Class Actions Outline

Class Actions

1. Rule 23 Requirements

   1. Numerosity

   2. Typicality

   3. Common Questions of law or fact.

      1. Usually efficiency of the market is the common question of fact.

      2. Commonality and typicality tend to merge into one another, as "both serve as guideposts for determining whether the named plaintiff's claim and the class claims are so inter-related that the interests of the class members will be fairly and adequately protected in their absence." In re Worldcom (pg. 55)

   4. Class Representative will fairly and adequately represent the interests of the class.

      1. The class representative must not be subject to unique defenses that "threaten to become the focus of the litigation."

         • This typically comes up when reliance on the efficiency of the market is pleaded.

2. Securities cases are Rule 23(b)(3) classes

   1. Common questions predominate.

   2. Class action is superior to any other method of bringing a securities action.

3. Notice is required

   1. Notice must describe the binding effect of a class judgment on members.

      1. The Vivendi issue: Will a U.S. class action judgment in favor of the defendant preclude foreign shareholders from bringing claims in foreign courts.

         • "More likely than not" standard adopted by the court.

4. Rule 23(f) provides the possibility of appeal from an order granting or denying class certification.

5. Class Certification Stage

   1. What factual findings must the trial judge make to justify class certification?

      1. (1) The securities were traded in an efficient market.

         • The most common way of conducting this inquiry is to apply the so-called Cammer factors. See Cammer v. Bloom (pg. 704)

           • (1) Extent of weekly volume;

           • (2) How many stock analysts follow the company;

           • (3) Number of market-makers and arbitrageurs;

           • (4) Status as an S-3 issuer; and

           • (5) Data showing close connection between release of information and prompt changes in stock price.

      2. (2) Most courts also require a showing that the fraud in question actually distorted the stock price, even though this goes directly to the merits of the lawsuit.

   2. The plaintiff does not have to show loss causation at the class certification stage. Erica P. John Fund v. Haliburton Co. (Supp. pg. 111)

   3. Materiality does not have to be shown at the class certification stage. See Amgen

6. PSLRA

   1. Lead Plaintiff

      1. Most adequate plaintiff

         • The PSLRA requires the appointment as lead counsel of a lead plaintiff that the court deems to be "the most capable of adequately representing the interests of class members."

           • There is a rebuttable presumption that the most adequate plaintiff is the person who has either filed a complaint or made a motion and who has the "largest financial interest in the relief sought by the class."

      2. Right to appoint lead counsel

         • The lead plaintiff selects and retains counsel, subject to the approval of the court.

      3. Not necessarily first to file.

      4. Must be appointed within 90 days.

   2. As noted above, the PSLRA requires that the complaint state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind, (i.e., scienter).

      1. "A complaint will survive . . . only if a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged." Tellabs, Inc. v. Makor Issues & Rights, Ltd.

      2. What kind of facts to allege:

         • According to the Second Circuit in Novak v. Kasaks, a strong inference of scienter may arise when the complaint sufficiently alleges that the defendant (1) benefitted in a concrete and personal way from the purported fraud; (2) engaged in deliberately illegal behavior; (3) knew facts or had access to information suggesting that their public statements were not accurate; or (4) failed to check information that they had a duty to monitor.

      3. In Matrixx Initiatives v. Siracusano (pp. 65-66), Plaintiff alleged that the defendant purposefully decided to conceal the results of an independent report showing the negative health-related impact of a pharmaceutical product because the defendant knew it would have an adverse effect on the market.

         • To support scienter the plaintiff alleged:

           • that the defendant was sufficiently concerned about the report that it retained a consultant to review the alleged effects of the product,

           • that the defendant asked a doctor to conduct animal studies,

           • that the defendant convened a panel of physicians and scientists in response to the report,

           • that the defendant prevented the study from using the name of its product in the public report,

           • that the defendant issued a press release suggesting that studies had confirmed that the product did not cause the reported health issues, when in fact it had not conducted any such studies and that the scientific evidence was insufficient to determine whether or not the product actually caused the reported health issues.

   3. Mandatory stay of discovery pending a motion to dismiss.

      1. Obligation to preserve evidence.

   4. Mandatory Rule 11 determination and mandatory sanction.

   5. Limitations on damages and proportionate liability

      1. 90 day look back period

         • Damages cannot exceed the difference between the price paid or received and mean trading price for 90 days after corrective disclosure.

      2. Liable defendant is only liable to the extent of proportionate fault.

         • Jury must allocate the percentage of liability.

   6. Safe Harbor for Forward-Looking Statements

      1. Protects any oral or written forward-looking statement which is (a) identified as such and accompanied by meaningful cautionary language, or (b) is immaterial or the plaintiff fails to prove that the forward-looking statement "was made with actual knowledge" it was misleading.

   7. The PSLRA requires that loss causation facts must be pleaded with specificity. See Dura

      1. Later cases have held that loss causation may be pleaded on the theory that the truth gradually emerged through a series of partial disclosures and that the entire series of partial disclosures prompted the stock...

Buy the full version of these notes or essay plans and more in our Securities Litigation Outlines.