On 7 July 2017, in In re Petrobras Securities, the Second Circuit Court of Appeals partially vacated an order certifying classes asserting claims under the Exchange Act and the Securities Act of 1933, on the basis that the lower court had insufficiently considered whether individual determinations as to whether over-the-counter bond purchases were "domestic" transactions would predominate over common issues of fact and law.
Under Morrison v. National Australia Bank Ltd., a seminal United States Supreme Court case decided in 2010, a foreign plaintiff cannot recover in the United States courts for securities fraud perpetrated outside the United States in connection with securities traded on foreign exchanges. In the Petrobras case, the court ruled that, in the class proposed by the plaintiffs, issues as to whether a transaction was foreign or domestic under Morrison would predominate over the issues common to the entire proposed class. For that reason, said the court, it could not fully uphold the district court's ruling certifying the case as a class action. The predominance of common issues is a threshold requirement for class certification under Rule 23 of the Federal Rules of Civil Procedure.
The court also clarified that, unlike other circuit courts, the Second Circuit requires only that a class be "defined using objective criteria that establish a membership with definite boundaries" to meet the threshold "ascertainability" requirement under Rule 23.
In affirming the lower court decision in part, the Second Circuit also held that, in Exchange Act cases, plaintiffs may be able to avail themselves of the "fraud on the market" presumption that the defendant relied on the allegedly false statement, even if they do not establish that the news released to the market caused statistically significant changes in the share price.
This decision is significant in several respects. First, it clarified the Second Circuit's position on ascertainability. Second, it established the importance, when considering class certification, of carefully reviewing Morrison issues. Finally, it clarified the Second Circuit's position on the fraud-on-the-market presumption of reliance at the class certification stage.
More information on Petrobras, you may refer to our note at:
http://www.lit-sl.shearman.com/second-circuit-partially-vacates-class-certificat
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