Securities Fraud – Class Certification

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7^th Circuit Court of Appeals

Case Name: Carpenters Pension Trust Fund for Northern California, et al., v. Allstate Corporation, et al.,

Case No.: 19-1830

Officials: KANNE, HAMILTON, and BARRETT, Circuit Judges.

Focus: Securities Fraud – Class Certification

The district court certified a plaintiff class in this securities fraud case against Allstate Corporation. We granted leave for defendants to pursue this interlocutory appeal of that order under Federal Rule of Civil Procedure 23(f). The class certification presents several challenging questions about how to apply the “Basic” fraud-on-the-market presumption of reliance in the wake of a series of more recent Supreme Court decisions.

Established in Basic, Inc. v. Levinson, 485 U.S. 224 (1988), the fraud-on-the-market presumption allows plaintiffs to avoid proving individual reliance upon fraudulent misrepresentations and omissions. Instead, plaintiffs may prove that the given securities traded in efficient markets in which prices reflect all publicly available information, including misrepresentations, and all investors were thus entitled to rely on that public information and pricing. Id. at 246–47. That makes securities fraud cases better suited for class certification.

Evidence supporting or refuting the Basic presumption of reliance is often relevant to three other closely related issues in a securities fraud case—materiality, loss causation, and transaction causation. Recent Supreme Court decisions on those issues pose a difficult challenge at the class certification stage. A district court deciding whether to certify a plaintiff class may not use the evidence to decide loss causation then, Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. 804 (2011) (Halliburton I), and may not use the same evidence to decide materiality then, Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, 568 U.S. 455 (2013). Those questions are left for the merits. Yet to decide class certification using the Basic presumption, a court must consider the same evidence if the defense offers it to show the absence of transaction causation, also known as price impact. Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. 258 (2014) (Halliburton II).

These precedents require a district court to split some very fine hairs. In this case, the district court granted class certification after admitting, but without engaging with, the evidence that defendants offered to defeat the Basic presumption, an expert opinion that the alleged misrepresentations had no impact on the stock price. The judge concluded that the issue was tied so closely to the merits that he should not decide it on class certification. We understand that view. The Supreme Court has long warned the lower federal courts not to confuse class certification decisions with the merits, e.g., Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 177 (1974), and the court may not consider materiality and loss causation at the class certification stage.

Under Halliburton II, however, the court’s approach was based on a legal error, so we must vacate for reconsideration. Class certification may well be appropriate here, but the district court must decide at the class stage the price impact issue posed by the defendants’ price impact evidence and plaintiffs’ rebuttal. The court may not defer that question for the merits. We also affirm the district court’s adding a new class representative and, by agreement of the parties, direct a modification of any class certification to limit the class to buyers of the defendant’s common stock rather than any other securities.

In Part I, we summarize the alleged fraud, the defendants’ response, and the district court’s order granting class certification. In Part II, we set out the standard for our review of the class certification order, including the need for factfinding. In Part III, we apply Rule 23(b)(3)’s predominance requirement for certifying plaintiff classes in securities fraud cases, the Basic presumption, and the Halliburton/Amgen trilogy at the heart of this appeal, and then set out guidance for remand. In Part IV, we affirm the district court’s order adding a new proposed class representative, and in Part V we briefly note the parties’ and our agreement that the proposed class definition must be limited to buyers of Allstate’s common stock.

Affirmed

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Derek A Hawkins is trademark corporate counsel for Harley-Davidson. Hawkins oversees the prosecution and maintenance of the Harley-Davidson’s international trademark portfolio in emerging markets.