United States: Securities Certification Requires Actual Evidence – In Re Kosmos Energy

Last Updated: April 7 2014
Article by Andrew J. Trask

For some time, academics have been decrying the demise of the class action, arguing that the Supreme Court's precedent makes it harder than ever to certify a class under Rule 23. And yet, as one practitioner I know observed, plaintiffs keep filing the things. And quite a few courts keep certifying them.

Now, however, at least one federal district court appears to be listening to the academy.

The case, In re Kosmos Energy Ltd. Secs. Litig., No. 3:12-CV-373-B, 2014 U.S. Dist. LEXIS 36365 (N.D. Tex. Mar. 19, 2014), appears to be an unremarkable stock-drop case, the exact kind that is often considered easy to certify. And that's exactly what plaintiffs argued.

The court, however, disagreed vehemently. In an opinion that cites liberally to Dean Robert Klonoff's article The Decline of Class Actions, it refused to certify the class because the plaintiffs did not meet their burden of proof for Rule 23. As the court explained the standard:

"The culmination of the movement by courts–away from a presumptively pro-plaintiff view to the more restrictive approach today–was most recently summed up by the Supreme Court in its 2013 opinion, Comcast v. Behrend. In Comcast, the Supreme Court, re-stated–its now firmly entrenched view–that a plaintiff seeking class certification "'must affirmatively demonstrates his compliance'" with Rule 23(a) by showing that "'there are in fact sufficiently numerous parties, common questions of law or fact,' typicality of claims or defenses, and adequacy of representation." ...

Going forward, the clear directive to plaintiffs seeking class certification–in any type of case–is that they will face a rigorous analysis by the federal courts, will not be afforded favorable presumptions from the pleadings or otherwise and must be prepared to prove with facts –and by a preponderance of the evidence–their compliance with the requirements of Rule 23

(Italics in original, bold added.) Specifically, the court found that the plaintiff in this case had not proven either adequacy or predominance. In finding that plaintiffs had not shown that they were adequate, the court cited Professor Mullenix's decade-old article Taking Adequacy Seriously, and then offered a rigorous analysis of the declaration offered by the lead plaintiff's representative:

To elaborate, the Saville Declaration makes a number of conclusory pronouncements, such as the following: "I have participated in the Plan's decision-making with respect to litigation matters, and have participated in supervising outside legal counsel in the Plan's pending litigation." The Declaration's explanation as to how Saville is actually participating in decision-making and supervising counsel is scant at best. In paragraph five–the paragraph containing the most detail in the eight paragraph sworn statement–the Declaration claims that Saville "received and reviewed" reports and correspondence, "supervised"discovery preservation, "reviewed pleadings" and "consulted with lawyers." But this type of generic detail is really no detail at all, for it provides naught by which to assess Saville's credibility, her knowledge about the underlying facts of the case, or how much of what she has stated may have been prompted by counsel. Indeed, any potential class representative in any securities case could make almost identical assertions.

(Italics in original, bold added.)

Similarly, the court was unconvinced by the plaintiffs' arguments (which appeared to largely center on defendant's conduct and the presumed materiality of certain statements) that common issues predominated:

That Lead Plaintiff's submissions are akin to no evidence at all, under Comcast, ought to end the Court's predominance inquiry here. Indeed, the Plan makes no effort to argue that its "proof" demonstrates predominance. Instead, its position appears to be that such proof is unnecessary. In essence, the Plan asks the Court to presume that the proposed class is certifiable simply because of the securities law provisions pursuant to which this case was filed. Relying on this ill-founded assumption, the Plan assures the Court that "common proof regarding [the essential issues in this case] will be offered on a uniform, Class-wide basis.

(Italics in original, bold added.)  As a result, the court refused to certify a class, based almost entirely on its conclusion that the plaintiff had not offered sufficient evidence to justify certification.

Coupled with Judge Posner's recent opinion in Parko v. Shell Oil Co., In re Kosmos Energy offers a clear takeaway: in 2014, class certification requires an actual evidentiary showing.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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