Loss causation and class certification

Michigan Law Review

Volumn 108, Issue 2, 2009, Pages 255-276

  Serajeddini, Steven ^a  

^a NONE

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EID: 71949092160     PISSN: 00262234     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (203)

1. Rule 10b-5 makes it unlawful for any person to "make any untrue statement [or omission] of a material fact ... in connection with the purchase or sale of any security." 17 C.F.R. § 240.10b-5 (2007).
2. Securities Exchange Act of 1934 §10(b), 15 U.S.C. §78j(b) (2006).
3. The Court first recognized this implied remedy in Superintendent of Insurance v. Bankers Life & Casualty Co., 404 U.S. 6 (1971),
4. later acknowledging that it had become "a judicial oak which [grew] from little more than a legislative acorn." Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 737 (1975).
5. Stephen J. Choi & Robert B. Thompson, Securities Litigation and Its Lawyers: Changes During The First Decade After The PSLRA, 106 COLUM. L. REV. 1489, 1490 (2006).
6. See Karen Donovan, Class-Action Cases Rise, Fueled by Subprime Troubles, N. Y. TIMES, Dec. 21, 2007, at C7 ("Class-action filings, excluding subprime cases and those stemming from the backdating of stock options, have increased almost 40 percent from 2006. Average settlements have also jumped, to $33.2 million from $22.7 million.").
7. 4 ALAN R. BROMBERG & LEWIS D. LOWENFELS, BROMBERG AND LOWENFELS ON SECURITIES FRAUD & COMMODITIES FRAUD §7:469, at 7-911 (2d ed. 2008).
8. Id.
9. FED. R. CIV. P. 23(f) advisory committee's note to 1993 amendments;
10. BROMBERG & LOWENFELS, supra note 6. Even a small diminution in stock price spread over a mass of shareholders can result in an enormous judgment against a defendant.
11. In re Polymedica Corp. Sec. Litig., 432 F.3d 1, 17 n.20 (1st Cir. 2005).
12. Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 178 (1974) (reasoning that merits adjudication is best addressed under the "traditional rules and procedures applicable to civil trials" and not in the "absence of established safeguards").
13. FED. R. Civ. P. 23.
14. In re Hydrogen Peroxide Antitrust Litig., 552 F.3d 305, 320 (3d Cir. 2008);
15. Teamsters Local 445 Freight Div. Pension Fund v. Bombardier Inc., 546 F.3d 196, 202-203 (2d Cir. 2008).
16. See BROMBERG & LOWENFELS, supra note 6, §7.462, at 7-898.54.
17. Courts, following the lead of common law fraud, have distilled 10b-5 into six elements: a material misrepresentation (or omission), scienter, a connection with the purchase or sale of a security, reliance, economic loss, and loss causation. Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341-342 (2005).
18. Loss causation asks whether the diminution in value can be attributed to the misrepresentation and subsequent corrective disclosure. 4 THOMAS LEE HAZEN, TREATISE ON THE LAW OF SECURITIES REGULATION §12.11[3], at 160-61 (6th ed. 2009). In its simplest sense, this can be answered with respect to all stockholders with the same methodology.
19. BROMBERG & LOWENFELS, supra note 6, §7:441, at 7-898.5.
20. Basic Inc. v. Levinson, 485 U.S. 224, 242 (1988). Thus, the court must ask "whether the element of reliance raises a common issue, and assuming that it does not whether the common issues still predominate.
21. " Korn v. Franchard Corp., 456 F.2d 1206, 1210 (2d Cir. 1972). Before Basic, courts often incorrectly classified reliance as a question of damages to be determined individually following resolution of the merits of the class, or even eliminated it as an element altogether, to avert conflict with the predominance requirement of Rule 23(b)(3).
22. Comment, The Impact of Class Actions on Rule 10b-5, 38 U. CHI. L. REV. 337, 345-46 (1971). The typical response of courts was to have each shareholder sign an affidavit attesting their reliance, which the court would then have the discretion to accept.
23. Frederick C. Dunbar & Dana Heller, Fraud on the Market Meets Behavioral Finance, 31 DEL. J. CORP. L. 455, 461 (2006). This would be a costly and potentially perjurious exercise for plaintiffs. Courts went to such lengths because the alternative would have been to dismiss every single class action because of the reliance element.
24. The Impact of Class Actions on Rule 10b-5, supra.
25. Fraud-on-the-market theory is "a practical resolution to the problem of balancing the substantive requirement of proof of reliance in securities cases against the procedural requisites of [Rule] 23." Basic, 485 U.S. at 242 (internal quotation marks omitted). Basic memorialized the theorem, which had been around for some time prior.
26. See, e.g., In re LTV Sec. Litig., 88 F.R.D. 134, 143 (N.D. Tex. 1980).
27. Basic, 485 U.S. at 248.
28. Id. at 247.
29. Unger v. Amedisys Inc., 401 F.3d 316, 322 (5th Cir. 2005).
30. Basic, 485 U.S. at 248.
31. 417 U.S. 156, 177 (1974).
32. 457 U.S. 147 (1982).
33. E.g., In re Initial Pub. Offerings Sec. Litig., 471 F.3d 24, 41 (2d Cir. 2006) (holding that class certification "require[s] definitive assessment of Rule 23 requirements, notwithstanding their overlap with merits issues");
34. Gariety v. Grant Thornton, LLP, 368 F.3d 356, 366 (4th Cir. 2004). Nonetheless, courts attempting to vitiate the rigor demanded by Rule 23 continue to invoke Eisen.
35. E.g., In re Hydrogen Peroxide Antitrust Litig., 240 F.R.D. 163, 169 (E.D. Pa. 2007),
36. overruled by In re Hydrogen Peroxide Antitrust Litig., 552 F.3d 305 (3d Cir. 2009).
37. 487 F.3d 261, 265 (5th Cir. 2007).
38. The Fifth Circuit reaffirmed Oscar in Luskin v. Intervoice-Brite Inc., 261 F. App'x 697 (5th Cir. 2008).
39. Oscar, 487 F.3d at 268-270
40. See infra notes 46, 74.
41. For examples of courts in other circuits that have rejected Oscar, see In re Nature's Sunshine Product's Inc. Securities Litigation, 251 F.R.D. 656, 665 (D. Utah 2008) ("[T]he Fifth Circuit's decision in Oscar appears to be in conflict with Supreme Court and Tenth Circuit precedent which warn against determining the merits at the class certification stage.");
42. Lapin v. Goldman Sachs & Co., 254 F.R.D. 168, 186 (S.D.N.Y 2008) ("Oscar should be rejected as a misreading of Basic");
43. and In re Micron Technologies, Inc., Securities Litigation, 247 F.R.D. 627, 634 (D. Idaho 2007) ("It is unlikely that [Oscar's standard] would be adopted in this Circuit because it misreads Basic").
44. For examples of commentators, see Recent Case, Securities Litigation-Class Certification-Fifth Circuit Holds That Plaintiffs Must Prove Loss Causation Before Being Certified As A Class.-Oscar Private Equity Investments v. Allegiance Telecom, Inc., 487 F.3d 261 (5th Cir. 2007),
45. 121 HARV. L. REV. 890, 895 (2008);
46. and Tad E. Thompson, Recent Development, Messin' with Texas: How The Fifth Circuit's Decision in Oscar Private Equity Misinterprets The Fraud-on-theMarket Theory, 86 N.C L. REV. 1086, 1100 ( 2008).
47. See, e.g., Jeffrey L. Oldham, Comment, Taking "Efficient Markets" Out of the Fraud-on-the-Market Doctrine After the Private Securities Litigation Reform Act, 97 Nw. U. L. REV. 995 (2003).
48. 487 F.3d 261 (5th Cir. 2007).
49. Id. at 272 (Dennis, J., dissenting).
50. See Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 342-43 (2005);
51. see also Glaser v. Enzo Biochem, Inc., 464 F.3d 474, 479 (4th Cir. 2006) ("It is only after the fraudulent conduct is disclosed to the investing public, followed by a drop in value of the stock, that the .. . investor has suffered a "loss" that is actionable after the Supreme Court's decision in Dura.").
52. Transaction causation and reliance diverge in certain contexts-for example, in cases concerning proxy statements, where proof of reliance is not always necessary to show transaction causation, or in the case of omissions. 2 FEDERAL REGULATION OF SECURITIES, ANNOTATED §1489, at 43:222 (1997);
53. see Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 153-54 (1972). However, for the purposes of 10b-5, transaction causation has long been equated to reliance.
54. See Dura, 544 U.S. at 341-42. Prior to the PSLRA, some lower courts adopted a much more stringent measure of transaction causation that required more to prove reliance than mere but-for causation,
55. see Herman & MacLean v. Huddleston, 459 U.S. 375, 387 (1983); however, these courts were unwittingly treating causation as a whole.
56. See Devonbrook, Inc. v. Lily Lynn, Inc., No.70 Civ. 4687, 1974 WL 419, at *3-4 (S.D.N.Y June 26, 1974). Professor Donald Langevoort characterizes the elements as follows: "[F]irst, the showing that the market was distorted by the fraud; second, that the emergence of the truth, corrective disclosure, caused a loss to some or all investors. The former, as just noted, is what Basic focused on as a predicate for the presumption of reliance. The latter, loss causation, is conceptually separate."
57. Donald C. Langevoort, Basic at Twenty: Rethinking Fraud-on-the-Market 29 (Georgetown Law & Econ. Research Paper No. 1026316, 2007), available at http://ssrn.com/abstractID=1026316.
58. Alaska Elec. Pension Fund v. Flowserve Corp., 572 F.3d 221, 230 (5th Cir. 2009);
59. In re Motorola Sec. Litig., 505 F. Supp. 2d 501, 542 (N.D. Ill. 2007).
60. Loss causation requires "that the defendant's misrepresentation (or other fraudulent conduct) proximately caused the plaintiff's economic loss." Dura, 544 U.S. at 346. Implicit in the definition of a corrective disclosure is a causal link to the misrepresentation. Therefore, by showing that the disclosure is the corrective disclosure, and that it moved the market, the plaintiff establishes loss causation.
61. See Oscar, 487 F.3d at 265, for a similar conclusion regarding market movement and loss causation.
62. Dura, 544 U.S. at 342;
63. Semerenko v. Cendant Corp., 223 F.3d 165, 185 (3d Cir. 2000) (holding that at any time before the corrective disclosure, "the cost of the alleged misrepresentation is still incorporated into the value of the security and may be recovered at any time simply by reselling the security at the inflated price").
64. The public misrepresentation defrauds purchasers of stock even if they did not specifically rely on the bad information. Basic Inc. v. Levinson, 485 U.S. 224, 241-242 (1988).
65. Id. at 245;
66. accord Bradford Cornell & James C. Rutten, Market Efficiency, Crashes, and Securities Litigation, 81 TUL. L. REV. 443, 455-58 (2006) (noting that fully efficient markets are "not logically possible"). There is some dispute as to what Basic meant by continually referring to the "integrity" of the market. The correspondence between Justice Brennan and Justice Blackmun at the time of the opinion suggests that Justice Blackmun thought that reliance on the integrity of the market was necessary to establish the presumption - that is, "if there exists such a person who did not rely on the integrity of the market price to be accurate, that person was not defrauded by the misrepresentation."
67. See STEPHEN J. CHOI & A.C. PRITCHARD, SECURITIES REGULATION: CASES AND ANALYSIS (2d ed. 2008). Justice Brennan's understanding did not view this belief in integrity to be necessary, and took the view that merely buying through the market was sufficient to establish the presumption.
68. See id.
69. Basic, 485 U.S. at 244.
70. In re LTV Sec. Litig., 88 F.R.D. 134, 143 (N.D. Tex. 1980).
71. 4 HAZEN, supra note 15, § 12.10;
72. Jonathan R. Macey & Geoffrey P. Miller, Good Finance, Bad Economics: An Analysis of the Fraud-on-the-Market Theory, 42 STAN. L. REV. 1059, 1078-1079 (1990).
73. Macey & Miller, supra note 43, at 1077. There are three efficiency hypotheses: weak, semistrong, and strong. Weak form efficiency supposes that stock price is independent of past performance because the market's valuation of the security already includes all historical information. By contrast, strong form efficiency supposes that current market prices reflect all information, both public and private; therefore, even insider traders cannot outperform the market.
74. Id. at 1077-1078
75. Cornell & Rutten, supra note 40, at 458-60;
76. see infra Part II.
77. At least one commentator has suggested the materiality requirement as an alternate means to justify the conclusion of Oscar. See Langevoort, supra note 35, at 39-40.
78. Similarly, the Fifth Circuit opinions in Nathenson v. Zonagen Inc., 267 F.3d 400 (5th Cir. 2001), and
79. Greenberg v. Crossroads Systems, Inc., 364 F.3d 657 (5th Cir. 2004), can be read as attempts by the Fifth Circuit to impose a higher standard of materiality. Given that the cases came before Dura, however, they could also be trying to impose some sort of loss causation pleading requirement.
80. See supra note 37.
81. TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976).
82. Oran v. Stafford, 226 F.3d 275, 282 (3d Cir. 2000) ("[I]f a company's disclosure of information has no effect on stock prices, 'it follows that the information disclosed ... was immaterial as a matter of law.'"
83. (quoting In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1425 (3d Cir. 1997))).
84. Ganino v. Citizens Utils. Co., 228 F.3d 154, 165 (2d Cir. 2000) ("Materiality is determined in light of the circumstances existing at the time the alleged misstatement occurred.").
85. Spielman v. Gen. Host Corp., 402 F. Supp. 190, 194 (S.D.N.Y 1975) ("The determination of materiality is to be made upon all the facts as of the time of the transaction and not upon a 20-20 hindsight view long after the event." (emphasis added)), aff'd, 538 F.2d 39 (2d Cir. 1976).
86. For example, the Second, Fourth, and Ninth circuits, as well as the SEC, espouse this view. In re Salomon Analyst Metromedia Litig., 544 F.3d 474, 482 (2d Cir. 2008) (holding, postOscar, that the concept of materiality in Basic does not require market movement and to require it would "misread" Basic);
87. Greenhouse v. MCG Capital Corp., 392 F.3d 650, 660-61 (4th Cir. 2004) ("The majority rule seems to be that [a stock price drop] can be some evidence, but not, standing alone, dispositive evidence.");
88. No. 84 Employer-Teamster Joint Council Pension Trust Fund v. Am. W Holding Corp., 320 F.3d 920, 934 (9th Cir. 2003);
89. SEC Staff Accounting Bulletin No. 99, 64 Fed. Reg. 45,150, 45,152 (1999) ("Consideration of potential market reaction to disclosure of a misstatement is by itself 'too blunt an instrument to be depended on' in considering whether a fact is material.");
90. see also United States v. Bilzerian, 926 F.2d 1285, 1298 (2d Cir. 1991) ("[W]hether a public company's stock price moves up or down or stays the same after the filing of a Schedule 13D does not establish the materiality of the statements made, though stock movement is a factor the jury may consider relevant.").
91. Dunbar & Heller, supra note 17, at 509-510 (explaining how immaterial information can affect stock prices).
92. No. 84 Employer-Teamster Joint Council Pension Trust Fund, 320 F.3d at 934 ("Because of the[] distortions [in 'efficient markets'], adoption of a bright-line rule assuming that the stock price will instantly react would fail to address the realities of the market.").
93. See 4 HAZEN, supra note 15, § 12.9, for a list of different categories of information that courts have deemed material.
94. SEC Staff Accounting Bulletin No. 99, 64 Fed. Reg. 45,150, 45,152. One commentator has argued that the standard should instead focus on the length of the misrepresentation, rather than the degree, because persistent misstatements are more likely to affect the market.
95. James J. Park, Assessing the Materiality of Financial Misstatements (Brooklyn Law Sch., Legal Studies Paper No. 109), available at http://papers.ssrn.com/sol3/papers.cfm?abstract-id=1158566. In any case, this is a general standard of materiality.
96. See Oscar Private Equity Invs. v. Allegiance Telecom, Inc., 487 F.3d 261, 269 (5th Cir. 2007).
97. See id.
98. (citing Macey & Miller, supra note 43, at 1083). For a commentator's take on the same point,
99. see, for example, Carol R. Goforth, The Efficient Capital Market Hypothesis-An Inadequate Justification for the Fraud-on-the-Market Presumption, 27 WAKE FOREST L. REV. 895 (1992).
100. Macey & Miller, supra note 43, at 1078. The Court did not apply either strong or weakform efficiency. Strong form efficiency would preclude a misrepresentation claim because the market would know the truth regardless of the misrepresentations of the defendant. At the same time, Basic explicitly went beyond weak form efficiency, which focuses only on past stock prices, by noting that the market price of shares reflects all publicly available information-the definition of semistrong form efficiency.
101. Id.
102. see Basic v. Levinson, 485 U.S. 224, 246 (1988).
103. Macey & Miller, supra note 43, at 1078.
104. See generally RICHARD A. BREALEY ET AL., PRINCIPLES OF CORPORATE FINANCE 331-354 (8th ed. 2006) (describing the efficient markets hypothesis and its most common anomalies).
105. Gariety v. Grant Thornton, LLP, 368 F.3d 356, 368 (4th Cir. 2004) ("[Basic] offers little guidance for determining whether a market is efficient."). Courts have had a difficult time providing a definition for an efficient market.
106. Brad M. Barber et al., The Fraud-on-the-Market Theory and the Indicators of Common Stocks' Efficiency, 19 J. CORP. L. 285, 310 (1994) ("[D]etermination of efficiency has to date been based on intuition, rules of thumb, or both.").
107. See supra Section I. A.
108. The Oscar court was particularly concerned with this type of efficiency. Oscar Private Equity Invs. v. Allegiance Telecom, Inc., 487 F.3d 261, 269-270 (5th Cir. 2007).
109. The Cammer test, discussed infra note 66, predominantly focuses on security-specific factors. Cammer v. Bloom, 711 F. Supp. 1264, 1286-1287 (D.N.J. 1989).
110. Basic Inc. v. Levinson, 485 U.S. 224, 241 (1988).
111. The most common test, first announced in Cammer, 711 F. Supp. at 1286-87, is a general approach that looks at a number of factors characteristic of efficiency: (1) a large weekly trading volume; (2) the existence of a significant number of reports by securities analysts; (3) the existence of market makers and arbitrageurs in the security; (4) the eligibility of the company to file an S-3 Registration Statement; and (5) a history of immediate movement of the stock price caused by unexpected corporate events or financial releases.
112. In re Polymedica Corp. Sec. Litig., 432 F.3d 1, 14 (1st Cir. 2005).
113. The case for market movement is stronger for materiality-but similarly unavailing- which by its definition focuses on the specific type of information. See infra Section II.C.
114. Oscar Private Equity Invs. v. Allegiance Telecom, Inc., 487 F.3d 261, 269-270 (5th Cir. 2007).
115. Like materiality, the specific instance may in fact be sufficient but not necessary to generally show efficiency because it would be the most probative example for factor five of the Cammer test. See supra note 66.
116. Basic Inc. v. Levinson, 485 U.S. 224, 248-249 (1988).
117. Id. at 248.
118. Oscar, 487 F.3d at 265 ("In Nathenson [v. Zonagen Inc., 267 F.3d 400 (5th Cir. 2001)], the link was severed by publicly available information that the misrepresentation didn't move the stock price."). It is worth noting at this point that market movement after the disclosure does not rebut the presumption. This evidence bears on loss causation and only incidentally on reliance, provided the defendant can show that the disclosure really was at the time when the market disseminated the information and no other changed circumstances accounted for the absence of a drop. Interestingly, this would effectively require the defendant to show all the causal elements of loss causation, but without a loss, to mount a rebuttal.
119. See Greenberg v. Crossroads Sys., Inc., 364 F.3d 657, 666 (5th Cir. 2004) ("[P]laintiffs must demonstrate: (1) that the negative 'truthful' information causing the decrease in price is related to an allegedly false, non-confirmatory positive statement made earlier and (2) that it is more probable than not that it was this negative statement, and not other unrelated negative statements, that caused a significant amount of the decline."). In other words, loss causation provides the necessary link between the disclosure and the misrepresentation, and this, by extension, allows reliance-or but-for causation, which is focused on the misrepresentation-to be refuted through the disclosure.
120. E.g., Jaime A. Levitt & Michael Gerard, Loss Causation at Class Certification: Illusory Circuit Split, N. Y.L. J., Nov. 5, 2008, at para. 20.
121. Id.
122. But see Oscar, 487 F.3d at 275 (Dennis, J., dissenting). Judge Dennis takes the position that Basic also shifts the burden of persuasion.
123. Id.
124. FED. R. EVID. 301.
125. Oscar, 487 F.3d at 274 (Dennis, J., dissenting).
126. 1 CHRISTOPHER B. MUELLER & LAIRD C. KIRKPATRICK, FEDERAL EVIDENCE § 71, at 1336-1339 (2d ed. 1994).
127. See supra Sections I.B.I & I.B.2.
128. As explained in note 73, supra, an absence of a price movement after a disclosure is not in itself a rebuttal.
129. Alternatively, the plaintiff could abandon the fraud-on-the-market presumption and attempt to prove actual reliance for some or all class members. Zlotnick v. TLE Commc'ns, 836 F.2d 818, 824 (3d Cir. 1988).
130. FED. R. CIV. P. 23(C)(1)(B) (emphasis added).
131. Cf. Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 342 (2005) ("[I]f, say, the purchaser sells the shares quickly before the relevant truth begins to leak out, the misrepresentation will not have led to any loss.").
132. See Allen Ferrell & Atanu Saha, The Loss Causation Requirement for Rule 10b-5 Causes of Action: The Implications of Dura Pharmaceuticals, Inc. v. Broudo, 63 Bus. LAW. 163, 175-176 (2007).
133. In re Sun Microsystems, Inc. Sec. Litig., No. C-89-20351-RPA, 1990 WL 169140, at *8 (N.D. Cal. Aug. 20, 1990) (quoting In re Sunrise Sec. Litig., No. 655, 1987 WL 19343, at *2 (E.D. Pa. July 7, 1987)).
134. Colindres v. QuietFlex Mfg., 235 F.R.D. 347, 368 (S.D. Tex. 2006).
135. See Dura, 544 U.S. at 342. The definition of corrective disclosure assumes reflexivity with the initial misrepresentation. It may take one of many forms, ranging from an outright statement to a diffuse market dissemination of the truth. To understand the nature of this definition of disclosure is to understand, if possible, exactly what "proximately caused the loss."
136. See supra note 37 and accompanying text for further discussion on this identity.
137. In re SciMed Securities Litigation, No. 3-91-575, 1993 WL 616692 (D. Minn. Sept. 29, 1993), held that "commencement and termination dates for a class period and concomitant class membership determinations can be resolved only by an inquiry to the merits of the suit."
138. Id. at *7. The court then concluded, however, that Eisen prohibited such an exercise.
139. Id.
140. But even in these instances, the corrective disclosure may actually turn out to be a market dissemination of the truth in advance of the apparent disclosure.
141. See In re Ikon Office Solutions, Inc., 191 F.R.D. 457, 467 (E.D. Pa. 2000).
142. 417 U.S. 156, 178 (1974).
143. 7AA CHARLES ALAN WRIGHT ET AL., FEDERAL PRACTICE AND PROCEDURE §1785 (3d ed. 2005 & Supp. 2009).
144. Gen. Tel. Co. of Sw. v. Falcon, 457 U.S. 147, 160 (1982);
145. In re Initial Pub. Offerings Sec. Litig., 471 F.3d 24, 41 (2d Cir. 2006) ("[Class certification] require[s] definitive assessment of Rule 23 requirements, notwithstanding their overlap with merits issues." (emphasis added)),
146. reh'g denied, 483 F.3d 70 (2d Cir. 2007);
147. Gariety v. Grant Thornton, LLP, 368 F.3d 356, 366 (4th Cir. 2004);
148. Newton v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 259 F.3d 154, 166 (3d Cir. 2001);
149. cf. Prof'l Adjusting Sys. of Am., Inc. v. Gen. Adjustment Bureau, Inc., 64 F.R.D. 35, 38 (S.D.N.Y. 1974) (holding it acceptable, in a pre-2003 amendment context, to conduct "discovery directed at an early stage of the litigation to the very purpose of defining the class or determining that it is too amorphous for judicial handling"). The Fifth Circuit has warned, however, that a class certification hearing should not digress into "mini-trials on the merits of the class or individual claims."
150. Unger v. Amedisys Inc., 401 F.3d 316, 321 (5th Cir. 2005).
151. See, e.g., In re Hydrogen Peroxide Antitrust Litig., 552 F.3d 305, 320 (3d Cir. 2008) ("[A] district court errs as a matter of law when it fails to resolve a genuine legal or factual dispute relevant to determining the requirements [of Rule 23].");
152. Oscar Private Equity Invs. v. Allegiance Telecom Inc., 487 F.3d 261, 267-268 (5th Cir. 2007).
153. See, e.g., In re Boesky Sec. Litig., 120 F.R.D. 626, 628 (S.D.N.Y 1988) (holding a mere determination of the "character or type" of the plaintiffs was necessary);
154. Staffln v. Greenberg, No.79-3157, 1980 WL 1404, at *2 (E.D. Pa. Feb. 27, 1980) ("It may well be that... a number of class members may be shown to have suffered no damage. That fact does not and should not, prevent the court from certifying a class provided that the Rule 23 requirements are met."
155. (quoting Tucker v. Arthur Anderson, 67 F.R.D. 468, 482 (S.D.N. Y. 1975))).
156. See FED. R. CIV. P. 23(C)(1) ("An order that grants or denies class certification may be altered or amended before final judgment.");
157. see also, e.g., In re Blech Sec. Litig., No.94 Civ. 7696(RWS), 2003 WL 1610775, at *16 (S.D.N.Y Mar. 26, 2003) (changing the class period to the period in which plaintiff actually alleged damages);
158. Gilbert v. First Alert, Inc., 165 F.R.D. 81 (N.D. Ill. 1996).
159. See Alliance to End Repression v. Rochford, 565 F.2d 975, 977 (7th Cir. 1977) (listing cases that state a definiteness requirement).
160. Vernon J. Rockier & Co., Inc. v. Graphic Enters., Inc., 52 F.R.D. 335, 338 (D. Minn. 1971).
161. E.g., Mueller v. CBS, Inc., 200 F.R.D. 227, 233 (W.D. Pa. 2001)
162. (quoting In re Tetracycline Cases, 107 F.R.D. 719, 728 (WD. Mo. 1985)).
163. Bzdawka v. Milwaukee County, 238 F.R.D. 469, 474 (E.D. Wis. 2006). Courts usually make this determination on a case-by-case basis.
164. E.g., Roman v. ESB, Inc., 550 F.2d 1343, 1348 (4th Cir. 1976).
165. For further precision, see Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005).
166. See Choi & Thompson, supra note 4, at 1490 ("[T]he PSLRA reflected several core assertions that had been part of the push for the legislation: plaintiffs' attorneys initiated and managed securities class actions; attorneys had incentives to pursue claims that were not optimal for corporations, shareholders, and the larger society; settlement was independent of the merits.").
167. See, e.g., In re Victor Techs. Sec. Litig., 102 F.R.D. 53, 58 (N.D. Cal. 1984), aff'd, 792 F.2d 862 (9th Cir. 1986) ("[S]hould the development of facts during the course of the litigation prove otherwise, this court can always fashion appropriate relief at that time.");
168. Weinberger v. Thornton, 114 F.R.D. 599, 606 (S.D. Cal. 1986) ("[T]his court must, at this stage of the proceedings, accept the proposed time limits of the Class Period. They will be adjusted, if necessary, by the trier of fact."). Courts will then amend the class period or introduce subclasses to ensure the requirements of Rule 23 are met.
169. See Robert G. Bone & David S. Evans, Class Certification and the Substantive Merits, 51 DUKE L.J. 1251, 1292 (2002) ("[T]he class obtains substantial settlement leverage from a favorable certification decision.").
170. See Bryant G. Garth, Studying Civil Litigation Through the Class Action, 62 IND. L.J. 497, 501-502 (1987) ("[T]he failure to win certification reduces the bargaining power of the plaintiff and the will to continue the fight.... Class certification makes such a difference in the settlement value of the case that defendants will not take plaintiffs' claims seriously until certification is achieved.").
171. Studies have shown that even where the parties are experts or are informed of the potential framing effect, the effects of anchoring persist. Birte Englich & Thomas Mussweiler, Sentencing Under Uncertainty: Anchoring Effects in the Courtroom, 31 J. APPLIED SOC. PSYCHOL. 1535, 1536 (2001). For background discussion on the effects of anchoring in the courtroom, as well as the phenomenon in general,
172. see id.
173. See Bone & Evans, supra note 104 ("[T]he vast majority of certified class actions settle, most soon after certification.");
174. Garth, supra note 105.
175. The timing of the class period decision should have no effect on the expected settlement prior to the class certification stage. The probability of proving the affirmative case, which defines the expected judgment, is constant regardless of the timing.
176. STEVEN SHAVELL, FOUNDATIONS OF ECONOMIC ANALYSIS OF LAW 422-423 (2004).
177. See infra Section ILD for a discussion on why this is the case.
178. See H.R. REP. NO.104-369, at 31 (1995) (Conf. Rep.), as reprinted in 1995 U.S.C.C.A.N. 730, 730 (noting that the PSLRA was an attempt to curb "the abuse of the discovery process to impose costs so burdensome that it is often economical for the victimized party to settle");
179. Richard A. Posner, An Economic Approach to Legal Procedure and Judicial Administration, 2 J. LEGAL STUD. 399, 418 (1973).
180. Posner, supra note 111, at 418-419
181. First, the potential judgments are exponentially large compared to the typical civil suits. Risk aversion has commonly been used as a justification for the frequency of settlement in securities class actions and the oft-noted irrelevance of the merits. Unsurprisingly, studies show that the greater the risk-i.e., the judgment-the greater the aversion-i.e., the desire to settle. Second, the costs of litigation are very high. The higher the costs of litigation, the greater the range of possible settlement values.
182. See id.
183. Because the cost of taking a securities suit to trial can be in the millions and span several years, it is more likely that the parties' respective expectations of prevailing (taking into account an optimism bias) will fail to overcome this range. This intrinsic high likelihood of settlement makes it more advantageous for plaintiffs to seek negative-value suits-suits with an expected value of less than zero at the outset.
184. See Bone & Evans, supra note 104, at 1294-95, 1298 ("[F]irst, the class action magnifies the stakes through aggregation; second, it increases the defendant's riskbearing, litigation, and reputation costs .... [C]orporate defendants tend to be risk-neutral, but they are likely to become more risk-averse as the potential class-wide liability represents a larger fraction of corporate assets.").
185. At the time of the PSLRA, some commentators expressed concern that the heightened pleading standards, an arguably analogous modification to the one at issue in this Note, would impose a societal cost because the increase in false negatives would outweigh the decrease in false positives. See Lynn A. Stout, Type I Error, Type II Error, and the Private Securities Litigation Reform Act, 38 ARIZ. L. REV. 711 (1996).
186. For a discussion concluding that Congress has succeeded in this intent to some extent thus far, see Marilyn F. Johnson et al., Do the Merits Matter More? The Impact of the Private Securities Litigation Reform Act, 23 J.L. ECON. & ORG. 627 (2007).
187. Increased expected trial costs for the defendant mean a greater likelihood of settlement. When the loss causation case is strong, requiring the plaintiff to prove it at class certification will not reduce his probability of attaining class certification (which makes the defendant less likely to settle) sufficiently to offset the increased cost of class certification.
188. Because class certification requires the parties to prove loss causation, those cases that make it past this point will be more likely to prevail at trial. This increases the expected judgment after class certification. It is worth noting that, again, the expected judgment before class certification will not change.
189. For a discussion of the motivations behind the PSLRA and how it has changed securities class actions, see Choi & Thompson, supra note 4.
190. These fears were noted by many as a byproduct of the PSLRA. See, e.g., Stephen J. Choi, Do the Merits Matter Less After the Private Securities Litigation Reform Act?, 23 J.L. ECON. & ORG. 598 (2007);
191. Stout, supra note 114. There could be a similar effect here. A fundamental difference between a heightened standard at class certification rather than a motion to dismiss- which Professor Choi's paper addresses-is that the former allows more substantive discovery and careful examination and therefore courts are less likely to be influenced by superficial factors such as the "hard evidence" of a concurrent SEC investigation.
192. An increase in the expected costs of litigation makes settlement more likely. See Posner, supra note 111, at 417-420
193. See supra note 117.
194. See Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 178 (1974).
195. This is true despite the fact that class certification decisions can be appealed under FED. R. CIV. P. 23(f).
196. In re Initial Pub. Offerings Sec. Litig., 471 F.3d 24, 41 (2d Cir. 2006) ("[Determination as to a Rule 23 requirement is made only for purposes of class certification and is not binding on the trier of facts, even if that trier is the class certification judge.").
197. FED. R. CIV. P. 23(C)(1)(A) (1998) (amended 2003).
198. See Oscar Private Equity Invs. v. Allegiance Telecom, Inc., 487 F.3d 261, 267 (5th Cir. 2007).
199. FED. R. CIV. P. 23(C)(1)(A).
200. FED. R. CIV. P. 23(C)(1)(C) advisory committee's note to 2003 Amendment.
201. See generally Edward Brunet, Markman Hearings, Summary Judgment, and Judicial Discretion, 9 LEWIS & CLARK L. REV. 93 (2005) (discussing the timing and procedural ramifications of Markman hearings).
202. See, e.g., Thompson, supra note 29, at 1100 ("By increasing the standard for materiality, shifting the rebuttable presumption in favor of plaintiffs to a burden they must bear, and moving this determination to the class certification stage, the logical conclusion is that the Fifth Circuit's holding will make it much more difficult for plaintiffs alleging securities fraud to succeed in 10b-5 litigation.") (emphasis added);
203. Recent Case, supra note 29, at 896 ("Requiring loss causation at the certification stage reduces the likelihood that such attorneys can extract a quick settlement by alleging loss causation even though the case is unlikely to prevail at trial.").