In a significant securities class certification decision invoking the Supreme Court’s seminal ruling in Amchem Prods., Inc. v. Windsor, 521 U.S. 591 (1997), the Second Circuit vacated the district court’s denial of certification of a settlement class in In re American International Group, Inc. Securities Litig., No. 10-4401-cv, slip op. (2d Cir. Aug. 13, 2012). The Second Circuit held that in the settlement context, the problem of whether a trial will be manageable given the existence of individualized issues of reliance is not a concern. Accordingly, even if plaintiffs cannot avail themselves of the fraud-on-the-market presumption of reliance to overcome the predominance of individualized issues at tiral, a settlement class can nevertheless be certified provided it meets the other criteria of Rule 23.
The case involved a number of securities class actions filed against American International Group (“AIG”), General Reinsurance Corporation (“Gen Re”) and others, alleging that AIG and Gen Re violated section 10(b) of the Securities Exchange Act of 1934 “by entering into a sham $500 million reinsurance transaction designed to mislead the market and artificially increase AIG’s share price.” In 2008, the lead plaintiffs moved to certify a litigation class and the Gen Re defendants moved for judgment on the pleadings. Settlement discussions ensued. In 2009, the lead plaintiffs and Gen Re reached a settlement and moved for preliminary approval of the settlement. Meanwhile, the district court heard the lead plaintiffs’ class certification motion. Gen Re did not participate in those proceedings in view of the settlement it had reached with the lead plaintiffs. Nevertheless, on February 22, 2010, the district court denied the lead plaintiffs’ motion to certify a class as against Gen Re, and subsequently denied lead plaintiffs’ motion for preliminary approval of the settlement as “moot.”
On June 23, 2010, the lead plaintiffs and Gen Re jointly moved for preliminary approval of the settlement, arguing that the standards for class certification differed as between a litigation class and a settlement class, and while the litigation class could not meet the Rule 23 requirements, the settlement class could meet those standards pursuant to the Supreme Court’s Amchem decision. The district court disagreed and denied preliminary approval of the settlement, ruling that the lead plaintiffs’ claim against Gen Re could not meet the predominance criterion of Rule 23 because of the issue of individualized reliance. The district court would not “dispense with the requirement of proving the application of the fraud-on-the-market presumption when certifying a class for settlement purposes.” At the same time, the district court granted Gen Re’s motion for judgment on the pleadings.
In vacating the district court’s denial of certification of a class for settlement purposes and remanding the case for further proceedings, the Second Circuit held that pursuant to Amchem, “[i]n 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.'” The Second Circuit held that “the [district] court erred in holding that a Section 10(b) settlement class must satisfy the fraud-on-the market presumption [of reliance under Basic, Inc. v. Levinson, 485 U.S. 224 (1988)] in order to demonstrate predominance….[A] litigation class’s failure to qualify for the Basic presumption typically renders trial unmanageable, precluding a finding that common issues predominate….By contrast, with a settlement class, the manageability concerns posed by numerous individual questions of reliance disappear.”
The Second Circuit remanded the case for further proceedings in accord with its ruling, and further reminded the district court that a key question in certifying any class, litigation or settlement, is whether the absent class members have been adequately represented. That requirement, as well as the other Rule 23 requirements, remain subject to rigorous analysis in the settlement context.