage in the transaction in question.' " Robbins, 116 F.3d 

at 1447 (quoting Currie v. Cayman Res. Corp., 835 F.2d 

780, 785 (11th Cir. 1988)); see also Peil, 806 F.2d at 1160. 

"Recognizing that the requirement of showing direct

reliance presents an unreasonable evidentiary burden in a 

securities market where face-to-face transactions are rare 

and where lawsuits are brought by classes of investors . . . 

this court has adopted a rule that creates a presumption of 

reliance in certain cases." Semerenko, 223 F.3d at 178. 

"The reason for shifting the burden on the reliance issue 

has been an assumption that the plaintiff is generally 

incapable of proving that he relied on a material 

[nondisclosure]." Sharp v. Coopers & Lybrand, 649 F.2d 

175, 188 (3d Cir. 1981), overruled in part on other grounds, 

In re Data Access Sys. Sec. Litig., 843 F.2d 1537 (3d 

Cir.1988) (en banc). 

The seminal opinion on the presumption of reliance in 

securities fraud cases is Affiliated Ute Citizens of Utah v. 

United States, 406 U.S. 128, 153-54 (1970). Affiliated Ute 

involved an effort by some members of the Ute tribe to 

distribute its assets among its members. For this purpose, 

the tribe placed its assets in a corporation and issued each 

member ten shares of stock that were subsequently 

deposited in a local bank. As fiduciary, the bank assumed 

responsibility for enforcing the stocks' restrictions. For its 

own benefit and unknown to the Utes, the bank facilitated 

sales of the stock to outside investors at costs below its fair 

market value. When the Utes discovered the bank's 

practice, they sued under Rule 10b-5. In defense, the bank 

claimed the Utes failed to establish reliance on a 

misrepresentation of material fact. But the Supreme Court 

held the plaintiffs were entitled to a presumption of 

reliance, holding that in cases "involving primarily a failure 

to disclose [material facts], positive proof of reliance is not 

a prerequisite to recovery." Id. at 153. Applying this 

precept, we have held that "the proper approach to the 

 24 
problem of reliance is to analyze the plaintiff 's allegations, 

in light of the likely proof at trial, and determine the most 

reasonable placement of the burden of proof of reliance." 

Sharp, 649 F.2d at 188; see also Joseph v. Wiles, 223 F.3d 

1155, 1162 (10th Cir. 2000) (recognizing that " Affiliated Ute 

presumption of reliance exists in the first place to aid 

plaintiffs when reliance on a negative would be practically 

impossible"); Blackie v. Barrack, 524 F.2d 891, 907 (9th 

Cir. 1975) (same). 

We extended the Affiliated Ute presumption of reliance to 

investors when securities dealers failed to disclose a pricing 

policy that overcharged investors in the purchase and sale 

of "penny stocks."14 In Hoxworth II, investors alleged they 

were systematically defrauded by a securities dealer's 

failure to disclose its pricing policy of excessive markups or 

markdowns on different securities. 980 F.2d 912. Because 

of this uniform, material nondisclosure, we concluded that 

the "plaintiffs [were] entitled to the presumption of reliance 

set forth in Affiliated Ute." Id. at 924; cf. Eisenberg v. 

Gagnon, 766 F.2d 770, 786-87 (3d Cir. 1985) (holding 

individual questions of reliance in securities class action 

involving investment in tax shelters did not preclude 

certification). In analogous cases, reliance has not been a 

hurdle to class certification. See Grandon v. Merrill Lynch & 

Co., Inc., 147 F.3d 184, 190 (2d Cir. 1998) ("A broker-dealer 

commits fraud (in violation of S 10(b) and Rule 10b-5) by 

charging customers excessive markups without proper

disclosure."); Bank of Lexington & Trust Co. v. Vining-Sparks 

Sec., Inc., 959 F.2d 606, 613 (6th Cir. 1992) ("[T]he failure 

to disclose exorbitant mark-ups violates section 78j(b) and 

Rule 10b-5."); Angelastro v. Prudential-Bache Sec., Inc., 764 

F.2d 939, 942-46 (3d Cir. 1985) (reliance does not bar 

private securities fraud action involving nondisclosure of 

fraudulent credit terms on margin accounts); Ettinger v. 

Merrill Lynch, Pierce, Fenner & Smith, Inc., 122 F.R.D. 177, 

180, 182 (E.D. Pa. 1988) (reliance not an issue in securities 

class action alleging securities dealer failed to disclose 

improper markups on bonds). 

_________________________________________________________________ 

14. "Penny stocks are low-priced, high-risk equity securities for which 

there is frequently no well-developed market." Hoxworth II, 980 F.2d at 

914 n.1. 

 25 
Investors may also be entitled to a rebuttable 

presumption of reliance under the "fraud-on-the-market 

theory." This is because "in an efficient market the 

misinformation directly affects the stock prices at which the 

investor trades and thus, through the inflated or deflated 

price, causes injury even in the absence of direct reliance." 

In re Burlington Coat Factory, 114 F.3d at 1419 n.8 (citing 

Basic Inc., 485 U.S. at 241-42). Reliance may be presumed 

when a fraudulent misrepresentation or omission impairs 

the value of a security traded in an efficient market. Basic 

Inc., 485 U.S. at 241-42; Semerenko, 223 F.3d at 178; In re 

Burlington Coat Factory, 114 F.3d at 1419 n.8. Here

plaintiffs' claims do not involve an omission or 

misrepresentation that affected the value of a security in an 

efficient market. Therefore, a presumption of reliance based 

on this theory would be inappropriate. 

The District Court did not explicitly rule on whether 

reliance could be presumed. Instead the court observed 

that the investors' trades "involved multiple circumstances 

which bear decisively upon the existence of reliance." In re 

Merrill Lynch, et al. Sec. Litig., 191 F.R.D. 391, 395 (D.N.J. 

1999) (hereinafter "Merrill Lynch"). On this point, the court 

found that some plaintiffs may have known about the

defendants' practice, belying their argument. Id. ("The 

degree of sophistication of the putative class members 

varies widely. Some, no doubt, were new to the world of 

NASDAQ trading; some were institutional investors."). 

Plaintiffs contend that defendants' uniform practice of 

executing trades at the NBBO price, even if better prices 

were reasonably available from alternative sources, and 

their failure to disclose the practice to their customers 

warrant a presumption of reliance. Defendants respond 

that at least some plaintiffs knew of the execution practice 

which nullifies their reliance. In support, they cite several 

news articles describing the practice15 as well as an SEC 

_________________________________________________________________ 

15. See, e.g., Floyd Norris, The S.E.C. Tries to Insure that Investors Get 

Better Stock Prices, N.Y. Times, Sept. 28, 1995, at D8; Daniel Kadlec, 

Young Traders Can Be Gamble for Street, USA Today, Sept. 27, 1995, at 

3B; Warren Getler, Reuter's Instinet is Biting Off Chunks of Nasdaq's 

Territory, Wall St. J., Oct. 4, 1994, at C1; Gretchen Morgenson, Fun and 

Games on Nasdaq, Forbes, Aug. 16, 1993, at 74; Craig Torres, How 

Street Turns Your Stock Trades to Gold, Wall St. J., Feb. 16, 1993, at C1. 

 26 
report noting that institutional investors (who fall within 

the putative class's broad definition)16 used alternative 

electronic trading sources to obtain better prices for their 

trades. Br. of Appellees at 56-57. Because some plaintiffs 

knew or should have known of their practice, defendants 

assert that reasonable reliance on the alleged nondisclosure 

did not occur class-wide. For this reason, a presumption of 

reliance is arguably unavailable. See Straub v. Vaisman & 

Co., Inc., 540 F.2d 591, 595-98 (3d Cir. 1976). 

While it seems apparent that some class members likely 

knew of defendants' practice, this knowledge does not 

necessarily invalidate the presumption. When defendants 

fail to disclose material information about a uniform 

practice involving the purchase or sale of securities, 

plaintiffs may be entitled to a presumption of reliance 

which defendants may rebut. See, e.g., Affiliated Ute, 406 

U.S. at 153-54; Hoxworth II, 980 F.2d at 924; Blackie, 524 

F.2d at 905-06; see also In re Prudential Ins. Co. of Am. 

Sales Practice Litig., 148 F.3d 283, 314 (3d Cir. 1998) 

(approvingly noting conclusion that "because plaintiffs' 

fraud-based claims stem largely from misleading omissions, 

reliance can be presumed") (quotation and citation omitted) 

(hereinafter "Prudential"). Presuming reliance class-wide is 

proper when the material nondisclosure is part of a

common course of conduct.17 Hoxworth II, 980 F.2d at 924 

(holding class entitled to presumption of reliance against 

securities dealer for failure to disclose exorbitant pricing 

_________________________________________________________________ 

16. Plaintiffs define the class as consisting"of all persons who placed 

market orders with Merrill Lynch or PaineWebber or Dean Witter to 

purchase or sell shares of OTC stock between November 4, 1992 and 

August 28, 1996." 

17. Further explaining the justification for presuming reliance from 

material nondisclosures, we noted in Sharp that " `[s]ince nothing is 

affirmatively represented in a nondisclosure case, demanding proof of 

reliance would require the plaintiff to demonstrate that he had in mind 

the converse of the omitted facts, which would be virtually impossible to 

demonstrate in most cases.' " 649 F.2d at 188 n.18 (quoting Note, The 

Reliance Requirement in Private Actions Under SEC Rule 10b-5, 88 Harv. 

L. Rev. 584, 590 (1975) (footnote omitted)). The justifications for 

creating 

presumptions in general are explored in greater depth in 2 J. Strong, 

McCormick on Evidence S 343, p. 437-43 (5th ed. 1999). 

 27 
policy for securities); see also Prudential, 148 F.3d at 314; 

Ettinger, 122 F.R.D. at 180. 

To reiterate, the investors have alleged that the brokerdealers failed to disclose their policy of executing NASDAQ 

trades at the NBBO price. Like a securities dealer's failure 

to disclose its policy of overcharging investors, defendants' 

execution of investors' trades at the NBBO price, when 

better prices may have been available from alternative 

services, constitutes a potentially fraudulent common 

course of conduct from which reliance can be presumed. 

See Hoxworth II, 980 F.2d at 924 (holding plaintiffs entitled 

to presumption of reliance because of defendants' 

nondisclosure of pricing policy);18 see also Prudential, 148 

F.3d at 314. We will not require each plaintiff to prove he 

relied on a practice which defendants did not affirmatively 

disclose. See Sharp, 649 F.2d at 188-89; Ettinger, 122 

F.R.D. at 180. Because their allegations of a uniform 

nondisclosure would make it impractical for investors to 

affirmatively prove their lack of knowledge of defendants' 

practice, the burden of rebutting a presumption of reliance 

is properly placed on defendants here. Therefore, under this 

set of facts, we hold presuming reliance would be 

appropriate because defendants allegedly failed to disclose 

their trade execution practice. 

C. Economic Loss 

1. 

Under Rule 10b-5, a plaintiff must also establish that he 

suffered an economic loss that was caused by defendant's 

fraudulent conduct. Semerenko, 223 F.3d at 185; 

Huddleston, 640 F.2d at 549. If economic loss is evident, 

then plaintiff must prove a "sufficient causal nexus between 

the loss and the alleged [nondisclosure]." Semerenko, 223 

_________________________________________________________________ 

18. This was based on an earlier decision by our circuit that the "burden 

shifting rationale of Affiliated Ute was fully applicable" to the 

nondisclosure of an exorbitant markup pricing policy. Hoxworth v. 

Blinder, Robinson & Co., Inc., 903 F.2d 186, 202 (3d Cir. 1990) 

(hereinafter "Hoxworth I"). 

 28 
F.3d at 184. Loss causation derives its function from the 

"standard rule of tort law that the plaintiff must allege and 

prove that, but for the defendant's wrongdoing, the plaintiff 

would not have incurred the harm of which he complains." 

Bastian v. Petren Res. Corp., 892 F.2d 680, 685 (7th Cir. 

1990). 

Initially, loss causation was a requirement established by 

the courts. In re Phillips Petroleum Sec. Litig. , 881 F.2d 

1236, 1244 (3d Cir. 1989) (citing Huddleston, 640 F.2d at 

549); Angelastro, 764 F.2d at 942-43; see also Bastian, 892 

F.2d at 685. But under the Private Securities Litigation 

Reform Act of 1995, it became a statutory element of 

private securities fraud claims under Rule 10b-5. The Act 

provides that "[i]n any private action arising under this 

chapter, the plaintiff shall have the burden of proving that 

the act or omission of the defendant alleged to violate this 

chapter caused the loss for which the plaintiff seeks to 

recover damages." 15 U.S.C. S 78u-4(b)(4). 

In any event, it is necessary here to separate the concept 

of economic loss from the issue of loss causation. Of 

particular importance is whether plaintiffs have, in fact, 

suffered an economic loss. "[F]ailure to show actual 

damages is a fatal defect in a Rule 10b-5 cause of action." 

Feldman v. Pioneer Petroleum, Inc., 813 F.2d 296, 302 (10th 

Cir. 1987); see also 2 T. Hazen, Law of Securities Regulation 

S 13.7, p. 553 (3d ed. 1995) ("Failure to allege or prove 

actual damages will result in dismissal of any 10b-5 

damage claim."). For this reason, "[i]nvestors cannot 

complain about a fraud that did not cause them any harm." 

Latigo Ventures v. Laventhol & Horwath, 876 F.2d 1322, 

1325 (7th Cir. 1989); Huddleston, 640 F.2d at 555. The 

economic loss that plaintiffs claim would be the difference 

between the price at which their trades were executed and 

the "better" price allegedly available from an alternative 

trading source.19 Therefore, to show economic loss,

_________________________________________________________________ 

19. The Court of Appeals for the Tenth Circuit has explained how the 

measure of damages should be calculated under Rule 10b-5: 

 Although neither Section 10(b) of the [Securities Exchange] Act nor 

 Rule 10b-5 contains explicit provisions for determining damages, 

 29 
plaintiffs must establish that a "better" price was

obtainable for each executed trade. If a "better" price was 

unavailable for a particular trade, then a class member 

could not have suffered injury and cannot maintain a Rule 

10b-5 claim. 

2. 

The District Court held that economic loss could neither 

be established nor presumed class-wide. Merrill Lynch, 191 

F.R.D. at 397. Finding that defendants' practice did not 

detrimentally affect the value of plaintiffs' securities across 

the entire market nor did it necessarily result in 

overcharging, the District Court found no resemblance to 

cases where economic injury naturally flowed from 

defendant's alleged conduct. Id. at 396. Irrespective of 

reliance, the District Court found that, after reviewing the 

record, many investors received the best available price 

when defendants executed their trades at the NBBO listed 

price. Id. ("The record as it is presently constituted requires 

the conclusion that in a large number of transactions there 

were no better prices from other sources."). Drawing on the 

summary judgment record where it determined from a 

sample analysis of twelve trades executed by defendants 

that only one resulted in actual economic injury to a class 

representative, the District Court concluded that an 

undefined number of class members sustained no economic 

loss whatsoever, necessitating the conclusion that damages 

were not susceptible to class-wide proof.20 Id. at 396; see 

_________________________________________________________________ 

 courts have applied the "actual damages" standard of Section 28 of 

 the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78bb(a), to 

Rule 

 10b-5 claims. Under Section 28 of the Act, the "correct measure of 

 damages . . . is the difference between the fair value of all that 

the 

 (plaintiff) received and the fair value of what he would have 

received 

 had there been no fraudulent conduct." Randall v. Loftsgaarden, 

 478 U.S. 647, 661-62 (1986). 

Feldman, 813 F.2d at 301-02 (footnotes omitted). 

20. In defendants' motion for summary judgment, the District Court 

examined twelve of the class representatives' trades with the defendants 

during the initial class period (November 4, 1992 to November 4, 1994). 

 30 
also In re Merrill Lynch et al., Sec. Litig., 911 F. Supp. at 

766. Based on this reasoning, the District Court found the 

question of economic loss remained unique to each 

investor. Plaintiffs argue against extrapolating the 

improbability of class-wide damages from twelve trades and 

contend the District Court erred in finding that"many" 

_________________________________________________________________ 

Although the court's opinion mentions thirteen trades, only twelve were 

evaluated. While the court was provided pricing information from 

SelectNet to compare the prices at which the trades were executed, "[n]o 

information on either Instinet prices, SOES limit order file prices or 

payment for order flow arrangements was supplied for any of the 

transactions." In re Merrill Lynch, et al. Sec. Litig., 911 F. Supp. at 

766 

(footnote omitted). 

In the only trade where the District Court found a plaintiff had clearly 

sustained economic injury, plaintiff Binder purchased 1000 shares of 

Optical Radiation through PaineWebber on April 21, 1994. Six minutes 

after receiving the order, PaineWebber executed it at a price of 

$20/share. However, earlier that morning an offer was sent over 

SelectNet that remained open for the entire day to sell 2000 shares of 

Optical Radiation in blocks of 1000 at $19 3/4. Had PaineWebber 

executed the trade at the price offered on SelectNet, the plaintiff would 

have saved $25. 

In two other trades, the court also found inferential and speculative 

evidence that better prices may have been available. On the same day 

that plaintiff Binder placed an order to buy 7000 shares of Hydron 

Technologies at 2 9/16, which PaineWebber executed through a marketmaker in the security, an offer restricted to Lehman Bros. to sell up to 

3000 shares of Hydron Technologies at 2 1/2 was broadcast on 

SelectNet. Based on this restricted offer, plaintiffs contend the lower 

price indicated a better price for the stock would have been available 

from other sources, potentially Instinet. Additionally, plaintiffs assert 

Merrill Lynch's execution of plaintiff Zakheim's purchase order for 120 

shares of U.S. Healthcare at 42 3/4 was, on average, $0.16/share more 

than the price at which Merrill Lynch executed trades in the stock 

throughout the day. For this reason, plaintiffs reasoned a better price 

was more than likely available on Instinet that day. 

The District Court found SelectNet would not have provided superior 

prices in six other transactions. Id. While no information from an 

alternative source was provided for the remaining three transactions, the 

court noted it was still possible that superior prices may have been 

available for them. Id. 

 31 
class members were uninjured. But we agree with the

District Court's finding that plaintiffs' claims would require 

individual treatment to determine actual injury. 

In fraud-on-the-market or overcharging cases that 

warrant a presumption of reliance, plaintiffs satisfy their 

initial burden because they sustain economic loss by 

reason of the alleged conduct.21 In fraud-on-the-market 

cases, the price at which a stock is traded is presumably 

affected by the fraudulent information, thus injuring every 

investor who trades in the security. In re Burlington Coat 

Factory, 114 F.3d at 1419 n.8 (citing Basic Inc., 485 U.S. at 

241-42). Nor was economic loss a question in those 

securities claims where defendants failed to disclose a 

fraudulent pricing policy that overcharged investors. 

Accordingly, presuming economic loss was the ineluctable 

_________________________________________________________________ 

21. It bears noting that class actions alleging antitrust injury often 

raise 

similar concerns. In antitrust class actions, injury may be presumed 

when it is clear the violation results in harm to the entire class. 

Bogosian 

v. Gulf Oil Corp., 561 F.2d 434, 454 (3d Cir. 1977); In re Nasdaq MarketMakers Antitrust Litig., 169 F.R.D. 493, 526 (S.D.N.Y. 1996). In Bogosian, 

a class of service station dealers sued their lessors, major oil 

companies, 

for forcing them to purchase gasoline at controlled prices in violation of 

the antitrust laws. 561 F.2d 434. We recognized that 

 when an antitrust violation impacts upon a class of persons . . . , 

 there is no reason why proof of the impact cannot be made on a 

 common basis so long as the common proof adequately 

 demonstrates some damage to each individual. Whether or not fact 

 of damage can be proven on a common basis therefore depends 

 upon the circumstances of each case. 

Id. at 454. Likewise, in In re Nasdaq Market-Makers, a class was certified 

to pursue allegations that market makers of NASDAQ traded securities 

conspired to charge supra-competitive prices on the securities they 

traded for investors. 169 F.R.D. 493. The court noted that plaintiffs' 

claim of antitrust injury was "susceptible [to] . . . common classwide 

proof [because] . . . an illegal price-fixing scheme presumptively damages 

all purchasers of a price-fixed product in an affected market." Id. at 

526. 

Nevertheless, antitrust cases still require proof of injury to each 

individual for common questions to predominate in a class action. 

Windham v. Am. Brands, Inc., 565 F.2d 59, 65-66 (4th Cir. 1977) (en 

banc); see also Broussard v. Meineke Disc. Muffler Shops, Inc., 155 F.3d 

331, 342-43 (4th Cir. 1998) (citing Windham, 565 F.2d at 66); Kline v. 

Coldwell, Banker & Co., 508 F.2d 226, 233 (9th Cir. 1974). 
 32 
by-product of the alleged fraud. The same does not hold 

true here. The execution of plaintiffs' trades at the NBBO 

listed price did not necessarily injure each class member. 

Plaintiffs may be entitled to a presumption of economic loss 

only when it is clear each class member has in fact

sustained economic injury. See Semerenko, 223 F.3d at 

185. In a securities class action, a putative class may 

presumptively establish economic loss on a common basis 

only if the evidence adequately demonstrates some loss to 

each individual plaintiff. 

Because securities claims may take on several forms, 

proving economic loss on a common basis is a fact-specific 

inquiry. See EchoCath, 235 F.3d at 884; Grandon, 147 F.3d 

at 190; see also Bogosian, 561 F.2d at 454 (evaluating loss 

in antitrust class actions). We find no support in the case 

law for presuming economic injury for purposes of class 

certification in Rule 10b-5 claims22 absent indication that 

each plaintiff has suffered an economic loss. See 

Semerenko, 223 F.3d at 184-85 ("[W]here the claimed loss 

involves the purchase of a security at a price that is inflated 

due to an alleged misrepresentation, there is a sufficient 

causal nexus between the loss and the alleged 

misrepresentation to satisfy the loss causation 

requirement."); see also Robbins, 116 F.3d at 1448 ("Our 

decisions explicitly require proof of a causal connection 

between the misrepresentation and the investment's 

subsequent decline in value."); Hayes v. Gross, 982 F.2d 

104, 107 (3d Cir. 1992) (injury assumed when security 

purchased at price inflated by fraudulent 

misrepresentation); Scattergood v. Perelman, 945 F.2d 618, 

624 (3d Cir. 1991) (same). 

In assessing the question of economic loss, it is 

important to bear in mind how the facts here differ from 

those in a typical securities action. Unlike a "fraud-on-themarket" claim, this case does not involve a 

_________________________________________________________________ 

22. The cases on which we rely generally discuss loss causation in the 

context of applying the requirements of a Rule 10b-5 claim, not class 

certification. Many of these cases arise as class actions, but they 

typically involve motions to dismiss for failure to state a claim or 

motions 

for summary judgment rather than class certification. 

 33 
misrepresentation or omission that decreased the value of 

a security. Furthermore, unlike excessive over-pricing 

policy claims, this case does not involve a practice that 

necessarily harmed investors across the class.23 See 

generally Grandon, 147 F.3d 184; Hoxworth II , 980 F.2d 

912; Vining-Sparks, 959 F.2d 606; Angelastro, 764 F.2d 

939; Ettinger, 122 F.R.D. 177. In this case, defendants 

allegedly executed trades solely at the NBBO price.

Depending on the facts of each trade, the NBBO listed price 

may or may not have provided a class member with the 

best price. Therefore, economic loss to the plaintiffs cannot 

be presumed by the purchase or sale of a security at the 

NBBO price, and we will not presume it across the class. 

In sum, we conclude that the putative class would be 

entitled to a rebuttable presumption of reliance but not of 

economic loss. Therefore, their claims do not warrant a 

rebuttable presumption of class-wide injury.24 

_________________________________________________________________ 

23. Plaintiffs also contend that the claims in this case are similar to 

those in Prudential, where we certified a settlement class alleging fraud. 

148 F.3d 283. The claims here are easily distinguished from the 

securities fraud claims in Prudential. In Prudential, the federal 

securities 

claims involved the sale of vanishing premium life insurance policies 

which the insurance company fraudulently claimed would become selffunding. 148 F.3d at 300 (citing In re Prudential Ins. Co. of Am. Sales 

Practices Litig., 962 F. Supp. at 500). By purchasing the policies, 

plaintiffs risked economic injury because the instruments were 

structurally incapable of meeting the financial expectations Prudential 

had promised. Whether or not class members actually suffered economic 

injury was immaterial to the viability of the class's claims because the 

insurance company did not contest liability. See Prudential, 148 F.3d at 

296-97. 

24. Citing AUSA Life Ins. Co. v. Ernst and Young, 206 F.3d 202 (2d Cir. 

2000), plaintiffs contend that defendants' trading practice established 

loss causation throughout the class because it was foreseeable the 

practice would cause economic harm to class members. See 206 F.3d at 

217-20 (remanding dismissal of securities action for reconsideration of 

loss causation in terms of foreseeability that defendant's conduct would 

have caused alleged economic harm). By focusing on whether or not the 

loss was simply foreseeable, plaintiffs have put an improper gloss on the 

court's opinion. The Court of Appeals for the Second Circuit has 

explained that "loss causation . . . examines how directly . . . [the 

fraudulent conduct] caused the loss, and whether the resulting loss was 

 34 
VI. 

Turning to the test for class certification, we must 

examine the elements of a Rule 10b-5 claim through the 

prism of Fed. R. Civ. P. 23 to determine whether the 

District Court abused its discretion in failing to certify the 

class. A putative class must satisfy the four conjunctive 

criteria of Fed. R. Civ. P. 23(a): numerosity, commonality, 

typicality, and adequacy of representation.25 A class seeking 

_________________________________________________________________ 

a foreseeable outcome of the fraudulent [conduct]." Suez Equity 

Investors, 250 F.3d at 96 (summarizing the Court of Appeals for the 

Second Circuit's definition of loss causation). Whether or not the loss is 

foreseeable becomes a factor only if direct causation has been 

demonstrated. Id. 

Our test for loss causation is framed somewhat differently. As noted, 

a viable Rule 10b-5 securities claim must show a"sufficient causal 

nexus between the loss and the alleged [nondisclosure]." Semerenko, 223 

F.3d at 184; see also In re Phillips Petroleum , 881 F.2d at 1244 (holding 

fraudulent misrepresentation "must touch upon the reasons for the 

investment's decline in value") (citing Huddleston, 640 F.2d at 549). In 

other words, to establish loss causation, a claim must demonstrate that 

the fraudulent conduct proximately caused or substantially contributed 

to causing plaintiff 's economic loss. See EchoCath, 235 F.3d at 883-84; 

Semerenko, 223 F.3d at 186. Whether there are differences between 

these standards for loss causation, it is far from certain in this case 

that 

each plaintiff has sustained a loss, unlike the insurance companies in 

AUSA. 

In the end, we need not address here whether their claims establish 

loss causation because we find that plaintiffs' claims do not warrant a 

class-wide presumption of economic loss. For those investors who did 

not receive the best available price and suffered a loss as a result, 

establishing loss causation would not be an issue. See Hoxworth I, 903 

F.2d at 203 n.24 (rejecting defendants' argument that excessive markups 

or markdowns may not have been the cause of plaintiffs' injuries). 

25. Fed. R. Civ. P. 23(a) provides: 

 Prerequisites to a Class Action. One or more members of a class 

 may sue or be sued as representative parties on behalf of all only 

if 

 (1) the class is so numerous that joinder of all members is 

 impracticable, (2) there are questions of law or fact common to the 

 class, (3) the claims or defenses of the representative parties are 

 typical of the claims or defenses of the class, and (4) the 

 representative parties will fairly and adequately protect the 

interests 

 of the class. 
 35 
money damages must also satisfy the (b)(3) requirements of 

predominance and superiority--namely, whether common 

questions of law or fact predominate and whether the class 

action represents the superior method for adjudicating the 

case.26 

Denying class certification, the District Court found that 

plaintiffs' claims were atypical and the class representatives 

inadequate to represent the class. On related grounds, the 

court also held that common issues did not predominate 

and the class action device was neither superior nor 

manageable. Merrill Lynch, 191 F.R.D. at 397-98. As noted, 

we review the District Court's decision denying class 

certification for abuse of discretion. See supra p. 10. 

A. Federal Rule of Civil Procedure 23(a) 

The certification requirements of Fed. R. Civ. P. 23(a) 

embrace two rudimentary principles: 1) the necessity and 

efficiency of adjudicating the claims as a class and 2) the 

assurance of protecting the interests of absentee members.27 

_________________________________________________________________ 

26. Fed. R. Civ. P. 23(b) provides: 

 Class Actions Maintainable. An action may be maintained as a 

 class action if the prerequisites of subdivision (a) are satisfied, 

and 

 in addition: 

 * * * 

 (3) the court finds that the 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 the fair and efficient adjudication of the 

 controversy. The matters pertinent to the findings include: (A) the 

 interest of members of the class in individually controlling the 

 prosecution or defense of separate actions; (B) the extent and 

nature 

 of any litigation concerning the controversy already commenced by 

 or against members of the class; (C) the desirability or 

undesirability 

 of concentrating litigation of the claims in the particular forum; 

(D) 

 the difficulties likely to be encountered in the management of a 

 class action. 

27. We have explained in greater detail that 

 [t]he drafters designed the procedural requirements of Rule 23, 

 especially the requisites of subsection (a), so that the court can 
 36 
Baby Neal v. Casey, 43 F.3d 48, 55 (3d Cir. 1994); G.M. 

Trucks, 55 F.3d at 785. If the class does not satisfy each of 

the 23(a) criteria, the suit cannot be maintained as a class 

action. For this reason, we will address each criterion in 

turn. 

1. Numerosity 

Numerosity requires a finding that the putative class is 

"so numerous that joinder of all members is impracticable." 

Fed. R. Civ. P. 23(a)(1). It is clear the size of putative class 

satisfies this criterion. There are hundreds of thousands of 

class members and joinder would be impracticable. Id.; 

Merrill Lynch, 191 F.R.D. at 394. 

2. Commonality & Typicality 

" `The concepts of commonality and typicality are broadly 

defined and tend to merge,' " because they focus on similar 

aspects of the alleged claims. Barnes, 161 F.3d at 141 

(quoting Baby Neal, 43 F.3d at 56). Commonality requires 

the presence of "questions of law or fact common to the 

class," Fed. R. Civ. P. 23(a)(2), and typicality demands that 

"the claims or defenses of the representative parties are 

typical of the claims or defenses of the class." Fed. R. Civ. 

P. 23(a)(3). The significance of commonality is self-evident: 

it provides the necessary glue among class members to 

_________________________________________________________________ 

 assure, to the greatest extent possible, that the actions are 

 prosecuted on behalf of the actual class members in a way that 

 makes it fair to bind their interests. The rule thus represents a 

 measured response to the issues of how the due process rights of 

 absentee interests can be protected and how absentees' represented 

 status can be reconciled with a litigation system premised on 

 traditional bipolar litigation. 

 *** 

 The Rule 23(a) class inquiries (numerosity, commonality, 

typicality, 

 and adequacy of representation) constitute a multipart attempt to 

 safeguard the due process rights of absentees. Thus, the ultimate 

 focus falls on the appropriateness of the class device to assert 

and 

 vindicate class interests. 

G.M. Trucks, 55 F.3d at 785, 796. 

 37 
make adjudicating the case as a class worthwhile. 1

Herbert B. Newberg & Alba Conte, Newberg on Class 

Actions S 3.01, p. 3-4 (3d ed. 1992). Typicality ensures the 

interests of the class and the class representatives are 

aligned "so that the latter will work to benefit the entire 

class through the pursuit of their own goals." Barnes, 161 

F.3d at 141. "The typicality criterion is intended to preclude 

certification of those cases where the legal theories of the 

named plaintiffs potentially conflict with those of the 

absentees by requiring that the common claims are 

comparably central to the claims of the named plaintiffs as 

to the claims of the absentees." Baby Neal , 43 F.3d at 57 

(citing Weiss v. York Hosp., 745 F.2d 786, 810 (3d Cir. 

1984)). 

We have set a low threshold for satisfying both 

requirements. See Barnes, 162 F.3d at 141 (noting claims 

based on common course of conduct satisfy typicality); In re 

Sch. Asbestos Litig., 789 F.2d 996, 1010 (3d Cir. 1986) 

(highlighting that the " `threshold of commonality is not 

high' ") (quoting Jenkins v. Raymark Indus., Inc., 782 F.2d 

468, 472 (5th Cir. 1986)). That is, "Rule 23(a) does not 

require that class members share every factual and legal 

predicate to meet the commonality and typicality 

standards." G.M. Trucks, 55 F.3d at 817." `[N]either of these 

requirements mandates that all putative class members 

share identical claims.' " Prudential, 148 F.3d at 311 

(quoting Baby Neal, 43 F.3d at 56). Nevertheless, we 

require courts to examine them separately because the 

criteria remain distinct. Baby Neal, 43 F.3d at 56.

a. Commonality 

As noted, commonality does not require an identity of 

claims or facts among class members. Prudential , 148 F.3d 

at 310 (citing Baby Neal, 43 F.3d at 56)." `The commonality 

requirement will be satisfied if the named plaintiffs share at 

least one question of fact or law with the grievances of the 

prospective class.' " Id. (quoting Baby Neal, 43 F.3d at 56); 

Georgine v. Amchem Prods., Inc., 83 F.3d 610, 627 (3d Cir. 

1996), aff 'd sub nom., Amchem Prods., Inc. v. Windsor, 521 

U.S. 591 (1997). 

 38 
The District Court found, and it is not seriously contested 

on appeal, that common questions of law and fact are 

present. Merrill Lynch, 191 F.R.D. at 394. Whether the 

defendants' execution of their customers' trades at prices 

quoted on the NBBO violates Rule 10b-5 constitutes a 

factual and legal claim that is common to the entire class. 

In fact, plaintiffs' claims raise several common issues 

including: 1) did defendants intentionally execute the 

plaintiffs' orders at the NBBO price without examining 

other alternatives; 2) did defendants fail to disclose their 

practice in violation of their duty to their customers; 3) 

were defendants technologically capable of providing 

superior prices to those offered on the NBBO; and 4) did 

defendants' conduct violate S 10(b) of the Securities 

Exchange Act of 1934. See Br. of Appellants at 31. The 

District Court properly held the putative class satisfied this 

requirement. 

b. Typicality 

The typicality inquiry here centers on whether " `the 

named plaintiff[s'] individual circumstances are markedly 

different or . . . the legal theory upon which the claims are 

based differs from that upon which the claims of other 

class members will perforce be based.' " Eisenberg, 766 

F.2d at 786 (quoting Weiss, 745 F.2d at 809 n.36). The 

criterion acts as a bar to class certification only when "the 

legal theories of the named representatives potentially 

conflict with those of the absentees." Georgine, 83 F.3d at 

631. If the claims of the named plaintiffs and putative class 

members involve the same conduct by the defendant, 

typicality is established regardless of factual differences.28 

_________________________________________________________________ 

28. One treatise describes this standard as met"[w]hen it is alleged that 

the same unlawful conduct was directed at or affected both the named 

plaintiffs and the class sought to be represented." 1 Newberg on Class 

Actions S 3.13, p. 3-77; see also Prudential, 148 F.3d at 311 

(" `Commentators have noted that cases challenging the same unlawful 

conduct which affects both the named plaintiffs and the putative class 

usually satisfy the typicality requirement irrespective of the varying 

fact 

patterns underlying the individual claims.' ") (quoting Baby Neal, 43 F.3d 

at 58); In re NASDAQ Market-Makers, 169 F.R.D. at 510-11 ("[The 

typicality requirement is satisfied] where the claims are based on the 

same legal theory and where the class members have allegedly been 

injured by the same course of conduct as that which allegedly injured 

the proposed representatives."). 

 39 
Barnes, 161 F.3d at 141; see also 1 Newberg on Class 

Actions S 3.15, p. 3-78 ("Factual differences will not render 

a claim atypical if the claim arises from the same event or 

practice or course of conduct that gives rise to the claims 

of the class members, and if it is based on the same legal 

theory."). Our jurisprudence "assures that a claim framed 

as a violative practice can support a class action embracing 

a variety of injuries so long as those injuries can all be 

linked to the practice." Baby Neal, 43 F.3d at 63 

(discussing Falcon, 457 U.S. 147). As a result, we have 

concluded that the requirement "does not mandate that all 

putative class members share identical claims," Barnes, 

161 F.3d at 141, because " `even relatively pronounced 

factual differences will generally not preclude a finding of 

typicality where there is a strong similarity of legal theories' 

or where the claim arises from the same practice or course 

of conduct." Prudential, 148 F.3d at 311 (quoting Baby 

Neal, 43 F.3d at 58); Hoxworth II, 980 F.2d at 923.

The District Court found that the different circumstances 

surrounding each trade over the class period rendered the 

claims of the named representatives "[a]typical of those 

members of the huge class." Merrill Lynch, 191 F.R.D. at 

397. It reasoned that "[i]f proof of the representatives' 

claims would not necessarily prove all the proposed class 

members['] claims, the representatives['] claims are not 

typical of the proposed members' claims." Id. The District 

Court also believed that individual questions on reliance 

and injury buttressed its finding. Id. But typicality does not 

require similarity of individual questions concerning 

reliance or damages on the part of the class representatives 

and class members in a securities fraud action. Blackie, 

524 F.2d at 905-06. In fact, whether the class 

representatives' claims prove the claims of the entire class 

highlights important issues of individual reliance and 

damages that are more properly considered and relevant 

under the predominance and superiority analysis. 

In Hoxworth II, we found a putative class of securities 

investors, who had purchased or sold excessively markedup securities, satisfied the typicality requirement. 980 F.2d 

at 923. Although the class members may have purchased 

or sold different securities at varying prices, all their claims 

 40 
stemmed from defendant's "course of conduct in failing to 

advise purchasers of its excessive markup policy." Id.; see 

also Ettinger, 122 F.R.D. at 180-81 (holding typicality 

satisfied where "[p]laintiff 's claims and those of the class 

arise from the same conduct of defendant and are based on 

the same legal theory"). Similarly, in Eisenberg v. Gagnon, 

we held that securities claims involving fraudulent

inducement to invest in worthless tax shelters satisfied 

typicality. 766 F.2d 770 (3d Cir. 1985). Although the named 

plaintiffs invested in different tax shelters, their 

investments were "prepared by the same defendants, and 

contain[ed] the same alleged omissions and 

misrepresentations." Id. at 786. The typicality in their legal 

claims was sufficient to meet this criterion. 

The named plaintiffs here, like the members of the 

putative class, are purchasers and sellers of securities on 

the NASDAQ. They allege that defendants violated their 

duty of best execution by automatically executing each 

investor's trade at prices listed on the NBBO without 

consulting alternative sources that may have provided 

better value. Plaintiffs' claims rest solely on a single legal 

theory--a Rule 10b-5 violation-- and allege a uniform 

course of conduct--automatic execution of their trades at 

the NBBO listed price. Any differences then among class 

members are factual--which security, at what price, under 

what circumstances, etc. The alleged cause of their injuries, 

however, remains typical throughout the class. Because 

each class member "would need to demonstrate the 

existence of this scheme, their interests are sufficiently 

aligned that the class representatives can be expected to 

adequately pursue the interests of the absentee class 

members." Prudential, 148 F.3d. at 312. The inability of a 

class representative to prove every other class members' 

claim does not necessarily result in failure of the typicality 

requirement. The District Court erred in finding potential 

factual differences rendered plaintiffs' claims atypical. 

3. Adequacy of Representation 

Class representatives must "fairly and adequately protect 

the interests of the class." Fed. R. Civ. P. 23(a)(4). This 

requires a determination of (1) whether the representatives' 

 41 
interests conflict with those of the class and (2) whether the 

class attorney is capable of representing the class. Falcon, 

457 U.S. at 157 & n.13; Barnes, 161 F.3d at 141. The 

Supreme Court has counseled that this element "serves to 

uncover conflicts of interest between named parties and the 

class they seek to represent." Amchem, 521 U.S. at 625. It 

also functions as a catch-all requirement that "tend[s] to 

merge with the commonality and typicality criteria of Rule 

23(a)." Id. at 626 n.20.29 

After determining economic loss could not be presumed 

class-wide,30 the District Court found the class's 

employment of a statistical formula to calculate and 

allocate damages would create conflicts between plaintiffs 

who were actually injured and uninjured plaintiffs in 

search of a windfall. Merrill Lynch, 191 F.R.D. at 398. 

Questioning plaintiffs' ability to resolve this conflict, the 

court refrained from deciding whether the class satisfied 

the adequacy of representation requirement.31 

Following the Supreme Court's observation that adequacy 

of representation is an admixture of commonality and 

typicality, the District Court's reservation appears to be 

_________________________________________________________________ 

29. Although in a different context, both the Supreme Court and our 

Court found the potential harm to absentee members of the class 

particularly significant in denying certification in the Amchem 

litigation. 

Amchem, 521 U.S. at 626-28 ("As the Third Circuit pointed out, named 

parties with diverse medical conditions sought to act on behalf of a 

single giant class rather than on behalf of discrete subclasses. In 

significant respects, the interests of those within the single class are 

not 

aligned. Most saliently, for the currently injured, the critical goal is 

generous immediate payments. That goal tugs against the interest of 

exposure-only plaintiffs in ensuring an ample, inflation-protected fund 

for the future."). This concern is not implicated in the case before us. 

30. "Turning to the other elements of a Rule 10b-5 claim, reliance and 

damages, it is evident that common questions of fact do not prevail." 

Merrill Lynch, 191 F.R.D. at 395. 

31. Defendants assert that plaintiffs did not properly preserve this issue 

on appeal because it is only mentioned in a footnote in their brief. While 

plaintiffs do not discuss adequacy of representation, they do contest the 

underlying factors motivating the District Court's conclusion. Because 

the issue was present in their opening brief and is implicit in their 

claims, it was sufficiently raised on appeal. 

 42 
based on its earlier conclusion that the class did not satisfy 

the typicality requirement. As noted, the District Court's 

typicality concerns reflect inquiries better addressed under 

our review of predominance and superiority. See supra p. 

41. While the commonality and typicality criteria tend to 

merge into an analysis of adequacy of representation under 

Fed. R. Civ. P. 23(a), the standards for measuring the 

predominance of common issues under Fed. R. Civ. P.

23(b)(3) should not be imputed to adequacy of 

representation.32 That is to say, the reasons for denying 

certification under the predominance standard may not 

necessarily compel denying certification under 23(a)(4), 

because the predominance requirement is more stringent 

than commonality and typicality. See supra note 32. On 

these facts, we hold that counsel would suitably represent 

the class and that there are no foreseeable conflicts 

between the named representatives and the class they seek 

to represent that would bar certification. Therefore, the 

putative class would satisfy the adequacy of representation 

requirement. 

B. Fed. R. Civ. P. 23(b)(3) 

Class certification under Fed. R. Civ. P. 23(b)(3) must 

also satisfy the twin requirements of predominance and 

superiority. The predominance inquiry demands "that

questions of law or fact common to the members of the 

class predominate over any questions affecting only

individual members." Fed. R. Civ. P. 23(b)(3). Superiority 

calls for a determination that a class action is the best 

method of achieving a "fair and efficient adjudication of the 

controversy." Id. The Supreme Court has explained that 

these elements were adopted 

_________________________________________________________________ 

32. We have interpreted the "predominance requirement [as] 

incorporat[ing] the commonality requirement." Georgine, 83 F.3d at 626. 

The Supreme Court has also noted that "the predominance requirement 

of Rule 23(b)(3) is similar to the requirement of Rule 23(a)(3) that 

`claims 

or defenses' of the named representatives must be`typical of the claims 

or defenses of the class.' " Amchem, 521 U.S. at 623 n.18. 

Notwithstanding, the Court has counseled that "the predominance 

requirement is far more demanding [than commonality]." Id. at 623-24. 

 43 
 to cover cases in which a class action would achieve 

 economies of time, effort, and expense, and promote 

 . . . uniformity of decision as to persons similarly 

 situated, without sacrificing procedural fairness or 

 bringing about other undesirable results . . . [which] 

 . . . invite[ ] a close look at the case before it is 

 accepted as a class action . . . . 

Amchem, 521 U.S. at 615 (internal quotations and citations 

omitted). To assist in this "close look," Fed. R. Civ. P. 

23(b)(3) includes a nonexclusive list of relevant factors: 

 (A) the interest of members of the class in individually 

 controlling the prosecution or defense of separate 

 actions; (B) the extent and nature of any litigation 

 concerning the controversy already commenced by or 

 against members of the class; (C) the desirability or 

 undesirability of concentrating the litigation of the 

 claims in the particular forum; (D) the difficulties likely 

 to be encountered in the management of a class action. 

Fed. R. Civ. P. 23(b)(3). Simply, "[i]ssues common to the 

class must predominate over individual issues, and the 

class action device must be superior to other means of 

handling the litigation." Prudential, 148 F.3d at 313-14. 

1. Predominance 

Predominance measures whether the class is sufficiently 

cohesive to warrant certification. Amchem, 521 U.S. at 623. 

Unlike commonality, predominance is significantly more 

demanding, requiring more than a common claim. Id. at 

623-24. After holding the class was not entitled to a 

presumption of class-wide loss, the District Court found 

that individual questions of whether each class member 

sustained economic injury presented insurmountable 

obstacles to certification. Merrill Lynch, 191 F.R.D. at 396- 

97 ("[A]bsent proof of classwide pecuniary loss resulting 

from that reliance, there can be no classwide claim for 

securities fraud."). Examining millions of trades to ascertain 

whether or not there was injury, said the court, meant that 

individual issues overwhelmed common questions among 

the class. Id. at 397-98. We agree. 

 44 
Because the automated execution of orders at the NBBO 

listed price did not necessarily injure each class member, 

the District Court found that "whether a class member 

suffered damages would have to be determined on a trade 

by trade basis," because "some class members would have 

suffered damages; while some would not." Id. at 396. This 

individual inquiry is complicated by several factors. 

Assessing economic injury to a class member would first 

require examining whether a particular trade provided an 

investor with "the best reasonably available price." Newton, 

135 F.3d at 270. The comparison between the price at 

which a particular trade was executed on the NBBO with 

the prices and trades available at the same time on

alternative electronic sources would only begin to answer 

this question. As the Newton court recognized: 

 [A]scertaining what prices are reasonably available in 

 any particular situation may require a factual inquiry 

 into all of the surrounding circumstances . . . . 

 * * * 

 Other terms in addition to price are also relevant to 

 best execution. In determining how to execute a client's 

 order, a broker-dealer must take into account order 

 size, trading characteristics of the security, speed of 

 execution, clearing costs, and the cost and difficulty of 

 executing an order in a particular market. When the 

 plaintiffs state that better "prices" were reasonably 

 available from sources other than the NBBO, we 

 understand that to mean that, given an evaluation of 

 price as well as all of the other relevant terms, the 

 trade would be better executed through a source of 

 liquidity other than the NBBO (e.g. SelectNet, Instinet, 

 in-house limit orders or market orders held by the 

 defendants, or limit orders place by the public in the 

 Small Order Execution System). 

Id. at 270 & n.2 (internal citations omitted). These factors 

would appear to vary from class member to class member 

and, for each class member, from trade to trade. Whether 

a class member suffered economic loss from a given 

securities transaction would require proof of the 

circumstances surrounding each trade, the available

 45 
alternative prices, and the state of mind of each investor at 

the time the trade was requested. This Herculean task, 

involving hundreds of millions of transactions, counsels 

against finding predominance. 

In an effort to gloss over this requirement, plaintiffs 

suggest their expert could calculate the amount of damages 

each class member sustained thereby removing proof of 

injury as an obstacle to certification. In a sworn 

declaration, plaintiffs' expert provided no model formula, 

but instead projected that he could devise a formula that 

would measure damages among the class and serve as a 

plan for allocation.33 We are not convinced. But even if 

plaintiffs could present a viable formula for calculating 

damages (which they have not), defendants could still 

require individualized proof of economic loss. See, e.g., 

Kline, 508 F.2d at 236 & n.9. 

The District Court rejected plaintiffs' arguments. Drawing 

guidance from antitrust jurisprudence, the court concluded 

that "[p]roof of damage . . . must be distinguished from the 

mere calculation of damages." Merrill Lynch , 191 F.R.D. at 

396. As the Court of Appeals for the Eighth Circuit

recognized after reviewing Supreme Court jurisprudence, 

" `an antitrust plaintiff must prove that his damages were 

caused by the unlawful acts of the defendant. . . [before] 

the amount of damages may be determined.' " Amerinet v. 

_________________________________________________________________ 

33. On this point, the testimony by plaintiffs' expert was limited to the 

averment that 

 based on my work and my familiarity with statistical relationships 

 which can be powerfully applied to relevant market data, it is my 

 opinion a reliable measure of damages can be developed in this case 

 based on the application of well-established statistical 

techniques. 

 Based upon an analysis of the types of data set forth in 

Plaintiffs' 

 Damage Submission, I can devise a formula which measures class- 

 wide damages and from which a plan of allocation can be 

 constructed. I will develop the formula using explanatory variables 

 that have been widely-used in published studies analyzing 

 transaction costs and the bid-asked spread. I will test the formula 

 against actual transaction data to make any necessary adjustments. 

 The methodology described herein will, in my opinion, yield a 

 reliable measure of damages suffered as a result of the practices 

 challenged in this lawsuit. 

 46 
Xerox Corp., 972 F.2d 1483, 1494 (8th Cir. 1992) (quoting 

MCI Communications Corp. v. Am. Tel. & Tel. Co., 708 F.2d 

1081, 1161 (7th Cir. 1983)). On this basis, the District 

Court reasoned that 

 [c]lass treatment of damages issues, however, 

 presumes the ability to prove the fact of damage 

 without becoming enmeshed in individual questions of 

 actual damage . . . [.] Where proof of fact of damage 

 requires evidence concerning individual class members, 

 the common questions of fact become subordinate to 

 the individual issues, thereby rendering class 

 certification problematic. 

Merrill Lynch, 191 F.R.D. at 396 (quotation and citation 

omitted). Proof of injury (whether or not an injury occurred 

at all) must be distinguished from calculation of damages 

(which determines the actual value of the injury). Even 

assuming plaintiffs' ability to calculate damages, the 

District Could held this did not exempt them from proving 

each class member suffered economic injury. Therefore, the 

court found that determining actual economic loss on the 

part of each investor would involve individual questions 

that predominate over common ones. 

The District Court's analogy to antitrust class actions is 

well-taken. In a Rule 10b-5 securities claim that"impacts 

upon a class of persons . . . there is no reason . .. why 

proof of the impact cannot be made on a common basis so 

long as the common proof adequately demonstrates some 

damage to each individual." Bogosian, 561 F.2d at 454 

(discussing injury in antitrust cases). The ability to 

calculate the aggregate amount of damages does not 

absolve plaintiffs from the duty to prove each investor was 

harmed by the defendants' practice. In class actions based 

on a "fraud-on-the-market," an excessive pricing policy for 

securities, or an antitrust violation, the alleged conduct 

itself causes economic injury. But only those class

members whose trades could have been executed at better 

prices sustained economic injury here. Determining which 

class members were economically harmed would require an 

individual analysis into each trade and its alternatives. The 

individual questions, therefore, are overpowering. As we 

held in Georgine: 

 47 
 Even if we were to assume that some issues common 

 to the class beyond the essentially settled question of 

 the harmfulness of asbestos exposure remain, the huge 

 number of important individualized issues overwhelm 

 any common questions. Given the multiplicity of 

 individualized factual and legal issues, . . . we can by 

 no means conclude that the questions of law or fact 

 common to the members of the class predominate over 

 any questions affecting only individual members. 

83 F.3d at 630 (internal quotes omitted); Barnes , 161 F.3d 

at 146 ("Because nicotine addiction must be determined on 

an individual basis and remains an essential part of 

plaintiffs' . . . claim . . . class treatment is inappropriate."). 

While obstacles to calculating damages may not preclude 

class certification, the putative class must first demonstrate 

economic loss on a common basis. As noted, the issue is 

not the calculation of damages but whether or not class 

members have any claims at all. 

The District Court was also guided by our decision in 

Georgine. Merrill Lynch, 191 F.R.D. at 396 ("Although in 

Georgine, as in the present case, there were several 

common questions, the Court held that class treatment was 

inappropriate because `each individual plaintiff 's claim 

raises radically different factual and legal issues from those 

of other plaintiffs . . . [.] In such circumstances, the 

predominance requirement of Rule 23(b)(3) cannot be

met.' ") (quoting Georgine, 83 F.3d at 618). In Amchem, the 

Supreme Court affirmed our determination that a 

settlement class of individuals exposed to asbestos

products failed the predominance prong because of 

significant individual issues surrounding each claim. The 

plaintiffs had been exposed to "different asbestos containing 

products, for different amounts of time, in different ways, 

and over different periods." Georgine, 83 F.3d at 626. There 

were also different classes of plaintiffs--some who were 

presently injured and some who had been exposed but

whose future injury remained speculative. Id. The 

individualized differences as to amount of asbestos

exposure and future injury were significant because they 

would "lead to disparate applications of legal rules, 

including matters of causation, comparative fault, and the 

 48 
types of damages available to each plaintiff." Id. at 627. For 

these reasons, the constellation of individual issues 

eclipsed common questions. 

Citing the Supreme Court's guidance that 

"[p]redominance is a test readily met in certain cases 

alleging consumer or securities fraud or violations of the 

antitrust laws," Amchem, 521 U.S. at 625 (citing Comm. 

Note, Fed. R. Civ. P. 23), plaintiffs contend Amchem, a mass 

tort action, may be distinguished, and argue that individual 

economic injury need not be factored into the 

predominance calculus. See Hoxworth II, 980 F.2d at 924 

(holding that "uniform scheme to defraud investors in the 

class securities . . . would support class action treatment"); 

Ettinger, 122 F.R.D. at 182 (common question of exorbitant 

markups on securities predominates over individual 

damage calculations). 

Although the securities claims are unlike the mass tort 

claims in Amchem, the obstacles to satisfying the 

predominance requirement are comparable. In Amchem, the 

Court found that individual questions on the varying 

degrees and effects of asbestos exposure overpowered 

common ones. The breadth of the claims here may be 

different from Amchem, but the sheer number of claims 

raising individual questions of injury is strikingly similar. 

In Georgine, we recognized "individualized issues can 

become overwhelming in actions involving long-term mass 

torts (i.e., those which do not rise out of a single accident)." 

161 F.3d at 628. The alleged injuries in Newton arise out of 

the execution of hundreds of millions of trades, not a single 

act of fraudulent conduct. The distinct facts among the 

hundreds of thousands of plaintiffs involving hundreds of 

millions of trades will determine whether securities 

violations occurred. Because plaintiffs' claims will require 

an economic injury determination for each trade, we hold 

the putative class fails to satisfy the predominance 

requirement. 

Moreover, as we have noted in securities cases involving 

fraud-on-the-market or excessive markups, injury 

necessarily flowed from defendant's conduct and reliance 

and injury could be presumed. In those cases, if 

defendant's conduct was held fraudulent, a claim of loss 

 49 
naturally followed. Here it remains contested whether 

defendants' conduct in each trade was fraudulent as well as 

whether the investors suffered a loss as a result. Because 

it is clear that at least some of the plaintiffs have not 

suffered economic injury, individual questions remain that 

would have to be adjudicated separately. For these reasons, 

we hold this case does not fall within the scope of those 

"certain cases alleging . . . securities fraud," Amchem, 521 

U.S. at 625 (emphasis supplied), in which predominance 

may be readily established.34 

Because economic loss cannot be presumed, ascertaining 

which class members have sustained injury means 

individual issues predominate over common ones. 

Therefore, the District Court exercised its sound discretion 

_________________________________________________________________ 

34. In the alternative, the putative class argues that under Prudential, 

148 F.3d 283, the predominance inquiry will not be undermined if each 

class member has not suffered economic injury. Br. of Appellants at 47- 

49. But plaintiffs' reliance on Prudential is misplaced. First, the lion's 

share of the fraud claims in Prudential were largely unrelated to federal 

securities law. Prudential, 148 F.3d at 314. In describing the claims, the 

district court observed: 

 [M]ost of the plaintiffs' claims [did] not even involve a reliance 

 element. Plaintiffs' claims for breach of contract, breach of 

implied 

 obligation of good faith and fair dealing, negligence, negligent 

 training and supervision, and unjust enrichment do not involve 

 reliance. An individual issue with respect to one element of a 

small 

 portion of plaintiffs' claims does not outweigh the multitude of 

 issues common to the remaining elements and claims. 

In re Prudential Ins. Co. of Am. Sales Practice Litig., 962 F. Supp. at 

516. 

The claims in this appeal fall squarely under Rule 10b-5. Second, 

plaintiffs note that the class in Prudential contained "both injured and 

uninjured policyholders" without barring certification. 148 F.3d at 306. 

Based on this, plaintiffs contend that even if some class members did 

not suffer economic loss, class certification should not be prohibited in 

this case either. We disagree. In Prudential, the presence of injured and 

uninjured class members was evaluated in the context of standing, not 

class certification. Id. at 306-07. But satisfaction of constitutional 

standing does not answer the predominance inquiry. Furthermore, there 

was no dispute over the individual question of economic loss in 

Prudential because the defendant insurance company did not contest 

liability and waived all defenses. See Prudential, 148 F.3d at 296-97. 

 50 
in finding the putative class did not satisfy the 

predominance requirement. 

2. Superiority 

Even if reliance and damages could be presumed or 

determined in separate proceedings after certification, this 

action fails to satisfy Fed. R. Civ. P. 23(b)(3)'s superiority 

requirement. 

A class action must represent the best "available 

method[ ] for the fair and efficient adjudication of the 

controversy." Fed. R. Civ. P. 23(b)(3). Here we must address 

"the difficulties likely to be encountered in the management 

of a class action." Fed. R. Civ. P. 23(b)(3)(D). According to 

the District Court, the need for individualized inquiry into 

actual injury transformed the "[e]xploration of each and 

every customer's NASDAQ transactions with defendants 

during the period from November 4, 1992 to August 28, 

1996 [into] a mind-boggling undertaking." Merrill Lynch, 

191 F.R.D. at 398. We agree. With hundreds of millions of 

trades, it is difficult to imagine how this case can be tried.35 

Contending each individual claim is so small that only a 

class action will provide a remedy, plaintiffs maintain that 

_________________________________________________________________ 

35. Defendants contend that plaintiffs have not preserved this issue on 

appeal because they did not address superiority in their initial brief. 

See 

Br. of Appellees at 69. The plaintiffs' waiver of a dispositive issue, 

they 

argue, provides sufficient grounds for affirming the District Court. See 

Nagle v. Alspach, 8 F.3d 141, 143-44 (3d Cir. 1993) (holding issues to be 

appealed must appear in briefing to be preserved). Although the plaintiffs 

do not address superiority directly in their brief, they raise the issue 

specifically in their reply brief, and the facts and arguments on 

superiority are present throughout their brief. We have concluded that 

" `[a]n issue is waived unless a party raises it in its opening brief.' " 

Reform Party of Allegheny County v. Allegheny County Dept. of Elections, 

174 F.3d 305, 316 n.11 (3d Cir. 1999) (quoting Laborers' Int'l Union of 

N. Am. v. Foster Wheeler Corp., 26 F.3d 375, 398 (3d Cir. 1994)). We also 

reasoned that "absent extraordinary circumstances, briefs must contain 

statements of all issues presented for appeal, together with supporting 

arguments and citations." Simmons v. City of Philadelphia, 947 F.2d 

1042, 1065 (3d Cir. 1991). But we believe the issue of superiority was 

implicit in the plaintiffs' opening brief and was adequately raised on 

appeal. 

 51 
denying certification will absolve defendants from 

wrongdoing. The District Court rejected this rationale as a 

"basis for excusing plaintiffs from proving the essential 

elements of their cause of action." Merrill Lynch, 191 F.R.D. 

at 398. We agree. Recently we held this factor "by itself is 

insufficient to overcome the hurdles of predominance and 

superiority and efficient and fair management of a trial, 

which Rule 23(b) requires." In re LifeUSA Holding Inc., 242 

F.3d at 148 n.13. We also recognize that some class

members, such as large institutional investors who fall 

within the class definition, arguably would have a 

significant financial stake to raise stand-alone claims. 

Turning to manageability, the District Court's evaluation 

must be "granted a wide range of discretion." Link v. 

Mercedes Benz of N. Am., Inc., 550 F.2d 860, 864 (3d Cir. 

1977). "Manageability is a practical problem, one with 

which a district court generally has a greater degree of 

expertise and familiarity than does the appellate court." In 

re Sch. Asbestos Litig., 789 F.2d at 1011. It encompasses 

"the whole range of practical problems that may render the 

class action format inappropriate for a particular suit." 

Eisen, 417 U.S. at 164. 

Here there are hundreds of millions of transactions

executed over several years. Plaintiffs maintain their expert 

can devise a formula for calculating injury and damages 

that will allay manageability concerns. Yet we are hesitant 

to rely on a formulaic nostrum given the consequences if it 

fails to meet expectations. See Windham, 565 F.2d at 70 

("But where the court finds, on the basis of substantial 

evidence as here, that there are serious problems now 

appearing, it should not certify the class merely on the 

assurance of counsel that some solution will be found."). As 

noted, actual injury cannot be presumed, and defendants 

have the right to raise individual defenses against each 

class member. See In re Sch. Asbestos Litig., 789 F.2d at 

1011 ("The potential for individual defenses . . . clearly 

poses significant case management concerns."). We hold 

that establishing proof of the plaintiffs' injuries and 

litigating the defenses available to the defendants would 

present insurmountable manageability problems for the 

District Court. 

 52 
The superiority requirement also casts serious doubt on 

the efficiency and manageability of certifying this class for 

trial. "In terms of efficiency, a class of this magnitude and 

complexity could not be tried. There are simply too many 

uncommon issues, and the number of class members is

surely too large. Considered as a litigation class, then, the 

difficulties likely to be encountered in the management of 

this action are insurmountable." Georgine, 83 F.3d at 632- 

33.36 Although plaintiffs attempt to fit this case under 

Prudential, that case raised different issues because the 

class was certified for the purpose of settlement. This is 

significant because "the settlement approval inquiry is far 

different from the certification inquiry. In settlement 

situations, the superiority requirement arguably translates 

into the question whether the settlement is a more 

desirable outcome for the class than individualized

litigation, and may assure that the settlement has not 

grossly undervalued plaintiffs' interests." G.M. Trucks, 55 

F.3d at 796. Significantly, in Prudential we did not have to 

"inquire whether the case, if tried, would present 

intractable management problems . . . for the proposal 

[was] that there be no trial." Amchem , 521 U.S. at 620. 

Additionally we have recognized that adjudicating Rule 10b5 securities claims as a class action satisfies superiority 

only if the litigation results in fewer individual actions. 

Because injury determinations must be made on an 

individual basis in this case, adjudicating the claims as a 

class will not reduce litigation or save scarce judicial 

resources. Under these circumstances, plaintiffs fail to 

satisfy the superiority standard. See G.M. Trucks, 55 F.3d 

at 783 ("One of the paramount values in [class actions] is 

efficiency. Class certification enables courts to treat 

common claims together, obviating the need for repeated 

adjudications on the same issue."). 

We are also mindful that Amchem and Prudential involved 

mature claims. The class settlements were the result of 

verdicts on established liability and damages awards. This 

case does not share a similar track record. Of course, many 

_________________________________________________________________ 

36. Of course, one of the central concerns behind denying certification in 

Georgine was the potential harm to absentee members. This is not a 

factor here. 

 53 
securities fraud claims do not generally implicate maturity 

concerns because they do not raise complex issues of 

causation and injury. Furthermore, the divergent outcomes 

in Amchem and Prudential make it clear that maturity alone 

is neither necessary nor sufficient for certification, but it 

may help to ensure that class certification is "superior to 

individual adjudication." Castano, 84 F.3d at 747. 

The specter of adjudicating plaintiffs' claims at trial is, at 

the very least, daunting. Individual questions of economic 

loss present insurmountable manageability problems.

Moreover, class certification would place hydraulic pressure 

on defendants to settle which weighs in the superiority 

analysis. See supra note 8. At trial, determining actual 

injury would require hundreds of millions of individual 

assessments. For these reasons, the District Court was 

clearly within its sound discretion to hold this case failed to 

satisfy the superiority requirement. 

VII. 

In sum, although the putative class satisfies the 

requirements of Fed. R. Civ. P. 23(a), it cannot meet the 

requirements of Fed. R. Civ. P. 23(b)(3). In particular, the 

investors' claims fail the predominance and superiority 

requirements under Fed. R. Civ. P. 23(b)(3). For these 

reasons, we will affirm the judgment of the District Court. 

A True Copy: 

Teste: 

 Clerk of the United States Court of Appeals 

 for the Third Circuit 

 54