United States: Class Certification In Securities Fraud Actions: A View From The Second Circuit

INTRODUCTION

It has been said that "consensus holds that allegations of securities fraud are particularly suitable for class action treatment" under Federal Rule of Civil Procedure 23. Kermit Roosevelt III, Defeating Class Certification in Sec. Fraud Actions, 22 REV. LITIG. 405, 406 (2003), accord, Biben v. Card, 1986 WL 1199, at *12 (W.D. Mo. 1986) ("Securities fraud cases are uniquely suited to class action treatment.") (citation and quotations omitted). Nevertheless, there are various issues that arise at the class certification stage in federal securities fraud litigation that must be resolved through rigorous analysis before the matter may proceed on a class basis. This article presents a current overview of many of those issues, primarily from the perspective of courts within the Second Circuit.

I. THE SECOND CIRCUIT FRAMEWORK FOR ASSESSING THE REQUIREMENTS OF RULE 23

A. Rule 23 Requirements Generally

In determining whether class certification is appropriate under Rule 23, a district court must first ascertain whether the proposed class representative meets the preconditions of Rule 23(a) – numerosity, commonality, typicality, and adequacy – and whether the proposed class action is maintainable by satisfying one of the subsections of Rule 23(b). In the context of securities fraud class actions, the relevant subsection is 23(b)(3), which requires that "[t]he questions of law or fact common to the members of the class predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fair[ly] and efficient[ly] adjudicat[ing] of the controversy." Fed.R.Civ.P. 23(b)(3) (2009). If the district court determines that the claim meets these requirements of 23(a) and 23(b), it may grant class certification.

B. Burden of Proof

The party moving for class certification bears the burden of demonstrating that each of the Rule 23 prerequisites is met. See, e.g., Newman v. RCN Telecom Servs., Inc., 238 F.R.D. 57, 72 (S.D.N.Y. 2006) ("In order to pass muster, plaintiffs–who have the burden of proof at class certification–must make 'some showing' [that the class comports with Rule 23]. That showing may take the form of, for example, expert opinions, evidence (by document, affidavit, live testimony, or otherwise), or the uncontested allegations of the complaint.") (citations omitted). Moreover, the district court must find that the Rule 23 requirements are met by a "preponderance of the evidence." Teamsters Local 445 Freight Div. Pension Fund v. Bombardier Inc., 546 F.3d 196, 202 (2d Cir. 2008), accord, In re Dynex Capital, Inc. Sec. Litig., No. 05 Civ. 1897(HB), 2011 WL 781215, at *1 (S.D.N.Y. March 7, 2011).

C. Standard of Determination

Rule 23 is given liberal rather than restrictive construction, and "courts are to adopt a standard of flexibility." In re Sadia, S.A. Sec. Litig., 269 F.R.D. 298, 304 (S.D.N.Y. 2010) (granting motion for class certification); see also, Gary Plastic Packaging Corp. v. Merrill Lynch, 903 F.2d 176, 179 (2d Cir. 1990), cert. denied, 902 F.2d 176 (2d Cir. 1991) ("In light of the importance of the class action device in securities fraud suits, [Rule 23] these factors are to be construed liberally.") (citations omitted). That said, "[t]he class-action device was designed as an exception to the usual rule that litigation is conducted by and on behalf of the individual named parties only." Gen. Tel. Co. of Sw. v. Falcon, 457 U.S. 147, 155 (1982) (internal quotations omitted), accord, In re Visa Check/Mastermoney Antitrust Litig., 192 F.R.D. 68, 78 (E.D.N.Y. 2000), aff'd, 280 F.3d 124 (2d Cir. 2001). Therefore, [a]pproving a party to represent (and, upon final judgment, bind) absent class members ought not be taken lightly. Nor should subjecting defendants to the enhanced potential liability that comes with a certified class." In re Countrywide Fin. Corp. Sec. Litig., 273 F.R.D. 586, 595 (C.D. Cal. 2009).

The Second Circuit has summarized its standard of determination for class certification as follows:

In re Initial Pub. Offering (IPO) Sec. Litig., 471 F.3d 24, 41 (2d Cir. 2006). Thus, rather than accepting "some showing" by the plaintiffs that the claim satisfies the requirements of Rule 23, the district court must make a clear "ruling" or "determination" that each requirement is met before granting class certification even if there is an overlap with an issue on the merits. Id. at 40, accord, Lapin v. Goldman Sachs & Co., 254 F.R.D. 168, 174 (S.D.N.Y. 2008). Notably, "the district judge must receive enough evidence, by affidavits, documents, or testimony, to be satisfied that each Rule 23 requirement has been met." In re IPO Sec. Litig., 471 F.3d at 41 (emphasis added). In this regard, a district judge must assess all relevant evidence, including expert testimony, to make this determination, "just as the judge would resolve a dispute about any other threshold prerequisite for continuing a lawsuit." Id., accord, In re Sadia, S.A. Sec. Litig., 269 F.R.D. at 307; Fogarazzo v. Lehman Bros., Inc., 263 F.R.D. 90, 98 (S.D.N.Y. 2009).¹

Although expert testimony is not explicitly required to support a motion for class certification, Plaintiffs will likely have to produce an expert who can demonstrate that injury can be proven on a classwide basis with common proof. Indeed, plaintiffs and defendants routinely present expert testimony at the class certification phase, and failure to do so can have severe consequences. For example, the Eighth Circuit affirmed an order denying class certification for lack of expert evidence presented by plaintiff, holding, "a court may be required to resolve disputes concerning the factual setting of the case. This extends to the resolution of expert disputes concerning the import of evidence concerning the factual setting – such as economic evidence as to business operations or market transactions." Blades v. Monsanto Co., 400 F.3d 562, 575 (8th Cir. 2005). This inquiry should be limited to whether, "if [plaintiff's] basic allegations were true, common evidence could suffice, given the factual setting of the case, to show classwide injury." Id.²

II. RULE 23(A) REQUIREMENTS

To be certified, a putative class must initially meet all four prerequisites set forth in Rule 23(a), commonly referred to as numerosity, commonality, typicality, and adequacy. In re Salomon Analyst Metromedia Litig. v. Citigroup Global Mkts., Inc., 544 F.3d 474, 478 (2d Cir. 2008).

A. Numerosity

First, the proposed class must be so numerous that the joinder of all members is impractical. Fed.R.Civ.P. 23(a)(1). However, joinder need not be impossible. "[J]oinder may merely be difficult or inconvenient, rendering use of a class action the most efficient method to resolve plaintiffs' claims." In re Sadia, S.A. Sec. Litig., 269 F.R.D. at 304; Fogarazzo, 263 F.R.D. at 96.

In the context of securities fraud litigation, this requirement is fairly straightforward. "In securities fraud class actions relating to publicly owned and nationally listed corporations, the numerosity requirement may be satisfied by a showing that a large number of shares were outstanding and traded during the relevant period." In re IMAX Sec. Litig., 272 F.R.D. 138, 146 (S.D.N.Y. 2010) (quoting In re Vivendi Universal, S.A. Sec. Litig., 242 F.R.D. 76, 84 (S.D.N.Y. 2007)); see also, Cheney v. Cyberguard Corp., 213 F.R.D. 484, 490 (S.D. Fla. 2003) ("[C]ourts generally assume that the numerosity prong has been met where a class action involves nationally traded securities.") (citation omitted). Moreover, "numerosity is presumed when a class consists of 40 members" or more. Consol. Rail Corp. v. Town of Hyde Park, 47 F.3d 473, 483 (2d Cir. 1995).

B. Commonality

Second, there must be questions of law and fact that are common to all class members. Fed.R.Civ.P. 23(a)(2). However, it is not necessary that all class members make identical claims and arguments. As long as "common questions ... predominate, differences among the questions raised by individual members will not defeat commonality." In re Sadia, S.A. Sec. Litig., 269 F.R.D. at 304; Fogarazzo, 263 F.R.D. at 96. Commonality often merges with the Rule 23(a)(3) requirement of typicality, discussed below, because "'both serve as guideposts for determining whether . . . the named plaintiff's claim and the class claims are so interrelated that the interests of the class members will be fairly and adequately protected in their absence.'" In re IMAX Sec. Litig., 272 F.R.D. at 146 (quoting Gen. Tele. Co. of Sw., 457 U.S. at 158 n. 13).

Like numerosity, "[t]he commonality requirement has been applied permissively in securities fraud [class] litigation." In re Initial Public Offering Sec. Litig., 227 F.R.D. 65, 87, (S.D.N.Y. 2004), vacated on other grounds, 471 F.3d 24 (2d Cir. 2006) (footnotes omitted). "In general, where putative class members have been injured by similar material misrepresentations and omissions, the commonality requirement is satisfied." Id. Furthermore, because a party seeking certification for a securities fraud class action must also satisfy the more demanding "predominance" requirement of 23(b)(3); the Supreme Court has stated that the commonality inquiry is essentially "subsumed under" this more stringent predominance inquiry. Amchem Prod., Inc. v. Windsor, 521 U.S. 591, 609 (1997). The Second Circuit has followed this holding. See, e.g., Brown v. Kelly, 609 F.3d 467, 486 (2d Cir. 2010) ("To the extent that the [defendants] contend that [plaintiff] failed to establish commonality and typicality under Rule 23(a) because individualized questions will arise, we address these arguments infra in the context of the predominance requirement of Rule 23(b)(3).") (citation omitted).

C. Typicality

The third requirement under Rule 23(a) is that the claims or defenses of the representative parties must be typical of the claims or defenses of the class. Fed.R.Civ.P. 23(a)(3). Thus "the party seeking certification must show that 'each class member's claim arises from the same course of events and each class member makes similar legal arguments to prove defendant's liability.'" In re Flag Telecom Holdings, Ltd. Sec. Litig., 574 F.3d 29, 35 (2d Cir. 2009) (quoting Robidoux v. Celani, 987 F.2d 931, 936 (2d Cir. 1993)). This burden is "fairly easily met." DeBoer v. Mellon Mortg. Co., 64 F.3d 1171, 1174 (8th Cir. 1995), accord, Dupler v. Costco Wholesale Corp., 249 F.R.D. 29, 40 (E.D.N.Y. 2008).

Nonetheless, a lack of typicality may be found in cases where the named plaintiff "was not harmed by the [conduct] he alleges to have injured the class" or the named plaintiff's claim is subject to "specific factual defenses atypical of the class." In re Sadia, S.A. Sec. Litig., 269 F.R.D. at 304-05; Fogarazzo, 263 F.R.D. at 96. Indeed, class certification is inappropriate where the unique defenses of a class representative might become "the focus of litigation" and thus threaten the interests of absent class members. Gary Plastic Packaging Corp., 903 F.2d at 180, cert. denied, 903 F.2d 176 (2d Cir. 1991); see also, Baffa v. Donaldson, Lufkin & Jenrette Sec. Corp., 222 F.3d 52, 60 (2d Cir. 2000).

In securities fraud class actions in particular, the possibility of unique defenses is often a problem for the proposed class because the circumstances surrounding the representatives' purchases of securities are often different from those of the other class members. If the timing or motivation behind these purchases is found to be substantially different from the rest of the class, the district court may find the representative claims atypical and deny certification.

1. Unique Defenses Arising from the Circumstances of Plaintiffs' Transactions in the Subject Securities

One example of this is where the representatives of the proposed class are shown to have relied upon an insider or broker or other investment professionals in making their purchases. In Blank v. Jacobs, the court denied plaintiffs' motion for class certification because the lead plaintiffs did not rely on statements of the company's auditors in purchasing shares and thus "did not rely on the price of the stock as a reflection of the value of that stock." No. 03-CV-2111 (JS)(MLO), 2009 WL 3233037, at *5 (E.D.N.Y. Sept. 30, 2009). Instead, the lead plaintiffs relied upon either information received from the company that was not otherwise available or their own assessment of the value of the shares. Id. Because the proposed lead plaintiffs would be subject to unique defenses that threatened to become the focus of the litigation, the court held that typicality had not been established by a preponderance of the evidence. Id. at *6.

In addition, a district court may determine that there is a lack of typicality given the timing of the proposed class representatives' purchases of the securities. If these lead plaintiffs were 'in-and-out' traders who purchased and sold all of their stock before the alleged fraud was first revealed, they may not be able to satisfy the loss causation element of their Section 10(b) claim. Thus, given that the in-and-out traders are subject to unique defenses, the court is likely to determine that their claims as proposed lead plaintiffs are atypical of the class by a preponderance of the evidence. See, e.g., In re Flag Telecom Holdings, Ltd. Sec. Litig., 574 F.3d 29 (2d Cir. 2009) (finding that investors seeking class certification did not meet the typicality requirement of Rule 23(A)(3) because they did not show by a preponderance of the evidence that they were likely to establish loss causation).

Similarly, in In re IMAX Sec. Litig., 272 F.R.D. at 147, the court held that the plaintiff seeking class representative status was subject to unique defenses because it could not establish loss causation and thus was atypical. The complaint sought damages based on a stock price drop following an alleged corrective disclosure regarding an SEC investigation into financial results. Id. The plaintiff purchased stock prior to the close of the company's fourth quarter of 2005 and prior to the announcement of financial results in that quarter. Id. However, the August 9, 2006 disclosure at issue was not a corrective disclosure for alleged misstatements because it went "beyond the temporal (4Q 2005 and later) and topical . . . limitations" of the alleged misstatements. Id. at 148. Thus, the court explained: "While a disclosure of a government investigation may be sufficient to adequately plead loss causation, . . . a corrective disclosure for the purposes of loss causation should place investors on notice of the type of specific fraudulent accounting practices that Plaintiffs allege. Here, while the disclosure of the SEC investigation specifically addressed IMAX's MEA accounting policy that was applied in 4Q 2005, and disclosed in the Company's 2005 10–K, it did not address, or suggest an investigation into, IMAX's accounting practices in earlier periods." Id. at 149 (internal quotations omitted). As a result, the plaintiff could not establish loss causation and thus could not establish typicality for purposes of class certification.

Finally, some courts look to the circumstances of the purchase and sale to determine that the class members are in conflict and thus cannot satisfy typicality. For example, in In re Seagate Tech. II Sec. Litig., 843 F. Supp. 1341 (N.D. Cal. 1994), the court found that there were potential class conflicts between a group of class members who sold a security on a particular day on which the price of the security fell and those who purchased the security on the same day. However, while Seagate has been widely cited, courts in the Second Circuit have nearly universally declined to follow its holding or reasoning. See In re Am. Int'l. Grp., Inc. Sec. Litig., 265 F.R.D. 157, 164 (S.D.N.Y. 2010) (citing cases).

2. Unique Defenses Arising from Intra-Class Period Purchases Following "Corrective" Disclosures

While "there is no per se rule to this effect," courts have sometimes found that "a person that increases his holdings in a security after revelation of an alleged fraud involving that security is subject to a unique defense that precludes him from serving as a class representative." Rocco v. Nam Tai Elec., Inc., 245 F.R.D. 131, 136 (S.D.N.Y. 2007) (rejecting as atypical a proposed class representative who had purchased defendant's stock after the public disclosure of some, but not all, of defendant's fraudulent statements and omissions); see also Gary Plastic Packaging Corp., 903 F.2d at 179-80 (holding that there was no abuse of discretion by district court in finding plaintiff was an inappropriate class representative "since its claim is subject to several unique defenses including its continued purchases of CDs through Merrill despite having notice of, and having investigated, the alleged fraud.").

Courts in the Second Circuit, on the other hand, have been more lenient and do not necessarily find that a representative's purchase of shares after a corrective disclosure will create a unique defense that defeats typicality. See, e.g., In re Monster Worldwide, Inc. Sec. Litig., 251 F.R.D. 132, 135 (S.D.N.Y. 2008) ("the fact that a putative class representative purchased additional shares in reliance on the integrity of the market after the disclosure of corrective information has no bearing on whether or not [the representative] relied on the integrity of the market") (quoting In re Salomon Analyst Metromedia, 236 F.R.D. 208, 216 (S.D.N.Y. 2006), rev'd on other grounds, 544 F.3d 474 (2d Cir. 2008)).³

D. Adequacy

The fourth requirement of Rule 23(a) is that the representative parties demonstrate that they will fairly and adequately protect the interests of the class. Fed.R.Civ.P. 23(a)(4). "Generally, adequacy of representation entails inquiry as to whether: 1) plaintiff's interests are antagonistic to the interest of other members of the class and 2) plaintiff's attorneys are qualified, experienced and able to conduct the litigation." Baffa, 222 F.3d at 60. This inquiry extends to both the class representative and the representation by counsel because they are intertwined in the question of whether there is fair and adequate representation of the class. Id. The Second Circuit has also held that "to judge the adequacy of representation," courts may look beyond the capacity of the representative plaintiff and "consider the honesty and trustworthiness of the named plaintiff." Savino v. Computer Credit, Inc., 164 F.3d 81, 87 (2d Cir. 1998) (citations omitted); see also, In re NYSE Specialists Sec. Litig., 240 F.R.D. 128, 144 (S.D.N.Y. 2007) ("The Second Circuit has allowed for the consideration of characteristics such as honesty, trustworthiness, and credibility in judging the adequacy of a class representative pursuant to Rule 23(a).") (citations omitted).

1. Knowledge and Capacity of the Class Representatives.

The Second Circuit has found that adequacy is not met "where the class representatives ha[ve] so little knowledge of and involvement in the class action that they would be unable or unwilling to protect the interests of the class against the possibly competing interests of the attorneys." Maywalt v. Parker & Parsley Petroleum Co., 67 F.3d 1072, 1077-78 (2d Cir. 1995) (citations omitted); accord, In re WorldCom, Inc. Sec. Litig., 219 F.R.D. 267, 286 (S.D.N.Y. 2003). That said, the Supreme Court has expressly disapproved of attacking the adequacy of a class representative based on his or her ignorance. Surowitz v. Hilton Hotels Corp., 383 U.S. 363, 370-74 (1966). Therefore, the Second Circuit has held that even in the absence of extensive knowledge of the case, proof of the representative's ability and willingness to carry out the responsibilities of representing the class is sufficient to demonstrate adequacy. Baffa, 222 F.3d at 61-62.

For example, in In re Sadia, S.A. Sec. Litig., defendants challenged the adequacy of the plaintiffs' corporate designee because he could not answer numerous questions during depositions and demonstrated an "alarming unfamiliarity with the suit." 269 F.R.D. at 310. The court determined that this was insufficient to challenge adequacy under Rule 23(a)(3). Id.; see also Wagner v. Barrick Gold Corp., 251 F.R.D. 112, 118 (S.D.N.Y. 2008) ("[I]n complex actions such as securities actions, [a] plaintiff need not have expert knowledge of all aspects of the case to qualify as class representative."). Similarly, in New Jersey Carpenters Health Fund v. Residential Capital, LLC, the defendants failed to successfully challenge adequacy when they argued that the plaintiffs were not educated about the allegation, had not read the pleadings or other case documents, and had little control over the proposed class counsel who made unilateral decisions throughout the litigation. No. 08 CV 8781(HB), 2010 WL 1257528, at *3 (S.D.N.Y. Mar. 31, 2010). The court determined that the plaintiffs' general knowledge of the basic issues and the counsel's over-forty-years experience with securities and other class action litigation were sufficient to demonstrate adequacy of class representation. Id. at *4; In re Monster Worldwide, Inc. Sec. Litig., 251 F.R.D. at 135 (finding that the proposed class representative was inadequate because plaintiff had simply lent its name to a suit that was "controlled entirely by the class attorney").

2. Antagonistic Interests Among Class Members.

To satisfy the adequacy requirement, "the class members must not have interests that are 'antagonistic' to one another." In re Drexel Burnham Lambert Grp., Inc., 960 F.2d 285, 291 (2d Cir. 1992) (citations omitted). In practice, this inquiry into potential inter-class antagonism substantially overlaps with the typicality inquiry as outlined above. A case out of the Fifth Circuit is instructive on this point. In In re Enron Corp. Sec. Litig., 206 F.R.D. 427, 455 (S.D. Tex. 2002), the proposed lead plaintiff had purchased Enron stock pursuant to its investment advisor's advice after the initial public disclosures regarding Enron's overstatement of its assets and partnership liabilities were issued. These purchases also occurred after the first lawsuits were filed and after the SEC announced it was investigating the company. Id. As a result, the court found the lead plaintiff to be inadequate under Rule 23(a)(3) because it had "issues and interests atypical of and antagonistic to those of the rest of the class." Id.

In addition to such conflicts, "[a] key element in the determination of whether a plaintiff's interests are antagonistic to those of other members of the class is the relationship between the class representative and class counsel." In re IMAX Sec. Litig., 272 F.R.D. at 141 (citations omitted). In IMAX, the long-standing and close business relationship between the proposed lead plaintiff and the class counsel appeared problematic to the court given the financial stake each had in the other. Id. at 156. The court appealed to the reasoning stated in In re Discovery Zone Sec. Litig., 169 F.R.D. 104, 109 (N.D. Ill. 1996) "Even where the named plaintiff does not expect to share directly in the attorneys' fees, his business relationship with counsel may leave him more interested in maximizing the return to his counsel than in aggressively presenting the proposed class' action"(internal quotations omitted). Thus, the IMAX court determined the proposed lead plaintiff to be inadequate, particularly in light of the large pool of disinterested investors who could serve as class representative, and it ultimately denied class certification. 272 F.R.D. at 157.

3. Adequacy Under the Private Securities Litigation Reform Act.

The adequacy inquiry in securities fraud litigation must also conform to the heightened standards set forth in the 1995 Private Securities Litigation Reform Act (PSLRA), which governs all civil actions arising under the federal securities laws and brought on behalf of a class. The PSLRA provides that "[t]he most adequate plaintiff shall, subject to the approval of the court, select and retain counsel to represent the class." 15 U.S.C. § 77z-1(a)(3)(B)(v) (1998). In short, the lead plaintiff procedures require all plaintiffs who file a putative securities class action to publish notice of the action which, inter alia, informs eligible and interested investors of their right to seek appointment as lead plaintiff in the action. This procedure specifically banned the pre-PSLRA practice of counsel selecting plaintiff. "Giving the Lead Plaintiff primary control for the selection of counsel was a critical part of Congress' effort to transfer control of securities class actions from lawyers to investors." Schulman v. Lumenis, Ltd., No. 02 Civ. 1989 (DAB), 2003 WL 21415287, at *6 (S.D.N.Y. June 18, 2003) (quoting Gluck v. CellStar Corp., 976 F. Supp. 542, 550 (N.D. Tex. 1997)). Courts, however, may decline to approve the lead plaintiff's suggested counsel to "protect the interests of the class." 15 U.S.C. § 77z-1(a)(3)(B)(iii)(II)(aa).

III. IMPLICIT REQUIREMENTS OF RULE 23

In addition to the four enumerated requirements of Rule 23(a), courts in the Second Circuit and elsewhere have found that a class seeking certification must satisfy two other implicit requirements – standing and ascertainability.

A. Standing

Although not stated in Rule 23, the constitutional concept of "standing" requires the named plaintiffs to show that they have a personal interest in the outcome of the litigation. Thus, "any analysis of class certification must begin with the issue of standing. . . . Only after the court determines the issues for which the named plaintiffs have standing should it address the question of whether the named plaintiffs have representative capacity, as defined by Rule 23(a), to assert the rights of others." Griffin v. Dugger, 823 F.2d 1476, 1482 (11th Cir. 1987).

1. Standing Under Section 11 of the '33 Act: Where Lead Plaintiffs Are Aftermarket Purchasers.

All purchasers of registered securities have standing to sue under Section 11. Non-purchasers have no standing to sue. Barnes v. Osofsky, 373 F.2d 269, 271 (2d Cir. 1967). Thus, it has been long-established that to have standing to assert a Section 11 claim, "plaintiffs must be able to 'trace their shares to an allegedly misleading registration statement.'" In re Global Crossing, Ltd. Sec. Litig., 313 F. Supp. 2d 189, 206 (S.D.N.Y. 2003) (quoting DeMaria v. Andersen, 318 F.3d 170, 176 (2d Cir. 2003)); see also, In re IPO Sec. Litig., 227 F.R.D. 65, 117 (S.D.N.Y. 2004), vacated on other grounds, 471 F.3d 24, 41 (2d Cir. 2006) (stating that only "[a]ftermarket purchasers who can trace their shares to an allegedly misleading registration statement have standing to sue under §11 of the 1933 Act."). Furthermore, the ability to show standing under Section 11 impacts the typicality requirement under Rule 23(a)(3). As the In re IPO court explained, "class representatives are atypical with respect to plaintiffs' section 11 classes [when] they are subject to the unique defense that they cannot trace their shares to an allegedly defective registration statement" 227 F.R.D. at 96; see also, In re Quarterdeck Office Sys., Inc. Sec. Litig., No. CV 92-3970-DWW(GHKx), 1993 WL 623310, at *3 (C.D. Cal. Sept. 30, 1993) (finding that the "named plaintiffs' lack of standing provides adequate grounds for denying certification since it indicates that their claims are atypical"). Therefore, demonstrating traceability is an important requirement for lead plaintiffs seeking class certification under Section 11.

A Section 11 plaintiff bears the burden of proving that her securities are traceable. See In re Global Crossing, 313 F. Supp. 2d at 207. The plaintiff may successfully trace her shares "if she demonstrates that her stock was actually issued pursuant to a defective registration statement." In re IPO Sec. Litig., 227 F.R.D. at 117 (quotations and alterations omitted). But the plaintiff's evidence must be fairly direct: "[t]racing may be established either through proof of a direct chain of title from the original offering to the ultimate owner (e.g., if the owner was an allocant in the IPO, or took actual physical possession of share certificates directly from an allocant), or through proof that the owner bought her shares in a market containing only shares issued pursuant to the allegedly defective registration statement." Id. at 117-18. Thus, bare assertions or hypothetical tracing is insufficient. Courts apply this requirement strictly, "even where its application draws arbitrary distinctions between plaintiffs based on the remote genesis of their shares." Id. at 117.⁴

The requirement can be insurmountable for some plaintiffs. As some courts have noted, it is "virtually impossible to trace shares to a registration statement once additional unregistered shares have entered the market." In re IPO Sec. Litig., 227 F.R.D. at 117-18. Yet plaintiffs are not entitled to a presumption of traceability, "[e]ven where the open market is predominantly or overwhelmingly composed of registered shares." Id. Moreover, the actual tracing of each plaintiff's stock has been found to be a necessarily individualized inquiry that could disqualify a class under the Rule 23(b) predominance requirement. See id. at 118 ("insofar as each class member must individually prove that her shares were issued pursuant to the relevant registration statement, the necessity of trying individual issues should disqualify the class").⁵

2. Standing Under Section 12 of the '33 Act.

Unlike Section 11 claims, standing to sue under Section 12 is limited to those "persons who have directly purchased the securities from the underwriting defendants in the subject public offering(s), and not in the secondary market." Pub. Emps.' Ret. Sys. of Mississippi v. Merrill Lynch & Co., 714 F. Supp. 2d 475, 484 (S.D.N.Y. 2010) (citing Gustafson v. Alloyd Co., 513 U.S. 561, 578 (1995)); see also, Caiafa v. Sea Containers Ltd., 525 F. Supp. 2d 398, 407 (S.D.N.Y. 2007) ("[B]ecause the plaintiffs fail to allege that they purchased the securities in a public offering, as opposed to in the aftermarket, their Section 12(a)(2) claim [is] dismissed.") (internal quotations omitted). Therefore, if plaintiffs demonstrate that they purchased shares directly in the initial public offering, they have standing to sue under Section 12 and do not need to "trace" their purchases as they would for a Section 11 claim. In re Am. Bank Note Holographics, Inc. Sec. Litig., 93 F. Supp. 2d 424, 436 (S.D.N.Y. 2000).

3. Standing Under Section 10(b) of the '34 Act.

While the language of Section 10(b) and Rule 10b-5 does not specifically provide for a private right of action, the Supreme Court has long recognized the implicit creation of such a right in light of Congress' intent to supplement Commission action of the Commission with private enforcement. J. I. Case Co. v. Borak, 377 U.S. 426, 432 (1964). However, the Second Circuit placed limits on this private right of action under Rule 10b-5 by limiting the class of plaintiffs who could make use of it. In Birnbaum v. Newport Steel Corp., the court held that because Rule 10b-5 "was directed solely at that type of misrepresentation or fraudulent practice usually associated with the sale or purchase of securities," a plaintiff must be a purchaser or seller of securities to have standing. 193 F.2d 461, 464 (2d Cir. 1952). This "purchaser or seller" requirement was later confirmed by the Supreme Court in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 754-55 (holding that individuals who failed to purchase a stock due to misrepresentation of its value did not have standing to sue because they were not purchasers or sellers of the security). The Second Circuit has thus continued to apply this restrictive "purchaser or seller" requirement for standing to sue under Rule 10b-5 that it set in Birnbaum. See, e.g., Ontario Pub. Servs. Emps. Union Pension Trust Fund v. Nortel Networks Corp., 369 F.3d 27, 34 (2d Cir. 2004); In re NYSE Specialists Sec. Litig., 503 F.3d 89, 102 (2d Cir. 2007).

4. Standing Where Lead Plaintiff Did Not Purchase All Securities At Issue.

While federal courts do not require that each member of a class submit evidence of personal standing, "a class cannot be certified if it contains members who lack standing." Denney v. Deutsche Bank AG, 443 F.3d 253, 263-64 (2d Cir. 2006). However, while a lead plaintiff must have standing to sue on at least some of the claims at issue, "it would be premature to defeat class certification on the basis that some Plaintiff did not purchase every single security forming the basis of the claims." In re Dynex Capital, Inc. Sec. Litig., No. 05 CIV. 1897(HB), 2009 WL 3380621, at *3 (S.D.N.Y. Oct. 19, 2009); see also Hevesi v. Citigroup, Inc., 366 F.3d 70, 82 (2d Cir. 2004) ("[I]t is inevitable that, in some cases, the lead plaintiff will not have standing to sue on every claim.") (citation omitted).

Second Circuit case law is somewhat conflicting regarding whether a court may certify a class of purchasers of a security or fund that was not also purchased by the lead plaintiffs. This issue has been addressed as one of standing, not whether Rule 23 requirements have been met. See In re Am. Int'l. Grp., Inc. Sec. Litig., 265 F.R.D. at 164. Thus, a class action plaintiff does not have standing to bring claims on behalf of purchasers of different securities where those claims are based on different factual allegations and legal theories. Id. (citing cases). For example, where purported class representatives bought only ordinary shares as opposed to debt, they were found to lack standing to bring claims on behalf of class members who purchased debt, despite allegations that the same general course of conduct allegedly engaged in by the defendants caused injury to all putative class members. In re Parmalat Sec. Litig., No. 04 MD 1653(LAK), 2008 WL 3895539, at *3 (S.D.N.Y. Aug. 21, 2008).

Similarly, in In re Am. Int'l Grp., Inc. Sec. Litig., because the lead plaintiffs' Section 10(b) and Rule 10b-5 claims related to AIG stock were based upon different legal theories and would require proof of different facts than their Section 11 claims related to AIG bonds, the lead plaintiffs did not have standing to bring the Section 11 bond claims of the proposed class by virtue of their Section 10(b) and Rule 10b-5 claims. 265 F.R.D. at 165.

B. Ascertainability

Courts in the Second Circuit have recognized additional implicit requirements under Rule 23(a) – that the proposed class be precise, objective, and presently ascertainable by the court. Bakalar v. Vavra, 237 F.R.D. 59, 64 (S.D.N.Y. 2006). Thus, "the requirement that there be a class will not be deemed satisfied unless the class description is sufficiently definite so that it is administratively feasible for the court to determine whether a particular individual is a member." In re Sadia, S.A. Sec. Litig., 269 F.R.D. 298, 305 (S.D.N.Y. 2010); Fogarazzo 263 F.R.D. at 97. The class must be ascertainable "by reference to objective criteria," In re Sadia, 269 F.R.D. at 305, without requiring the court to engage "in numerous fact-intensive inquiries." Bakalar, 237 F.R.D. at 64; Fears v. Wilhelmina Model Agency, Inc., 02 CIV. 4911 HB, 2003 WL 21659373, at *2 (S.D.N.Y. July 15, 2003).

IV. RULE 23(B) REQUIREMENTS

After showing that the proposed class satisfies the prerequisites of Rule 23(a), plaintiffs must further show that the class is "maintainable" under Rule 23(b). In re Salomon Analyst Metromedia Litig. v. Citigroup Global Mkts., 544 F.3d 474, 478 (2d Cir. 2008). For securities fraud class actions, once the district court determines that the requirements of Rule 23(a) are satisfied, it "may then consider granting class certification where it 'finds that the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.'" Teamsters Local 445 Freight Div. Pension Fund v. Bombardier Inc., 546 F.3d 196, 202 (2d Cir. 2008) (quoting Fed.R.Civ.P. 23(b)(3)). Therefore, the two principal inquiries when determining class certification under 23(b)(3) are superiority and predominance.

A. Superiority

When seeking class certification under Rule 23(b)(3), plaintiffs must demonstrate that a class action is superior to individual litigation or other available methods for fair and efficient adjudication of the controversy. F.R.Civ.P. 23(b)(3). This ensures that Rule 23(b)(3) "encompasses those cases in which a class action would achieve economies of time, effort, and expense, and promote uniformity of decision as to persons similarly situated, without sacrificing procedural fairness or bringing about other undesirable results." In re Nassau Cnty. Strip Search Cases, 461 F.3d 219, 225 (2d Cir. 2006) (quoting Fed.R.Civ.P. 23(b)(3) adv. comm. n. to 1966 amend.). There are four non-exhaustive factors that are relevant to this inquiry: "(A) the interests of members of the class in individually 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 desirability or undesirability of concentrating the litigation of the claims in the particular forum; and (D) the difficulties likely to be encountered in management of a class action." F.R.Civ.P. 23(b)(3)(A)-(D). Courts find the fourth factor, manageability, to be the most relevant. In the Second Circuit, for example, manageability concerns are often addressed by creating subclasses to divide the issues and keep arguments focused. See, e.g., In re Cendant Corp. Litig., 264 F.3d 201, 244 n. 25 (3d Cir. 2001) (encouraging district courts to consider sub-classing and noting that it is "not inconsistent" with the PSLRA to create subclasses).

B. Predominance

The predominance requirement "tests whether proposed classes are sufficiently cohesive to warrant adjudication by representation," and is "far more demanding" than the commonality requirement under Rule 23(a). Moore v. PaineWebber, Inc., 306 F.3d 1247, 1252 (2d Cir. 2002) (quoting Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 623-24 (1997)). The predominance requirement is met "if the plaintiff can establish that the issues in the class action that are subject to generalized proof, and thus are applicable to the class as a whole, ... predominate over those issues that are subject only to individualized proof." Cordes & Co. Fin. Serv., Inc. v. A.G. Edwards & Sons, Inc., 502 F.3d 91, 108-09 (2d Cir. 2007). (Internal quotations omitted). The predominance requirement is defeated where common questions of knowledge do not predominate over individual questions. For example, in IPO, "[t]he claim that lack of knowledge [was] common to the class [was] thoroughly undermined by the plaintiffs own allegations as to [] widespread [] knowledge of the alleged scheme." In re IPO Sec. Litig., 471 F.3d 24, 43 (2d Cir. 2006).

Whether securities fraud class actions can satisfy the predominance requirement for certification often involves a complex inquiry into the substance of the claims themselves. As the Supreme Court recently noted, "[c]onsidering whether 'questions of law or fact common to class members predominate' begins, of course, with the elements of the underlying cause of action." Erica P. John Fund, Inc. v. Halliburton Co., 131 S.Ct. 2179, 2181 (2011). Therefore, before analyzing the predominance inquiry in securities fraud litigation in depth, it is necessary first to outline the elements of the substantive claims at issue.

1. Liability Under the Securities Act of 1933.

Section 11 of the Securities Act imposes liability on issuers and other signatories of a registration statement that, upon becoming effective, "contain [s] an untrue statement of a material fact or omit[s] to state a material fact required to be stated therein or necessary to make the statements therein not misleading." 15 U.S.C. § 77k(a). "So long as a plaintiff establishes one of the three bases for liability under these provisions -- (1) a material misrepresentation; (2) a material omission in contravention of an affirmative legal disclosure obligation; or (3) a material omission of information that is necessary to prevent existing disclosures from being misleading," the issuer's liability is absolute. Litwin v. Blackstone Grp., L.P., 634 F.3d 706, 715-716 (2d Cir. 2011) (quoting In re Initial Pub. Offering ("IPO") Sec. Litig., 483 F.3d 70, 73 n. 1 (2d Cir. 2007)). Thus, a prima facie case under Section 11 is straightforward, requiring only a showing of a material misrepresentation or omission from a defendant's registration statement. Herman & MacLean v. Huddleston, 459 U.S. 375, 381-82 (1983). However, it is important to note that strict liability only extends to statutorily enumerated parties: (1) signatories of the registration statement; (2) directors or partners of the issuer at the time of filing; (3) persons consenting to be named as about to become a director or partner; (4) accountants or other experts consenting to be named as preparing or certifying part of the registration statement; and (5) underwriters of the security at issue. See 15 U.S.C. § 77k(a) (1998); Herman, 459 U.S. at 381-82 (noting the limits of Section 11 liability).

Section 12(a)(2) of the Act imposes liability under similar circumstances on issuers or sellers of securities by means of a prospectus. See 15 U.S.C. § 77l(a)(2) (1974). Specifically, Section 12(a)(2) allows purchasers in an offering to seek damages from "statutory sellers" if the offering was carried out by a prospectus or oral communication that is materially false or misleading. Id.

Control person claims under Section 15 of the Securities Act are often included along with claims for liability under Sections 11 and 12. To establish Section 15 liability, a plaintiff must show a "primary violation" and "control of the primary violator." ECA & Local 134 IBEW Joint Pension Trust v. JP Morgan Chase Co., 553 F.3d 187, 206-07 (2d Cir. 2009); see also, In re Morgan Stanley Info. Fund Sec. Litig., 592 F.3d 347, 358 (2d Cir. 2010).

2. Liability Under the Securities Exchange Act of 1934.

To bring a securities fraud claim under Section 10(b) of the Securities Exchange Act and Rule 10b-5, a plaintiff must show: (1) a material misrepresentation (or omission); (2) scienter; (3) a connection with the purchase or sale of a security; (4) reliance; (5) economic loss; and (6) loss causation. See Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, 552 U.S. 148, 157 (2008); Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341-42 (2005); Lentell v. Merrill Lynch & Co., 396 F.3d 161, 172 (2d. Cir. 2005), cert. denied, 546 U.S. 935 (2005). However, the Supreme Court has stated that because Rule 10b-5 provides for an implied private right of action, liability under this provision must be construed narrowly. Cent. Bank of Denver, N. A. v. First Interstate Bank of Denver, N. A., 511 U. S. 164, 180 (1994) (holding that Rule 10b–5's private right of action does not include suits against aiders and abettors). The Court recently reaffirmed this narrow scope of 10b-5 liability in Janus Capital Grp., Inc. v. First Deriv. Traders, 131 S. Ct. 2296, 2303 (2011), where it held that "the maker of a statement is the entity with authority over the content of the statement" and thus only the maker, not the alleged source of the false statement, is liable under Rule 10b-5.

Control persons can also be held liable for securities fraud under Section 20(a) of the Exchange Act. See, e.g., S.E.C. v. First Jersey Sec., Inc., 101 F.3d 1450, 1472 (2d Cir. 1996) ("a plaintiff must show a primary violation by the controlled person and control of the primary violator by the targeted defendant, and show that the controlling person was in some meaningful sense [a] culpable participant [] in the fraud perpetrated by [the] controlled person []") (internal quotations omitted).

Under Section 101(b) of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u-4(b), a complaint alleging fraud under the '34 Act which is brought as a class action must "specify each statement alleged to have been misleading [and] the reason or reasons why the statement is misleading, and" if an allegation regarding the statement is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed" and "state with particularity facts giving rise to a strong inference that the defendant acted with" scienter. The Second Circuit has recognized that the PSLRA "establishes a more stringent rule for inferences involving scienter because [it] requires particular allegations giving rise to a strong inference of scienter." ECA, Local 134 IBEW Joint Pension Trust of Chi. v. JP Morgan Chase Co., 553 F.3d 187, 196 (2d Cir. 2009) (quotations and citation omitted).

V. DEMONSTRATING PREDOMINANCE IN SECURITIES FRAUD CLASS ACTIONS

Having outlined the substantive elements of the relevant securities fraud claims, it is then possible to examine the unique issues that arise for class representatives seeking to show predominance in the putative class' claims as required by Rule 23(b)(3).

A. Transaction Causation: Presumptions of Reliance.

A Section 10(b) claim presents a unique problem to parties seeking class certification under Rule 23(b)(3). Because reliance is an element of a Section 10(b) claim, parties cannot establish reliance individually by members of the class because it would defeat the predominance requirement for class certification that common questions of fact and law predominate over those affecting only individual members. In re IPO Sec. Litig., 471 F.3d 24, 42 (2d Cir. 2006). Securities fraud plaintiffs generally seek to rely on two presumptions to demonstrate reliance or transaction causation: the fraud-on-the-market presumption and the Affiliated Ute presumption. Plaintiffs may also try to appeal to the fraud-created-the-market presumption to establish reliance, but will likely not have success outside of the Fifth and Tenth Circuits. As discussed in more detail in Section VI, below, these presumptions are rebuttable, and the court must provide the defendant the opportunity to rebut. Basic v. Levinson, 485 U.S. 224, 245 (1988). If the defendant succeeds, the plaintiff cannot establish "reliance on a class-wide basis, and each plaintiff will have to prove reliance individually." Teamsters Local 445 Freight Div. Pension Fund v. Bombardier, Inc., No. 05 Civ. 1898(SAS), 2006 WL 2161887, at *12 (S.D.N.Y. Aug. 1, 2006), aff'd., 546 F.3d 196 (2d Cir. 2008).

1. Fraud-on-the-Market Presumption.

The Supreme Court established the fraud-on-the-market presumption in Basic Inc. v. Levinson, 485 U.S. 224, 245-47 (1988), where it held that the class members were all purchasers of securities who presumptively relied on a price in an efficient market. Under this principle, courts presume that "(1) misrepresentations by an issuer affect the price of securities traded in the open market, and (2) investors rely on market price of securities as an accurate measure of their value." In re IPO, 471 F.3d at 42 (quoting Hevesi, 366 F.3d at 77. Therefore, an investor generally "may avail herself of the presumption that she 'relied on the integrity of the price set by the market' if the market is efficient." Fogarazzo, 263 F.R.D. at 99. But she must "show that the alleged misrepresentation was material and publicly transmitted into a well-developed market" to successfully invoke the presumption. In re Sadia, S.A. Sec. Litig., 269 F.R.D. at 307. Defendants can rebut the presumption by demonstrating that the market price was not affected by the misrepresentations, possibly by showing that market makers knew the truth or that the concealed information "credibly entered the market and dissipated the effects of the misstatements." Fogarazzo, 263 F.R.D. at 99. In other words, defendants can present rebuttal evidence that the plaintiff did not actually rely upon the market price or that such reliance was not reasonable.

In Fogarazzo v. Lehman Bros., Inc., the fraud-on-the-market presumption was successfully invoked. The plaintiffs presented an expert to support their contention that analyst reports contained material statements, which affected the price of securities. Id. at 102. The plaintiffs' expert noted that numerous empirical studies in the past two decades confirmed the "broadly accepted principle" that analyst reports issued by reputable brokerage firms "tend to cause substantial impacts on stock transaction prices." Id. at 102-03. The expert also conducted an analysis of the market reaction to the analyst reports that were the subject of this action. "By utilizing a three-day cumulative abnormal return methodology, [the expert] concluded that significant price responses surrounded the release of the analyst reports at issue, indicating that the market relied on the recommendations of these analysts." Id. at 103. As such, the Court found the plaintiff was entitled to the fraud-on-the-market presumption. Id.

In contrast, the court in In re IPO Sec. Litig., held that the plaintiffs failed to put forth sufficient evidence of market efficiency to avail themselves of the presumption. 471 F.3d at 42. In their claim against underwriters for alleged misrepresentation and market manipulation, they asserted through their own allegations that the alleged fraud was in connection with an IPO. Id. As the court explained, because a "primary market for newly issued [securities] is not efficient or developed under any definition of these terms," the plaintiffs essentially admitted to purchasing from an inefficient market. Id. (citation omitted.) Therefore, the proposed class could not establish collective reliance to show predominance under Rule 23(b)(3).

2. Fraud-Created-the-Market Presumption

In addition to the fraud-on-the-market theory, plaintiffs in securities fraud class actions sometimes attempt to establish reliance under a fraud-created-the-market presumption. "Fraud-created-the-market is based on the theory that investors rely not on the integrity of the market price, but on the integrity of the market itself." Alter v. DBLKM, Inc., 840 F. Supp. 799, 805 (D. Colo. 1993) (citation omitted.) The Fifth Circuit, for example, has held that even if a plaintiff cannot establish that she relied on the offering itself, she is still entitled to 10b-5 relief if she can plead and prove the following elements to establish reliance: "that (1) the defendants knowingly conspired to bring securities onto the market which were not entitled to be marketed, intending to defraud purchasers, (2) [the plaintiff] reasonably relied on the Bonds' availability on the market as an indication of their apparent genuineness, and (3) as a result of the scheme to defraud [the plaintiff] suffered a loss." The Tenth Circuit affirmed this fraud-created-the-market theory in T.J. Raney & Sons, Inc. v. Fort Cobb, Oklahoma Irrigation Fuel Auth., 717 F.2d 1330, 1332 (10th Cir. 1983) (citation omitted), and added a fourth requirement that the plaintiff prove that the securities were "unlawfully issued." Id. at 1330.

However, the fraud-created-the-market presumption has failed to gain traction in other circuits. In the Second Circuit in particular, courts have recognized that "[i]t is not established that the theory that fraud created the market is viable in this circuit." Washington Nat. Ins. Co. of New York v. Morgan Stanley & Co. Inc., No. 90 Civ. 3342 (TPG), 1999 WL 461796, at *9 (S.D.N.Y. July 2, 1999) (expressing doubt about the theory and declining to apply it in the alternative because the bonds were not unlawfully issued); see also, In re Towers Fin. Corp. Noteholders Litig., No. 93CIV 0810(WK)(AJP), 1995 WL 571888, at *23 (S.D.N.Y. Sept. 20, 1995) (discussing doubtful viability of theory in Second Circuit and declining to adopt theory under facts of case because "[n]otes were newly issued to a non-developed market"). Therefore, plaintiffs in the Second Circuit are only likely to have success establishing reliance on the integrity of the market price and not on the integrity of the market itself.

3. Affiliated Ute Presumption.

"[A] presumption of reliance may apply in cases in which plaintiffs have alleged that defendants failed to disclose information." Fogarazzo, 263 F.R.D. at 100. Specifically, "where a plaintiff's fraud claims are based on omissions, transaction causation may be satisfied so long as the plaintiff shows that defendants had an obligation to disclose the information and the information withheld is material." Id. Facts are material if "a reasonable investor might have considered them important in the making of [a] decision." Id. "This presumption is nevertheless not conclusive. 'Once the plaintiff establishes the materiality of the omission ... the burden shifts to the defendant to establish ... that the plaintiff did not rely on the omission in making the investment decision.'" Id. (quoting duPont v. Brady, 828 F.2d 75, 76 (2d Cir. 1987)).

In Fogarazzo, plaintiffs alleged that defendants failed to disclose a quid pro quo arrangement it had with investment bankers and research analysts, which made the analyst reports misleading. 263 F.R.D. at 106. Plaintiffs were able to rely on the Affiliated Ute presumption because the court determined that "a reasonable investor would likely rely less on an analyst report if that investor knew it was tainted by conflicts of interest as a result of research analysts' quid pro quo arrangements with investment bankers." Id. In other words, the omission must be material before a court will presume collective reliance on that omission for purposes of class certification. Id.; see also Teamsters Local 445 Freight Div. Pension Fund v. Bombardier, Inc., No. 05 Civ. 1898 (SAS), 2006 WL 2161887, at *5 (S.D.N.Y. Aug. 1, 2006), aff'd, 546 F.3d 196 (2d Cir. 2008) (holding that the plaintiffs could not rely on the Affiliated Ute presumption because positive statements, not omissions, were central to the alleged fraud).

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Footnotes

1. Of course, district courts have "ample discretion" to limit discovery and "the extent of a hearing" on Rule 23 issues "in order to assure that a class certification motion does not become a pretext for a partial trial of the merits." In re IPO, 471 F.3d at 41; accord In re Sadia, 269 F.R.D. at 307-08.

2. Courts in other circuits have gone so far as to require "a full Daubert analysis before certifying the class if the situation warrants." Am. Honda Motor Co. v. Allen, 600 F.3d 813, 816 (7th Cir. 2010), accord, Sher v. Raytheon Co., No. 09-15798, 2011 WL 814379, at *1 (11th Cir. Mar. 9, 2011) (finding that the district court erred by not sufficiently evaluating and weighing conflicting expert testimony on class certification). While there is a trend of using Daubert motions to defeat class certification, courts have utilized different approaches to evaluate class certification experts. The Supreme Court has not yet addressed whether expert testimony must pass muster under Daubert at the class certification stage.

3. "Of course, unusual post-disclosure trading patterns present typicality problems." In re Countrywide Fin. Corp. Sec. Litig., 273 F.R.D. at 603 (emphasis in original).

4. Courts in other circuits apply this standard strictly as well. See, e.g., In re Fleet Boston Fin. Corp. Sec. Litig., 253 F.R.D. 315, 348 (D.N.J. 2008) (requiring "actual, i.e., fact-based rather than statistical tracing"); Krim v. PCOrder.com, Inc., 210 F.R.D. 581, 586 (W.D. Tex. 2002) ("Lead Plaintiffs must demonstrate all stock for which they claim damages was actually issued pursuant to a defective statement, not just that it might have been, probably was, or most likely was, issued pursuant to a defective statement."), aff'd., 402 F.3d 489 (5th Cir. 2001).

5. Not all courts have viewed tracing difficulties among aftermarket purchases to be so problematic in the class certification stage. See, e.g., Freeland v. Iridium World Commc'ns, Ltd., 233 F.R.D. 40, 46 (D.D.C. 2006) ("It would be inappropriate to foreclose such Plaintiffs' resort to the class action format simply because some of their cases may be difficult to prove."); In re LILCO Sec. Litig., 111 F.R.D. 663, 671 (E.D.N.Y. 1986) (holding that because it was readily apparent that all class members were purchasers of the relevant stock, "tracing will not pose insurmountable obstacles warranting denial of class status.").

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