Opinion ID: 785935
Heading Depth: 2
Heading Rank: 2

Heading: The Citigroup Petition

Text: 21 In our view, the Citigroup Defendants' petition falls within the second category of appealable decisions identified in Sumitomo, because the certification order implicates a legal question about which there is a compelling need for immediate resolution. Sumitomo, 262 F.3d at 139. That question is whether a district court may certify a class in a suit against a research analyst and his employer, based on the fraud-on-the-market doctrine, without a finding that the analyst's opinions affected the market prices of the relevant securities. The fraud-on-the-market doctrine, as described by the Supreme Court in Basic v. Levinson, creates a rebuttable presumption that (1) misrepresentations by an issuer affect the price of securities traded in the open market, and (2) investors rely on the market price of securities as an accurate measure of their intrinsic value. See Basic, 485 U.S. at 245-47, 108 S.Ct. 978; accord, e.g., In re Ames Dep't Stores Inc. Stock Litig., 991 F.2d 953, 967 (2d Cir.1993). This presumption, if unrebutted, thus allows plaintiffs to satisfy the element of reliance in securities fraud claims under the 1934 Act. As the District Court explained, the doctrine arose as a practical response to the difficulties of proving direct reliance in the context of modern securities markets, where impersonal trading rather than a face-to-face transaction is the norm. Class Opinion, 219 F.R.D. at 291. Although the fraud-on-the-market doctrine clearly applies to statements made by issuers, as in Basic, we have never addressed whether it also applies to reports by analysts. 22 [A] novel legal question will not compel immediate review unless it is of fundamental importance to the development of the law of class actions and it is likely to escape effective review after entry of final judgment. Sumitomo, 262 F.3d at 140. Although we did not grant the defendants' Rule 23(f) petition in Sumitomo, we suggested in that decision that a district court's extension of the fraud-on-the-market doctrine should, in some circumstances, be reviewed on an interlocutory basis. See id. at 142-43 (noting that the uncertainty surrounding whether the fraud-on-the-market doctrine could be applied to common-law fraud claims tips in favor of a grant of interlocutory review). Similarly, in West v. Prudential Securities, Inc., 282 F.3d 935, 937 (7th Cir.2002), the Seventh Circuit concluded that a district court's application of the fraud-on-the-market doctrine to a stockbroker's statements to his customers present[ed] a novel and potentially important question of law. Cf. Newton v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 259 F.3d 154, 165 (3d Cir.2001) (granting Rule 23(f) petition where certification decision raised fundamental questions about what type of private securities claims merit class certification). 23 The application of the fraud-on-the-market doctrine in a novel context can have a significant effect on the law of class actions because the presumption of reliance created by the doctrine is often essential to class certification in securities suits. Reliance is an element of securities fraud claims under the 1934 Act. See, e.g., Harsco Corp. v. Segui, 91 F.3d 337, 342 (2d Cir.1996). To the extent that members of a plaintiff class of securities purchasers can invoke the Basic presumption by alleging fraud on the market, they need not prove individual reliance on alleged misrepresentations by an issuer. By contrast, if plaintiffs are not entitled to the Basic presumption because they cannot plead fraud on the market, reliance must be proved separately as to each class member, and common issues may not predominate over individual issues. See Basic, 485 U.S. at 242, 108 S.Ct. 978 (Requiring proof of individualized reliance from each member of the proposed plaintiff class effectively would have prevented respondents from proceeding with a class action [under Fed.R.Civ.P. 23(b)(3)], since individual issues then would have overwhelmed the common ones.). 24 Based on the close connection between the Basic presumption and the requirement that questions of law or fact common to the members of the class predominate over any questions affecting only individual members, Fed.R.Civ.P. 23(b)(3), the Seventh Circuit in West reversed a district court's order certifying a class consisting of all purchasers of Jefferson Savings Bancorp stock during the period when a stockbroker was falsely telling his clients that Jefferson would be acquired. West, 282 F.3d at 940. The Court determined first that the Basic presumption could not be applied to a stockbroker's statements to his customers because [t]he district court did not identify any causal link between non-public information and securities prices, let alone show that the link is as strong as the one deemed sufficient (by a bare majority) in Basic....  Id. at 938. Having determined that the Basic presumption could not be applied in the absence of such a causal link, the Court then concluded that common issues did not predominate and the certification decision could not stand. See id. (explaining that [a] district judge may not duck hard questions [at the certification stage] by observing that each side has some support). 25 Here, in certifying a class over the Citigroup Defendants' objections, Judge Cote applied the fraud-on-the-market doctrine to an analyst's expression of opinion as opposed to an issuer's statement of fact. In so doing, Judge Cote declined to wade into th[e] battle of the experts as to the existence of a causal link between Grubman's analyst reports and movements in the price of WorldCom securities; instead, Judge Cote credited the plaintiffs' allegation that Grubman's statements of opinion changed the prices of WorldCom securities during the Class Period. 5 Class Opinion, 219 F.R.D. at 299-300 & n. 42. Thus, like the district court in West, the District Court in the instant case has applied the fraud-on-the-market doctrine in a novel context 6 without identifying a causal link between the statements at issue and the price of securities. 26 The Citigroup Defendants contend that the Basic presumption may not be extended to analyst research reports without a specific finding by the District Court that the analysts' misrepresentations actually affected the price of securities traded in the open market. In support of this contention, the Citigroup Defendants point out that Federal Rules of Civil Procedure 23(b)(3) requires findings by the District Court. See Fed.R.Civ.P. 23(b)(3) (allowing an action to be maintained as a class action only if the court finds that the questions of law or fact common to the members of the class predominate over any questions affecting only individual members (emphasis added)). They argue that by extending the Basic presumption to opinions expressed by an analyst without any finding that the analyst's statements affected market prices, the District Court ignored a crucial distinction between, on the one hand, the uniquely authoritative statements of issuers and, on the other hand, expressions of opinion by analysts. According to the Citigroup Defendants, in light of the direct connection between the Basic presumption and the certification criteria in Rule 23(b)(3), the mere allegation that an analyst's statement affected the price of securities traded in the market must be thoroughly tested at the certification stage. 27 We need not decide what evidentiary showing, if any, the plaintiffs must make at the class certification stage in order to benefit from the Basic presumption in an action against research analysts and their employers. For the purposes of this petition, we simply observe that the Citigroup Defendants have offered a substantial legal argument in support of their position. 7 We also note that, like in West but unlike in Sumitomo, the District Court's extension of the fraud-on-the-market doctrine in the instant case is closely connected to its certification decision, because, in order to recover from the Citigroup Defendants, each class member will have to prove reliance on one or more of Grubman's statements of opinion — either individually or with the benefit of the Basic presumption. 8 Finally, it is our view that the issue presented in this case is not only novel but also significant, because the application of the fraud-on-the-market doctrine to opinions expressed by research analysts would extend the potentially coercive effect of securities class actions to a new group of corporate and individual defendants — namely, to research analysts and their employers. 9 Based on these considerations, we conclude that the Citigroup Defendants have presented an issue that is of fundamental importance to the development of the law of class actions, Sumitomo, 262 F.3d at 140. 28 We also conclude that, in the circumstances presented, the District Court's decision to apply the Basic presumption at the certification stage is likely to escape effective review after entry of final judgment. Id. As the Seventh Circuit noted in West, very few securities class actions are litigated to conclusion, so review of [a] novel and important legal issue [concerning the scope of the Basic presumption] may be possible only through the Rule 23(f) device. West, 282 F.3d at 937. Moreover, numerous courts and scholars have warned that settlements in large class actions can be divorced from the parties' underlying legal positions. See id. (The effect of a class certification in inducing settlement to curtail the risk of large awards provides a powerful reason to take an interlocutory appeal.); In re Visa Check/MasterMoney Antitrust Litig., 280 F.3d 124, 148 (2d Cir.2001) (Jacobs, J., dissenting) (One sound basis for granting jurisdiction under Rule 23(f) is... the circumstance that the class certification `places inordinate or hydraulic pressure on defendants to settle, avoiding the risk, however small, of potentially ruinous liability.' (quoting Newton v. Merrill Lynch, 259 F.3d 154, 164 (3d Cir.2001))) 10 ; see also Janet Cooper Alexander, Do the Merits Matter? A Study of Settlements in Securities Class Actions, 43 Stan. L.Rev. 497 (1991). 29 These concerns about the effect of class certification weigh heavily in the instant case, which arises from the largest corporate fraud and accounting scandal in United States history. (Compl.¶ 1) This is not the run-of-the-mill class action, or even the run-of-the-mill securities class action. As the District Court noted, WorldCom issued billions of shares and billions of dollars of debt securities during the Class Period, and it is uncontested that tens of thousands of investors are putative class members. Class Opinion, 219 F.R.D. at 280. Reflecting on the large number of parties to this litigation, as well as the staggering amount of money to which the class members could be entitled after final judgment, the District Court observed that however deep the pockets of the defendants, the losses suffered through the WorldCom debacle are greater. Id. at 304. Based on this extraordinary observation, coming from a seasoned district judge who is intimately familiar with the pleadings and the record, it is hard to conceive of many cases that are less likely than the instant case to yield an appealable final judgment. With that in mind, we conclude that the novel question presented in this case is not only legally significant but also likely to escape effective review after entry of final judgment. Sumitomo, 262 F.3d at 140.