IN RE PETROBRAS SECURITIES
Docket No. 16-1914-cv
United States Court of Appeals for the Second Circuit
July 7, 2017
August Term, 2016 (Argued: November 2, 2016)
Plaintiffs-Appellees,
PETER KALTMAN, individuаlly and on behalf of all others similarly situated, DIMENSIONAL EMERGING MARKETS VALUE FUND, DFA INVESTMENT DIMENSIONS GROUP INC., on behalf of its series Emerging Markets Core Equity Portfolio, Emerging Markets Social Core Equity Portfolio and T.A. World ex U.S. Core Equity Portfolio, DFA INVESTMENT TRUST COMPANY, on behalf of its series The Emerging Markets Series, DFA AUSTRIA LIMITED, solely in its capacity as responsible entity for the Dimensional Emerging Markets Trust, DFA International Core Equity Fund and DFA International Vector Equity Fund by Dimensional Fund Advisors Canada ULC solely in its capacity as Trustee, DIMENSIONAL FUNDS PLC, on behalf of its sub-fund Emerging Markets Value Fund, DIMENSIONAL FUNDS ICVC, on behalf of its sub-fund Emerging Markets Core Equity Fund, SKAGEN AS, DANSKE INVEST MANAGEMENT A/S, DANSKE INVEST MANAGEMENT COMPANY, NEW YORK CITY EMPLOYEES’ RETIREMENT SYSTEM, NEW YORK CITY POLICE PENSION
Plaintiffs,
PETRÓLEO BRASILEIRO S.A. PETROBRAS, BB SECURITIES LTD., MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED, BANK OF CHINA (HONG KONG) LIMITED, BANCA IMI, S.P.A., SCOTIA CAPITAL (USA) INC., THEODORE MARSHALL HELMS, PETROBRAS GLOBAL FINANCE B.V., PETROBRAS AMERICA INC., CITIGROUP GLOBAL MARKETS INC., ITAU BBA USA SECURITIES, INC., J.P. MORGAN SECURITIES LLC, MORGAN STANLEY & CO. LLC, MITSUBISHI UFJ SECURITIES (USA), INC., HSBC SECURITIES (USA) INC., STANDARD CHARTERED BANK, BANCO BRADESCO BBI S.A.,
Defendants-Appellants,
JOSE SERGIO GABRIELLI, SILVIO SINEDINO PINHEIRO, PAULO ROBERTO COSTA, JOSE CARLOS COSENZA, RENATO DE SOUZA DUQUE, GUILLHERME DE OLIVEIRA ESTRELLA, JOSE MIRANDA FORMIGL FILHO, MARIA DAS GRACAS SILVA FOSTER, ALMIR GUILHERME BARBASSA, MARIANGELA MOINTEIRO TIZATTO, JOSUE CHRISTIANO GOME DA SILVA, DANIEL LIMA DE OLIVEIRA, JOSE RAIMUNDO BRANDA PEREIRA, SERVIO TULIO DA ROSA TINOCO, PAULO JOSE ALVES, GUSTAVO TARDIN BARBOSA, ALEXANDRE QUINTAO FERNANDES, MARCOS ANTONIO ZACARIAS, CORNELIS FRANCISCUS JOZE LOOMAN, PRICEWATERHOUSECOOPERS AUDITORES INDEPENDENTES,
Defendants.
Appeal from an order of the United States District Court for the Southern District of New York (Rakoff, J.) certifying two classes under
First, Appellants challenge both class definitions insofar as they include all otherwise eligible persons who purchased debt securities in “domestic transactions,” аs defined in Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010). Because the district court must verify the domesticity of individual over-the-counter transactions in globally traded notes, Appellants argue that both classes fail to satisfy the requirements for certification under Rule 23. We hold that the district court committed legal error by failing to address the need for such Morrison inquiries in its analysis of predominance under
Second, Appellants assert that the district court erred in finding that the Exchange Act class was entitled to a presumption of reliance under Basic Inc. v. Levinson, 485 U.S. 224 (1988). We find no abuse of discretion in the district court‘s blended analysis of direct and indirect evidence of market efficiency. We therefore affirm as to this issue.
AFFIRMED IN PART, VACATED IN PART, AND REMANDED.
JEREMY A. LIEBERMAN, Mark I. Gross, Emma Gilmore, John A. Keho & Brenda F. Szydlo (on the brief), Pomerantz LLP, New York, NY, for the Plaintiffs-Appellees.
JAY B. KASNER, Boris Bershteyn, Scott D. Musoff & Jeremy A. Berman (on the brief), Skadden, Arps, Slate, Meagher & Flom LLP, New York NY, for Defendants-Appellants BB Securities Ltd., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Bank of China (Hong Kong) Limited, Banca IMI, S.p.A., Scotia Capital (USA) Inc., Citigroup Global Markets Inc., Itau BBA USA Securities, Inc., J.P. Morgan Securities LLC, Morgan Stanley & Co. LLC, Mitsubishi UFJ Securities (USA), Inc., HSBC Securities (USA) Inc., Standard Chartered Bank, and Banco Bradesco BBI S.A.
GARAUFIS, District Judge:
This expedited appeal arises out of an order entered in the United States District Court for the Southern District of New York (Rakoff, J.) certifying two classes in this securities fraud action against Petróleo Brasileirо S.A. – Petrobras (“Petrobras“) and various other defendants. See In re Petrobras Sec. Litig. (the “Certification Order“), 312 F.R.D. 354 (S.D.N.Y. 2016).
The district court certified two classes (the “Classes“) for money damages under
First, Appellants challenge both class definitions insofar as they include all otherwise eligible persons who purchased Petrobras debt securities in “domestic transactions.” Because Petrobras‘s debt securities do not trade on a domestic exchange, the district court must assess each class member‘s over-the-counter transactions for markers of domesticity under Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010). Appellants assert that the neеd for such assessments precludes class certification, particularly in light of concerns over the availability and content of the necessary transaction records. We first address Appellants’ arguments regarding the “implied” Rule 23 requirement of “ascertainability,” taking this opportunity to clarify the scope of the contested ascertainability doctrine: a class is ascertainable if it is defined using objective criteria that
Second, with regard to the Exchange Act Class, the Petrobras Defendants4 challenge the district court‘s finding that Plaintiffs were entitled to a presumption of reliance under the “fraud on the market” theory established in Basic Inc. v. Levinson, 485 U.S. 224 (1988). We find no abuse of discretion in the district court‘s determination that Plaintiffs met their burden under Basic with a combination of direct and indirect evidence of market efficiency. We therefore affirm as to this issue.
For the reasons set forth below, we AFFIRM IN PART and VACATE IN PART the judgment of the district court and REMAND the case for further proceedings consistent with this opinion.
We provide here a brief summary of the proceedings below as relevant for the issues on appeal. For additional background on Plaintiffs’ allegations and causes of action, see the district court‘s prior orders. See In re Petrobras Sec. Litig. (the “July 2015 Order“), 116 F. Supp. 3d 368, 373–77 (S.D.N.Y. 2015) (summarizing the original consolidated complaint); In re Petrobras Sec. Litig. (the “December 2015 Order“), 150 F. Supp. 3d 337 (S.D.N.Y. 2015) (discussing new allegations in the amended pleadings).5
I. Factual Background
A. Plaintiffs’ Allegations of Corruption at Petrobras
Plaintiffs’ claims arise out of a conspiracy that began in the first decade of the new millennium, at which time Petrobras was expanding its production capacity. The company used a competitive bidding process for major capital expenditures, including the construction and purchase of oil refineries. Over a
Brazil‘s Federal Police discovered the scheme during a money-laundering investigation, and ultimately arrested a number of the individuals involved. As details of the scandal emerged, Petrobras made corrective disclosures that, according to Plaintiffs, significantly understated the extent of incorrectly capitalized payments and inflated asset values. Even so, the value of Petrobras‘s securities declined precipitously. Plaintiffs allege that, “[a]t its height in 2009, Petrobras was the world‘s fifth-largest company, with a market capitalization of $310 billion“; by early 2015, its worth had allegedly declined to $39 billion. 4th Am. Compl. ¶ 2.
Petrobras‘s common and preferred shares trade on a Brazilian stock exchange, the BM&F BOVESPA. The company sponsors American Depository Shares (“ADS“)6 that represent its common and preferred shares. Those ADS are listed and trade on the New York Stock Exchange (“NYSE“).
In addition, Petrobras has issued multiple debt securities (the “Notes“; collectively with ADS, “Petrobras Securities“) underwritten by syndicates of domestic and foreign banks. The Notes do not trade on any U.S. exchange. Investors trade Notes in over-the-counter transactions, whether in connection with an initial debt offering or in the global secondary market.
II. Procedural History
In December 2014 and January 2015, Petrobras investors filed five putative class actions asserting substantially similar claims against Petrobras and other defendants. The district court consolidated those actions in February 2015 and
A. Plaintiffs’ Causes of Action
As relevant for this appeal, Plaintiffs assert a cause of action under the Exchange Act against the Petrobras Defendants, and three causes of action under the Securities Act against various Petrobras and Underwriter Defendants.
1. Claims Under the Exchange Act
Plaintiffs’ Exchange Act claims are brought against Petrobras and the Subsidiaries on behalf of holders of Petrobras ADS and Notes. Plaintiffs assert that, during the class period of January 22, 2010, to July 28, 2015, the Petrobras Defendants made two types of false and misleading statements in violation of Section 10(b) of the Exchаnge Act and
2. Claims Under the Securities Act
Plaintiffs rely on similar factual allegations in their claims under the Securities Act, brought on behalf of Petrobras Noteholders. Plaintiffs allege that the Petrobras Defendants and the Underwriter Defendants made materially false representations in registration statements and other documents connected with offerings of Petrobras Notes in May 2013 and March 2014 (the “Offerings“), thereby establishing liability under Sections 11, 12(a)(2), and 15 of the Securities Act. See
B. The Certification Order
On February 2, 2016, the district court granted Plaintiffs’ motion to certify two classes under
Because Petrobras Notes do not trade on any U.S.-based exchange, Noteholders in both Classes are only entitled to assert claims under the Exchange Act and the Securities Act if they can show that they acquired their Notes in “domestic transactions.” Morrison, 561 U.S. at 267. To ensure compliance with
The Exchange Act Class is defined, in relevant part,8 as:
[A]ll purchasers who, between January 22, 2010 and July 28, 2015, . . . purchased or otherwise acquired [Petrobras Securities], including debt securities issued by [the Subsidiaries] on the [NYSE] or pursuant to other domestic transactions, and were damaged thereby.
Id. at 372.
The Securities Act Class is defined, in relevant part, as:
[A]ll purchasers who purchased or otherwise acquired [Notes] in domestic transactions, directly in, pursuant and/or traceable to [U.S.-registered public offerings on May 15, 2013, and March 11, 2014] . . . , and were damaged thereby.9
Id. The Securities Act Class definition is temporally limited to purchases made “before Petrobras made generally available to its security holders an earnings
III. The Instant Appeal
On June 15, 2016, a panel of this Court granted Appellants’ timely filed petition for permission to appeal the Certification Order under
DISCUSSION
A plaintiff seeking certification of a
Appellants do not challenge the district court‘s findings with regard to the class certification elements under Rule 23(a). Rather, they assert two arguments under
I. Standard of Review
“We review a district court‘s conclusions as to whether the requirements of
Thus, neither Abrams nor Robidoux applied a different standard to denials versus grants of class certification. Rather, both cases stated that this Court is more likely to find abuse of discretion in appeals involving the issue of class certification—whether certification was granted or denied—when compared with other types of legal issues. It appears that Lundquist misinterpreted that comparison. In sum, no Second Circuit case provides any reasoning or justification for the idea that we review denials of class certification with more scrutiny than grants.
The Supreme Court has never drawn a distinction between the standard used to review district court denials or grants of class certification. See, e.g., Tyson Foods, Inc. v. Bouaphakeo, — U.S. —, 136 S. Ct. 1036, 1045–46 (2016). Recent Supreme Court class certification cases emphasize that courts must “conduct a rigorous analysis” to determine whether putative class plaintiffs meet Rule 23‘s requirements. Comcast Corp. v. Behrend, — U.S. —, 133 S. Ct. 1426, 1432 (2013); see also Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338, 351 (2011). That said, we need not decide the issue here. We take this opportunity, however, to point out the distinction as one that need not and ought not be drawn. Should the resolution of this issue prove determinative of the outcome in a future matter, the question can likely be resolved by this Court‘s protocol for the circulation of opinions at that time.
II. “Domestic Transactions” as a Condition for Class Membership
The two certified Classes include all claims arising out of Petrobras Notes purchased in “domestic transactions” during the class period, thereby capturing the broadest membership possible under Morrison. Appellants argue that the difficulties inherent in assessing putative class members’ transaction records make the Classes uncertifiablе for several reasons, the most important of which, for our purposes, are (1) the ascertainability doctrine, which has seen recent developments in this Circuit and others; and (2) predominance. We hold that both class definitions satisfy the ascertainability doctrine as it is defined in this Circuit. We further hold, however, that the district court erred in conducting its predominance analysis without considering the need for individualized Morrison inquiries. On that basis, we vacate the district court‘s certification decision and remand for further proceedings.
1. Defining “Domestic Transactions“: Morrison and Absolute Activist
“It is a longstanding principle of American law that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States.” Morrison, 561 U.S. at 255 (internal quotation marks and citation omitted). Based on that presumption against extraterritoriality, the Supreme Court held in Morrison that the reach of U.S. securities law is presumptively limited to (1) “transactions in securities listed on domestic exchanges,” and (2) “domestic transactions in other securities.” Id. at 267 (discussing Section 10(b) of the Exchange Act); see also id. at 268 (noting that “[t]he same focus on domestic transactions is evident in the Securities Act“).12
As noted in the margin, we assume that a purchase of Petrobras ADS qualifies under Morrison‘s first prong as long as the transaction occurs on the
This Court‘s decision in Absolute Activist elaborated on that standard: for “securities that are not traded on a domestic exchange,” a transaction is considered “domestic if [1] irrevocable liability is incurred or [2] title passes within the United States.” Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60, 67 (2d Cir. 2012). In other words, for a transaction to qualify as domestic, either (1) the purchaser must have “incurred irrevocable liability within the United States to take and pay for a security, or . . . the seller [must have] incurred irrevocable liability within the United States to deliver a
The location or residency of the buyer, seller, or broker will not necessarily establish the situs of the transaction. Id. at 68-69. Rather, plaintiffs demonstrate the location where irrevocable liability was incurred or legal title transferred by producing evidence “including, but not limited to, facts concerning the formation of the contracts, the placement of purchase orders, . . . or the exchange of money.” Id. at 70.
2. The District Court‘s Pre-Certification Morrison Inquiries
Before certifying the Classes, the district court twice adjudicated Morrison-based challenges to Plaintiffs’ claims. When the class action was first consolidated, the court dismissed, without prejudice, all Securities Act claims based on Plaintiffs’ failure “to allege that they purchased the relevant securities in domestic transactions.” July 2015 Order, 116 F. Supp. 3d at 386.
Plaintiffs responded with new allegations and documentary evidence regarding Notes transactions for each of the four putative named plaintiffs. Defendants once аgain moved to dismiss. The district court found that two of the named plaintiffs had adequately pleaded domestic transactions based on their acquisition of Notes directly from U.S. underwriters in the Offerings.
The district court determined that the other two named plaintiffs had failed to satisfy the Morrison inquiry and dismissed their Securities Act claims. Id. at 340-43. One plaintiff, for example, presented a confirmation slip stating that Petrobras Notes had been purchased “in U.S. dollars and that the Notes were held in ‘[s]afekeeping of securities abroad, depository country: U.S.A.‘” Id. at 341 (quoting the 4th Am. Compl.). According to the district court, this “language suggests that the purchase occurred outside the United States because it refers to the United States as ‘abroad.‘” Id. (emphasis added). The district court similarly found insufficient an allegation that an investment manager “located in the United Kingdom[] instructed its U.S. affiliate, located in Chicago, Illinois, to transfer Petrobras Notes to [the plaintiff entity,] located in the United Kingdom.” Id. The court noted that “a ‘transfer,’ rather than a purchase, [was]
In an attempt to preserve those claims, Plaintiffs offered two alternative methods for establishing domestic transactions as a matter of law. First, Plaintiffs argued that a securities transaction should qualify as “domestic” if beneficial title is transferred when the transaction is settled through a domestic securities depository, such as the Depository Trust Company (“DTC“) located in New York City. Id. The district court disagreed, finding that “[t]he mechanics of DTC settlement are actions needed to carry out transactions, but they involve neither the substantive indicia of a contractual commitment necessary to satisfy Absolute Activist‘s first prong nor the formal weight of a transfer of [legal] title necessary for its second.” Id. at 342 (emphasis added); see also id. (“[T]he Second Circuit has [] indicated that domestic ‘actions needed to carry out transactions, and not the transactions themselves,’ are insufficient to satisfy Morrison.” (quoting Loginovskaya v. Batratchenko, 764 F.3d 266, 275 (2d Cir. 2014))). The district court also expressed concern that, “assuming the parties are correct that most securities transactions settle through the DTC or similar depository
Finally, Plaintiffs proposed a method for constructively establishing the domesticity of Notes transactions: “allegations that a plaintiff purchased Notes ‘on the offering date and at the offering price’ [should be] sufficient to demonstrate irrevocable liability because all the underwriters who sold in the initial offerings only did so in the United States.” Id. at 342 (quoting the 4th Am. Compl.). The district court rejected this theory, nоting that certain documents related to the Offerings “imply that some underwriters did initially offer the Notes outside the United States.” Id. (emphasis added).14
“Most [] circuit courts of appeals have recognized that
In Brecher v. Republic of Argentina, we offered our first and, thus far, only affirmative definition15 of the implied ascertainability requirement:
[T]he touchstone of ascertainability is whether the class is sufficiently definite so that it is administratively feasible for the court to determine whether a particular individual is a member. A class is ascertainable when
defined by objective criteria that are administratively feasible and when identifying its members would not require a mini-hearing on the merits of each case.
Brecher, 806 F.3d at 24-25 (internal quotation marks and citations omitted). Based on this language, Appellants argue for a “heightened” ascertainability requirement under which any proposed class must be “administratively feasible,” over and above the evident requirements that a class be “definite” and “defined by objective criteria,” and separate from
We take this opportunity to clarify the ascertainability doctrine‘s substance and purpose. We conclude that a freestanding administrative feasibility requirement is neither compelled by precedent nor сonsistent with
1. The Proceedings Below and Arguments on Appeal
In its Certification Order, the district court rejected Defendants’ argument that, “because of the nuances of the ‘domestic transaction’ standard, determining
Appellants renew that argument on appeal, packaged as a challenge to the district court‘s finding “that the Morrison determination is ‘administratively feasible.‘” Id. at 364 (quoting Brecher, 806 F.3d at 24). Appellants cite heavily to cases from the Third Circuit, which has formally adopted a “heightened” two-part ascertainability test under which plaintiffs must not only show that “the class is ‘defined with reference to objective criteria,‘” but also that “there is ‘a reliable and administratively feasible mechanism for determining whether putative class members fall within the class definition.‘” Byrd v. Aaron‘s Inc., 784 F.3d 154, 166 (3d Cir. 2015), as amended Apr. 28, 2015 (quoting Hayes v. Wal-Mart Stores, Inc., 725 F.3d 349, 355 (3d Cir. 2013)); see also Carrera v. Bayer Corp., 727 F.3d 300, 305 (3d Cir. 2013); Marcus v. BMW of N. Am., LLC, 687 F.3d 583, 592-95 (3d Cir. 2012).
With all due respect to our colleagues on the Third Circuit, we decline to adopt a heightened ascertainability theory that requires a showing of
2. Our Decision in Brecher v. Republic of Argentina
Brecher was one of several opinions in which we assessed a class action initiated by holders of Argentinian bonds “[a]fter Argentina defaulted on between $80 and $100 billion of sovereign debt in 2001.” Brecher, 806 F.3d at 23 (listing prior decisions). The district court originally “certified a class under a continuous holder requirement, i.e., the class contained only those individuals who [] possessed beneficial interests in a particular bond series issued by the
When the district court granted summary judgment to the plaintiffs, we vacated in part after finding that the district court‘s method of calculating aggregate damages had likely produced impermissibly inflated awards. See Seijas v. Republic of Argentina, 606 F.3d 53, 58-59 (2d Cir. 2010); Hickory Sec., Ltd. v. Republic of Argentina, 493 F. App‘x 156, 160 (2d Cir. 2012) (summary order). On remand, the district court “modif[ied] the class definition by removing the continuous holder requirement and expanding the class to all holders of beneficial interests in the relevant bond series[,] without limitation as to time held.” Brecher, 806 F.3d at 24. The defendants appealed once again.
We concluded that, without the continuous holder requirement, the modified class was unascertainable. Id. at 26. We first defined the elements of ascertainability, explaining that a propоsed class: (1) must be “sufficiently definite so that it is administratively feasible for the court to determine whether a particular individual is a member“; and (2) must be “defined by objective criteria that are administratively feasible,” such that “identifying its members would not require a mini-hearing on the merits of each case.” Id. at 24 (citations omitted).
Turning to the facts of the case, we expressed concern that the class was insufficiently bounded:
The secondary market for Argentine bonds is active and has continued trading after the commencement of this and other lawsuits. . . . Further, all bonds from the same series have the same trading number identifier (called a CUSIP/ISIN), making it practically impossible to trace purchases and sales of a particular beneficial interest. Thus, when it becomes necessary to determine who holds bonds that fall inside (or outside) of the class, it will be nearly impossible to distinguish between them once traded on the secondary market without a criterion as to time held.
Id. at 25-26 (citations omitted). We concluded that “[t]his case presents [] a circumstance where an objective standard—owning a beneficial interest in a bond series without reference to time owned—is insufficiently definite to allow
As this summary clarifies, we reached our decision in Brecher by asking whether the class wаs defined by objective criteria that made the class‘s membership sufficiently definite, not whether the class was administratively feasible.17 See, e.g., id. at 26 (“The lack of a defined class period . . . makes the modified class insufficiently definite as a matter of law.” (emphasis added)). The opinion‘s language about “administrative feasibility” and “mini-hearings” was not strictly part of the holding, and was not intended to create an independent element of the ascertainability test; rather, that language conveyed the purpose underlying the operative requirements of definiteness and objectivity. That is, a class must be “sufficiently definite so that it is administratively feasible for the court to determine whether a particular individual is a member“; a class must be “defined by objective criteria” so that it will not be necessary to hold “a mini-
This interpretation finds further support in the district court cases we cited in Brecher‘s articulation and application of the ascertainability standard. Compare Bakalar v. Vavra, 237 F.R.D. 59, 65 (S.D.N.Y. 2006) (declining to certify a class seeking recovery of artworks traceable to a particular estate—an objective criterion—because the movants were unable to identify the specific artworks, and were therefore also unable to identify “the owners, possessors or individuals who participated in transfers of such works“), with Ebin v. Kangadis Food Inc., 297 F.R.D. 561, 567 (S.D.N.Y. 2014) (acknowledging the challenge of identifying individuals who purchased a particular brand of olive oil during the class period, but finding the class ascertainable because “ascertainability . . . is designed only to prevent the certification of a class whose membership is truly indeterminable” (emphasis added) (internal quotation marks and citations omitted)), and Charron v. Pinnacle Grp. N.Y. LLC, 269 F.R.D. 221, 229 (S.D.N.Y. 2010) (finding that ascertainability was satisfied because the proposed class was “defined by objective criteria—namely, whether a given apartment is rent-regulated” and “owned by the [defendant corporation]; and whether the
3. Ascertainability and Rule 23
Having concluded that our decision in Brecher did not create an independent administrative feasibility requirement, we now consider whether such a requirement is compulsory under
The heightened ascertainability test, as articulated by the Third Circuit and endorsed by Appellants, treats administrative feasibility as an absolute standard: plaintiffs must provide adequate “assurance that there can be ‘a reliable and administratively feasible mechanism for determining whether putative class members fall within the class definition.‘” Byrd, 784 F.3d at 164-65 (quoting Hayes, 725 F.3d at 355); cf. Mullins, 795 F.3d at 663 (“When administrative inconvenience is addressed as a matter of ascertainability, courts tend to look at the problem in a vacuum, considering only the administrative costs and headaches of proceeding as a class action.” (citation omitted)).
On its face, this test appears to duplicate
The proposed administrative feasibility test also risks encroaching on territory belonging to the predominance requirement, such as classes that require highly individualized determinations of member eligibility. See, e.g., Mazzei v. The Money Store, 829 F.3d 260, 272 (2d Cir. 2016) (internal quotation marks omitted), cert. denied, — U.S. —, 137 S. Ct. 1332 (2017). Like superiority, predominance is a comparative standard: ”
We conclude that an implied administrative feasibility requirement would be inconsistent with the careful balance struck in
Our decision in Brecher did not create an administrative feasibility requirement, and we decline to adopt one now. The ascertainability requirement, as defined in this Circuit, asks district courts to consider whether a proposed class is defined using objective criteria that establish a membership with definite boundaries. This modest threshold requirement will only preclude certification if a proposed class definition is indeterminate in some fundamental way. If there is no focused target for litigation, the class itself cannot coalesce, rendering the class action an inappropriate mechanism for adjudicаting any
4. Application
The district court‘s analysis in the Certification Order is not precisely consistent with the ascertainability standard articulated in this opinion. The district court focused primarily on the types of feasibility concerns that we hold are not controlling of the ascertainability analysis, and effectively addressed ascertainability as a component of superiority. 312 F.R.D. at 363-64. Nonetheless, the district court‘s findings reflect an understanding that objective criteria would permit the identification of class members. We agree.
Unlike in Brecher or the сases cited therein, neither the parties nor the properties that are the subject of this litigation are fundamentally indeterminate. Finding no error in the district court‘s conclusion on this point, we reject Appellants’ contention that the classes defined by the district court fail on ascertainability grounds.
1. Legal Standard
A district court may only certify a class under
The distinction between “individual” and “common” questions is thus central to the predominance analysis. As the Supreme Court has explained:
An individual question is one where “members of a proposed class will need to present evidence that varies from member to member,” while a common question is one where “the same evidence will suffice for each member to make a prima facie showing or the issue is susceptible to generalized class-wide proof.”
Tyson Foods, Inc. v. Bouaphakeo, — U.S. —, 136 S. Ct. 1036, 1045 (2016) (alteration omitted) (quoting 2 William B. Rubenstein, Newberg on Class Actions § 4:50, at 196–97 (5th ed. 2012)).
The predominance inquiry mitigates this risk by “ask[ing] whether the common, aggregation-enabling, issues in the case are more prevalent or important than the non-common, aggregation-defeating, individual issues.” Tyson Foods, 136 S. Ct. at 1045 (emphasis added) (quoting Rubenstein, supra, at 195–96); see also id. (The “inquiry tests whether proposed classes are sufficiently cohesive to
2. Application
A proper assessment of predominance in this action involves two predicate questions about the role of Morrison inquiries. First, is the determination of domesticity material to Plaintiffs’ class claims? See Amchem Prods., 521 U.S. at 623 (explaining that predominance “trains on the legal or factual questions that qualify each class member‘s case as a genuine controversy“). If so, is that determination “susceptible to generalized class-wide proof” such that it represents a “common” questiоn rather than an “individual”
With regard to the first question, ”Morrison makes clear that [determining] whether [federal securities law] applies to certain conduct is a ‘merits’ question.” Absolute Activist, 677 F.3d at 67 (quoting Morrison, 561 U.S. at 254). In other words, a putative class member only has a viable cause of action if the specific Petrobras Securities sued upon were purchased in a qualifying “domestic transaction.” City of Pontiac, 752 F.3d at 179; see also Morrison, 561 U.S. at 273 (holding that securities fraud claims that lack a domestic connection must be dismissed for “fail[ure] to state a claim on which relief can be granted“).
The district court clearly recognized Morrison‘s importance because the class definitions import Morrison‘s unelaborated legal standard, namely that Petrobras Securities must have been purchased in “domestic transactions.” See
On the available record, the investigation of domesticity appears to be an “individual question” requiring putative class members to “present evidence that varies from member to member.” Id. (citation omitted). As discussed above, a plaintiff may demonstrate the domesticity of a particular transaction by producing evidence “including, but not limited to, facts concerning the formation of the contracts, the placement or purchase orders, the passing of title, or the exchange of money.” Absolute Activist, 677 F.3d at 70; see also Discussion Section II.A, supra. These transaction-specific facts are not obviously “susceptible to [] class-wide proof,”24 nor did Plaintiffs suggest a form of representative proof
In cases that have applied Morrison and Absolute Activist—including the district court‘s own experience adjudicating Petrobras-specific inquiries—factfinders have considered various types of evidence offered to prove the domesticity of various types of transactions. See, e.g., Loginovskaya, 764 F.3d at 274–75 (finding that domestic wire transfers failed to satisfy Absolute Activist because they were “actions needed to carry out the transactions, and not the transactions themselves“); In re Petrobras Sec. Litig., 152 F. Supp. 3d 186, 193 (S.D.N.Y. 2016) (explaining that the high-level documentation provided by various plaintiffs was insufficient to plead a domestic transaction); December 2015 Order, 150 F. Supp. 3d at 340–41 (finding that two proposed class representatives failed to plead domestic transactions in Petrobras Notes).
The two approved class representatives with Notes-based claims were both located in the United States, placed their Notes purchase orders in the United States, and procured their securities directly from United States underwriters as part of the initial Notes Offerings. See December 2015 Order, 150 F. Supp. 3d at 340. Appellants argue that thоse transactions are the easy case. As the Underwriter Defendants observe, the Classes as currently defined potentially “include[] numerous foreign and domestic entities that purchased securities from other foreign and domestic entities, possibly through foreign and domestic intermediaries, using different methods, under different circumstances, and reflected in different types of records (assuming any records of the purchases exist at all).” Underwriter Defs.’ Br. at 3.
The need for Morrison inquiries nominally presents a common question because the need to show a “domestic transaction” applies equally to each putative class member. However, Plaintiffs bear the burden of showing that, more often than not, they can provide common answers. Amgen, 133 S. Ct. at 1196. In this case, the potential for variation across putative class members—who sold them the relevant securities, how those transactions were effectuated, and what forms of documentation might be offered in support of domesticity—appears to generate a set of individualized inquiries that must be considered
Consider, for instance, the Supreme Court‘s recent Amgen decision, which similarly involved class claims under Section 10(b) the
For the foregoing reasons, we vacate the district court‘s certification of the Classes insofar as they include all otherwise eligible class members who acquired
III. “Fraud on the Market” and the Presumption of Reliance
The second issue on appeal concerns the district court‘s finding that the Exchange Act Class was entitled to a presumption of class-wide reliance on the market price of Petrobras‘s ADS and Notes. In reaching that conclusion, the district court found that Plaintiffs satisfied their burden of showing that the Petrobras Securities traded in efficient markets, as required under the “fraud on
A. The “Fraud on the Market” Theory
1. Legal Standard
Plaintiffs alleging claims under Section 10(b) of the
On its face, the reliance element would appear to preclude class certification on predominance grounds: “[e]ach plaintiff would have to prove reliance individually,” with the result that “common issues would not ‘predominate’ over individual ones.” Id. at 2416 (citation omitted). The Supreme Court resolved that tension almost three decades ago in Basic Inc. v. Levinson, reasoning that “[a]n investor who buys or sells stock at the price set by the market does so in reliance on the integrity of that price,” and so “an investor‘s reliance on any public material misrepresentations [] may be presumed for purposes of a Rule 10b–5 action.” 485 U.S. at 247 (emphasis added).
In 2014, the Court affirmed the continued vitality of the “fraud on the market” theory, and clarified that the so-called ”Basic presumption actually incorporates two constituent presumptions:”
First, if a plaintiff shows that the defendant‘s misrepresentation was public and material and that the stock traded in a generally efficient market, he is entitled to a presumption that the misrepresentation affected the stock price.
Second, if the plaintiff also shows that he purchased the stock at the market price during the relevant period, he is entitled to a further presumption that he purchased
the stock in reliance on the defendant‘s misrepresentation.
Halliburton II, 134 S. Ct. at 2414. If a putative class successfully establishes the Basic presumption, “defendants must be afforded an opportunity . . . to defeat the presumption through evidence that [the] alleged misrepresentation [at issue in the plaintiffs’ legal claim] did not actually affect the market price of the stock.” Id. at 2417.
2. Market Efficiency and the Cammer Factors
“The fraud-on-the-market theory rests on the premise that certain well developed markets are efficient processors of public information,” meaning that “the ‘market price of shares’ will ‘reflect all publicly available information.‘” Amgen, 133 S. Ct. at 1192 (quoting Basic, 485 U.S. at 246 (alteration omitted)).
This Court “has not adopted a test for the market efficiency of stocks or bonds.” Teamsters Local 445 Freight Div. Pension Fund v. Bombardier Inc., 546 F.3d 196, 204 n.11 (2d Cir. 2008). A test based on the so-called ”Cammer factors” has been “routinely applied by district courts considering the efficiency of equity markets,” and has also been applied, in modified form, “to bond markets with a recognition of the differences between the manner in which debt bonds and equity securities trade.” Id.; see also Cammer v. Bloom, 711 F. Supp. 1264, 1286–87 (D.N.J. 1989) (articulating five factors); Krogman v. Sterritt, 202 F.R.D. 467, 478 (N.D. Tex. 2001) (describing three additional factors that are commonly included in Cammer analyses); In re Enron Corp. Sec., 529 F. Supp. 2d 644, 747–49 (S.D. Tex. 2006) (applying the Cammer factors in modified form to debt securities).
All but one of the Cammer factors examine indirect indicia of market efficiency for a particular security, such as high trading volume, extensive analyst coverage, multiple market makers, large market capitalization, and an issuer‘s eligibility for simplified SEC filings. The fifth Cammer factor, however, invites plaintiffs to submit direct evidence, consisting of “empirical facts showing a cause and effect relationship between unexpected corporate events or financial releases and an immediate response in the stock price.” Cammer, 711 F. Supp. at 1287; see also Halliburton II, 134 S. Ct. at 2415 (“[P]laintiffs [] can and do introduce evidence of the existence of priсe impact in connection with ‘event studies‘—regression analyses that seek to show that the market price of the defendant‘s stock tends to respond to pertinent publicly reported events.” (citation and emphasis omitted)).
At the outset, the Petrobras Defendants assert an error of law: they challenge the district court‘s purported holding that Plaintiffs were entitled to the Basic presumption based solely on their indirect evidence of market efficiency. This argument mischaracterizes the district court‘s analysis. True, the court noted that “Petrobras was one of the largest and most-analyzed firms in the world throughout the Class Period,” and explained that in instances where “the indirect [Cammer] factors overwhelmingly describe a large and well-functioning market for Petrobras securities, common sense suggests that the market would materially react to material disclosures.” Certification Order, 312 F.R.D. at 367. The opinion did not stop there, however. The court proceeded with an “involved analysis” of Plaintiffs’ empirical evidence—which Defendants disputed as to “almost every aspect“—and “ultimately conclude[d] that plaintiffs [had] satisfied the fifth Cammer factor.” Id.; see also id. at 367–71. Anything to the contrary was, at most, a holding in the alternative. We therefore decline to reach the Petrobras Defendants’ legal question—whether plaintiffs may satisfy the Basic presumption without any direct evidence of price impact—because the issue is not squarely presented for our review.
In the class certification proceedings, the parties’ “experts [] sparred over whether any direct evidence of [Cammer‘s] fifth factor existed.” Id. at 367. Plaintiffs’ expert ran multiple event studies and reported that “there were more likely to be big price movements on days when important Petrobras events occurred, demonstrating [that] the markets in Petrobras securities were responsive to new information.” Id. at 367–68. Defendants responded with numerous challenges to “the execution and the sufficiency” of that test. Id. at 368. They specifically criticized the test‘s failure to examine directionality, that is, “whether the price of a security moved up or down as expected based on the precipitating market event.” Id. at 369; see also id. at 370 (describing the defense expert‘s position that “in an efficient market, the price of a security should always
In this case, where the indirect Cammer factors lay a strong foundation for a finding of efficiency, a statistically significant showing that statistically significant price returns are more likely to occur on event dates is sufficient as direct evidence of market efficiency and thereby to invoke Basic‘s presumption of reliance at the class certification stage.
Id. at 371.
We find that the district court‘s conclusion “falls within the range of permissible decisions.” Roach, 778 F.3d at 405 (citation omitted). The district court properly declined to view direct and indirect evidence as distinct requirements, opting instead for a holistic analysis based on the totality of the evidence presented. See, e.g., In re JPMorgan Chase & Co. Sec. Litig., No. 12 CIV. 03852 (GBD), 2015 WL 10433433, at *7 (S.D.N.Y. Sept. 29, 2015) (“Defendants’ criticisms of Plaintiffs’ event study distract[] from the central
The Petrobras Defendants’ contentions on appeal amount to an intensified reformulation of the claim we bypassed above: not only should putative class plaintiffs be required to offer direct evidence of market efficiency, they argue, but the evidence must specifically consist of empirical data showing that the price of the relevant securities predictably moved up in response to good news and down in response to bad news. The gravamen of their claim is that plaintiffs would only be entitled to the Basic presumption after making a substantial showing of market efficiency based on directional empirical evidence alone, irrespective of any other evidence they may have offered.29
We reject this proposition. In short, the Petrobras Defendants are attempting to relabel a sufficient condition as a necessary one. We noted in Bombardier that “[a]n event study that correlates the disclosures of unanticipated,
The Supreme Court has similarly declined to define a precise evidentiary standard for market efficiency, but the Court‘s opinions consistently suggest that the burden is not an onerous one. See Halliburton II, 134 S. Ct. at 2410 (“Even the foremost critics of the efficient-capital-markets hypothesis acknowledge that public information generally affects stock prices,” and so “[d]ebates about the precise degree to which stock prices accurately reflect public information are [] largely beside the point.“); id. at 2417 (Ginsburg, J., concurring) (interpreting the holding in Halliburton II as “impos[ing] no heavy toll on securities-fraud plaintiffs with tenable claims“); Amgen, 133 S. Ct. at 1192 (“[I]t is reasonable to presume that most investors . . . will rely on [a] security‘s market price as an unbiased assessment of the security‘s value in light of all public information.“);
The Petrobras Defendants’ proposed evidentiary hierarchy unreasonably discounts the potential probative value of indirect evidence of market efficiency. As noted above, all but one of the widely used Cammer factors focus on elements that would logically appear in, or contribute to, an efficient securities market. Those factors would add little to the Basic analysis if courts only ever considered them after finding a strong showing based on direct evidence alone.
Indeed, indirect evidence is particularly valuable in situations where direct evidence does not entirely resolve the question. Event studies offer the seductive promise of hard numbers and dispassionate truth, but methodological constraints limit their utility in the context of single-firm analyses. See generally Alon Brav & J. B. Heaton, Event Studies in Securities Litigation: Low Power, Confounding Effects, and Bias, 93 Wash. U. L. Rev. 583 (2015); see also id. at 588 n.11 (collecting academic criticism of single-firm event studies). Notably, small
In sum, the district court properly considered a combination of direct and indirect evidence in reaching its conclusion that Petrobras ADS and Notes both trade in efficient markets. The court conducted a rigorous analysis of the parties’ proffered evidence and objections. We find no abuse of discretion, and therefore
CONCLUSION
For the foregoing reasons, the district court‘s Certification Order is AFFIRMED IN PART and VACATED IN PART, and the case is REMANDED to the district court for further proceedings consistent with this opinion.
Notes
The first case to suggest that we apply a different standard to denials of class certification was Lundquist v. Security Pacific Automotive Financial Services Corp., 993 F.2d 11, 14 (2d Cir. 1993) (per curiam). Lundquist cited Robidoux v. Celani, 987 F.2d 931, 935 (2d Cir. 1993), and Abrams v. Interco Inc., 719 F.2d 23, 28 (2d Cir. 1983), for the proposition that “we are noticeably less deferential to the district court when that court has denied class status than when it has certified a class.” Id. But Abrams and Robidoux do not support this proposition. Abrams states, in relevant part: “Abuse of discretion can be found far more readily on appeals from the denial or grant of class action status than where the issue is, for example, the curtailment of cross-examination or the grant or denial of a continuance,” because “courts have built a body of case law with respect to class action status.” 719 F.2d at 28 (emphasis added) (citation omitted). Robidoux repeated that “abuse of discretion can be found more readily on appeals from the denial of class status than in other areas, for the courts have built a body of case law with respect to class action status.” 987 F.2d at 935 (emphasis added) (citing Abrams, 719 F.2d at 28).