In this class action case, we face a rare joint appeal from a district court’s order. After the parties arrived at a settlement agreement, the district court (Deborah A. Batts, J.) denied plaintiffs’ motion to certify a settlement class. The court held that the class could not satisfy the predominance requirement of Federal Rule of Civil Procedure 23(b)(3) because the fraud-on-the-market presumption does not apply to the class’s securities fraud claims. We hold that, under Amchem Products, Inc. v. Windsor,
BACKGROUND
In October 2004, a number of securities fraud class actions were filed in the United States District Court for the Southern Dis
On December 15, 2006, Lead Plaintiffs filed the Consolidated Third Amended Class Action Complaint (“Complaint”) on behalf of a putative class consisting of investors who purchased AIG’s publicly traded securities between October 28, 1999, and April 1, 2005. The Complaint alleges, in relevant part, that AIG and Gen Re violated Rule 10b-5(a) and (c), promulgated under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), by entering into a sham $500 million reinsurance transaction designed to mislead the market and artificially increase AIG’s share price.
In particular, the Complaint alleges that in late 2000 and early 2001 AIG and Gen Re entered into a two-part transaction that allowed AIG to book a total of $500 million in premiums revenues and $500 million of claims reserves to its balance sheet in the fourth quarter of 2000 and first quarter of 2001. The terms of the transaction appeared to require AIG to make an additional $100 million of claims payments in the event that additional losses developed. According to the Complaint, however, the additional $100 million of risk was a fiction, having been added by the parties to give the appearance that risk was being transferred in the transaction. In reality, AIG was only obligated to pay a total amount of $500 million in losses, which was equal to the amount of premiums revenues that AIG was receiving from Gen Re. The Complaint alleges that the transaction was therefore not a bona fide reinsurance transaction, which would have required that AIG assume actual insurance risk, but was instead a transaction that would only look like reinsurance for AIG’s accounting purposes. The Complaint further alleges that Gen Re did not treat the transaction as reinsurance in its own accounting, but knew that AIG intended to account for the transaction improperly as reinsurance. In exchange for its participation in the transaction, Gen Re received an undisclosed $5.2 million side payment.
The sham reinsurance transaction came, according to the Complaint, at a time when investors were concerned about recent reductions in AIG’s loss reserves. The transaction had a significant impact on AIG’s financial statements, allowing it to report added loss reserves of $106 million for the fourth quarter of 2000 and $63 million for the first quarter of 2001. As the Complaint noted, the increased re
The Complaint further alleges that the true nature of the transaction remained hidden from public view until late 2004 and early 2005, when the Securities and Exchange Commission and the New York Attorney General began to investigate AIG’s dealings with Gen Re. Following a series of news reports detailing the results of the investigation, AIG publicly acknowledged on March 30, 2005, that it had improperly treated the Gen Re transaction as reinsurance for accounting purposes. In the wake of that announcement, as well as of the disclosure of numerous other serious accounting improprieties at AIG, the company’s stock price dropped substantially. On May 31, 2005, AIG issued a dramatic restatement of its earnings for the previous four years, reducing its reported pretax income for that period by more than $3.9 billion.
Just over a year after filing the Complaint, Lead Plaintiffs moved, on February 20, 2008, to certify a class for litigation of its claims against all of the defendants, including the Gen Re Defendants. To demonstrate the element of reliance in their Section 10(b) claim, the Lead Plaintiffs invoked- the fraud-on-the-market doctrine of Basic Inc. v. Levinson,
The Stoneridge plaintiffs had alleged that Charter Communications, Inc., a cable operator, arranged a transaction with two of its suppliers of digital cable set top boxes in which Charter overpaid for each set top box by $20 and the suppliers returned the overpayment by purchasing advertising from Charter at above-market rates. Id. at 154-55,
The Supreme Court held that the Stoneridge plaintiffs’ claim failed because the plaintiffs had not adequately alleged reliance under Section 10(b). Id. at 159,
In their motion for judgment on the pleadings, the Gen Re Defendants argued that, under Stoneridge, the Lead Plaintiffs failed to state a Section 10(b) claim against Gen Re because Gen Re made no public statements about the sham reinsurance transaction. The Lead Plaintiffs opposed the motion, arguing, among other things, that their claims against Gen Re survived Stoneridge because key details about the sham transaction — including Gen Re’s participation in it and the amount of loss reserves transferred — were disclosed to the market by AIG in state regulatory filings shortly after the transaction was consummated. In these circumstances, Lead Plaintiffs argued, AIG’s investors can be presumed, through the fraud-on-the-market doctrine, to have relied on Gen Re’s deceptive acts. Thus, the central dispute between the parties was whether Stoneridge bars a Section 10(b) claim against a counterparty to a deceptive transaction with an issuer of stock where the existence of the transaction and the counterparty’s participation in it is dis
The district' court did not immediately rule on this question. On September 23, 2008, Gen Re filed its opposition to Lead Plaintiffs’ motion for class certification. At around the same time, in light of the “uncertainty with respect to how the District Court, and this Court, would rule on the Stoneridge issue,” Gen Re and the Lead Plaintiffs entered into settlement discussions. Joint Brief of Appellants and Appellees (“Joint Br.”) at 5.
On November 3, 2008, the parties jointly requested that the district court hold Gen Re’s motion for judgment on the pleadings in abeyance so that they could participate in mediation. The court stayed decision of the motion until February 6, 2009.
While the Gen Re litigation was stayed, the district court heard several days of evidence and argument on Lead Plaintiffs’ pending motion for class certification. In light of the settlement, the Gen Re Defendants did not participate in those proceedings. On February 22, 2010, the district court issued a lengthy class certification decision, which, in relevant part, denied Lead Plaintiffs’ class certification motion with respect to the claims against Gen Re. See In re Am. Int’l Grp., Inc. Sec. Litig.,
Because Lead Plaintiffs have not established or even pled that the Gen Re Defendants made any public misstatement or omission with regard to AIG, the fraud-on-the-market presumption does not apply to claims against these Defendants, and individual issues of reliance predominate over common issues for the claims against the Gen Re Defendants regarding AIG stock. Accordingly, the Court does not certify the class of claims against the Gen Re Defendants.
Id. at 175,
Thereafter, the Settling Parties continued to seek approval of the Gen Re settlement. On June 23, 2010, they jointly moved for preliminary approval of the settlement, arguing that even if certification of a litigation class was inappropriate, the
On September 10, 2010, the court issued an order (“Dismissal Order”) denying the preliminary approval motion and granting Gen Re’s long-dormant motion for judgment on the pleadings. On the class certification question, the court rejected the Settling Parties’ “attempts to distinguish between settlement and litigation classes based upon the issue of manageability at trial.” Dismissal Order at 3. According to the court, the parties’ trial manageability argument was beside the point, because the Lead Plaintiffs’ claim against Gen Re still “fail[ed] to meet the predominance requirement” of Federal Rule of Civil Procedure 23(b)(3). Id. As support for this conclusion, the court again invoked our decision in In re Salomon, noting its “teaching that ‘a successful rebuttal’ of proof of the elements of the fraud-on-the-market presumption ‘defeats certification by defeating the Rule 23(b)(3) predominance requirement.’” Id. (quoting In re Salomon,
Lead Plaintiffs filed a timely notice of appeal. The Settling Parties then jointly moved to bifurcate this appeal, so that the issue of the propriety of certifying a settlement class (about which the Settling Parties agree) could be addressed before the merits issues (about which they disagree). We granted the motion, and the Settling Parties filed a joint brief that argues that the district court erred by declining to certify a settlement class.
DISCUSSION
I. Standard of Review
We review both a district court’s ultimate decision on class certification and its rulings as to individual Rule 23 requirements for abuse of discretion. In re IPO,
II. Class Certification Requirements
“Rule 23 does not set forth a mere pleading standard.” Wal-Mart Stores, Inc. v. Dukes, — U.S. -,
Before approving a class settlement agreement, a district court must first determine whether the requirements for class certification in Rule 23(a) and (b) have been satisfied. See In re Pet Food Prods. Liab. Litig.,
In its landmark decision in Amchem, the Supreme Court addressed whether a class of both current and future asbestos claimants could be certified for the purpose of entering into a global settlement of virtually all asbestos claims.
In the course of its opinion, the Court recognized that “the ‘settlement only’ class has become a stock device” in modern class action litigation, and noted that it had “granted review to decide the role settlement may play, under existing Rule 23, in determining the propriety of class certification.” Id. at 618, 619,
[S]ome inquiries essential to litigation class certification are no longer problematic in the settlement context. A key question in a litigation class action is manageability — how the case will or can be tried, and whether there are questions of fact or law that are capable of common proof. But the settlement class presents no management problems because the case will not be tried. Conversely, other inquiries assume heightened importance and heightened scrutiny because of the danger of conflicts of interest, collusion, and unfair allocation.
Sullivan v. DB Invs., Inc.,
As noted above, the Lead Plaintiffs seek to certify a Rule 23(b)(3) class, and therefore must show that common questions of law or fact “predominate” over purely individual questions and that a class action is “superior” to other methods of resolving the dispute. Fed.R.Civ.P. 23(b)(3). As Amchem observed, Rule 23(b)(3) was developed “for situations in which class-action treatment is not as clearly called for as it is in Rule 23(b)(1) and (b)(2), [but] may nevertheless be convenient and desirable.”
(A) the class members’ interests in individually controlling the prosecution or defense of separate actions; (B) the extent and nature of any litigation concerning the controversy already begun by or against class members; (C) the desirability or undesirability of concentrating the litigation of the claims in the particular forum; and (D) the likely difficulties in managing a class action.
Fed.R.Civ.P. 23(b)(3).
Rule 23(b)(3)’s predominance requirement tests “whether proposed classes are sufficiently cohesive to warrant adjudication by representation.” Amchem, 521
When evaluating litigation classes, we have held that the predominance “requirement is satisfied ‘if resolution of some of the legal or factual questions that qualify each class member’s case as a genuine controversy can be achieved through generalized proof, and if these particular issues are more substantial than the issues subject only to individualized proof.’ ” Myers,
In the context of a settlement class, concerns about whether individual issues would create “intractable management problems” at trial drop out of the predominance analysis because “the proposal is that there be no trial.” Amchem,
While the predominance inquiry will sometimes be easier to satisfy in the settlement context, other requirements of Rule 23 “designed to protect absentees by blocking unwarranted or overbroad class definitions,” such as the Rule 23(a)(4) requirement of adequate representation, will “demand undiluted, even heightened, attention.” Id. at 620,
The district court held that it could not certify a settlement class because Stoneridge barred plaintiffs from invoking the fraud-on-the-market presumption against Gen Re. The Settling Parties note that the proposed class in this securities case is far more cohesive than the sprawling asbestos class in Amchem, and argue that the district court erred by denying their joint motion for preliminary approval of the Gen Re settlement because, “[wjhether or not a class could properly have been certified ... for purposes of litigation, such a class could have been — and should have been— certified conditionally for settlement purposes.” Joint Br. at 10, 23.
Even assuming that the district court correctly applied Stoneridge— an issue we do not reach
Therefore, a litigation class’s failure to qualify for Basic presumption typically renders trial unmanageable, precluding a finding that common issues predominate. See Basic,
The district court suggested that our decision in In re Salomon, which involved a litigation class, bars class certification in Section 10(b) actions when the fraud-on-the-market presumption does not apply. In In re Salomon, we recognized that “a district court [must] make a ‘definitive assessment’ that the Rule 23(b)(3) predominance requirement has been met.”
As noted, however, In re Salomon involved a litigation class, not a settlement class, see 544 F.3d at-479-80, and nowhere in that decision did we suggest that a Section 10(b) settlement class cannot be certified unless the fraud-on-the-market presumption applies to plaintiffs’ claims. Indeed, our emphasis in In re Salomon was on permitting defendants the opportunity to “successfully rebut” the presumption prior to certifying the class. Id. at 485. In the context of a litigation class, postponing analysis of the defendant’s rebuttal arguments until after certification is inappropriate because the rebuttal could demonstrate that individual reliance issues would render a trial unmanageable, thereby defeating the predominance requirement. However, as noted above, those manageability concerns do not stand in the way of certifying a settlement class.
The district court also appears to have viewed manageability and predominance as two independent inquiries under Rule 23(b)(3). See Dismissal Order at 3-4. However, the plain text of Rule 23(b)(3) states that one of the “matters pertinent” to a finding of predominance is “the likely difficulties in managing a class action.” Fed.R.Civ.P. 23(b)(3)(D); see also Am-chem,
We now clarify that a Section 10(b) settlement class’s failure to satisfy the fraud-on-the-market presumption does
On remand, the district court should pay particular attention to Amchem’s guidance that in the settlement context Rule 23’s requirements “designed to protect absentees by blocking unwarranted or overbroad class definitions ... demand undiluted, even heightened, attention.”
In addition, we note that there may be circumstances in which it will be appropriate for a district court to determine, in its analysis of class certification, whether the fraud-on-the-market presumption applies to the claims of a settlement class. For example, if there appear to be conflicts within the class, with some members who could satisfy the presumption and others who cannot, a district court may need to address the applicability of the presumption in order to make findings with respect to adequacy of representation or predominance, or to evaluate whether subclasses are necessary. See Fed.R.Civ.P. 23(c)(5) (permitting the division of a class into subclasses); see also In re Literary Works,
Because we vacate the district court’s class certification ruling, we will also vacate its order granting judgment on the pleadings to Gen Re and its grant of partial final judgment to Gen Re under Federal Rule of Civil Procedure 54(b). Defendants in class action suits are entitled to settle claims pending against them on a class-wide basis even if a court believes that those claims may be meritless,
Finally, we emphasize that our order vacating the district court’s class certification order should not be taken as an endorsement of the fairness of the proposed settlement — an issue we leave to the district court to address in the first instance in the event that it determines that class certification is appropriate.
CONCLUSION
For the reasons stated above, we VACATE the district court’s (1) class certification order with respect to the Gen Re class; (2) its order granting Gen Re judgment on the pleadings; and (3) its grant of partial final judgment to Gen Re under Rule 54(b). We further REMAND this case to the district court with instructions that it conduct further proceedings not inconsistent with this opinion.
Notes
. That order was entered by the Honorable Laura Taylor Swain, to whom the case was originally assigned.
. For a broader overview of the various parties to and allegations in the AIG securities litigation, see In re American International Group, Inc. Securities Litigation,
. The elements of a Section 10(b) securities fraud claim are "(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.” Erica P. John Fund, Inc. v. Halliburton Co., -U.S. -,
. As the Court noted, Section 10(b) liability does not extend to aiders and abettors. Stoneridge,
. In addition, the Court noted that the presumption did not apply because suppliers "had no duty to disclose” the transaction to investors. Id. at 159,
. According to the Court, the scheme liability argument effectively suggested that “in an efficient market investors rely not only upon the public statements relating to a security but also upon the transactions those statements reflect.” Id. at 160,
. The stay was granted by the Honorable John E. Sprizzo, to whom the case had been reassigned. Judge Sprizzo died in December 2008, and the consolidated actions were reassigned to Judge Batts.
. Accordingly, the Amchem Court cautioned that the fairness inquiry under Rule 23(e) does not supplant the Rule 23(a) and (b) requirements, but instead "function[s] as an additional requirement.” Id.; see also Ortiz v. Fibreboard Corp.,
. Thus, we do not consider whether the Lead Plaintiffs' arguments are consistent with Pacific Investment Management Co. LLC v. Mayer Brown LLP,
. We note that the Supreme Court has recently granted certiorari in Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, No. 11-1085, — U.S.-,