Opinion ID: 2758262
Heading Depth: 4
Heading Rank: 4

Heading: Presumption of Reliance

Text: The foregoing analysis confirms that plaintiffs have satisfied the predominance prong of Rule 23(b)(3). The district court, however, rather than crediting an inference of causation, instead borrowed the presumption of reliance from securities law to give plaintiffs an extra—and ultimately unneeded—boost in their efforts to establish reliance. As we explain, the presumption of reliance does not apply to RICO fraud. 12 The fraud-on-the-market theory arises from the Supreme Court’s interpretation of federal securities law. In securities cases, plaintiffs can take advantage of a legal presumption that the defendant’s misrepresentations affected their investment decision in situations where proving causation is unfeasible. See 11 (...continued) Presumably, plaintiffs intend to prove Hutchens’s low batting average in funding loans, his lack of capitalization, and other features that reflect the illicitness of the scheme. By contrast, Hutchens and his associates will try to discredit this theory, pointing to any available evidence that would probatively communicate Hutchens’s authenticity as a lender. On both sides, this dispute is resolvable by common evidence. And the answer to this predominant question may, in many ways, definitively end the litigation. The existence of such a predominating question places a thumb on the scale in favor of class certification. All told, we are satisfied that common questions will predominate over any issue requiring individualized attention. 12 The legal distinction between a presumption and an inference helps clarify our divergence with the reasoning behind the district court’s class certification decision. A presumption is a legal conclusion that will alter the plaintiffs’ burden of proof on the merits of their RICO allegations at trial. By contrast, an inference is simply a commonsense deduction based on the facts presented that plaintiffs can use to satisfy Rule 23(b). -35- Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, 552 U.S. 148, 159 (2008). For proceedings under § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, “[r]equiring a plaintiff to show a speculative state of facts . . . places an unrealistic evidentiary burden on the 10(b) plaintiff.” Joseph v. Wiles, 223 F.3d 1155, 1162 (10th Cir. 2000). This understanding is based on two seminal Supreme Court cases, Basic Inc. v. Levinson, 485 U.S. 224 (1988) and Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972), which are the cornerstones of this presumption of reliance. In Basic Inc., the Supreme Court declined to require the 10(b) plaintiff to provide direct proof of reliance on defendant’s misrepresentation, recognizing that doing so “effectively would . . . prevent[] [plaintiffs] from proceeding with a class action” in typical securities fraud cases. Basic Inc., 485 U.S. at 242. And in Affiliated Ute, the Court endorsed a similar presumption of reliance when the theory of securities fraud centers on defendant’s failure to disclose material information. Affiliated Ute, 406 U.S. at 153–54. The rules from each of these cases largely rest on the unique nature of publicly traded securities markets. This is because the private causes of action under the antifraud provisions of the federal securities laws rely on the condition of the public market at the time of the alleged fraudulent transaction as much as the subjective decisions by individual investors. See T.J. Raney & Sons, Inc. v. Fort Cobb, Oklahoma Irr. Fuel Auth., 717 F.2d 1330, 1332 (10th Cir. 1983). -36- Indeed, the fraud-on-the-market theory allows plaintiffs to benefit from a relaxed pleading standard that grants them a rebuttable presumption of reliance on the value of an allegedly fraudulent security price. See Basic Inc., 485 U.S. at 229–30. For class certification, this legal presumption of classwide reliance is particularly accommodating because it helps avoid questions of individualized reliance and their attendant difficulties under the predominance prong of Rule 23(b)(3). The sui generis nature of securities fraud supports the reasoning behind entitling plaintiffs to a presumption of reliance because only where an arguably efficient market provides the backdrop for fraud allegations does the fraud-on-the-market theory hold any water. See Amgen Inc., 133 S. Ct. at 1192. This is so because an efficient market incorporates all publicly available information into a security’s price. Id. Thus, a particular public, material misrepresentation will artificially inflate the security’s price, and individual investors, conscious of the nature of the efficient market, will rely on the price of the security in their decision to invest. Id. By relying on the efficiency of the market, an investor has essentially relied on the misrepresentation or omission (even if he never actually heard it). Id. Similarly, as we referenced above, the Affiliated Ute presumption posits that when a theory of securities fraud is based on a fraudulent failure to disclose material facts, courts do not require the plaintiff to counterfactually demonstrate that it would have relied on the omitted material information; instead, the court -37- permits the factfinder to presume that they would have done so. See Affiliated Ute, 406 U.S. at 153–54. This presumption typically does not apply to affirmative misrepresentations made by the defendant. Joseph v. Wiles, 223 F.3d 1155, 1163 (10th Cir. 2000). In sum, the presumption is uniquely applicable in the securities context and it has not gained traction in other fields of law. See generally 2 McLaughlin on Class Actions § 8:11 (10th ed. 2013). And this presumption is unsuited for RICO fraud cases because they involve a more self-contained universe of plaintiffs and conduct by defendants that does not necessitate a legal presumption. Given that, we decline to apply a species of the presumption to RICO allegations and cannot endorse the district court’s decision holding otherwise. 13 13 Although the district court ultimately did not need to employ the Affiliated Ute presumption, its predominance analysis was sufficiently rigorous to support the alternative conclusion that we reach today: Plaintiffs have evidence and expect to prove that these entities were essentially shell corporations that, like Hutchens himself, had no ability to fund the large loans, let alone the collection of loans to which they committed. The point of the case is that all of this was a giant ruse to scam applicants possibly desperate for loan funds out of the advance fees that were demanded of them. Those questions are common to all members of the class. If these facts are established, then I am inclined towards the view that proof of actual reliance on an individual basis is not necessary. Cf. Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 153–55 (1972). It (continued...) -38-