The U.S. Court of Appeals for the Second Circuit has reversed a lower court’s refusal to certify a settlement class in an investor lawsuit against General Reinsurance Corp.
Southern District Judge Deborah Batts (See Profile) in 2010 had refused to approve a $72 million settlement obtained by investors whoclaimed that Gen Re engaged in a fraudulent transaction with American International Group Inc. in 2000 and 2001 allowing AIG to inflate its revenues and loss reserves.
Batts had reasoned 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, which presumes that purchasers of stock are defrauded even if they did not specifically rely on the misstatements at issue, did not apply to the claims made by the plaintiffs.
But the Second Circuit said yesterday that “because settlement eliminates the need for a trial, a settlement class need not demonstrate that the fraud-on-the-market presumption applies to its claims in order to satisfy the predominance requirement.”
Judges Ralph Winter (See Profile), Robert Katzmann (See Profile) and Gerard Lynch (See Profile) made that ruling in In re American International Group Securities Litigation, 10-4401-cv. Oral arguments were heard on Jan. 9. Lynch wrote the panel’s 26-page opinion.
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Led by three Ohio public pension funds, investors sued in the Southern District in 2007, alleging a $500 million sham transaction was intended to mislead the market and artificially inflate AIG’s stock price.
The complaint alleged the sham nature of the transaction was concealed until late 2004 and early 2005, when AIG’s dealings with Gen Re were investigated by the Securities and Exchange Commission and the New York State Attorney General’s Office. AIG publicly acknowledged improperly treating the transaction as reinsurance for accounting purposes in March 2005.
In 2010, Batts held that, because the lead plaintiffs “have not established or even pled that the Gen Re Defendants made any public misstatement or omission in 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.”
Batts also granted summary judgment on the pleadings for Gen Re and partial final judgment.
Lynch said the circuit was presented with a “rare joint appeal” with both parties disagreeing with Batts and seeking approval of their settlement.
Lynch cited the “landmark” case of Amchem Products v. Windsor, 521 U.S. 591 (1997), where the U.S. Supreme Court held that a “sprawling” class of both current and future asbestos claimants should not be certified because it failed the predominance requirement.
According to the Amchem court, Lynch said, a district court “confronted with a request for settlement-only class certification…need not inquire whether the case, if tried, would present intractable management problems, for the proposal is that there is no trial.”
Here, Judge Lynch said, the parties note that the proposed class “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.”
He continued, “In the context of a litigation class, the fraud-on-the-market presumption spares the plaintiff class from the extremely laborious—and often impossible—task of proving at trial that each individual plaintiff was aware of and specifically relied upon the defendant’s false statement.” But with a settlement class, he said, “the manageability concerns posed by numerous individual questions of reliance disappear.”
The circuit then remanded the case for Batts to evaluate the fairness of the proposed settlement.
Thomas Dubbs of Labaton Sucharow argued for the plaintiff investors.
George Garvey of Munger, Tolles & Olson in Los Angeles argued for General Re.
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