In re Initial Public Offering Securities Litigation

Thousands of investors(Plaintiff) brought class action suitsclaiming securities fraud in connection with a series of initial public offerings (IPOs),against some of the nation's principal underwriters (Defendant), issuers, and individual officers and directors of the issuing companies. These suits were moved to the district court (Judge Scheindlin), where the cases were merged into 310 actions and Judge Scheindlinselected six as "focus cases."Claims essential to all actions were that allocation of shares were conditioned by the underwriters at the offer price on contracts to buy aftermarket shares;made it requisitefor customers who obtained allocations of shares at the offer price to remunerate three forms of “Undisclosed Compensation" to the underwriters; and their analysts were influenced in a multitude of inappropriate ways. It was also purported by these “Master Allegations" that the underwriters’expeditedreception of fast profits by insiders of the issuers and that the issuers partook in and gained from the underwriters’ misbehavior. Claims were filed under §§ 11 and 15 of the Securities Act, and §§ 10(b) and 20(a) of the Securities Exchange Act, as well as Rule 10(b)-5 and the claims related to both primary and secondary offerings. The underwriters moved to dismiss, and Judge Scheindlin denied the motions with a two set claim exception: some of the Rule 10b-5 claims against issuers and individual officers and the § 11 and § 15 claims of investors who had sold shares for more than the offering price. Regarding the six focus cases, JudgeScheindlin granted in part and denied in part the investors' motions for class certification. Judge Scheindlinclearly gave thought to the issue of the standard of proof that a plaintiff must fulfill to attain class certification in her order on class certification. The only parameters recognized by the Supreme Court in this regard, she noted, are that a court must conduct a "rigorous analysis" in which it "may be necessary for the court to probe behind the pleadings," but the court cannot "conduct a preliminary inquiry into the merits of a suit.” She mentions decisions by other circuit judges recently that recommend the plaintiffs need to fulfill the Rule 23 requirements by a preponderance of the evidence, even if a solution can only be found by a "preliminary inquiry into the merits." Where the required class certification components are “enmeshed” with the merits, however, she rejected the preponderance standard and instead, the "some showing" standard was adopted. There are many forms the showing may take the form of, some examples being: the opinions of experts, evidence (by document, affidavit, live testimony, or other), or the uncontested claims of the complaint. Judge Scheindlin then determined that the investors had fulfilled the Rule 23 requirements: numerosity, commonality, typicality, and adequacy of representation under Rule 23(a), and the two extra requirements for a (b)(3) class action: predominance (law or fact questions common to the class predominate over questions affecting individual members), and superiority (a class action is superior to other methods),under the "some showing" standard. Over the underwriters’ protests, she revised the class definition to She revised,over the underwriters’ objections, the class definition to omit the investors who purposefully partook in the purported plan. With regard to the investors' § 11 claims, Judge Scheindlin agreed with the underwriters that when shares that are not traceable enter the market, the individual queries of if an investor could trace his shares to the IPO would predominate, and so she terminated the class periods involving these claims during a period when unregistered share became tradeable. The class certifications were granted subject to the limit on class period for § 11 claims and modified class definition. Then,giving the investors a for sure recovery of one billion dollars, offset by the amount they would recover from the underwriters, the classes settled with the issuers and individual defendants. The underwriters appealed, arguing, inter alia, that Judge Scheindlinfailed to apply the proper standard in deciding if all the components of Rule 23 required for class certification had been met, class certification would be denied by the application of the proper standard because the requirement of predominance of common questions over individual questions could not be met. The court of appeals granted review.