District Court did not Abuse Discretion in Denying Class Action Certification in Securities Fraud Class Action because Reliance Required to Establish Securities Exchange Act § 10(b) Violation could not be Proven on a Class-Wide Basis Ninth Circuit Holds
Numerous putative class action complaints were filed against Deutsche Bank alleging securities fraud in the alleged manipulation of the stock price of GenesisIntermedia, Inc. (“GENI”); the class action lawsuit “followed the collapse of an elaborate stock manipulation scheme.” Desai v. Deutsche Bank Securities Ltd., ___ F.3d ___, 2009 WL 2245223, *1 (9th Cir. July 29, 2009). The class action litigation dragged on for more than 7 years without leaving the class certification stage, id., at *3. We do not here summarize the facts underlying the class action allegations or the tortured history of the class action litigation, including its trip from California to Minnesota and then back to California, see id., at *1-*3. Eventually, the class action complaint alleged violations of § 10(b) and § 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5, id., at *2. And eventually, plaintiffs filed a motion for class certification which the district court denied, id., at *3. Plaintiffs then settled with the “last defendant standing” – Deutsche Bank – but reserved the right to appeal the district court order denying class action treatment to the lawsuit. Id. The Ninth Circuit affirmed.
Plaintiffs had sought to certify the lawsuit as a class action under Rule 23(b)(3), which requires a finding of both predominance of common issues of fact or law and superiority of the class action device as a mechanism for resolving the dispute. Desai, at *4. The district court refused to certify the litigation as a class action because it concluded that the predominance test had not been met; specifically, the district court found that the element of reliance – which is required to prove a violation of § 10(b) of the 1923 Act – would have to be proven “on an individual basis because they could not prove [reliance] class-wide.” Id. The Ninth Circuit explained, “A ruling on class certification ‘is subject to a very limited review and will be reversed only upon a strong showing that the district court’s decision was a clear abuse of discretion.’” Id. (citation omitted).
The Circuit Court held that “[r]eliance establishes the causal connection between the alleged fraud and the securities transaction.” Desai, at *6 (citation omitted). “To say that a plaintiff relied on a defendant’s bad act is to say that the defendant’s actions ‘played a substantial part in the plaintiff’s investment decision.’” Id. (citation omitted). The Ninth Circuit explained also that reliance can be presumed in two situations: in omission cases, provided that the information withheld is material, and under a “fraud on the market theory.” Id. The district court concluded that neither presumption applied because, under the facts of the case, plaintiffs could not demonstrate an “efficient market” for the securities. Id., at *7. The Circuit Court agreed, see id., at *7-*8. The district court also refused plaintiffs’ invitation “to create a novel presumption of reliance on ‘the integrity of the market’ in the context of manipulation cases.” Id., at *7. The Ninth Circuit also rejected this invitation, finding that there was no authority to support it, id., at *9. Accordingly, the Circuit Court affirmed the district court order denying class certification, id.