Court Opinion

ID: 9632432
Source: CourtListenerOpinion
Date Created: 2023-08-22 11:14:47.520083+00
Date Added: 2024-06-11T12:38:07.730833
License: Public Domain

O’SCANNLAIN, Circuit Judge,
concurring:
My colleagues and I agree that the district court did not err in rejecting the integrity of the market presumption that Investors proffered in this case. I therefore join the court’s opinion affirming the district court’s refusal to certify the class. Unfortunately, however, we are left to conclude abruptly with a declaration of the result, for we cannot agree on the correct approach. I believe that, because the validity of a presumption of reliance in securities class actions is a matter of law and because errors of law are per se abuses of discretion, we must explicitly decide whether Investors are entitled to this novel presumption as a matter of law. I write separately to explain my view.
I
We review class certification decisions for abuse of discretion, but errors of law constitute per se abuses of discretion. Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 405, 110 S.Ct. 2447, 110 L.Ed.2d 359 (1990) (“A district court would necessarily abuse its discretion if it based its ruling on an erroneous view of the law.”). Here, Investors squarely raised and the district court forthrightly rejected a new legal theory — the “integrity of the market” presumption. This presumption, as described by Investors, would apply in this case. Therefore, if the presumption is legally valid, then Investors are entitled to plead it. If not, then they are not.
Consider the situation in reverse: suppose the district court had adopted the integrity of the market presumption and granted class certification. In such case, I believe we would be bound to reverse even if existing law did not squarely foreclose such a theory because we would have to decide whether the presumption was legally valid. The same is true here. The district court held that there is no integrity of the market presumption as a matter of law. We must decide whether that legal conclusion was correct.
In short, to reach the integrity of the market presumption on its merits is not a matter of choice. We must decide its validity. It was raised in the district court and addressed by the district court; it was raised and fully briefed on appeal. Where the district court “based its ruling on an erroneous view of the law,” then it “necessarily abuse[d] its discretion.” Id. I am at a loss as to how this case compels variation from this clear rule.
II
As explained, I would address the integrity of the market presumption on the merits. In my view, the presumption is legally unsupported and logically inadvisable. As presented to us, the integrity of the market presumption works in the following way. The average investor in securities typically relies on the “integrity of the market,” that is, that no one has destroyed its efficiency by manipulation. This consideration justifies a presumption of reliance, according to Investors, when manipulation allegedly destroys the efficiency of the market, and with it the reliability of the market’s price.
A
First, the cases from which Investors purport to have derived their theory do not support it.
Investors initially point to Gurary v. Winehouse, 190 F.3d 37 (2d Cir.1999), for support. But Gurary did not recognize any new presumption of reliance. It merely held that, to make out a manipulation claim, a plaintiff must show that he did not know “that the price was affected *944by the alleged manipulation.” Id. at 45. To be sure, the Second Circuit also noted that “[t]he gravamen of manipulation is deception of investors into believing that prices at which they purchase and sell securities are determined by the natural interplay of supply and demand, not rigged by manipulators.” Id. But this language merely summarizes the essence of a manipulation claim. It does not purport to go beyond the fraud on the market presumption.
Sticking with the Second Circuit, Investors also cite Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374 (2d Cir.1974). Such case does indeed offer support, for the opinion held that “proof of transaction causation is unnecessary by virtue of the allegations as to the effectuation of a scheme to defraud which includes market manipulation.” Id. at 381. This seems to say that there is no need to prove reliance to make out a manipulative conduct claim. But even Investors do not take that position. In any event, the Second Circuit has reversed itself on this point. See, e.g., ATSI Commc’ns, 493 F.3d at 101 (listing reliance as an element in a manipulative conduct claim). And In re Blech Securities Litigation, 961 F.Supp. 569 (S.D.N.Y. 1997), another case on which they rely, reiterated the reliance element, even to make out a claim for manipulative conduct. See id. at 585-86. Furthermore, Blech applied the fraud on the market presumption without recognizing any other presumption unique to manipulative conduct cases. Id.
Shores v. Sklar, 647 F.2d 462 (5th Cir. 1981) (en banc), does not help Investors either. In Shores, the Fifth Circuit concluded that, although the plaintiff could not show reliance on the specific misrepresentation, he could nonetheless show reliance because he was entitled to assume that an issued security was legally issued. See id. at 468. As the Fifth Circuit later described the case, Shores embraced a presumption of reliance where alleged fraud created the market for a security, insofar as “actors who introduced an otherwise unmarketable security into the market by means of fraud are deemed guilty of manipulation, and a plaintiff can plead that he relied on the integrity of the market rather than on individual fraudulent disclosures.” Regents of Univ. of Calif. v. Credit Suisse First Boston (USA), Inc., 482 F.3d 372, 391 (5th Cir.2007).
This “fraud created the market” theory, even were it viable, would not help Investors. They do not allege that the manipulative scheme of Deutsche Bank and others created the market for GENI’s stock. GENI’s shares traded publicly before the date the scheme allegedly began. Furthermore, they did not purchase the unregistered shares that the GENI insiders had lent down the chain of broker-dealers. Thus the theory of Shores would not apply to this case.
B
Beside being virtually unknown, an integrity of the market presumption is inadvisable because it would swallow the reliance requirement. Most investors do, I think it fair to say, assume that the markets are not corrupt. Cf. Basic, 485 U.S. at 246-47, 108 S.Ct. 978 (“It has been noted that ‘it is hard to imagine that there ever is a buyer or seller who does not rely on market integrity. Who would knowingly roll the dice in a crooked crap game?’ ” (quoting Schlanger v. Four-Phase Sys. Inc., 555 F.Supp. 535, 538 (S.D.N.Y. 1982))). But if that hypothesis sufficed to presume reliance, then no plaintiff would ever have to prove reliance. That might not worry me if this novel presumption made “the requisite causal connection,” which lies at the heart of the reliance element, “between a defendant’s [bad act] and a plaintiffs injury.” Basic, 485 U.S. at 243, 108 S.Ct. 978. But Investors’ in*945tegrity of the market presumption only connects the buyer or seller of securities with the market price; it does not connect the price to the defendant’s manipulative conduct. Unlike the fraud on the market presumption, this theory would permit a presumption of reliance no matter how unlikely it is that the market price in question would actually reflect the alleged manipulation.
The integrity of the market presumption that Investors proffer, then, would prove too much while doing too little. Prove too much, because it would obviate the need for plaintiffs in manipulative conduct cases to prove reliance; do too little, because it does not complete the causal connection between a plaintiffs transaction in securities and a defendant’s manipulation. Therefore, I would reject the invitation to recognize this new presumption of reliance.
C
Investors make a final argument for a new presumption of reliance that deserves separate discussion. They contend that allegations of manipulative conduct warrant distinctive treatment because the fraud on the market presumption does not apply to them.
It is true that the fraud on the market theory is normally phrased in terms of misrepresentations or omissions. See, e.g., id. (explaining that the fraud on the market theory “provides the requisite causal connection between a defendant’s misrepresentation and a plaintiffs injury.” (emphasis added)); No. 84 Employer-Teamster Joint Council Pension Trust Fund, 320 F.3d at 934 n. 12 (noting that the theory creates a “rebuttable presumption of investor reliance based on the theory that investors presumably rely on the market price, which typically reflects the misrepresentation or omission ” (emphasis added)).
But these statements do not foreclose the application of the fraud on the market theory to manipulative conduct cases. They simply reflect the relative rarity of such cases. Indeed, courts have applied the fraud on the market theory in the context of manipulation. Peil, 806 F.2d at 1162-63 (concluding that the fraud on the market theory pertains to claims brought under clauses (a), (b), and (c) of Rule 10b-5); Scone Invs., L.P. v. Am. Third Market Corp., No. 97 CIV. 3802, 1998 WL 205338, *5 (S.D.N.Y. Apr.28, 1998) (“The fraud on the market theory is especially applicable in the market manipulation context. Market manipulation schemes which are intended to distort the price of a security, if successful, necessarily defraud investors who purchase the security in reliance on the market’s integrity.”).
As a matter of logic, too, the fraud on the market theory is not limited to cases of misrepresentation and omission. Recall that it is “based on the hypothesis that, in an open and developed securities market, the price of a company’s stock is determined by the available material information regarding the company and its business.” Basic, 485 U.S. at 241, 108 S.Ct. 978 (internal quotation marks omitted). The artificial market activity that constitutes manipulative conduct, no less than misrepresentations of, or misleadingly incomplete statements about, a company’s earnings, is also information that the market price either does or does not reflect. The fraud on the market theory is one way courts can presume such a reflection, but Investors have chosen not to rely on it.1 *946They have also chosen not to argue for direct reliance. In other words, Investors have abandoned two well-worn paths to relief. There is no reason, then, to blaze a third, for the law does not let market manipulators off the hook.
Ill
In summary, it seems to me we must reach the validity of the integrity of the market presumption, for it is at the heart of the legal error Investors claim the district court made in the class certification ruling. I therefore concur in the court’s opinion so far as it goes, but write separately to address the legal issue that, in my view, drives this appeal. Doing so, I would conclude that the integrity of the market presumption Investors proffered is not legally valid, so the district court did not err in refusing to recognize it. Thus, where a putative class alleges manipulative conduct as a violation of § 10(b), it must either prove reliance directly or invoke its presumption pursuant to the fraud on the market theory.

. I recognize the possibility that certain allegations of manipulative conduct might change the application of the fraud on the market theory. This is because the plaintiff in manipulation cases often alleges that a defendant directly manipulated the price. Certainly, a plaintiff must still show that the market in *946question could absorb into the price the misinformation communicated by the alleged manipulation. But need a plaintiff show the same type of proof of an efficient market in a manipulation case as is required in a misrepreservation case? Although I note the doctrinal wrinkle, this is a question I would agree we actually do not need to reach, because Investors forsook the fraud on the market theory.