The United States District Court for the Northern District of Texas recently denied certification of a putative securities law class after finding that plaintiff failed to put forth actual facts showing adequacy and predominance, as required to satisfy the “stringent standards” of Rule 23 pursuant to the Supreme Court’s decisions in Wal-Mart Stores, Inc. v. Dukes and Comcast Corp. v. Behrend, as well as the Fifth Circuit’s decision in the securities law context in Berger v. Compaq Computer Corp. The plaintiff had sought to certify a class of investors who acquired stock from Kosmos Energy Limited through its May, 2011 initial public offering, claiming the company’s registration statement and prospectus contained false and misleading information.
In denying certification, the court emphasized that Comcast requires “quality evidence for each Rule 23 element — period.” The court found quality evidence of adequacy lacking where the class representative had never seen (much less read) Kosmos’ offering documents, nor could she identify any misstatements contained therein. The court also found quality evidence of predominance lacking where plaintiff — in lieu of any proof that common issues predominated for purposes of Rule 23(b)(3) — relied on conclusory statements that securities actions are ideally suited for class treatment.
Discussing the changing landscape of class actions in general, the court noted that the previous two decades have been marked by a departure from a “presumptively favorable approach” to class certification towards greater skepticism and the imposition of a more rigorous review. Ultimately, the court specified that, “[g]oing 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.”
This case is the latest to suggest that securities class actions are receiving increased scrutiny. On March 5, 2014, the Supreme Court heard oral argument in Halliburton Co. v. Erica P. John Fund, Inc., which raised the question of whether the Court should overrule or modify the Basic v. Levinson presumption of reliance in cases involving a fraud on the market theory and whether defendants may put forth evidence to rebut that presumption at the class certification stage. Although the Court has yet to rule on these issues, its willingness to address them suggests it may be ready to rethink its approach to securities class actions. Some believe that it should; a February 28, 2014 study initiated by the U.S. Chamber Institute for Legal Reform looked at the economic consequences of such cases. The study determined that securities class actions harm both investors and the economy, causing shareholders to suffer drops in stock prices and resulting in settlements that redistribute funds to class members who would not be able to recover damages in court.