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. e du/thir dc ir c uit_2001/237Filed 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.

2WILLIAM 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, w ho

traded on the National Association of Securities De alers Automated Quotation System (NASDAQ), for breaching their duty of best execution. Despite the broker-de alers' duty to execute trades under the most "favorable te rms reasonably available," the investors charge the def endants executed orders at the price offered on the central National Best Bid and Offer system (NBBO), failing to invest igate other feasible alternatives that potentially offere d better prices. With hundreds of thousands of investors in the putative class, this alleged practice affected hund reds of

millions of transactions.

The crux of this interlocutory appeal under Fed. R. Civ. P. 23(f) is whether plaintiffs' securities fraud cl aims satisfy the requirements for class certification under Fed. R. Civ. P.

323. The District Court denied plaintiffs' petition for class

certification. We will affirm.

I.

The District Court had jurisdiction over the federa l 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 p ermission 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 certific ation 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 certific ation is often the defining moment in class actions (for it may sound the "death knell" of the litigation on the pa rt of plaintiffs, or create unwarranted pressure to settl e nonmeritorious claims on the part of defendants), t he Rule acknowledges the extraordinary nature of class acti ons and permits the appellate courts to develop a coherent body of jurisprudence in this area.2

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1. The permissive interlocutory appeal provision wa s adopted under the power conferred by 28 U.S.C. S 1292(e).

2. Before Rule 23(f) was promulgated, the Supreme C ourt rejected the "death knell" doctrine as a justification for circu mventing the federalappellate-jurisdiction precondition that a district court decision " `end[

] the litigation on the merits and leave[ ] nothing f or the court to do but execute the judgment.' " Coopers & Lybrand v. Lives ay, 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 ha ve jurisdiction of appeals from all decisions of the district courts o f the United States . .

. except where a direct review may be had in the Supr eme Court." 28 U.S.C. S 1291 (1978). Because plaintiffs had the op portunity to pursue

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

its discretion permit an appeal from an order of a district court granting or denying class action certificatio n under this rule if application is made to it within ten d ays 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 purpo ses 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 (7 th Cir. 1999) (noting this authority "had gone unused, in p art because it invites the question whether a particula r rule truly `defines' or instead expands appellate jurisd iction"); 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 re quires 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 ma ndamus

to review certification decisions but with an uneas iness that their actions stretched the writ's traditionally re strictive parameters. See 5 James Wm. Moore et al., Moore's F ederal Practice S 23.61[9][c] (discussing standard and cas es); see also, e.g., In re Rhone-Poulenc Rorer Inc. , 51 F.3 d 1293 (7th Cir. 1995) (granting order of mandamus to rescind c lass

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litigation individually if class certification was denied, a district

court decision decertifying a putative class did not cons titute a final decision under 28 U.S.C. S 1291. Livesay, 437 U.S. at 467. A t the time, there existed no special rules on appealing class certifi cation decisions. Reasoning that a "death knell" exception would have to apply with equal force to all forms of litigation, the Court rejecte d this proposition.

While the Court recognized several policy arguments in fa vor of permitting appeals of certification decisions which effectivel y put an end to litigation, without legislative guidance or authori ty, 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 th e guidance for these appeals which was previously wanting.

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

motions, we have yet to articulate standards for gr anting 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 un fettered discretion whether to permit the [interlocutory] ap peal, 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 th e types of cases courts of appeals should review: "Permission is most likely to be granted when the certification decisio n turns on a novel or unsettled question of law, or when, as a practical matter, the decision of certification is likely dis positive of the litigation."4 Id.; see also 5 Moore's Federal P ractice S 23.61[9][b]. To provide further guidance on how t o separate the wheat from the chaff, the Note instruc ts that

several concerns justify expansion of presen t opportunities to appeal. An order denying ce rtification may confront the plaintiff with a situation in which the only sure path to appellate review is by pro ceeding to final judgment on the merits of an individua l claim that, standing alone, is far smaller than th e 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 ru n the risk of potentially ruinous liability.

Comm. Note, Fed. R. Civ. P. 23(f). We can glean fro m the Note, therefore, at least three principles to guide the appellate courts in their exercise of discretionary jurisdiction: (1) when denial of certification effe ctively

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3. Fortunately, four of our sister circuits have wr itten 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); Blai r v. Equifax Checking Servs., Inc., 181 F.3d 832, 833-36 (7th Ci r. 1999).

4. In effect, the Rule authorizes appellate courts to "restore equilibrium when a doubtful class certification ruling would vi rtually compel a party to abandon a potentially meritorious claim or defen se before trial." Mowbray, 208 F.3d at 293.

6terminates the litigation because the value of each

plaintiff 's claim is outweighed by the costs of st and-alone litigation; (2) when class certification places ino rdinate or hydraulic pressure on defendants to settle, avoidin g the risk, however small, of potentially ruinous liabili ty; and (3) when an appeal implicates novel or unsettled questi ons of law; in this situation, early resolution through in terlocutory appeal may facilitate the orderly development of th e law.5

But interlocutory review is not cabined by these circumstances. The Note signals that the new Rule g ives

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5. Other courts of appeals have adopted a taxonomy based on these principles. In the first case examining the standar ds for interlocutory appeal, Blair v. Equifax Checking Servs., Inc. , 18 1 F.3d 832, 833-36 (7th Cir. 1999), the Court of Appeals for the Seventh Ci rcuit provided an indepth description of the three examples mentioned a bove 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 simil arly invited the exercise of this review. In Waste Mgmt. Holdings, I nc. v. Mowbray, 208 F.3d 288, 292-95 (1st Cir. 2000), the Court of Appe als for the First Circuit largely adopted the Seventh Circuit's metho dology with one restriction. To prevent fecund legal minds from fra ming every legal issue as an important question of fundamental law, the co urt narrowed this review to cases in which "an appeal will permit the resolution of an unsettled legal issue that is important to the part icular litigation as

well as important in itself and likely to escape effecti ve 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 re viewing petitions in Prado-Steiman v. Bush, 221 F.3d 1266, 1271-77 (11th Cir. 2000). Adding other factors, the court elaborated on the principl es 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) t he strength of the district court's reasoning; (4) the status of the c ase before the district court; and (5) the "likelihood that future events m ay make immediate appellate review more or less appropriate." Id. at 1276. Recently, the Court of Appeals for the Fourth Circuit reviewed th e standards for granting a motion under Fed. R. Civ. P. 23(f) and a dopted 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).

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

the class certification decision that does not impl icate novel or unsettled legal questions may still merit interl ocutory review given the consequences likely to ensue. To p ut it another way, if the appellant demonstrates that the ruling on class certification is likely erroneous, " `taki ng into account the discretion the district judge possesses in implementing Rule 23, and the correspondingly defer ential standard of appellate review,' " Mowbray , 208 F.3d at 293 (quoting Blair, 181 F.3d at 835), interlocutory rev iew may be proper.

Furthermore, as explained in the Note, interlocutor y review is not constrained by the potentially limiti ng requirement of 28 U.S.C. S 1292(b) that the distric t court order "involve[ ] a controlling question of law as to which there is a substantial ground for difference of opi nion and that an immediate appeal from the order may materia lly advance the ultimate termination of the litigation. " Yet if allowing the litigation to follow its natural cours e would provide the moving party with an adequate remedy, interlocutory review will generally prove unnecessa ry. In the end, however, the courts of appeals are afforded wi de latitude as "[p]ermission to appeal may be granted or denied on the basis of any consideration that the c ourts of appeals finds persuasive." Comm. Note, Fed. R. Civ. P. 23(f).

We believe these principles provide a useful templa te for courts to work from when evaluating petitions under Rule 23(f). It is, of course, difficult to foresee all t he permutations to which this rule will apply, and cou rts 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 po wer under Rule 23(f) [should] be exercised. Neither a b right-line approach nor a catalog of factors would serve well- - especially at the outset, when courts necessarily m ust experiment with the new class of appeal."); see als o Comm. Note, Fed. R. Civ. P. 23(f) ("The courts of appeals will develop standards for granting review that reflect the

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

as the Committee Note mentions, class certification

decisions often involve "familiar and almost routin e issues" that do not necessitate interlocutory appeal. If gr anting the appeal, however, would permit us to address (1) the possible case-ending effect of an imprudent class certification decision (the decision is likely disp ositive of the litigation); (2) an erroneous ruling; or (3) facili tate development of the law on class certification, then granting the motion would be appropriate. But these instance s should not circumscribe our discretion; there may a lso be

other valid reasons for the exercise of interlocuto ry review. Again, we emphasize that the courts of appeals have been afforded the authority to grant or deny these petit ions "on the basis of any consideration that the court of ap peals 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 mem bers may be too small to survive as individual claims. O n the other, certifying the class may place unwarranted o r hydraulic pressure to settle on defendants. Either way, an adverse certification decision will likely have a d ispositive impact on the course and outcome of the litigation. Moreover, this case raises fundamental questions ab out what type of private securities claims merit class certification. For these reasons, the motion was pr operly granted.

III.

We review a decision granting or denying class

certification for abuse of discretion. In re LifeUS A Holding Inc., 242 F.3d 136, 143 (3d Cir. 2001); Holmes v. P ension Plan of Bethlehem Steel Corp., 213 F.3d 124, 136 (3 d Cir. 2000). The district court abused its discretion if its decision

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6. As set forth in the Note, the district courts"ha ving walked through the certification decision, can provide cogent advice o n 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 t he 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) (here inafter "G.M. Trucks") (quoting Int'l Union, UAW v. Mack Tr ucks, Inc., 820 F.2d 91, 95 (3d Cir. 1987)). A class cert ification decision requires a thorough examination of the fac tual and legal allegations. Barnes v. Am. Tobacco Co., 161 F .3d 127, 140 (3d Cir. 1998), cert. denied, 526 U.S. 1114 (19 99). 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 Southw est v. Falcon, 457 U.S. 147, 160 (1982); see also Amchem P rods., Inc. v. Windsor, 521 U.S. 591, 634-35 (1997) (Breye r, J., concurring in part and dissenting in part); 7B Wrig ht, Miller & Kane, S 1785, p. 16 (West Supp. 2000). "Be fore deciding whether to allow a case to proceed as a cl ass

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7. In its amicus brief, the Securities Industry Ass ociation 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 ma king 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, Pier ce, 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, t he NBBO exhausted the category of `reasonably available prices' during th e class period. This absence of precedent did not, however, absolve the district court of the duty to resolve the plaintiffs' securities fraud cl aim once it was presented in this suit."); see also Deposit Guaranty Nat'l Ba nk v. Roper, 445 U.S. 326, 339 (1980) ("The aggregation of individual cla ims 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 arg ued that "the mere fact that the [Securities and Exchange] Commis sion was considering (and has now adopted) rules that prospe ctively affect . . . broker-dealers' order handling obligations would no t 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 Cu riae the Securities and Exchange Commission, at 12 n.14, in Newton, 135 F.3 d 266.

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

inquiries are necessary under Rule 23." Szabo v. Br idgeport 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 underl ying the plaintiffs' cause of action, a court may consider t he substantive elements of the plaintiffs' case in ord er to

envision the form that a trial on those issues woul d take.") (footnotes omitted).

Over twenty-five years ago in Eisen v. Carlisle & Jacquelin, the Supreme Court cautioned against goin g beyond the pleadings in class certification decisio ns. 417 U.S. 156, 177 (1974) ("[N]othing in either the lang uage or history of Rule 23 . . . gives a court any authorit y 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 issu e of whether Fed. R. Civ. P. 23 required a class represe ntative in a securities class action to provide notice to a ll class

members. With a claim that amounted to no more than seventy dollars, the plaintiff in Eisen sought to s hift his notice burden to the defendant because providing no tice to the 2.25 million potential class members was extraordinarily costly (roughly $225,000). The dist rict court

held that the defendant should bear 90% of the cost

, because the plaintiff was "more than likely" to "pr evail on his claims." Holding this burden could not be shift ed, the Supreme Court affirmed the reversal by the court of appeals.

Not long after Eisen, the Court stepped away from t his bright-line declaration in Coopers & Lybrand v. Liv esay, when it held that

[e]valuation of many of the questions enteri ng into determination of class action questions is i ntimately

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 comm on questions of law or fact are obvious example s. The more complex determinations required in Rule 23(b)(3)

11class actions entail even greater entangleme nt with the

merits . . . .

437 U.S. 463, 469 n.12 (1978) (quotation and citati on omitted). Subsequently, in General Tel. Co. of Sout hwest v. Falcon, the Court appeared to move even further awa y 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 m ay be necessary for the court to probe behind the pleadings before coming to rest on the certification q uestion . . . . [A]ctual, not presumed conformance with Rule 23(a) remains . . . indispensable.

Falcon, 457 U.S. at 160. This reasoning applies wit h equal force to certification questions surrounding Fed. R . Civ. P. 23(b)(3). Szabo, 249 F.3d at 677. As the Court conc luded 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, court s may "delve beyond the pleadings to determine whether th e 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 compla int" to "make a preliminary inquiry into the merits"); see also Amchem, 521 U.S. at 615 (Fed. R. Civ. P. 23(b)(3) i nvites a "close look" before determining class certification ); 7B Wright, Miller & Kane, S 1785, p.16 (West Supp. 200 0) (courts not precluded from "necessary inquiry into the underlying elements of the case in order to evaluat e whether Rule 23 has been met"); Moore's Federal Pra ctice, Manual For Complex Litigation (Third) S 30.1 ("The decision on whether or not to certify a class, therefore, ca n be as important as decisions on the merits of the action and should be made only after consideration of all rele vant evidence and arguments presented by the parties.").

Since Eisen was decided, the nature of class action s and how they are litigated have undergone a sea change.

12Irrespective of the merits, certification decisions may have

a decisive effect on litigation. As mentioned, if i ndividual claims are small, then plaintiffs may not have the incentive or resources to pursue their claims if certificatio n is denied --sounding the "death knell" to the litigation.8 On the other hand, granting certification may generate unwarrant ed pressure to settle nonmeritorious or marginal claim s. Rhone-Poulenc, 51 F.3d at 1299-1300 (granting order of

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

Court of Appeals for the Seventh Circuit in In re Rhone-P oulenc Rorer Inc., 51 F.3d 1293 (7th Cir. 1995). In Rhone-Poulenc, the co urt granted a writ of

mandamus to reverse the certification of a class of hemophiliacs who

received blood contaminated with HIV. The class inv olved only a few hundred parties, but each individual had claims pos sibly worth millions

of dollars. The court reasoned that the enormous si ze of the potential liability would impose an "intense pressure to sett le," id. at 1298, because "[t]he risk of facing an all-or-nothing ver dict presents too high a risk, even when the probability of an adverse jud gment is low." Castano v. Am. Tobacco Co., 84 F.3d 734, 746 (5th C ir. 1996) (citing Rhone-Poulenc, 51 F.3d at 1298). It considered sett lements forcibly induced by the small probability of an immense judg ment "blackmail settlements." Rhone-Poulenc, 51 F.3d at 1298; see a lso Castano, 84 F.3d at 746; G.M. Trucks, 55 F.3d at 784-85. Although fi nding the hydraulic pressure to settle should not dispositively affect a certification decision, the court suggested that it should be balanced agai nst the benefits of a class action. Rhone-Poulenc, 51 F.3d at 1299 ("We d o 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 c lass action that have made it an authorized procedure for employment by f ederal courts."); see also Kline v. Coldwell, Banker & Co. 508 F.2d 226, 238 (9th Cir. 1974) ("I doubt that plaintiffs' counsel expect the immen se and unmanageable case that they seek to create to be tried. What the y 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 Co urt 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 litigat ion costs that he may find it economically prudent to settle and to aband on 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 set tle. It is a factor we weigh in our certification calculus.

13mandamus 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 certifica tion for settlement and remanding for further development on the record). In a similar vein, the Court of Appeals fo r the Fifth Circuit has concluded that "[g]oing beyond the plea dings is necessary, as a court must understand the claims, defenses, relevant facts, and applicable substantiv e law in order to make a meaningful determination of the certification issues." Castano, 84 F.3d at 744 (dec ertifying

class that sued tobacco manufacturers for nicotine addiction). In Castano, the court held that

a mass tort cannot be properly certified wit hout a prior

track record of trials from which the distri ct court can draw the information necessary to make the predominance and superiority analysis requir ed by rule

23. This is because certification of an imma ture tort results in a higher than normal risk that th e class action may not be superior to individual adj udication.

Id. at 747. Other courts have followed similar appr oaches. Szabo, 249 F.3d at 675-78; see also Rutstein v. Avi s Rent-ACar Sys., Inc., 211 F.3d 1228, 1234 (11th Cir. 2000 ); Hanon v. Dataproducts Corp., 976 F.2d 497, 508-09 (9th Ci r. 1992).

In reviewing a motion for class certification, a pr eliminary inquiry into the merits is sometimes necessary to d etermine whether the alleged claims can be properly resolved as a class action.9 This is such an instance. We must pr obe beyond the surface of plaintiffs' allegations in pe rforming our review to assess whether plaintiffs' securities claims satisfy Fed. R. Civ. P. 23's requirements.)

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9. See Geoffrey C. Hazard, Jr., Class Certification Based on Merits of the Claims, 69 Tenn. L. Rev. (forthcoming Fall 2001).

14IV.

A.

This case is before us for the second time. We have already provided a succinct description of the fact s, 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 purch ased and sold securities on the NASDAQ market, the ma jor

electronic market for "over-the-counter" sec urities, during the . . . period from November 4, 199 2 to [August 28, 1996] ("the class period"). The defendants are NASDAQ market makers. NASDAQ is a self- regulating market owned by the National Asso ciation of Securities Dealers ("NASD"), subject to over sight by the Securities and Exchange Commission ("SEC").

An "over-the-counter" market like NASDAQ dif fers in important respects from the more familiar au ction markets, like the New York and American Stoc k Exchanges. The NYSE and AMEX markets are distinguished by a physical exchange floor w here buy and sell orders actually "meet," with prices set by the interaction of those orders under the superv ision of a market "specialist." In a dealer market like NASDAQ, the market exists electronically, in the for m of a communications system which constantly recei ves and reports the prices at which geographically d ispersed market makers are willing to buy and sell di fferent securities. These market makers compete with one another to buy and sell the same securities using the

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10. The defendants who executed the plaintiffs' ord ers 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 a gent and a principal. For certification, plaintiffs are divide d into three

subclasses.

Each subclass consists of all the class members tha t placed market orders with a particular defendant.

15electronic system; NASDAQ is, then, an elect ronic

inter-dealer quotation system.

In a dealer market, market makers create liq uidity by being continuously willing to buy and sell t he security in which they are making a market. In this w ay, an individual who wishes to buy or sell a secur ity does not

have to wait until someone is found who wish es 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 particul ar security;

the difference between the listed "ask" and" bid" prices is the "spread" that market makers capture a s compensation.

The electronic quotation system ties togethe r the

numerous market makers for all over-the-coun ter securities available on NASDAQ. All NASDAQ m arket makers are required to input their bid and o ffer prices to the NASD computer, which collects the inf ormation and transmits, for each security, the highes t bid price and lowest ask price currently available. Th ese 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 offer ed security.

Plaintiffs allege that technological advance s made it feasible during the class period for the def endant market makers to execute orders at prices qu oted on private on-line services like SelectNet and Instinet and that those prices were frequently more favor able to their investor clients than the NBBO price. According to plaintiffs, the defendants regularly used these services and knew that prices better than NB BO were often available through them. Even though th ey knew that their investor clients expected them to secure the best reasonably available price, plaintiffs say, the defendants executed plaintiffs' orders at th e 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 t his way,

16they were able to inflate their own profit m argins at the

expense of their investor clients. This prac tice is alleged to violate section 10 of the Securit ies [Exchange] Act of 1934, 15 U.S.C. S 78j, and Rule 10b- 5 promulgated thereunder, 17 C.F.R. S 240.10 b-5.

The plaintiffs also charge defendants with t wo other

violations of section 10 and Rule 10b-5. Mar ket makers who simultaneously hold a market order for b oth sides of a transaction may obtain more favorable p rices than the NBBO by "crossing" these in-house orders

. Transactions handled in this way are execute d within the spread, giving both the purchaser and th e seller a better price. Similarly, a customer order ca n be matched by a market maker with an in-house l imit

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 fa ilure of the

defendants to execute orders of their client s in these ways when feasible constitutes a fraudulent practice because, by executing at the NBBO rather tha n matching customer orders, the defendants cap ture the full market "spread" as a fee for their serv ices 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 th e defendants. See Order Execution Obligations, Exchan ge Act. Rel. No. 34-37619A, 61 Fed. Reg. 48290, 48306-16, 4 8322- 23 (Sept. 12, 1996) ("While in the past quote-based

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11. For a more detailed description of the alternat ive avenues for executing trades on the NASDAQ (e.g., Instinet, Sel ectNet) 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 rema ined consistent whether they were acting as agents of the trade or principals. Newton,

135 F.3d at 270 n.1.

17executions in OTC [over the counter] securities wer e

generally recognized as satisfying best execution obligations, the development of efficient new facil ities has

altered what broker dealers must consider in seekin g execution of customer orders."); see also Newton, 1 35 F.3d at 271. The new regulations require the NBBO to incorporate prices displayed on Instinet and Select Net 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 u nder Fed. R. Civ. P. 12(b)(6) for failure to state a cla im upon which relief could be granted. At the request of th e District Court, defendants converted their motion into one f or summary judgment which was subsequently granted. Th e 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'"du ty of best execution" remained ill-defined during the cla ss period. In re Merrill Lynch, et al. Sec. Litig., 911 F. Sup p. at 769-71. Without a clear standard to apply against defendant s' employment of an industry-wide practice, the court found the nondisclosure of their trading execution practi ce, along with their implied representation to obtain best ex ecution, did not constitute a misrepresentation or omission of material fact. Id. Even if the practice constituted a material misrepresentation, the district court held defendan ts had not formed the requisite scienter, or intent to dec eive, 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 unanim ously reversed the district court and remanded, holding t he execution of trades at the NBBO, albeit the industr y standard, could still be considered fraudulent beha vior violating the standards of Rule 10b-5. Newton , 135 F.3d at 274. Noting this practice could constitute a materi al misrepresentation with scienter when better prices were reasonably available, we expressed no opinion on

18defendants' liability, only whether defendants' pra ctice

could be actionable under Rule 10b-5. Id. at 272-74 . On remand, plaintiffs amended their complaint, extendi ng the class period to the time new securities regulations took effect outlawing the defendants' alleged tortious p ractice.

Plaintiffs then moved for class certification which the District Court denied. An interlocutory appeal unde r Fed. R. Civ. P. 23(f) was then granted.

C.

Plaintiffs contend defendants' behavior in this cas e was unvarying, alleging it was their established practi ce to execute trades at prices displayed solely on the NB BO without investigating other sources. They claim thi s "common scheme" provides a uniform course of unlawf ul conduct well-suited for adjudication as a class act ion. 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 accoun ts. As noted in Newton, an SEC study reported that a "two- tiered market" existed during the class period where marke t makers exploited these services to garner better pr ices for themselves while simultaneously denying them to the ir customers.13 Id. at 273. For their part, defendants argue

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13. As noted in Newton, a three month study of pric es within the class period indicated that "85% of the bids and offers d isplayed by market

makers on Instinet and 90% of the bids and offers d isplayed on SelectNet were at better prices than those posted p ublicly 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 mitigat ed, however, by the fact that during a full year of the class period (1 993), for example, the electronic communication networks (including servic es like SelectNet and Instinet) "accounted for only 13% of share volume i n Nasdaq securities and only 1.4% of listed share volume." Securities a nd Exchange Commission, Div. of Market Regulation, Electronic C ommunication Networks and After-Hours Trading 6 (June 2000) (cit ing 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 be en 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.

19that 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 whet her defendants' alleged practice constitutes a Rule 10b -5 securities violation with respect to each individua l member of the putative class. Our inquiry only addresses w hether the federal securities claims alleged by the invest ors satisfy the requirements demanded by Fed. R. Civ. P. 23.

V.

To determine whether the claims alleged by the puta tive class meet the requirements for class certification , we must first examine the underlying cause of action--in th is case, a Rule 10b-5 private securities fraud claim. See Ba rnes, 161 F.3d at 138; McCarthy v. Kleindienst, 741 F.2d 1406, 1412 (D.C. Cir. 1984). This analysis is critical be cause class certification under Fed. R. Civ. P. 23(b)(3) is permissible only when "questions of law or fact com mon to the members of the class predominate over any quest ions affecting only individual members." Fed. R. Civ. P. 23(b)(3).

For the elements of the Rule 10b-5 claim which rema in in dispute, "[r]equiring proof of individualized relia nce [and injury] from each member of the proposed plaintiff class effectively would . . . prevent[ ] [plaintiffs] fro m proceeding with a class action, since individual issues then w ould . . . overwhelm[ ] the common ones." Basic Inc. v. Levins on, 485 U.S. 224, 242 (1988). On the other hand, presuming these elements would resolve "the problem of balancing th e substantive requirement of proof of reliance [and i njury] in securities cases against the procedural requisites of [Federal Rule of Civil Procedure] 23." Id. (quotati on and citation omitted); see also Peil v. Speiser, 806 F. 2d 1154 (3d Cir. 1986) (upholding presumption of reliance in Ru le 10b5 claims based on fraud-on-the-market theory); Hoxw orth v. Blinder, Robinson & Co., 980 F.2d 912 (3d Cir. 1992 ) (affirming class certification where reliance presu med) (hereinafter "Hoxworth II"); William Rubenstein, A Transnational Model of Adjudication, 89 Geo. L.J. 3 71, 391- 92 (2001) (discussing effect of presuming reliance in

20securities class actions). If proof of the essentia l elements of

the cause of action requires individual treatment, then

class certification is unsuitable. See Binder v. Gi llespie, 184 F.3d 1059, 1063-66 (9th Cir. 1999) (upholding class decertification where presumption of reliance and l oss unavailable), cert. denied, 528 U.S. 1154 (2000).

Under Rule 10b-5 causation is two-pronged. Huddlest on v. Herman & MacLean, 640 F.2d 534, 549 n.24 (5th Ci r. 1981), aff 'd in part, rev'd in part on other groun ds, 459 U.S. 375 (1983); see also James D. Cox, Robert W. Hillma n & Donald C. Langevoort, Securities Regulation: Cases and Materials 769-71 (3d ed. 2001); 5 A. Jacobs, The Im pact of Rule 10b-5 S 64.01[a], at 3-221 to 3-222 (Supp. 198 0). Reliance, or transaction causation, establishes tha t but for the fraudulent misrepresentation, the investor woul d not have purchased or sold the security. Suez Equity In vestors, 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 Prop s., Inc., 116 F.3d 1441, 1447 (11th Cir. 1997). Loss causatio n demonstrates that the fraudulent misrepresentation actually caused the loss suffered. Suez Equity Inve stors, 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-wi de presumptions of reliance and economic loss before t urning to the requirements for certification under Fed. R. Civ. P. 23(b)(3).

A.

Section 10(b) of the Securities Exchange Act of 193 4 makes it unlawful "[t]o use or employ, in connectio n 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 Exchan ge] Commission may prescribe." 15 U.S.C. S 78j(b). Unde r this statute, the Securities and Exchange Commission promulgated Rule 10b-5 which provides:

It shall be unlawful for any person, directl y or indirectly, by the use of any means or instr umentality

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

of any national securities exchange,

(a) to employ any device, scheme, or artific e to defraud,

(b) to make any untrue statement of a materi al fact or to omit to state a material fact necessary i n order to make the statements made, in the light of th e circumstances under which they were made, no t misleading, or

(c) To engage in any act, practice, or cours e of business which operates or would operate as a fraud o r deceit upon any person, in connection with the purc hase 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 1 0b-5, plaintiffs must demonstrate: (1) a misrepres entation or

omission of a material fact in connection wi th the purchase or sale of a security; (2) scienter on the part of the defendant; (3) reliance on the misrep resentation; and (4) damage resulting from the misreprese ntation.

Newton, 135 F.3d at 269; see also Semerenko v. Cend ant 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 viola tions under Rule 10b-5. Customarily those claims involve a fraudulent material misrepresentation or omission t hat 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 fu ture earnings); In re Westinghouse Sec. Litig., 90 F.3d 696, 700- 01 (3d Cir. 1996) (fraudulent representation of com pany's state of affairs)).

The alleged material nondisclosure here consisted o f a broker-dealer accepting an investor's order under t he implied representation of the duty of best executio n. This

22duty requires a broker-dealer to "use reasonable ef forts to

maximize the economic benefit to the client in each transaction." Newton, 135 F.3d at 270. A broker-dea ler who "accepts such an order while intending to breach th at duty makes a misrepresentation that is material to the p urchase or sale [of a security]." Id. at 269. If the order was executed in a manner inconsistent with this duty, it was als o performed with scienter. Id. at 273-74. Despite def endants' claim that execution at the NBBO price represented an acceptable industry-wide practice, we held in Newto n that plaintiffs had alleged a claim that at least satisf ied 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, relia nce and

loss causation--because these elements were not rel evant to the duty of best execution. On remand, the Distr ict Court picked up where we left off. Although the cou rt found no issues affecting misrepresentation and scienter that would preclude class certification, it held that in dividual questions on reliance and economic loss presented

formidable obstacles to class certification.

The parties disagree whether evidence of reliance a nd

economic loss are consistent with each trade or wou ld require individual treatment at trial. Defendants a rgue that reliance and economic loss cannot be presumed acros s the

class for the hundreds of millions of trades at iss ue. Because only class members who detrimentally relied on a defendants' execution practice would have a cause o f action, they maintain the individual inquiry necess ary to establish reliance and economic loss renders plaint iffs' 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 misrepresen tation or omission. Kline v. First W. Gov't Sec., Inc. , 2 4 F.3d 480, 487 88 (3d Cir. 1994); Peil, 806 F.2d at 1160 (disc ussing reliance). "It is axiomatic that a private action f or securities

23fraud must be dismissed when a plaintiff fails to p lead that

he or she reasonably and justifiably relied on an a lleged misrepresentation." Semerenko, 223 F.3d at 178 (cit ing Weiner, 129 F.3d at 315; In re Burlington Coat Fact ory, 114 F.3d at 1417). This burden requires a plaintiff to
demonstrate that defendants' conduct caused him" `t o 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 burde n in a

securities market where face-to-face transactions a re rare and where lawsuits are brought by classes of invest ors . . . this court has adopted a rule that creates a presum ption 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 genera lly 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 o f Utah v. United States, 406 U.S. 128, 153-54 (1970). Affilia ted Ute involved an effort by some members of the Ute tribe to distribute its assets among its members. For this p urpose, the tribe placed its assets in a corporation and is sued each member ten shares of stock that were subsequently deposited in a local bank. As fiduciary, the bank a ssumed responsibility for enforcing the stocks' restrictio ns. For its own benefit and unknown to the Utes, the bank facil itated

sales of the stock to outside investors at costs be low its fair

market value. When the Utes discovered the bank's practice, they sued under Rule 10b-5. In defense, t he 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 primaril y a failure to disclose [material facts], positive proof of rel iance is not a prerequisite to recovery." Id. at 153. Applying t his precept, we have held that "the proper approach to the

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

in light of the likely proof at trial, and determin e the most reasonable placement of the burden of proof of reli ance." Sharp, 649 F.2d at 188; see also Joseph v. Wiles, 2 23 F.3d 1155, 1162 (10th Cir. 2000) (recognizing that " Aff iliated Ute presumption of reliance exists in the first place t o aid plaintiffs when reliance on a negative would be pra ctically impossible"); Blackie v. Barrack, 524 F.2d 891, 907 (9th Cir. 1975) (same).

We extended the Affiliated Ute presumption of relia nce to

investors when securities dealers failed to disclos e a pricing policy that overcharged investors in the purchase a nd sale of "penny stocks."14 In Hoxworth II, investors alle ged they were systematically defrauded by a securities deale r's failure to disclose its pricing policy of excessive markups or

markdowns on different securities. 980 F.2d 912. Be cause of this uniform, material nondisclosure, we conclud ed that the "plaintiffs [were] entitled to the presumption of reliance set forth in Affiliated Ute." Id. at 924; cf. Eisen berg v. Gagnon, 766 F.2d 770, 786-87 (3d Cir. 1985) (holdin g individual questions of reliance in securities clas s action involving investment in tax shelters did not preclu de certification). In analogous cases, reliance has no t been a

hurdle to class certification. See Grandon v. Merri ll Lynch & Co., Inc., 147 F.3d 184, 190 (2d Cir. 1998) ("A bro ker-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. Vin ing-Sparks Sec., Inc., 959 F.2d 606, 613 (6th Cir. 1992) ("[T] he failure to disclose exorbitant mark-ups violates section 78 j(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 nondisclo sure of fraudulent credit terms on margin accounts); Etting er 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 d isclose improper markups on bonds).

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14. "Penny stocks are low-priced, high-risk equity securities for which there is frequently no well-developed market." Hoxw orth II, 980 F.2d at

914 n.1.

25Investors may also be entitled to a rebuttable

presumption of reliance under the "fraud-on-the-mar ket theory." This is because "in an efficient market th e misinformation directly affects the stock prices at which the investor trades and thus, through the inflated or d eflated 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 pr esumed when a fraudulent misrepresentation or omission imp airs the value of a security traded in an efficient mark et. Basic Inc., 485 U.S. at 241-42; Semerenko, 223 F.3d at 17 8; 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 secu rity in an efficient market. Therefore, a presumption of relia nce based on this theory would be inappropriate.

The District Court did not explicitly rule on wheth er reliance could be presumed. Instead the court obser ved that the investors' trades "involved multiple circu mstances which bear decisively upon the existence of relianc e." 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 memb ers varies widely. Some, no doubt, were new to the worl d of NASDAQ trading; some were institutional investors." ).

Plaintiffs contend that defendants' uniform practic e 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 cus tomers warrant a presumption of reliance. Defendants respo nd that at least some plaintiffs knew of the execution practice which nullifies their reliance. In support, they ci te several news articles describing the practice15 as well as an SEC

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15. See, e.g., Floyd Norris, The S.E.C. Tries to In sure 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; Gretch en Morgenson, Fun and Games on Nasdaq, Forbes, Aug. 16, 1993, at 74; Crai g Torres, How Street Turns Your Stock Trades to Gold, Wall St. J. , Feb. 16, 1993, at C1.

26report noting that institutional investors (who fal l within

the putative class's broad definition)16 used alte rnative electronic trading sources to obtain better prices for their trades. Br. of Appellees at 56-57. Because some pla intiffs knew or should have known of their practice, defend ants assert that reasonable reliance on the alleged nond isclosure did not occur class-wide. For this reason, a presum ption of reliance is arguably unavailable. See Straub v. Vai sman & Co., Inc., 540 F.2d 591, 595-98 (3d Cir. 1976).

While it seems apparent that some class members lik ely knew of defendants' practice, this knowledge does n ot necessarily invalidate the presumption. When defend ants

fail to disclose material information about a unifo rm practice involving the purchase or sale of securiti es, plaintiffs may be entitled to a presumption of reli ance which defendants may rebut. See, e.g., Affiliated U te, 406 U.S. at 153-54; Hoxworth II, 980 F.2d at 924; Black ie, 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. 1 998) (approvingly noting conclusion that "because plaint iffs' fraud-based claims stem largely from misleading omi ssions, reliance can be presumed") (quotation and citation omitted) (hereinafter "Prudential"). Presuming reliance clas s-wide is proper when the material nondisclosure is part of a common course of conduct.17 Hoxworth II, 980 F.2d a t 924 (holding class entitled to presumption of reliance against

securities dealer for failure to disclose exorbitan t pricing

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16. Plaintiffs define the class as consisting"of al l persons who placed market orders with Merrill Lynch or PaineWebber or Dean Witter to purchase or sell shares of OTC stock between Novemb er 4, 1992 and August 28, 1996."

17. Further explaining the justification for presum ing 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 v irtually impossible to

demonstrate in most cases.' " 649 F.2d at 188 n.18 (quoting Note, The Reliance Requirement in Private Actions Under SEC R ule 10b-5, 88 Harv. L. Rev. 584, 590 (1975) (footnote omitted)). The ju stifications for creating presumptions in general are explored in greater dep th in 2 J. Strong, McCormick on Evidence S 343, p. 437-43 (5th ed. 199 9).

27policy 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 b rokerdealers failed to disclose their policy of executin g NASDAQ trades at the NBBO price. Like a securities dealer' s failure to disclose its policy of overcharging investors, d efendants' execution of investors' trades at the NBBO price, w hen better prices may have been available from alternat ive services, constitutes a potentially fraudulent comm on course of conduct from which reliance can be presum ed. See Hoxworth II, 980 F.2d at 924 (holding plaintiff s entitled to presumption of reliance because of defendants' nondisclosure of pricing policy);18 see also Pruden tial, 148 F.3d at 314. We will not require each plaintiff to prove he relied on a practice which defendants did not affir matively disclose. See Sharp, 649 F.2d at 188-89; Ettinger, 122 F.R.D. at 180. Because their allegations of a unifo rm nondisclosure would make it impractical for investo rs to affirmatively prove their lack of knowledge of defe ndants' practice, the burden of rebutting a presumption of reliance is properly placed on defendants here. Therefore, u nder 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 t hat he suffered an economic loss that was caused by defend ant's fraudulent conduct. Semerenko, 223 F.3d at 185; Huddleston, 640 F.2d at 549. If economic loss is ev ident, then plaintiff must prove a "sufficient causal nexu s between the loss and the alleged [nondisclosure]." Semerenk o, 223

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18. This was based on an earlier decision by our ci rcuit that the "burden shifting rationale of Affiliated Ute was fully appl icable" to the nondisclosure of an exorbitant markup pricing polic y. Hoxworth v. Blinder, Robinson & Co., Inc., 903 F.2d 186, 202 (3 d Cir. 1990) (hereinafter "Hoxworth I").

28F.3d at 184. Loss causation derives its function fr om 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 compla ins." Bastian v. Petren Res. Corp., 892 F.2d 680, 685 (7t h Cir. 1990).

Initially, loss causation was a requirement establi shed 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 Bast ian, 892 F.2d at 685. But under the Private Securities Litig ation Reform Act of 1995, it became a statutory element o f private securities fraud claims under Rule 10b-5. T he Act provides that "[i]n any private action arising unde r this chapter, the plaintiff shall have the burden of pro ving that the act or omission of the defendant alleged to vio late this chapter caused the loss for which the plaintiff see ks 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, i n fact, suffered an economic loss. "[F]ailure to show actua l damages is a fatal defect in a Rule 10b-5 cause of action." Feldman v. Pioneer Petroleum, Inc., 813 F.2d 296, 3 02 (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 cann ot complain about a fraud that did not cause them any harm." Latigo Ventures v. Laventhol & Horwath, 876 F.2d 13 22, 1325 (7th Cir. 1989); Huddleston, 640 F.2d at 555. The economic loss that plaintiffs claim would be the di fference between the price at which their trades were execut ed and the "better" price allegedly available from an alte rnative trading source.19 Therefore, to show economic loss,

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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 [Secur ities Exchange] Act nor Rule 10b-5 contains explicit provisions for determining damages,

29plaintiffs must establish that a "better" price was

obtainable for each executed trade. If a "better" p rice was unavailable for a particular trade, then a class me mber could not have suffered injury and cannot maintain a Rule

10b-5 claim.

2.

The District Court held that economic loss could ne ither be established nor presumed class-wide. Merrill Lyn ch, 191 F.R.D. at 397. Finding that defendants' practice di d not detrimentally affect the value of plaintiffs' secur ities across the entire market nor did it necessarily result in overcharging, the District Court found no resemblan ce to cases where economic injury naturally flowed from defendant's alleged conduct. Id. at 396. Irrespecti ve of reliance, the District Court found that, after revi ewing the record, many investors received the best available price

when defendants executed their trades at the NBBO l isted price. Id. ("The record as it is presently constitu ted requires the conclusion that in a large number of transactio ns there were no better prices from other sources."). Drawin g on the summary judgment record where it determined from a sample analysis of twelve trades executed by defend ants that only one resulted in actual economic injury to a class representative, the District Court concluded that a n undefined number of class members sustained no econ omic loss whatsoever, necessitating the conclusion that damages were not susceptible to class-wide proof.20 Id. at 396; see

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courts have applied the "actual damages" sta ndard 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, t he "correct measure of damages . . . is the difference between the fair value of all that

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

received

had there been no fraudulent conduct." Randa ll 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' trade s with the defendants during the initial class period (November 4, 1992 t o November 4, 1994).

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

766. Based on this reasoning, the District Court fo und the question of economic loss remained unique to each investor. Plaintiffs argue against extrapolating th e improbability of class-wide damages from twelve tra des and contend the District Court erred in finding that"ma ny"

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Although the court's opinion mentions thirteen trad es, only twelve were evaluated. While the court was provided pricing inf ormation from SelectNet to compare the prices at which the trades were executed, "[n]o information on either Instinet prices, SOES limit o rder file prices or payment for order flow arrangements was supplied fo r any of the transactions." In re Merrill Lynch, et al. Sec. Lit ig., 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 purchas ed 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 w as 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 SelectNe t, the plaintiff would have saved $25.

In two other trades, the court also found inferenti al and speculative evidence that better prices may have been available . On the same day that plaintiff Binder placed an order to buy 7000 s hares of Hydron Technologies at 2 9/16, which PaineWebber executed through a marketmaker in the security, an offer restricted to Lehma n Bros. to sell up to 3000 shares of Hydron Technologies at 2 1/2 was bro adcast on SelectNet. Based on this restricted offer, plaintif fs contend the lower price indicated a better price for the stock would have been available from other sources, potentially Instinet. Additiona lly, plaintiffs assert Merrill Lynch's execution of plaintiff Zakheim's pu rchase 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 trad es in the stock throughout the day. For this reason, plaintiffs rea soned a better price was more than likely available on Instinet that day

.

The District Court found SelectNet would not have p rovided superior prices in six other transactions. Id. While no info rmation from an alternative source was provided for the remaining t hree transactions, the court noted it was still possible that superior pri ces may have been

available for them. Id.

31class members were uninjured. But we agree with the

District Court's finding that plaintiffs' claims wo uld require individual treatment to determine actual injury.

In fraud-on-the-market or overcharging cases that warrant a presumption of reliance, plaintiffs satis fy their initial burden because they sustain economic loss b y reason of the alleged conduct.21 In fraud-on-the-ma rket cases, the price at which a stock is traded is pres umably affected by the fraudulent information, thus injuri ng every investor who trades in the security. In re Burlingt on Coat Factory, 114 F.3d at 1419 n.8 (citing Basic Inc., 4 85 U.S. at 241-42). Nor was economic loss a question in those

securities claims where defendants failed to disclo se a fraudulent pricing policy that overcharged investor s. Accordingly, presuming economic loss was the ineluc table

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21. It bears noting that class actions alleging ant itrust injury often

raise similar concerns. In antitrust class actions, injur y may be presumed

when it is clear the violation results in harm to t he 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 lesso rs, major oil companies, for forcing them to purchase gasoline at controlled prices in violation of the antitrust laws. 561 F.2d 434. We recognized tha t

when an antitrust violation impacts upon a c lass of persons . . . , there is no reason why proof of the impact c annot be made on a common basis so long as the common proof ade quately demonstrates some damage to each individual. Whether or not fact of damage can be proven on a common basis th erefore 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 not ed that plaintiffs' claim of antitrust injury was "susceptible [to] . . . common classwide proof [because] . . . an illegal price-fixing schem e presumptively damages all purchasers of a price-fixed product in an affec ted market." Id. at

526. Nevertheless, antitrust cases still require proof o f injury to each individual for common questions to predominate in a class action. Windham v. Am. Brands, Inc., 565 F.2d 59, 65-66 (4t h 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).32by-product of the alleged fraud. The same does not hold

true here. The execution of plaintiffs' trades at t he NBBO listed price did not necessarily injure each class member. Plaintiffs may be entitled to a presumption of econ omic 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 b asis only if the evidence adequately demonstrates some l oss to each individual plaintiff.

Because securities claims may take on several forms

, proving economic loss on a common basis is a fact-s pecific inquiry. See EchoCath, 235 F.3d at 884; Grandon, 14 7 F.3d at 190; see also Bogosian, 561 F.2d at 454 (evaluat ing loss in antitrust class actions). We find no support in the case law for presuming economic injury for purposes of c lass

certification in Rule 10b-5 claims22 absent indicat ion 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 suf ficient 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 conn ection 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 securi ty 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 "fra ud-on-themarket" claim, this case does not involve a

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22. The cases on which we rely generally discuss lo ss causation in the context of applying the requirements of a Rule 10b- 5 claim, not class certification. Many of these cases arise as class a ctions, but they typically involve motions to dismiss for failure to state a claim or

motions for summary judgment rather than class certificatio n.

33misrepresentation or omission that decreased the va lue of

a security. Furthermore, unlike excessive over-pric ing policy claims, this case does not involve a practic e that necessarily harmed investors across the class.23 Se e 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, defend ants allegedly executed trades solely at the NBBO price. Depending on the facts of each trade, the NBBO list ed price may or may not have provided a class member with th e best price. Therefore, economic loss to the plainti ffs cannot be presumed by the purchase or sale of a security a t the NBBO price, and we will not presume it across the c lass.

In sum, we conclude that the putative class would b e entitled to a rebuttable presumption of reliance bu t not of economic loss. Therefore, their claims do not warra nt a rebuttable presumption of class-wide injury.24

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23. Plaintiffs also contend that the claims in this case are similar to those in Prudential, where we certified a settlemen t class alleging fraud. 148 F.3d 283. The claims here are easily distinguis hed from the

securities fraud claims in Prudential. In Prudentia l, the federal

securities claims involved the sale of vanishing premium life insurance policies which the insurance company fraudulently claimed wo uld become selffunding. 148 F.3d at 300 (citing In re Prudential I ns. Co. of Am. Sales Practices Litig., 962 F. Supp. at 500). By purchasi ng the policies, plaintiffs risked economic injury because the instr uments were structurally incapable of meeting the financial exp ectations 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 Pr udential, 148 F.3d at

296-97.

24. Citing AUSA Life Ins. Co. v. Ernst and Young, 2 06 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 fo r reconsideration of loss causation in terms of foreseeability that defe ndant'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 Secon d Circuit has explained that "loss causation . . . examines how d irectly . . . [the fraudulent conduct] caused the loss, and whether th e resulting loss was

34VI.

Turning to the test for class certification, we mus t examine the elements of a Rule 10b-5 claim through the prism of Fed. R. Civ. P. 23 to determine whether th e District Court abused its discretion in failing to certify the class. A putative class must satisfy the four conju nctive criteria of Fed. R. Civ. P. 23(a): numerosity, comm onality, typicality, and adequacy of representation.25 A cla ss seeking

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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). Whe ther or not the loss is foreseeable becomes a factor only if direct causati on has been

demonstrated. Id.

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

a viable Rule 10b-5 securities claim must show a"su fficient causal nexus between the loss and the alleged [nondisclosu re]." Semerenko, 223 F.3d at 184; see also In re Phillips Petroleum , 88 1 F.2d at 1244 (holding fraudulent misrepresentation "must touch upon the r easons for the investment's decline in value") (citing Huddleston, 640 F.2d at 549). In other words, to establish loss causation, a claim m ust demonstrate that the fraudulent conduct proximately caused or substa ntially contributed to causing plaintiff 's economic loss. See EchoCath , 235 F.3d at 883-84; Semerenko, 223 F.3d at 186. Whether there are diffe rences between these standards for loss causation, it is far from certain in this case

that each plaintiff has sustained a loss, unlike the ins urance companies in

AUSA.

In the end, we need not address here whether their claims establish loss causation because we find that plaintiffs' cla ims 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 th at excessive markups or markdowns may not have been the cause of plainti ffs' 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 la w or fact common to the class, (3) the claims or defenses of the rep resentative parties are typical of the claims or defenses of the cla ss, and (4) the representative parties will fairly and adequ ately protect the

interests

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

predominance and superiority--namely, whether commo n questions of law or fact predominate and whether th e class action represents the superior method for adjudicat ing the

case.26

Denying class certification, the District Court fou nd that plaintiffs' claims were atypical and the class repr esentatives inadequate to represent the class. On related groun ds, the court also held that common issues did not predomin ate and the class action device was neither superior no r manageable. Merrill Lynch, 191 F.R.D. at 397-98. As noted, we review the District Court's decision denying cla ss 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. 2 3(a) embrace two rudimentary principles: 1) the necessit y and efficiency of adjudicating the claims as a class an d 2) the assurance of protecting the interests of absentee m embers.27

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

Class Actions Maintainable. An action may be maintained as a class action if the prerequisites of subdivi sion (a) are satisfied,

and

in addition:

* * *

(3) the court finds that the questions of la w or fact common to the members of the class predominate over any qu estions 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 fi ndings include: (A) the

interest of members of the class in individu ally 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 des irability 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 requi rements of Rule 23, especially the requisites of subsection (a), so that the court can36Baby Neal v. Casey, 43 F.3d 48, 55 (3d Cir. 1994); G.M.

Trucks, 55 F.3d at 785. If the class does not satis fy each of the 23(a) criteria, the suit cannot be maintained a s a class action. For this reason, we will address each crite rion in

turn.

1. Numerosity

Numerosity requires a finding that the putative cla ss is "so numerous that joinder of all members is impract icable." Fed. R. Civ. P. 23(a)(1). It is clear the size of p utative class

satisfies this criterion. There are hundreds of tho usands of class members and joinder would be impracticable. I d.; Merrill Lynch, 191 F.R.D. at 394.

2. Commonality & Typicality

" `The concepts of commonality and typicality are b roadly 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 req uires the presence of "questions of law or fact common to the class," Fed. R. Civ. P. 23(a)(2), and typicality de mands that "the claims or defenses of the representative parti es are typical of the claims or defenses of the class." Fe d. R. Civ. P. 23(a)(3). The significance of commonality is sel f-evident: it provides the necessary glue among class members to

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assure, to the greatest extent possible, tha t the actions are prosecuted on behalf of the actual class mem bers in a way that

makes it fair to bind their interests. The r ule thus represents a measured response to the issues of how the d ue process rights of absentee interests can be protected and how absentees' represented status can be reconciled with a litigation s ystem 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 absentee s. Thus, the ultimate focus falls on the appropriateness of the cl ass device to assert

and

vindicate class interests.

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

37make 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 en sures the interests of the class and the class representative s are aligned "so that the latter will work to benefit th e entire class through the pursuit of their own goals." Barn es, 161 F.3d at 141. "The typicality criterion is intended to preclude certification of those cases where the legal theori es 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 plain tiffs as to the claims of the absentees." Baby Neal , 43 F.3 d 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 c laims based on common course of conduct satisfy typicalit y); In re Sch. Asbestos Litig., 789 F.2d 996, 1010 (3d Cir. 1 986) (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) doe s 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]eithe r of these requirements mandates that all putative class membe rs share identical claims.' " Prudential, 148 F.3d at 311 (quoting Baby Neal, 43 F.3d at 56). Nevertheless, w e require courts to examine them separately because t he 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 , 1 48 F.3d at 310 (citing Baby Neal, 43 F.3d at 56)." `The com monality requirement will be satisfied if the named plaintif fs share at least one question of fact or law with the grievanc es 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. Wind sor, 521 U.S. 591 (1997).

38The District Court found, and it is not seriously c ontested

on appeal, that common questions of law and fact ar e 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 entir e class. In fact, plaintiffs' claims raise several common is sues including: 1) did defendants intentionally execute the plaintiffs' orders at the NBBO price without examin ing other alternatives; 2) did defendants fail to discl ose their practice in violation of their duty to their custom ers; 3) were defendants technologically capable of providin g superior prices to those offered on the NBBO; and 4 ) did defendants' conduct violate S 10(b) of the Securiti es Exchange Act of 1934. See Br. of Appellants at 31. The District Court properly held the putative class sat isfied this requirement.

b. Typicality

The typicality inquiry here centers on whether " `t he named plaintiff[s'] individual circumstances are ma rkedly different or . . . the legal theory upon which the claims are based differs from that upon which the claims of ot her 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 potenti ally conflict with those of the absentees." Georgine, 83 F.3d at 631. If the claims of the named plaintiffs and puta tive class members involve the same conduct by the defendant, typicality is established regardless of factual dif ferences.28

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

the same unlawful conduct was directed at or affect ed 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 irrespec tive of the varying

fact patterns underlying the individual claims.' ") (quo ting Baby Neal, 43 F.3d at 58); In re NASDAQ Market-Makers, 169 F.R.D. at 5 10-11 ("[The typicality requirement is satisfied] where the clai ms 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.").

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

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 th e claims of the class members, and if it is based on the sam e 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 th at all putative class members share identical claims," Bar nes, 161 F.3d at 141, because " `even relatively pronoun ced factual differences will generally not preclude a f inding of typicality where there is a strong similarity of le gal theories' or where the claim arises from the same practice or course of conduct." Prudential, 148 F.3d at 311 (quoting B aby Neal, 43 F.3d at 58); Hoxworth II, 980 F.2d at 923.

The District Court found that the different circums tances surrounding each trade over the class period render ed 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 representa tives' claims would not necessarily prove all the proposed class members['] claims, the representatives['] claims ar e not typical of the proposed members' claims." Id. The District Court also believed that individual questions on re liance and injury buttressed its finding. Id. But typicali ty does not require similarity of individual questions concerni ng reliance or damages on the part of the class repres entatives

and class members in a securities fraud action. Bla ckie, 524 F.2d at 905-06. In fact, whether the class representatives' claims prove the claims of the ent ire class highlights important issues of individual reliance and damages that are more properly considered and relev ant under the predominance and superiority analysis.

In Hoxworth II, we found a putative class of securi ties investors, who had purchased or sold excessively ma rkedup securities, satisfied the typicality requirement . 980 F.2d at 923. Although the class members may have purchas ed or sold different securities at varying prices, all their claims

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

advise purchasers of its excessive markup policy." Id.; see also Ettinger, 122 F.R.D. at 180-81 (holding typica lity satisfied where "[p]laintiff 's claims and those of the class

arise from the same conduct of defendant and are ba sed on the same legal theory"). Similarly, in Eisenberg v. Gagnon, we held that securities claims involving fraudulent

inducement to invest in worthless tax shelters sati sfied typicality. 766 F.2d 770 (3d Cir. 1985). Although t he named plaintiffs invested in different tax shelters, thei r 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 secur ities on the NASDAQ. They allege that defendants violated th eir duty of best execution by automatically executing e ach investor's trade at prices listed on the NBBO witho ut consulting alternative sources that may have provid ed better value. Plaintiffs' claims rest solely on a s ingle legal theory--a Rule 10b-5 violation-- and allege a unifo rm course of conduct--automatic execution of their tra des at the NBBO listed price. Any differences then among c lass members are factual--which security, at what price, under what circumstances, etc. The alleged cause of their injuries, however, remains typical throughout the class. Beca use each class member "would need to demonstrate the existence of this scheme, their interests are suffi ciently aligned that the class representatives can be expec ted to adequately pursue the interests of the absentee cla ss members." Prudential, 148 F.3d. at 312. The inabili ty of a class representative to prove every other class mem bers' claim does not necessarily result in failure of the typicality requirement. The District Court erred in finding po tential factual differences rendered plaintiffs' claims aty pical.

3. Adequacy of Representation

Class representatives must "fairly and adequately p rotect the interests of the class." Fed. R. Civ. P. 23(a)( 4). This requires a determination of (1) whether the represe ntatives'

41interests 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. Th e Supreme Court has counseled that this element "serv es 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 "ten d[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 presum ed class-wide,30 the District Court found the class's employment of a statistical formula to calculate an d allocate damages would create conflicts between pla intiffs 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 con flict, the court refrained from deciding whether the class sat isfied the adequacy of representation requirement.31

Following the Supreme Court's observation that adeq uacy of representation is an admixture of commonality an d typicality, the District Court's reservation appear s to be

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29. Although in a different context, both the Supre me Court and our Court found the potential harm to absentee members of the class particularly significant in denying certification i n the Amchem litigation. Amchem, 521 U.S. at 626-28 ("As the Third Circuit p ointed out, named parties with diverse medical conditions sought to a ct on behalf of a single giant class rather than on behalf of discret e 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, infl ation-protected fund for the future."). This concern is not implicated i n 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 fac t do not prevail." Merrill Lynch, 191 F.R.D. at 395.

31. Defendants assert that plaintiffs did not prope rly preserve this issue on appeal because it is only mentioned in a footnot e in their brief. While plaintiffs do not discuss adequacy of representatio n, 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.

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

the typicality requirement. As noted, the District Court's typicality concerns reflect inquiries better addres sed under our review of predominance and superiority. See sup ra p. 41. While the commonality and typicality criteria t end to merge into an analysis of adequacy of representatio n 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 d enying certification under the predominance standard may n ot necessarily compel denying certification under 23(a )(4), because the predominance requirement is more string ent than commonality and typicality. See supra note 32. On these facts, we hold that counsel would suitably re present

the class and that there are no foreseeable conflic ts between the named representatives and the class the y seek to represent that would bar certification. Therefor e, the putative class would satisfy the adequacy of repres entation 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 t he class predominate over any questions affecting only individual members." Fed. R. Civ. P. 23(b)(3). Supe riority

calls for a determination that a class action is th e best method of achieving a "fair and efficient adjudicat ion of the controversy." Id. The Supreme Court has explained t hat these elements were adopted

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32. We have interpreted the "predominance requireme nt [as] incorporat[ing] the commonality requirement." Georg ine, 83 F.3d at 626. The Supreme Court has also noted that "the predomin ance requirement of Rule 23(b)(3) is similar to the requirement of R ule 23(a)(3) that
`claims or defenses' of the named representatives must be`t ypical of the claims or defenses of the class.' " Amchem, 521 U.S. at 62 3 n.18. Notwithstanding, the Court has counseled that "the predominance requirement is far more demanding [than commonality ]." Id. at 623-24.

43to cover cases in which a class action would achieve

economies of time, effort, and expense, and promote . . . uniformity of decision as to persons s imilarly situated, without sacrificing procedural fai rness or bringing about other undesirable results . . . [which] . . . invite[ ] a close look at the case bef ore it is accepted as a class action . . . .

Amchem, 521 U.S. at 615 (internal quotations and ci tations omitted). To assist in this "close look," Fed. R. C iv. P. 23(b)(3) includes a nonexclusive list of relevant f actors:

(A) the interest of members of the class in individually controlling the prosecution or defense of se parate actions; (B) the extent and nature of any li tigation concerning the controversy already commenced by or against members of the class; (C) the desira bility or undesirability of concentrating the litigati on of the claims in the particular forum; (D) the diff iculties likely to be encountered in the management of a cla ss 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 3 13-14.

1. Predominance

Predominance measures whether the class is sufficie ntly cohesive to warrant certification. Amchem, 521 U.S. at 623. Unlike commonality, predominance is significantly m ore 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 mem ber sustained economic injury presented insurmountable obstacles to certification. Merrill Lynch, 191 F.R. D. at 396- 97 ("[A]bsent proof of classwide pecuniary loss res ulting from that reliance, there can be no classwide claim for securities fraud."). Examining millions of trades t o ascertain whether or not there was injury, said the court, me ant that individual issues overwhelmed common questions amon g the class. Id. at 397-98. We agree.

44Because the automated execution of orders at the NB BO

listed price did not necessarily injure each class member,

the District Court found that "whether a class memb er suffered damages would have to be determined on a t rade by trade basis," because "some class members would have suffered damages; while some would not." Id. at 39 6. This individual inquiry is complicated by several factor s. Assessing economic injury to a class member would f irst require examining whether a particular trade provid ed an investor with "the best reasonably available price. " Newton, 135 F.3d at 270. The comparison between the price a t which a particular trade was executed on the NBBO w ith 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 av ailable in any particular situation may require a factu al inquiry into all of the surrounding circumstances .

. . .

* * *

Other terms in addition to price are also re levant to best execution. In determining how to execut e a client's order, a broker-dealer must take into accoun t order size, trading characteristics of the securit y, speed of execution, clearing costs, and the cost and difficulty of executing an order in a particular market. W hen the plaintiffs state that better "prices" were r easonably available from sources other than the NBBO, we understand that to mean that, given an evalu ation of price as well as all of the other relevant t erms, the trade would be better executed through a sou rce of liquidity other than the NBBO (e.g. SelectNe t, Instinet,

in-house limit orders or market orders held by the defendants, or limit orders place by the pub lic in the Small Order Execution System).

Id. at 270 & n.2 (internal citations omitted). Thes e factors would appear to vary from class member to class mem ber and, for each class member, from trade to trade. Wh ether a class member suffered economic loss from a given securities transaction would require proof of the circumstances surrounding each trade, the available

45alternative prices, and the state of mind of each i nvestor at

the time the trade was requested. This Herculean ta sk, involving hundreds of millions of transactions, cou nsels against finding predominance.

In an effort to gloss over this requirement, plaint iffs 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 f ormula, but instead projected that he could devise a formul a that would measure damages among the class and serve as a plan for allocation.33 We are not convinced. But ev en if plaintiffs could present a viable formula for calcu lating damages (which they have not), defendants could sti ll 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 co ncluded 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 jurisprude nce, " `an antitrust plaintiff must prove that his damag es were caused by the unlawful acts of the defendant. . . [ before] the amount of damages may be determined.' " Amerine t v.

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33. On this point, the testimony by plaintiffs' exp ert was limited to the

averment that

based on my work and my familiarity with sta tistical 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 wh ich measures class- wide damages and from which a plan of alloca tion can be constructed. I will develop the formula usin g explanatory variables that have been widely-used in published stud ies 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 re sult of the practices challenged in this lawsuit.

46Xerox Corp., 972 F.2d 1483, 1494 (8th Cir. 1992) (q uoting

MCI Communications Corp. v. Am. Tel. & Tel. Co., 70 8 F.2d 1081, 1161 (7th Cir. 1983)). On this basis, the Dis trict

Court reasoned that

[c]lass treatment of damages issues, however

, presumes the ability to prove the fact of da mage without becoming enmeshed in individual ques tions of actual damage . . . [.] Where proof of fact of damage requires evidence concerning individual clas s members, the common questions of fact become subordin ate to the individual issues, thereby rendering cla ss certification problematic.

Merrill Lynch, 191 F.R.D. at 396 (quotation and cit ation omitted). Proof of injury (whether or not an injury occurred at all) must be distinguished from calculation of d amages (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 p roving each class member suffered economic injury. Therefo re, the court found that determining actual economic loss o n the part of each investor would involve individual ques tions that predominate over common ones.

The District Court's analogy to antitrust class act ions is

well-taken. In a Rule 10b-5 securities claim that"i mpacts upon a class of persons . . . there is no reason . .. why proof of the impact cannot be made on a common basi s so long as the common proof adequately demonstrates so me damage to each individual." Bogosian, 561 F.2d at 4 54 (discussing injury in antitrust cases). The ability to calculate the aggregate amount of damages does not absolve plaintiffs from the duty to prove each inve stor was harmed by the defendants' practice. In class action s based on a "fraud-on-the-market," an excessive pricing po licy 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 be tter prices sustained economic injury here. Determining which class members were economically harmed would requir e an individual analysis into each trade and its alterna tives. The individual questions, therefore, are overpowering. As we held in Georgine:

47Even if we were to assume that some issues c ommon

to the class beyond the essentially settled question of the harmfulness of asbestos exposure remain, the huge number of important individualized issues ov erwhelm 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 predomina te over any questions affecting only individual memb ers.

83 F.3d at 630 (internal quotes omitted); Barnes , 161 F.3d at 146 ("Because nicotine addiction must be determi ned on an individual basis and remains an essential part o f plaintiffs' . . . claim . . . class treatment is in appropriate."). While obstacles to calculating damages may not prec lude class certification, the putative class must first demonstrate economic loss on a common basis. As noted, the issu e is not the calculation of damages but whether or not c lass 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 ("Althou gh in Georgine, as in the present case, there were severa l common questions, the Court held that class treatme nt 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 Amc hem, 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 clai m. The plaintiffs had been exposed to "different asbestos containing products, for different amounts of time, in differe nt ways, and over different periods." Georgine, 83 F.3d at 6 26. 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 rule s, including matters of causation, comparative fault, and the

48types of damages available to each plaintiff." Id. at 627. For

these reasons, the constellation of individual issu es eclipsed common questions.

Citing the Supreme Court's guidance that "[p]redominance is a test readily met in certain ca ses alleging consumer or securities fraud or violations of the antitrust laws," Amchem, 521 U.S. at 625 (citing Co mm. Note, Fed. R. Civ. P. 23), plaintiffs contend Amche m, a mass tort action, may be distinguished, and argue that i ndividual 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 t reatment"); Ettinger, 122 F.R.D. at 182 (common question of exo rbitant 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 varyin g degrees and effects of asbestos exposure overpowere d common ones. The breadth of the claims here may be different from Amchem, but the sheer number of clai ms raising individual questions of injury is strikingl y similar. In Georgine, we recognized "individualized issues c an become overwhelming in actions involving long-term mass torts (i.e., those which do not rise out of a singl e accident)." 161 F.3d at 628. The alleged injuries in Newton ar ise out of the execution of hundreds of millions of trades, no t a single act of fraudulent conduct. The distinct facts among the hundreds of thousands of plaintiffs involving hundr eds of

millions of trades will determine whether securitie s violations occurred. Because plaintiffs' claims wil l require an economic injury determination for each trade, we hold the putative class fails to satisfy the predominanc e requirement.

Moreover, as we have noted in securities cases invo lving fraud-on-the-market or excessive markups, injury necessarily flowed from defendant's conduct and rel iance and injury could be presumed. In those cases, if defendant's conduct was held fraudulent, a claim of loss

49naturally followed. Here it remains contested wheth er

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 ha ve not suffered economic injury, individual questions rema in 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," Am chem, 521 U.S. at 625 (emphasis supplied), in which predomina nce may be readily established.34

Because economic loss cannot be presumed, ascertain ing which class members have sustained injury means individual issues predominate over common ones. Therefore, the District Court exercised its sound d iscretion

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34. In the alternative, the putative class argues t hat 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 mispl aced. First, the lion's share of the fraud claims in Prudential were largel y unrelated to federal securities law. Prudential, 148 F.3d at 314. In des cribing the claims, the

district court observed:

[M]ost of the plaintiffs' claims [did] not e ven involve a reliance

element. Plaintiffs' claims for breach of co ntract, breach of implied obligation of good faith and fair dealing, n egligence, negligent training and supervision, and unjust enrichm ent do not involve reliance. An individual issue with respect t o one element of a

small portion of plaintiffs' claims does not outwe igh the multitude of issues common to the remaining elements and claims.

In re Prudential Ins. Co. of Am. Sales Practice Lit ig., 962 F. Supp. at

516. The claims in this appeal fall squarely under Rule 10b-5. Second, plaintiffs note that the class in Prudential contai ned "both injured and uninjured policyholders" without barring certificat ion. 148 F.3d at 306. Based on this, plaintiffs contend that even if some class members did not suffer economic loss, class certification shoul d not be prohibited in this case either. We disagree. In Prudential, the p resence of injured and uninjured class members was evaluated in the contex t of standing, not

class certification. Id. at 306-07. But satisfactio n of constitutional standing does not answer the predominance inquiry. Furthermore, there was no dispute over the individual question of econ omic loss in Prudential because the defendant insurance company did not contest liability and waived all defenses. See Prudential, 148 F.3d at 296-97.

50in 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 certificat ion, 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 o f the controversy." Fed. R. Civ. P. 23(b)(3). Here we mus t address "the difficulties likely to be encountered in the m anagement of a class action." Fed. R. Civ. P. 23(b)(3)(D). Ac cording to the District Court, the need for individualized inq uiry into actual injury transformed the "[e]xploration of eac h and every customer's NASDAQ transactions with defendant s during the period from November 4, 1992 to August 2 8, 1996 [into] a mind-boggling undertaking." Merrill L ynch, 191 F.R.D. at 398. We agree. With hundreds of milli ons of trades, it is difficult to imagine how this case ca n be tried.35

Contending each individual claim is so small that o nly a class action will provide a remedy, plaintiffs main tain that

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35. Defendants contend that plaintiffs have not pre served 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 th e 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 an d 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 Count y Dept. of Elections, 174 F.3d 305, 316 n.11 (3d Cir. 1999) (quoting Labo rers' Int'l Union of N. Am. v. Foster Wheeler Corp., 26 F.3d 375, 398 (3 d Cir. 1994)). We also reasoned that "absent extraordinary circumstances, briefs must contain statements of all issues presented for appeal, toge ther with supporting arguments and citations." Simmons v. City of Philad elphia, 947 F.2d 1042, 1065 (3d Cir. 1991). But we believe the issue of superiority was implicit in the plaintiffs' opening brief and was a dequately raised on appeal.

51denying certification will absolve defendants from

wrongdoing. The District Court rejected this ration ale as a "basis for excusing plaintiffs from proving the ess ential 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 predominanc e and superiority and efficient and fair management of a trial, which Rule 23(b) requires." In re LifeUSA Holding I nc., 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 cl aims.

Turning to manageability, the District Court's eval uation must be "granted a wide range of discretion." Link v. Mercedes Benz of N. Am., Inc., 550 F.2d 860, 864 (3 d Cir. 1977). "Manageability is a practical problem, one w ith which a district court generally has a greater degr ee of expertise and familiarity than does the appellate c ourt." In re Sch. Asbestos Litig., 789 F.2d at 1011. It encom passes "the whole range of practical problems that may ren der 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 th eir expert can devise a formula for calculating injury and dam ages that will allay manageability concerns. Yet we are hesitant to rely on a formulaic nostrum given the consequenc es if it fails to meet expectations. See Windham, 565 F.2d a t 70 ("But where the court finds, on the basis of substa ntial evidence as here, that there are serious problems n ow appearing, it should not certify the class merely o n the

assurance of counsel that some solution will be fou nd."). As noted, actual injury cannot be presumed, and defend ants 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 h old that establishing proof of the plaintiffs' injuries and litigating the defenses available to the defendants would present insurmountable manageability problems for t he

District Court.

52The superiority requirement also casts serious doub t on

the efficiency and manageability of certifying this class for trial. "In terms of efficiency, a class of this mag nitude 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 manage ment 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 becau se the class was certified for the purpose of settlement. This is significant because "the settlement approval inquir y is far different from the certification inquiry. In settle ment situations, the superiority requirement arguably tr anslates 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. Tr ucks, 55 F.3d at 796. Significantly, in Prudential we did no t have to "inquire whether the case, if tried, would present intractable management problems . . . for the propo sal [was] that there be no trial." Amchem , 521 U.S. at 620. Additionally we have recognized that adjudicating R ule 10b5 securities claims as a class action satisfies sup eriority only if the litigation results in fewer individual actions. Because injury determinations must be made on an individual basis in this case, adjudicating the cla ims as a class will not reduce litigation or save scarce jud icial resources. Under these circumstances, plaintiffs fa il to satisfy the superiority standard. See G.M. Trucks, 55 F.3d at 783 ("One of the paramount values in [class acti ons] is efficiency. Class certification enables courts to t reat common claims together, obviating the need for repe ated adjudications on the same issue.").

We are also mindful that Amchem and Prudential invo lved

mature claims. The class settlements were the resul t of verdicts on established liability and damages award s. This

case does not share a similar track record. Of cour se, many

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36. Of course, one of the central concerns behind d enying certification in Georgine was the potential harm to absentee members . This is not a

factor here.

53securities fraud claims do not generally implicate maturity

concerns because they do not raise complex issues o f causation and injury. Furthermore, the divergent ou tcomes

in Amchem and Prudential make it clear that maturit y alone is neither necessary nor sufficient for certificati on, but it may help to ensure that class certification is "sup erior to individual adjudication." Castano, 84 F.3d at 747.

The specter of adjudicating plaintiffs' claims at t rial is, at the very least, daunting. Individual questions of e conomic loss present insurmountable manageability problems. Moreover, class certification would place hydraulic pressure on defendants to settle which weighs in the superio rity analysis. See supra note 8. At trial, determining a ctual injury would require hundreds of millions of indivi dual assessments. For these reasons, the District Court was clearly within its sound discretion to hold this ca se 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 me et the requirements of Fed. R. Civ. P. 23(b)(3). In partic ular, the investors' claims fail the predominance and superio rity requirements under Fed. R. Civ. P. 23(b)(3). For th ese reasons, we will affirm the judgment of the Distric t Court.

A True Copy:

Teste:

Clerk of the United States Court of Appeals

for the Third Circuit

54