# In Re Enron Corp. Securities

> District Court, S.D. Texas · June 5, 2006 · 529 F. Supp. 2d 644

URL: https://www.frixlaw.com/law-library/cases/2355427

## Case

- **Full name:** In Re ENRON CORPORATION SECURITIES Derivative & “ERISA” Litigation. Mark Newby, Et Al., Plaintiffs v. Enron Corporation, Et Al., Defendants; The Regents of the University of California, Et Al. Individually and on Behalf of All Others Similarly Situated, Plaintiffs, v. Kenneth L. Lay, Et Al., Defendants
- **Court:** District Court, S.D. Texas
- **Decided:** June 5, 2006
- **Citations:** 529 F. Supp. 2d 644; 2006 U.S. Dist. LEXIS 43146; 2006 WL 4381143
- **Precedential status:** Published
- **Opinion:** Opinion by Da Harmon
- **Judges:** Harmon
- **Cited by:** 54 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/2355427

## How later opinions describe it (automated extraction)

- finding that the “primary markets, with a single seller and with the private and targeted solicitation of investors by the initial purchasers/underwriters’ sales forces in the primary markets here, cannot qualify as open markets[,]” but finding the secondary over-the-counter m…
- finding expert made a prima facie showing of market efficiency, relying in part on the nineteen bonds’ market value of over $3 billion in total and subsequently twenty-two bonds’ market value of $5.9 billion in total, as an indicator of efficiency
- applying the Fifth Circuit two-prong test that “examines the zeal and competence of the class representatives’ counsel and the class representatives’ willingness, experience, and ability to handle class actions, to take an active role in and control of the litigation, and to p…
- holding that any person who directly or indirectly engages in a manipulative or deceptive act as part of a scheme to defraud can be held liable as a primary violator

## Opinion text

*648
OPINION AND ORDER RE CLASS CERTIFICATION
MELINDA HARMON, District Judge.
ROADMAP
[[Image here]]
*649
[[Image here]]
The above referenced putative class action alleges violations of sections 10(b), 20(a), and 20A of the Securities Exchange Act of 1934, 15 U.S.C. 783(b), 78t(a), 78N 1(a), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240 .10b-5, and of sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. §§ 77k, 771(a), and 77o,
1
during a proposed Class Period commencing on October 19, 1998 and ending November 27, 2001.
2
Pending before the
*650
Court is Lead Plaintiff The Regents of the University of California’s amended motion for class certification (# 1445), pursuant to Federal Rule of Civil Procedure 23(a) and (b)(3). A class certification hearing was held on March 7-8, 2006.
Because they are directly relevant to the motion for class certification, this Court also addresses the Deutsche Bank Entities’ motion for partial reconsideration and dismissal, or motion to require a second amended complaint before a response by them (# 3791) and Lead Plaintiffs motion for leave to file an amended complaint as to Deutsche Bank and motion for entry of an order requiring Deutsche Bank to answer Lead Plaintiffs amended complaint (# 3903).
I. Lead Plaintiffs Objectives
Specifically Lead Plaintiff seeks certification of a single plaintiff class
3
defined as follows:
[A]ll persons, excluding defendants and members of their immediate families, any officer, director or partner of any defendant, any entity in which a defendant has a controlling interest and the heirs of any such excluded party, who purchased the publicly traded equity and debt securities of Enron Corporation between October 19, 1998 and November 27, 2001, including the publicly traded securities issued by Enron-related entities during the Class Period, the value or repayment of which was dependent upon the credit, financial condition or ability to pay of Enron, and (2) all states or political subdivisions thereof or state pension plans that purchased from defendants Enron’s 6.40% Notes due 7/15/06 or 6.95% Notes due 7/15/28, and that authorize the prosecution of their claim pursuant to the Texas Securities Act.
4
*651
# 1445 at 1. Plaintiffs have alleged a common scheme to defraud throughout the Class Period and argue that any of the multiple “separate schemes” raised in opposition by Defendants are part of this single scheme (including SPEs, off-the-book partnerships and transactions, swaps, etc.) to falsify Enron’s financial results and defraud its investors. The federal securities laws “reach complex fraudulent schemes as well as lesser misrepresentations or omissions.”
Shores v. Sklar,
647 p 2d 462;
m
(5th Cir.1981),
cert. denied,
*652
459 U.S. 1102 , 103 S.Ct. 722 , 74 L.Ed.2d 949 (1983).
5
Lead Plaintiff insists that the investors relied upon the integrity of the market price and on Enron’s reputation as a well run company in determining whether to buy Enron securities. Had they known of the concealed actions of some of the currently objecting Defendants, such as the Financial Institutions, who or which purportedly contributed to the fraudulent scheme but claim Plaintiffs failed to demonstrate reliance, the putative class representatives have testified that they would not have been lured into investing in the company, thereby justifying a presumption of class-wide reliance based on the fraud-on-the-market theory. More recently Lead Plaintiff has alternatively claimed that the class is entitled to a presumption of reliance under
Affiliated Ute Citizens of Utah v. United States,
406 U.S. 128 , 92 S.Ct. 1456 , 31 L.Ed.2d 741 (1972).
Lead Plaintiff proposes that the following plaintiffs, a mixture of individuals and entities, be designated as class representatives: (1) For purchasers of Enron Common Stock, Lead Plaintiff; Robert V. Flint; Amalgamated Bank, as Trustee for the Long View Collective Investment Fund, Long View Core Bond Index Fund and Certain Other Trust Accounts; Hawaii Laborers Pension Plan; George M. Placke; Michael J. Bessire; Dr. Richard Kimmerling; Michael B. Henning; John Zegarski; Joseph C. Speck; Ben L. Schuette; San Francisco City and County Employees’ Retirement System; John J. and Charlotte E. Cassidy, as Trustees for the John & Charlotte Cassidy Family Trust; Dr. Fitzhugh Mayo; and (2) for purchasers of Enron Debt, Washington State Investment Board; Employer-Teamsters Local Nos. 175 & 505 Pension Trust Fund; Archdiocese of Milwaukee Supporting Fund, Inc.; Nathaniel Pulsifer, trustee of the Shooters Hill Revocable Trust; Staro Asset Management, L.L.C.; and the Greenville Plumbers Pension Plan; (3) for purchasers of Enron Preferred Stock, Mervin Schwartz, Jr.; and Stephen M. Smith.
6
Lead Plaintiff also seeks approval of Lerach Coughlin Stoia Geller Rudman & Robbins LLP as Lead Class Counsel.
II. Objections to Motion for Class Certification
Because Lead Plaintiff has settled with Bank of America Corporation the Court does not address its individual brief in opposition, on behalf of itself and Banc of America Securities LLC (# 1778) and supplemental memorandum (# 2114).
Conseco Annuity Assurance Company, which initially opposed certification (# 1770) here of a class that would include purchasers of credit-linked notes issued by trusts created by Citigroup (“Citigroup CLNs”), not by Enron, for claims brought under § 12(a) (2) of the Securities Act of
*653
1933 and § 10(b) of the Securities Exchange Act of 1934, has since decided to join the
Newby
class and participated in the settlement between Citigroup and Lead Plaintiff, to which this Court recently gave final approval. Thus the Court also does not address its arguments.
A. Certain Defendants’ Opposition (# 1780),
7
Joined by Stanley C. Horton (# 1796) and Ken L. Harrison (# 1798)
Certain Defendants argue that Lead Plaintiff has not met its burden on the predominance and superiority requirements of Rule 23(b) and has failed to provide a roadmap of how the § 10(b) and Rule 10b-5 claims would be tried (identifying the substantive issues that will control the outcome, assessing which issues will predominate, and determining whether the issues are common to the class) in light of the variations in circumstances among putative class members, i.e. “manageability issues.”
Castano v. American Tobacco Co.,
84 F.3d 734, 741 (5th Cir.1996) (reversible error if a class is certified without consideration of how the trial on the merits will be conducted);
O’Sullivan v. Countrywide Home Loans, Inc.,
319 F.3d 732 , 738 (5th Cir.2003) (“Determining whether legal issues common to the class predominate over individual issues requires that the court inquire how the case will be tried”).
Certain Defendants contend that the class, defined too broadly, relied on more than eighty-five nonuniform, allegedly material misrepresentations (more than forty of which were oral statements made in conference calls with analysts and investors, followup conversations with analysts, interviews with the press and analysts, and statements made at analyst meetings and conferences) on different subjects and transactions made by different subsets of Defendants, and which gave rise to disparate degrees of reliance by putative class members, over a three-and-a-half-year period. Such claims are unsuitable for single-class certification.
8
See Simon v. Merrill Lynch, Pierce, Fenner & Smith,
482 F.2d 880, 882 (5th Cir.1973) (“If there is any material variation in the representations made or in the degrees of reliance thereupon, a fraud case may be unsuitable for treatment as a class action”
9
; an action based substantially on oral rather than written misrepresentations cannot be maintained as a class action);
Castano,
84
*654
F.3d at 745. “Similarly, if the writings contain material variations, emanate from several sources, or do not actually reach the subject investors, they are not more valid a basis for a class action than dissimilar oral representations.”
Simon,
482 F.2d at 882 . Certain Defendants argue that the complaint identifies many separate fraudulent schemes, in at least seven distinct time periods, involving different subsets of Defendants, with each scheme purportedly inflating the market price of the securities. Thus they maintain that different class members purchased and sold Enron securities at different times and presumptively relied on different alleged misrepresentations; such highly individualized issues are not subject to class-wide proof, insist Defendants.
See, e.g., Richland v. Cheatham,
272 F.Supp. 148 (S.D.N.Y.1967). The class includes some investors who bought and sold during the first two years and were not damaged by the alleged fraud and indeed may even have made money. Others bought their securities after the alleged fraud was disclosed to the market. “Where the plaintiffs’ damage claims focus almost entirely on facts and issues specific to individuals rather than the class as a whole, the potential ... that the class action may degenerate in practice into multiple lawsuits separately tried renders class treatment inappropriate.”
Bell Atlantic Corp. v. AT&T Corp.,
339 F.3d 294, 307 (5th Cir.2003) (antitrust case),
quoting Countrywide Home Loans,
319 F.3d at 744.
Additionally, Certain Defendants contend that unlike § 11 claims, whose damages could be determined by a mathematical or formulaic calculation, damages for § 10(b) claims would depend on date(s) of trading, profit or loss incurred, the extent to which the price paid and received reflected the “true” value versus inflated value of the stock, i.e., individual issues that would predominate over questions common to the class.
Finally Certain Defendants insist that current and former Enron employees should not be included in the class because they claim that they based their decisions to buy and sell Enron stock on various misrepresentations made to them as employees that were not made to the public, and therefore did not impact the public market price for the Enron stock. The employees, also, will have individual reliance issues and some may have had personal knowledge from working on the transactions involved.
B. Alliance Capital Management LLP’s Objections (# 1781, 1782)
Alliance Capital Management LLP (“Alliance Capital”) objects on the grounds of inadequacy to the appointment, as a class representative for all purchasers of Enron Debt Securities, of Staro Asset Management, LLC, which asserts only a § 11 claim based on a purportedly misleading Registration Statement for Enron Zero Coupon Notes. Alliance Capital explains that Staro is a general partner of a group of limited partnerships that focus on hedging and arbitrage and seek profits independent of the direction of the market. It is also an investment manager and advisor for client companies.
Alliance Capital charges generally, “Sta-ro has demonstrated a lack of candor in its dealing with the Court; it is subject to unique defenses, including lack of standing because it never owned either the Zero Coupon Notes or a derivative interest keyed to the value of the Notes; its interests are not typical of, and indeed are in direct conflict with, the interests of a majority of the class it seeks to represent; and Staro’s management has demonstrated a fundamental ignorance of the litigation, completely abdicating responsibility for its control to Staro’s lawyers.” # 1781 at 1. Alliance Capital emphasizes, with supporting documents, that when Staro earlier
*655
and unsuccessfully sought appointment as Lead Plaintiff for a class of debt investors in
Newby,
Staro claimed that it was a pure debt investor and that its losses amounted to $40 million. On deposition, its designated representative, investment analyst Donald Trent Bobbs, revealed that Staro’s note and bond purchases were only “one leg” of its “unified debt/equity investment strategy” and that its actual loss was half that it previously claimed because it offset its loss through the purchase and exercise of puts on Enron equity, which Staro had failed to disclose to the Court. Thus its claims are not typical of the class members’ either in its investment strategy nor its “loss.” Furthermore Alliance Capital asserts that based on the documents produced by Staro and the deposition testimony of its representative, there is no evidence that Staro or any of its limited partners purchased the Enron Zero Coupon Convertible Senior Notes Due 2021, on which Staro grounds its claim, but only that one of its limited partners had purchased an economic interest in a derivative.
10
In addition Bobbs testified that Staro had not notified the actual purchasers (its limited partners, to which Staro is a fiduciary) of the extent of its Enron losses and its decision to file this suit nor obtained their consent to filing it. Alliance Capital argues that Staro’s arbitrage strategy
11
(purchasing Enron convertible debt while it sold Enron stock short) differentiates its economic interests from those of investors in Enron, both equity and debt. Moreover Staro continued to trade in Enron securities after Enron’s negative disclosures in November 2001 and even after
*656
it filed for bankruptcy on December 2, 2001, and it made a profit from doing so; thus its interests differ sharply from those of most class members. While it now seeks to represent both equity and debt investors, Staro primarily was a short seller of Enron stock, with interests directly opposite those of most Enron equity investors.
Finally they challenge, as an inadequate class representative, Staro’s designated management witness, Donald Trent Bobbs. Bobbs admitted ignorance about fundamental developments in this litigation, including that he did not know of the court-ordered mediation, he had never seen Sta-ro’s application to be Lead Plaintiff, but could only guess that someone at Staro had read it, he had not authorized the filing of the motion, and he disagreed with some of the main contentions in Professor Stephen P. Feinstein’s supporting declaration, which he had not reviewed before it was filed (Dep. At 202-04).
The Outside Directors, the remainder of whose opposition will be discussed next, also argue that Staro has no standing to pursue claims on behalf of the Zero Coupon Convertible Notes because it did not purchase them; instead the three funds managed by Staro (Stark Investments, Shepherd and Reliant) purchased them and are the record holders of the securities in question. # 1785 at 13; Ex. 141 to Bobbs Dep. and Ex. B to # 1785. Outside Directors state that they consider the three funds to be adequate class representatives and that the three funds should be substituted for Staro.
Id.
at 14 n. 20. The Outside Directors also argue that Amalgamated Bank is suing in a representative capacity on behalf of other entities that are the actual holders of record of the notes at issue and that the real parties should be substituted as class representatives.
C. Outside Directors’ Opposition (# 1785), Joined by Rebecca Mark-Jusbasche (# 1792), and in part by Ken L Harrison
12
(# 1798)
The Outside Directors
13
oppose the motion for class certification for a single “behemoth” class as it relates to the claims under § 11 because (1) the class representatives lack standing; (2) the class includes claims that have previously been dismissed by the Court; (3) the class is not limited to the time periods authorized by § 11 and prior order of the Court (i.e., the periods after the registration statement for the offer was filed and before a Form 10K was filed by Enron (# 1269 at 130-32)); and (4) unlike § 10(b), § 11 does not require proof of reliance. They ask the Court to order Lead Plaintiff to amend and request “certification of tailored classes that conform to Fifth Circuit law and the Court’s previous orders,” specifically a “pure Section 11 class, with subclasses for each note offering.”
Outside Directors challenge Lead Plaintiffs standing to bring Section 11 claims when it bought no debt because that provision limits suits to purchasers of “such security.” 15 U.S.C. § 77k.
See Krim v. pcOrder,
402 F.3d 489, 495, 498 (5th Cir.2005) (Section ll’s “standing provisions limit putative plaintiffs to the ‘narrow class of persons’ consisting of ‘those who purchase securities that are the direct subject
*657
of the prospectus and registration statement’ “Section 11 is available for anyone who purchased directly in the offering and any after market purchasers who can demonstrate that their shares are traceable to the registration statement in question”). A Section 11 class representative must have purchased the same security sold pursuant to the same registration statement and offering documents as the class it seeks to represent.
14
Furthermore, Outside Directors insist the “mass class” motion does not provide a manageable trial plan for such a broad and amorphously described single class — it covers different classes of securities (debt, equity, and preferred stock for both Enron-related securities and Enron securities) purchased at different times over a three-year period, under three different statutes of the two federal securities acts (§§ 10(b) and 20(a) of the 1934 Act and §§ 11, 12, and 15 of the 1933 Act), as well as state statutory claims, involving different elements and types of proof (some requiring reliance and scienter, others not), against different parties, and involving different defenses. Submitting jury instructions if there is a single class would be rife with problems. Outside Directors suggest that a separate § 11 class be certified with subclasses for each note offering with proposed class representative with standing to represent each subclass. They contend that proper subclassing would insure that common issues predominate, specifically the two issues in § 11 claims, i.e., that financial statements in registration statements were misleading and the defendants’ due diligence defense (15 U.S.C. § 77k(b)(3)), which they claim is a common and predominant element of every § 11 trial. By certifying a section 11 class, judicial efficiency will be served because the defense need be tried only once, and if defendants prevail, no § 11 claim will survive. Individual reliance is not an issue under these claims because the Court dismissed all reliance-based claims. # 1269 at 130-32. While calculation of damages under § 11 will require each purchaser’s proof of purchase and sales prices, it is formulaic because it does not require calculation of the “true value” of Enron stock.
Moreover, for the Zero Coupon Convertible Notes, which originated as a Rule 144A private placement but were subsequently registered, the Court ruled (# 1269 at 132) that the § 11 claims were limited to persons who purchased in the registered offering filed on July 18, 2001; therefore claimants who bought in the 144A private placement lack standing to sue and should not be included in that subclass. Since the Court also dismissed § 11 claims brought on behalf of persons who purchased after the filing of a Form 10K because Lead Plaintiff failed to plead reliance by any of these parties, the subclass for claims for each note offering should be limited to persons who purchased after the registration statement and before the filing of a cumulative Form 10-K. # 1269 at 130; 15 U.S.C. § 77k(a) (requiring proof of reliance by persons who purchased after the issuer made available an earning statement covering a period of at least 12 months beginning after the effective date of the registration statement).
15
*658
D. Financial Institutions
16
(# 1788) (Joined by Deutsche Bank Entities # 4128), Supplemental Submission (# 1793), Supplemental Memorandum in Further Opposition (# 2317), Supplemental Memorandum in Opposition (# 4491), Notice of Supplemental Authority (#4596) and Reply (# 4629) to Response, Credit Suisse and Pershing LLC’s Supplemental Memorandum in Opposition (4490), Barclay’s Supplemental Memorandum (# 4492), and Deutsche Bank’s Opposition (# 4489)
The Financial Institutions also object to the lumping together of so many distinct claims with different elements, against different defendants, arising at different times, into one undifferentiated class.
Because the § 10(b) claims against the Financial Institutions are not based on alleged material misrepresentations, but on their conduct in the alleged fraudulent scheme under Rule 10b-5(a) and (c), and because Lead Plaintiff relies on the fraud-on-the-market presumption to satisfy the reliance element, the Financial Institutions argue that since their conduct was not conveyed to investors and the market, it could not have been relied upon by the investors and the market; therefore the presumption of reliance does not apply.
Basic, Inc.,
485 U.S. at 247, 108 S.Ct. 978 (presumption of reliance applies to “any public material misrepresentations”).
17
Thus each plaintiff must demonstrate that he relied on the specific conduct of each Financial Institution Defendant — undermining class certification because the predominance requirement cannot be satisfied.
Sandwich Chef of Tex., Inc. v. Reliance Nat'l Indemn. Ins. Co.,
319 F.3d 205, 211 (5th Cir.2003) (“Fraud actions that require proof of individual reliance cannot be certified as Fed.R.Civ.P. 23(b)(3) class actions because individual, rather than common, issues will predominate.”),
cert. denied,
540 U.S. 819 , 124 S.Ct. 101 , 157 L.Ed.2d 37 (2003).
Similarly, the Financial Institutions argue, it is also improper to presume that
*659
Lead Plaintiff can satisfy the requirement that the fraud be “in connection with the purchase or sale of any security,” i.e., that there be a nexus between the alleged fraud and a securities transaction, with respect to them. The transactions through which each of them allegedly participated in the alleged scheme took place at different times throughout the class period and affected different statements read by different plaintiffs in different ways; thus the Financial Defendants alleged transactions cannot be presumed to be “interdependent and coincidental” with all plaintiffs’ purchases.
The Financial Institutions cite testimony from the proposed representatives’ depositions that the Financial Institutions did not make any express representations to the representatives, but only “enabled,” “assisted” or “helped to perpetuate” Enron’s fraud, to demonstrate that it is inappropriate to presume that all putative class members relied upon the Financial Defendants’ nonpublic conduct. At deposition most representatives stated that they had had no contact with the Financial Institutions and had not relied on anything the Financial Institution Defendants said or did in making their investment decisions. Each class member must individually establish that he relied on each Financial Defendant’s conduct, they contend. In sum, they insist under Plaintiffs theory of liability, individual issues of reliance predominate over common questions.
Furthermore the Financial Institutions argue that Lead Plaintiffs class definition does not meet Rule 23(b)(3)’s superiority requirement because there are numerous different factual and legal issues relating to each defendant and because the huge putative class presents insurmountable manageability problems. If a class is certified for the § 10(b), § 11, and § 12(a)(2) claims, the Financial Institutions insist that the proposed class period for claims against the Financial Institution Defendants must be modified to begin on April 8, 1999 instead of October 19, 1998. They maintain that any claims made before April 8, 1999 against them are time-barred under the
Lampf
three-year period of repose, as this Court has ruled,
18
and that the Class Period must end on October 16, 2001, when Lead Plaintiff has asserted that Enron “shocked the markets” by announcing it had overstated its financial condition by more that $1 billion, a disclosure that operated as a “correction” of earlier financial statements and other statements about Enron’s financial condition.
Basic, Inc.,
485 U.S. at 248 , 108 S.Ct. 978 (if the fraud-on-the-market presumption applied and if the information that Lead Plaintiff claims has been concealed or misrepresented “credibly entered the market and dissipated the effects of the misstatements,” a plaintiff who “trades ... after the corrective statements would have no direct or indirect connection with the fraud.”);
In re Enron Corp. Sec., Derivative & ERISA Litig.,
235 F.Supp.2d 549, 574 (S.D.Tex.2002) (a misrepresentation is “immaterial if the information is already known to the market because the misrepresentation therefore cannot defraud the market”). Thus investors who purchased Enron securities after October 16, 2001 could not have relied on the alleged fraud and their claims cannot be saved by certifying them together with those of purchasers before October 16, 2001.
Moreover, argue the Financial Institutions, class members who purchased after that date cannot prevail as a matter of law because (1) for their § 10(b) claims relying on the fraud-on-the-market presumption,
*660
“[a]ny showing that severs the link between the alleged misrepresentation and either the price received (or paid) by the plaintiff, or his decision to trade at a fair market price [such as this corrective information], will be sufficient to rebut the presumption of reliance,”
Basic, Inc.,
485 U.S. at 248 , 108 S.Ct. 978 ; (2) their §§ 11 and 12(a)(2) claims are subject to an absolute loss causation defense (because of Enron’s statement that “shocked the markets” their losses could not have been caused by the alleged fraud); and (3) three of their § 11 claims (based on the May 19, 1999 offering of Enron Corp. 7.375% Notes due 5/15/2019, the August 10, 1999 offering of Enron Corp. 7% Exchangeable Notes due 7/31/2002, and a June 1, 2000 offering of Enron Corp. 7.875% Notes due 6/15/2003) require establishment of reliance because Enron filed a Form 10-K for the 12-month period after the registration statements became effective before their purchases, and thus the purchasers could not have relied upon the alleged fraud. 15 U.S.C. § 77k(a).
Regardless, argue the Financial Institutions, the Class Period alternatively must end at the latest by November 8, 2001 when Enron publicly announced that it was restating its financial statements for 1997-2000 to eliminate $600 million in profits and approximately $1.2 billion in shareholder equity and expressly warned that its financial statements and audit reports for that period “should not be relied upon.” Such an announcement precluded any reasonable reliance on Enron’s financial statements.
Lead Plaintiffs § 11 claims against the Financial Institution Defendants are based on four public securities offerings, three
19
of which were underwritten by different subsets of these Defendants. Not only do the claims present manageability problems because the offerings were conducted at different times, incorporated different Enron financial statements, and were underwritten by different combinations of them, argue the Financial Institutions, but some class members must prove reliance because they purchased them after Enron filed its Form 10-Ks for 1999 and 2000; these factors work against certifying this action as a single class. At minimum, different subclasses would have to be created under Rule 23(c)(4) for each of the three offerings for purchasers who must prove reliance and those who do not need to prove rebanee.
Financial Institution Defendants additionally assert that the claims under § 12(a)(2) fail because not a single proposed class representative bought the securities at issue and thus no one has standing to pursue claims based on any of the nine offerings, which were issued from September 1999 through July 2001.
See
this Court’s orders, # 1999
20
and 2043. The Financial Institutions’ Supplemental Submission points out that intervenor the Imperial County Employees Retirement System (“ICERS”) has withdrawn. Alternatively, if the Court does certify a class, a
*661
separate subclass should be established for each of the nine offerings.
Moreover, Financial Institution Defendants argue, since § 12(a) (2) claims must be brought within three years of the sale of the securities, the claims are barred by the applicable § 13’s statute of limitations/repose, 15 U.S.C. § 77m.
21
Since equitable tolling principles do not apply to the statute of repose (# 1999 at 58
&
n. 44, 59), they maintain that any belated inter-venor will not relate back to Lead Plaintiffs filing of the Amended Consolidated Complaint on May 15, 2003, which this Court has deemed filed as of January 14, 2003 (# 2044 at 6-7). That complaint asserted the § 12(a)(2) claims for the first time based on the Foreign Debt Securities, all the offerings of which occurred on or before July 12, 2001. Thus the statute of repose for the § 12(a)(2) claims expired at the latest on July 12, 2004, since the last of the offerings occurred on July 12, 2001, and no class member with standing has come forward. (ICERS settled its claims and withdrew.)
Financial Institutions further argue that the
American Pipe
rule tolling statutes of limitations and of repose when a class action is commenced does not apply when no named plaintiff has standing to assert the claims.
In re Colonial Ltd. P’ship Litig.,
854 F.Supp. 64 , 82 (D.Conn.1994).
In their most recent memorandum (# 4491), the Financial Institutions contend that to be primarily liable under § 10(b) in the wake of
Central Bank of Denver v. First Interstate Bank of Denver,
511 U.S. 164 , 114 S.Ct. 1439 , 128 L.Ed.2d 119 (1994) and progeny a defendant must have made a material misstatement or omission on which the market could rely. They insist Lead Plaintiff has not established any misrepresentation made by any Financial Institution Defendant with the requisite scienter of the individual corporate official making the statement to hold the Financial Institution liable under
Southland Sec. Corp. v. INSpire Ins. Solutions Inc.,
365 F.3d 353 , 366-67 (5th Cir.2004). Lead Plaintiff has also failed to demonstrate that any Financial Institution made an actionable misstatement through an analyst that had a material and measurable impact on the price of Enron securities.
Greenberg v. Crossroads Sys., Inc.,
364 F.3d 657, 663-66 (5th Cir.2004). They insist that Lead Plaintiffs allegation that claims against the Financial Institutions based on statements made by Enron, on which class members relied, about transactions funded or structured by the Financial Institution Defendants, are not actionable under
Central Bank
and
In re Dynegy, Inc. Sec. Litig.,
339 F.Supp.2d 804, 913, 916 (S.D.Tex.2004) (holding that Citigroup, alleged to have “structured, funded and executed two major series of transactions to hide off Dynegy’s balance sheet hundreds of millions of dollars in debt” and to have issued misleading analyst reports about Dynegy, was not liable for misstatements made by Dynegy in Dynegy’s financial statements because such claims are barred by
“Central Bank’s
limitations on liability for a secondary actor’s involvement in the preparation of false and misleading statements.”).
Furthermore the Financial Institutions assert that Lead Plaintiff has failed to demonstrate an efficient market for the Foreign Debt Securities, Enron Registered Bonds, Enron Preferred Securities, and Stock Options.
The Foreign Debt Securities were issued pursuant to unregistered private placements under 17 C.F.R. §§ 230.901 -
*662
230.905 in private offerings limited to Qualified Institutional Buyers (“QIBs,” i.e., entities owning and investing in the aggregate at least $100 million in securities that are exempted from registration for private resales of securities, under 17 C.F.R. § 230 .144A).
22
Regulation S, under which the foreign portions of the Foreign Debt Securities were issued, exempts such securities from registration requirements under § 5 of the Securities Act of 1933. The offering memoranda state they are confidential and prepared solely for the QIBs permitted to purchase them, are not offers to any other persons of the public generally, and that there is no existing market for the notes offered nor any assurance that there would be the development or liquidity of a market for them. They point out that Lead Plaintiffs expert, Dr. Blaine Nye, does not try to demonstrate that the primary offerings of the Foreign Debt Securities traded in efficient markets.
Moreover, argue the Financial Defendants, the market for the Foreign Debt Securities was inefficient. Dr. Nye’s data reflect that the Foreign Debt Securities were thinly traded in the secondary market, while Dr. Suresh M. Sundaresan, Deutsche Bank’s expert on market efficiency, shows they had small weekly turnover rates and low trading frequencies. Dr. Nye merely points out that the number of days during the Class Period when these securities even traded varied from 6.1% to 31.6%, with an average trading frequency of 20.6% and a median trading frequency of 21.0%; there was no trading of these securities on the majority of trading days. Dr. Nye provides data on institutional holdings, but fails to explain how that data compare with data for securities in inefficient markets. Dr. Nye states that analysts at only seven institutions covered Osprey and Marlin securities, at only five financial institutions covered Yosemite securities, and at only four financial institutions covered Enron credit-linked notes, far fewer than the 29-31 analysts covering Enron common stock. Moreover some of those analysts were affiliated with the underwriters of the Rule 144A offerings. In addition these debt securities were traded over the counter by calling around an informal net of investors and brokers rather than having a centralized trading platform with publicly quoted bids, asks and transactions.
See In re Livent, Inc. Sec. Litig.,
211 F.R.D. 219, 222 (S.D.N.Y.2002) (holding that notes not purchased on a public exchange but “bought and sold through an informal net of contacts among institutional investors and brokers who would exchange bids and negotiate prices privately” and where there “was no centralized source of price and trading information” was “inconsistent with the central tenet of ‘fraud on the market’ theory, which presupposes that ‘an efficient securities market rapidly incorporates all publicly available information about a company’s business and financial situation.’”);
Camden Asset Management, L.P. v. Sunbeam Corp.,
No. 99-CV-8275, 2001 WL 34556527 , *10 (S.D.Fla. July 3, 2001) (“debentures were not priced efficiently” where “the only way to obtain pricing information ... was by ‘calling around,’ rather than relying on a market where bids, asks, and transactions are quoted publicly and accurate transaction data and information is [sic ] available”);
Greenberg v. Boettcher & Co.,
755 F.Supp. 776, 782 (N.D.Ill.1991) (an efficient market for bonds is “ ‘a developed market — a secondary market with a relatively high level of trading activity and for which trading
*663
information such as price and volume were readily available’ ”).
In addition to joining in the Financial Institution Defendants’ briefs, Barclays, in a separate memorandum (#4492), points out that Barclays did not make any misrepresentations upon which class member or the market could have relied.
23
It argues that the fraud-on-the-market doctrine is unavailable against Barclays because the doctrine applies only to Rule 10b-5(b) claims; thus there are no common questions, including questions of reliance, that will predominate in claims against Bar-clays. It is also unavailable because Lead Plaintiff failed to show that any statement by Barclays had any effect on Enron’s stock price or was anything other than confirmatory under
Greenberg v. Crossroads Sys., Inc.,
364 F.3d 657 (5th Cir.2004).
Deutsche Bank entities filed additional Opposition (# 4489) to the motion for class certification. They identify as the § 10(b) allegations against them that Deutsche Bank entities made misrepresentations in Osprey, Yosemite and/or Marlin offering memoranda
24
and in debt and equity analyst reports. With respect to the fraud-on-the-market presumption of reliance, pointing to Dr. Sundaresan’s expert report, they argue that Lead Plaintiff cannot satisfy the touchstones for class certification established in recent Fifth Circuit cases
25
for application of the fraud-on-the-market presumption of classwide reliance because Lead Plaintiff cannot show that (1) the primary (new issue) or secondary markets for the Foreign Debt Securities, the Enron Registered Bonds, and the Preferred Securities were efficient, and (2) any of the alleged public misrepresentations is actionable, since the statements are either confirmatory
26
or they cannot be shown to have affected the price of the security (materiality). Furthermore, since many of the alleged misrepresentations occurred long after the start of the proposed class period and thus after many class members’ purchases, the proposed dates for the Class Period are not applicable against Deutsche Bank entities.
Nor, Deutsche Bank entities maintain, has Lead Plaintiff alleged that Deutsche Bank performed any timely fraudulent act that could independently constitute a primary violation upon which plaintiffs relied, since this Court previously ruled that structured tax transactions involving En
*664
ron and Deutsche Bank were time-barred.
In re Enron Corp.,
310 F.Supp.2d 819, 859 (S.D.Tex.2004).
27
Because the allegations against the Deutsche Bank entities are in the nature of misrepresentation and affirmative deceit, not of silence and omission, the Deutsche Bank entities insist the
Affiliated Ute
presumption of reliance is not applicable to the claims against them; it also does not apply because the proposed class had no special relationship with Deutsche Bank that could give rise to a duty to disclose.
Since there is not classwide presumption of reliance available to Lead Plaintiff according to Deutsche Bank, Lead Plaintiff must show reliance upon each Financial Institution’s statements or actions to avoid imposing liability on an entity that did not commit a primary violation but merely aided others; thus individual proof of reliance is required and bars class certification.
Deutsche Bank entities further argue that the market for each security must be considered separately in determining market efficiency and that primary markets by definition are not efficient. Moreover, they maintain that Dr. Nye’s Declaration ignores the primary market for the Enron debt securities and thus Lead Plaintiff has not met its burden of proof to trigger the fraud-on-the-market presumption.
*665
E. Putative Class Members’ Partial Objection (# 1789)
Putative Class Members (“Objectors”), as QIBs, purchased notes issued by the Osprey Trust. These Osprey Notes were not registered under the 1933 Securities Act and, as stated in the Offering Memorandum, were offered and sold only to QIBs in reliance on Rule 144A and in offshore transactions in reliance on Regulation S. The Objectors purchased only the Rule 144A Notes, but note that Lead Plaintiff asserts that both kinds of Osprey Notes fall inside the
Newby
class definition. The Objectors are opposed to certification of a single class of purchasers of Enron Corp. securities and purchasers of Osprey Notes.
They explain that the original
Newby
class action complaint, filed in April 2002, reached only investor losses in Enron Corp. securities, not losses in securities that were not issued by Enron, which include Osprey Notes. Thus these Objectors filed a separate non-class action in October 2002 in the California Superior Court against the banks and affiliated controlled entities that sold them the Osprey Notes, based solely on their losses from those Notes. Then on May 14, 2003 the
Newby
plaintiffs filed a first amended consolidated complaint that expanded the class to include losses for securities issued by Enron-related entities,
28
which includes Osprey Notes. The two
Newby
claims based on the Osprey Notes are grounded in (1) § 10(b) and Rule 10b-5, and (2) § 12(a)(2).
The Objectors point out that none of the proposed class representatives purchased Osprey Notes, received any of the Osprey offering materials, discussed the offering with the selling syndicate member, nor read or relied on particularized, material, false and misleading statements in those offering materials. Objectors argue that because no proposed class representative purchased the Osprey Notes, none has standing to bring claims on behalf of Osprey purchasers because none has a stake in the Osprey Notes nor interests aligned with those of the Osprey Note purchasers, and none can adequately prosecute claims. They contend that for claims under § 10(b) and § 12(a)(2), a plaintiff only has standing if it purchased or sold the relevant securities.
29
They further argue that even if a class representative had purchased Osprey
*666
Notes, the typicality and predominant elements for class certification cannot be satisfied.
The Objectors point out that
Newby
Lead Plaintiff has failed to name key Osprey Note sellers as defendants, including Bear Stearns for Osprey I and UBS War-burg for Osprey II, has failed to assert key facts and legal theories relating to the Osprey claims, and has characterized and attacked the Osprey structure as an artifice for Enron shareholders. They also object that the
Newby
plaintiffs have failed to consider the relative strengths and weaknesses of the Enron securities claims and the Foreign Debt Securities claims, but instead have insisted that all recovery be distributed pro-rata among class members.
The Objectors argue that they have different elements of proof to satisfy and different remedies available under California state law, which they contend they should not be deprived of the opportunity of pursuing, and that the Osprey Notes were not “covered securities” under SLU-SA.
While the Objectors could opt-out of
Newby,
they would risk their claims relating to their purchase of other Enron securities, which might be time-barred outside of
Newby
and which they did not include in their California lawsuit because they were being pursued in
Newby.
They ask the Court either to certify a class that excludes Osprey Notes purchasers from the
Newby
class or to allow them to opt out of the
Newby
class with respect to their Osprey Note purchases only, while still participating in the class with respect to any Enron-issued securities.
The Objectors emphasize the differences in situation, claims, and defenses of Osprey Noteholders from those of the Proposed Representative and other putative class members. The private offering to QIBs is different from public trading of securities on an United States securities exchange or in the NASDAQ system, which was the case with publicly traded Enron Corporation securities purchased by Lead Plaintiff and other proposed class representatives. The latter are not exempted from registration under Rule 144A. 17 C.F.R. § 230 .144A(d)(3)(I). In contrast investment banks purchase the Rule 144A securities and resell them to QIBs by means of printed private offering memoranda and direct sales presentations, and the QIBs buy directly from these investment banks. For example, the Osprey I syndicate directly solicited PIMCO and gave it the Osprey I Memorandum and DLJ Summary Sheet. In contrast the
Newby
plaintiffs did not receive those offering materials and thus were not affected by the alleged misleading statements made by the investment banks in those offering materials regarding the use of the offering proceeds, an absence of conflicts of interest, the Whitewing asset transactions and value of Whitewing assets, and the Osprey Noteholders’ ability to force liquidation of those assets upon default. The Objectors characterize
Newby
as a fraud-on-the-market case charging an overarching scheme and artifice to defraud against all scheme participants who are allegedly responsible for materially inflating Enron’s financial statements and caused the losses of investors who relied on the integrity of the market; they insist none of the six claims
30
in
Newby
adequately covers the
*667
Osprey Note purchasers.
F. Certain Individual Defendants’ Opposition to Class Certification of § 20A claims
31
(# 1795), Joined by Andrew Fastow (# 1796), and in part by Ken L Harrison (# 1798)
To prevail in a § 20A claim, a plaintiff must show that a defendant (1) used material, nonpublic information, (2) knew or recklessly disregarded that the information was material and nonpublic, and (3) traded contemporaneously with the plaintiff in the same class of security. Insisting that the adequacy, typicality, commonality, predominance, superiority, and manageability requirements of Rule 23 cannot be met, and that classwide proof is not possible, Certain Individual Defendants
32
argue that trying the § 20A claims as a single class “ignores the practical realities of what will be required for claimants to establish liability with respect to nearly 450 separate transactions, completed on more than 200 days, by 16 defendants, over a 3-year period.” Determining standing to sue requires a claimant-by-claimant inquiry as to when the individual plaintiff investor purchased and sold which stock, whether and to what extent the price of that stock was inflated at the time of that purchase and sale as a result of particular undisclosed material information used by which defendant, and whether that plaintiff suffered a loss
33
and if so, how much. They insist that proof would vary with individual defendants, trading days, and transactions. The Court would have to examine the particular circumstances of each transaction (e.g., material nonpublic information allegedly available to the trading defendant at the time of the transaction) to determine standing, liability and damages for that transaction. They cite conflicts of interest among putative class members in competition with each other to demonstrate that Enron stock was the most inflated on the day each traded.
Certain Individual Defendants further object that Lead Plaintiff has provided no trial plan to show how these individualized determinations could proceed as a class proceeding; indeed the motion for class certification does not mention the § 20A claims. Not only do they assert that individual questions would make a trial unmanageable, but they question how the enormous number of issues could be submitted to a jury, how a jury could keep track of the different issues for different plaintiffs against different defendants over a three-year period, and how standing could be established on a classwide basis without bringing each class member before the Court. They insist there are too many
*668
transactions with individual issues to make subclassing of any help.
In the event that the Court does certify a § 20A class, Certain Individual Defendants ask that the Court limit membership in that class or in subclasses to those who purchased stock within one day after a defendant sold his stock to satisfy the contemporaneity requirement, in light of recent case law.
34
Certain Individual Defendants argue that the proposed § 20A class representatives are not adequate to represent the class because they are not familiar with the legal and factual theories of the case, have relied entirely on Lead Counsel for factual investigation, and cannot distinguish among the defendants in this action. Many have never even read an opinion or order issued by the Court in this litigation and have not spent more than a few hours on this suit since its commencement. They cite examples from the deposition testimony of Dr. Richard Kimmerling, Michael Henning, Dr. Fitzhugh Mayo, Joseph Speck, Ben Schuette, and John Cassidy.
G. Vinson & Elkins, LLP (# 1799)
Vinson & Elkins LLP (“V & E”) also argues that class treatment is not appropriate as applied to claims against it because the fraud-on-the-market theory of presumed reliance applies only where a defendant communicated a misrepresentation to the relevant market, thus distorting the market price for the security at issue. V & E insists there is no evidence that it communicated any misrepresentation to the markets for Enron securities.
35
Therefore each plaintiff would have to prove reliance on the alleged fraud claims against it, precluding class certification. Moreover it argues that Lead Plaintiff has not shown that it was the creator of any misleading statements that did reach the market, although the Court found that Lead Plaintiff has alleged that it was. Lead Plaintiff has not provided any support for its unsubstantiated claim that V & E “drafted and/or approved the adequacy of Enron’s press releases, shareholder reports and SEC filings.” Nor has Lead Plaintiff identified specific statements that V & E allegedly was involved in creating or the specific securities to which such statements relate. V
&
E urges the Court to follow the majority rule of those courts that apply a “bright line rule” prohibiting a finding of primary liability under § 10(b) unless the secondary actor is identified as the author of a statement that reached the market; otherwise, it argues, application of the creator standard to support invocation of the fraud-on-the-market theory would allow plaintiffs to circumvent the reliance requirement.
36
H. Merrill Lynch’s Supplemental Opposition (#2286), Reply to Lead Plaintiffs Opposition (#2318), and Supplemental Memorandum (# 4486)
With respect to the claims against it, Merrill Lynch argues that the class is not
*669
certifiable under
Greenberg v. Crossroads Systems,
364 F.3d 657, 663 (5th Cir.2004) (holding that plaintiffs are not entitled to the fraud-on-the-market presumption of reliance for confirmatory statements, i.e., statements embodying information already known to the market and therefore already reflected in a stock’s price), and that
Greenberg
disposes of the entire case against Merrill Lynch. The
Greenberg
panel opined that “[a] causal relationship between the statement and actual movement of the stock price” is essential to demonstrate reliance.
Id.
at 665. The Fifth Circuit concluded that even for non-confmmatory, i.e., “actionable,” statements, there is no presumption of reliance where the price of the company’s stock “did not decline significantly after a revelation that the earlier positive statements were misleading.”
Id.
at 665. Furthermore, merely offering evidence that the price decreased after negative “truthful” information was released does not trigger the presumption of reliance; plaintiffs must also show that the earlier false statement that affected the stock’s price and that was not confirmatory is related to the later “truthful” statement with negative information that caused the decrease in value, i.e., “that it is more probable than not that it was this negative statement, and not other unrelated negative statements, that caused a significant amount of decline.”
Id.
at 665-66.
Merrill Lynch labels as “confirmatory” the fraudulent conduct claims asserted against it, specifically the allegations that it engaged in power swaps, the Nigerian barge transaction, and the LJM2 transactions in the fourth quarter of 1999 that “falsely inflated Enron’s profits to meet Wall Street’s and Enron’s internal targets,” and that “in response to Enron meeting analysts’ estimates,” Enron’s stock price increased. The alleged purpose and the resulting effect of Enron’s wrongful conduct was for Enron to meet Wall Street’s and analysts’ estimates. Merrill Lynch argues that Enron’s January 18, 2000 announcement, that Enron’s earnings for the fourth quarter of 1999 of $.31 per share ($1.18 for the year) were in line with the consensus estimates, is a “classic example of confirmatory information,” (Greenberg, 364 F.3d at 668 n. 16, and Amended Complaint at ¶¶ 742.5, 742.16, 742.18, and 742.22).
37
Moreover, Merrill Lynch insists that the press statement “embodied virtually all of Merrill Lynch’s allegedly wrongful conduct” and emphasizes that despite the alleged fraud, Enron’s stock price did not go up, but down.
Lead Plaintiff also alleges that Merrill Lynch issued misleading analyst reports, but Merrill Lynch claims that those alleged misrepresentations were also confirmatory, based on information previously announced by Enron.
See
# 2286 at 5 n. 6, listing the reports and their derivations from Enron announcements; Amended Complaint at ¶¶ 130, 142, 147, 149, 162, 181, 201, 208-09, 226, 250, 266, 321, and 362 (the bulk of which Merrill Lynch argues are repetitions of Enron information). Merrill Lynch further contends that Plaintiffs have not provided any evidence that the alleged false statements by Merrill Lynch’s analysts materially affected the price of Enron’s stock.
In addition to alleged conduct that was merely confirmatory and thus had no impact on stock price, not only did the price of Enron stock decline, not rise, after Merrill Lynch’s alleged participation in illicit transactions followed by Enron’s positive earnings announcement on January 18, 2000, but after the ultimate revelation of
*670
(“the truth”) in the Nigerian barge transaction and the power swaps transaction on April 9, 2002 and August 8, 2002, respectively, after Enron had filed for bankruptcy in December 2001, Enron stock actually rose three cents in value. Thus even for non-confirmatory statements Lead Plaintiff failed to show a significant decline following revelation of the truth, much less that any drop in price was attributable to these revelations as opposed to other news about Enron.
Therefore because Lead Plaintiff has not shown that Merrill Lynch’s conduct actually moved Enron’s stock price, the presumption of reliance is not triggered and a class cannot be certified on the claims against Merrill Lynch. Ex. C to #2286, Enron Press Release, Jan. 18, 2000; Ex. D,
Houston Chronicle,
Jan. 19, 2000; Ex. E, Stock Price Chart.
In addition, under the Fifth Circuit’s holding in
Southland Sec. Corp. v. INSpire Ins. Solutions, Inc.,
365 F.3d 353 , 364, 366 (5th Cir.2004) (because group pleading did not survive passage of the PSLRA, to determine whether a statement was made by a corporation with scienter one must examine the state of mind of the individual corporate official making or issuing the statement), the firm insists the § 10(b) claims against Merrill Lynch based on the analysts’ reports must be dismissed.
III. Prerequisites for Class Certification Under Rule 23
A. General Principles
Under Federal Rule of Civil Procedure 23(e)(1)(A) and (B), as amended in 2003, the court “must — -at an early practicable time
38
—determine by order whether to certify the action as a class action” and, if it determines that it should do so, “define the class and the class claims, issues, or defenses” in the order certifying the class. The court has wide discretion in determining whether to certify a class, but that discretion must be exercised within the bounds of Rule 23.
Henry v. Cash Today, Inc.,
199 F.R.D. 566, 570 (S.D.Tex.2000),
citing Castano v. American Tobacco Co.,
84 F.3d 734, 740 (5th Cir.1996). “Rule 23 is a remedial rule which should be construed liberally to permit class actions, especially in the context of securities fraud suits, where the class action device can prove effective in deterring illegal activity.”
Longden v. Sunderman,
123 F.R.D. 547, 551 (N.D.Tex.1988),
citing inter alia Simon v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,
482 F.2d 880 (5th Cir.1973), and 5
Newberg on Class Actions
§ 8800 (1977). The district court’s decision to certify a class will only be reversed for abuse of discretion or application of incorrect
*671
legal standards.
Mullen v. Treasure Chest Casino, LLC,
186 F.3d 620, 624 (5th Cir.1999), ce
rt. denied,
528 U.S. 1159 , 120 S.Ct. 1169 , 145 L.Ed.2d 1078 (2000).
In the process of determining whether a class should be certified, the court is required to conduct a rigorous analysis of Federal Rule of Civil Procedure 23’s prerequisites.
General Telephone Co. v. Falcon,
457 U.S. 147, 161 , 102 S.Ct. 2364 , 72 L.Ed.2d 740 (1982);
Castano,
84 F.3d at 740 . “Class certification hearings should not be mini-trials on the merits of the class or individual claims,” but nevertheless the court must go beyond the pleadings and examine the evidence to understand the claims, defenses and relevant facts and applicable substantive law to make a meaningful certification decision.
Unger v. Amedisys Inc.,
401 F.3d 316, 321 (5th Cir.2005) (“The plain text of Rule 23 requires the court to ‘find,’ not merely assume, the facts favoring class certification.”),
citing Eisen v. Carlisle & Jacquelin,
417 U.S. 156, 177-78 , 94 S.Ct. 2140 , 40 L.Ed.2d 732 (1974). The Fifth Circuit has stated that
Eisen
does not support “the view that a district court must accept, on nothing more than pleadings, allegations of elements central to the propriety of class certification under rule 23.”
Bell v. Ascendant Solutions, Inc.,
422 F.3d 307, 311-12 (5th Cir.2005) (holding that a review of the merits of a claim is proper to the degree necessary to determine whether the requirements of Rule 23 have been satisfied). Where the facts that must be considered for a Rule 23 determination overlap with the facts relating to the merits, they may be reviewed even where the resulting court findings might also coincidentally overlap.
Id.
at 312 (but warning that “ ‘[t]he findings made for resolving a class action certification motion serve the court
only
in its determination of whether the requirements of Rule 23 have been demonstrated’ ”),
citing and quoting Gariety v. Grant Thornton, LLP,
368 F.3d 356, 366 (4th Cir.2004).
39
In addition, the court, though not reaching the merits, must consider how plaintiffs’ claims will be tried, individually or on a class basis.
Castano,
84 F.3d at 744 . While the Court has reached the motion to certify rather late in the litigation, with fact discovery in large part completed, the evidence gleaned by the parties in that pursuit makes easier a rigorous analysis of the elements of Rule 23.
“District courts are permitted to limit or modify class definitions to provide the necessary precision.”
In re Monumental Life Ins. Co.,
365 F.3d 408 , 414 & n. 7 (5th Cir.2004)
(citing and quoting Robidoux v. Celani,
987 F.2d 931, 937 (2d Cir.1993) (“A court is not bound by the class definition proposed in the complaint and should not dismiss the action simply because the complaint seeks to define the class too broadly.”)), ce
rt. denied sub nom. Am. Nat’l Ins. Co. v. Bratcher,
543 U.S. 870 , 125 S.Ct. 277 , 160 L.Ed.2d 117 (2004);
Harris v. Gen. Dev. Corp.,
127 F.R.D. 655, 659 (N.D.Ill.1989) (“[I]t is certainly within the court’s discretion to limit or redefine the scope of the class.”);
Meyer v. Citizens &
*672
S. Nat’l Bank,
106 F.R.D. 356, 360 (M.D.Ga.1985) (“The Court has discretion in ruling on a motion to certify a class. This discretion extends to defining the scope of the class.”),
cert, denied sub nom. American Nat’l Ins. Co. v. Bratcher,
543 U.S. 870 , 125 S.Ct. 277 , 160 L.Ed.2d 117 (2004);
Turner v. Murphy Oil USA Inc.,
No. CIV. A. 05-4206, 234 F.R.D. 597 , 2006 WL 267333 (E.D.La. Jan.30, 2006)
(citing Monumental Life
for that proposition).
As the movant for class certification here, Lead Plaintiff bears the burden of demonstrating that a class action is appropriate and that all requirements of Rule 23 are satisfied.
Berger v. Compaq Computer Corp.,
257 F.3d 475, 479 (5th Cir.2001),
clarified and reh’g en banc denied,
279 F.3d 313 (5th Cir.2002).
B. Rule 23(a)’s Requirements
Rule 23(a), setting forth part of the “Prerequisites to a Class Action,”
40
provides,
One or more members of a class may sue or be sued as class representative parties on behalf of all only if (1) the class is so numerous that joinder of all members is impracticable, (2) there are questions of law or fact common to the class, (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class, and (4) the representative parties will fairly and adequately protect the interests of the class.
1. Numerosity
Plaintiffs need not prove the precise number of members in a class, but “must ordinarily demonstrate some evidence or a reasonable estimate of the number of purported class members.”
Zeidman v. J. Ray McDermott & Co., Inc.,
651 F.2d 1030, 1038 (5th Cir.1981) (“the proper focus is not on numbers alone but on whether joinder of all members is practicable.”). Furthermore, as is the case here, “the prerequisite expressed in Rule 23(a)(1) is generally assumed to have been met in class action suits involving nationally traded securities.”
Id.
at 1039 (finding it reasonable to assume that “any class composed of the sellers of a nationally traded security during a period in which hundreds of thousands or even millions of shares of the security were traded must necessarily be ‘so numerous that joinder of all members is impracticable.’ ”);
In re Dynegy, Inc. Sec. Litig.,
226 F.R.D. 263, 268-69 (S.D.Tex.2005)
(quoting Zeidman).
The Court finds that, for all Counts, the numerosity requirement, which has not been seriously challenged, has been easily satisfied by Plaintiffs’ reasonable estimate, where Enron security investors are clearly so numerous that joinder of all members is impracticable, i.e., extremely difficult or inconvenient.
Henry v. Cash Today, Inc.,
199 F.R.D. 566, 569 (S.D.Tex.2000).
2. Commonality
Commonality’s undemanding test is satisfied by Lead Plaintiffs showing that there are questions of law or fact common to the class and that resolution of at least one issue will affect all or a significant number of class members.
Henry,
199 F.R.D. at 569 ,
citing Forbush v. J.C. Penney Co.,
994 F.2d 1101, 1106 (5th Cir.1993);
In re Electronic Data Systems Corp. Sec.
*673
Litig.,
226 F.R.D. 559, 564 (E.D.Tex.2005),
aff'd,
429 F.3d 125 (5th Cir.2005).
The claims in
Newby
arise from the same set
of
facts and are brought under shared legal theories. Lead Plaintiff asserts that Defendants participated in an umbrella
Ponzi
scheme, a practice or course of business involving material misrepresentations which operated as a pervasive fraud to deceive the market and purchasers of Enron’s and Enron-related entities’ publicly traded securities, both stocks and bonds.
41
Here shared issues of law and fact satisfying the commonality requirement include whether Defendants violated the federal securities statutes; whether Defendants employed the alleged manipulative devices or engaged in the alleged wrongful
Ponzi
scheme to defraud investors; whether Defendants made misstatements and/or whether Defendants’ statements omitted material facts necessary to make those statements, under the circumstances in which they were made, not misleading; whether Defendants misrepresented material facts; whether Defendants knew or recklessly disregarded that the statements made by them were false and misleading; whether the value of the publicly traded Enron securities was artificially inflated; what damages were sustained by the putative class members; and what is the appropriate measure of damages. The facts satisfying the elements of §§ 10(b), 11, and 12(a)(2), and the derivative claims under §§ 20A, 20(a) and 15 (since they require proof of an underlying violation of the primary statutes), overlap, as does the proof of the alleged scheme of patterns of fraud. While the § 11 claimants focus on proving material misrepresentations in the Registration Statements of the securities they purchased, those statements incorporate the SEC filings targeted as part of the scheme by the § 10(b)/Rule 10b-5 claimants, who or which also seek to show the misrepresentations in the Registration Statements as part of the overall fraudulent course of business perpetrated by Defendants to conceal Enron’s actual financial status. The same is true of the offering documents for the section 12(a)(2) claimants. Thus commonality is satisfied.
3. Typicality
Similarly not demanding, the test for typicality is satisfied if the class representatives’ claims or defenses are typical of, but not necessarily identical to, those of the class; class representatives should have the same interests and have suffered the same injuries as others in the class, and the representatives’ and class members’ claims need only share the same essential characteristics, i.e., arise from a similar course of conduct and share the same legal theories.
Henry,
199 F.R.D. at 569 ;
Electronic Data,
226 F.R.D. at 565 .
See also Koch v. Dwyer,
No. 98 Civ. 5519(RPP), 2001 WL 289972 , *3 (S.D.N.Y. Mar.23, 2001) (“‘Rule 23(a)(3) is satisfied when each class member’s claim arises from the same course of events and each class member makes similar arguments to prove the defendant’s liability’”);
In re Ikon Office Solutions, Inc.,
191 F.R.D. 457, 463 (E.D.Pa.2000) (“Usually a plaintiffs claim is typical of a class if it challenges the same conduct as would the putative class.... Even quite significant factual differences will not defeat typicality so
*674
long as the legal theory upon which plaintiffs seek redress is the same as those they seek to represent.”);
White v. Sundstrand, Corp.,
No. 98 C 50070, 1999 WL 787455 , *3 (N.D.Ill. Sept.30, 1999) (“A claim is typical if ‘it arises from the same event or practice or course of conduct that gives rise to the claims of other class members and his or her claims are based on the same legal theory.’ ”).
The Court agrees with Lead Plaintiff that the claims of the proposed class representatives are typical because they arise from the same alleged
Ponzi
scheme, material misrepresentations, and course of conduct to defraud investors and artificially inflate the price of Enron’s and Enron-related entities’ publicly traded securities while concealing Enron’s debt, all of which purportedly induced them and the putative class to invest in these securities; and they are grounded in the same legal theory, federal securities law. The interest of the proposed class representatives, like that of the other putative class members, is to achieve the maximum possible recovery for the class.
See Lehocky v. Tidel Technologies, Inc.,
220 F.R.D. 491, 502-03 (S.D.Tex.2004) (“ ‘[A]s long as all class members are united in asserting a common right, such as achieving the maximum possible recovery for the class, the class interests are not antagonistic for representation purposes.’”).
The major concern under Rule 23(a)(3) is if unique defenses against a named plaintiff “threaten to become the
focus of the litigation,”
and the “key inquiry is whether a class representative would be required to devote considerable time to rebut the Defendants’ claims.”
Lehocky,
220 F.R.D. at 501 . The Fifth Circuit has recently rejected an argument that “the presence of a unique defense necessarily destroys typicality.”
Feder v. Electronic Data Systems Corp.,
429 F.3d 125, 137 (5th Cir.2005).
4. Adequacy
The court examines the zeal and competence of the class representatives’ counsel and the class representatives’ willingness, experience, and ability to handle class actions, to take an active role in and control of the litigation, and to protect the interests of the absent members, to determine if there is fair and adequate representation of the interests of the class.
Henry,
199 F.R.D. at 569 ;
Electronic Data,
226 F.R.D. at 566 ,
citing Berger,
257 F.3d at 479-82 . Even in the absence of proof that the class representatives and/or their counsel are inadequate, the court may not presume that they are adequate; the party seeking certification must demonstrate that they are adequate.
Berger,
257 F.3d at 481 . The court must also determine if there are any conflicts of interest between the named plaintiffs and the class they seek to represent, which would make the class representation inadequate.
Berger,
257 F.3d at 480 . “[B]ecause absent class members are conclusively bound by the judgment in any class action brought on their behalf, the court must be especially vigilant to ensure that the due process rights of all class members are safeguarded through adequate representation at all times.”
Id.
at 480 .
Pursuant to Rule 23(g) regarding the appointment of class counsel with the ability to fairly and adequately represent the interests of the class, the court must examine (1) “the work counsel has done in identifying or investigation potential claims in the action”; (2) “counsel’s experience in handling class actions, other complex litigation, and claims of the type asserted in the action”; (3) “counsel’s knowledge of the applicable law”; and (4) “the resources counsel will commit to representing the class.” Rule 23(g)(l)(C)(i).
In appointing Bill Lerach’s law firm, then Milberg Weiss Bershad Hynes
&
*675
Lerach LLP, now Lerach Coughlin Stoia Geller Rudman & Robbins LLP, as Lead Counsel under the PSLRA, the Court found counsel to be highly qualified, widely experienced in securities class actions, and competent to conduct litigation in the
Newby
class action. The firm is comprised of probably the most prominent securities class action attorneys in the country. It is not surprising that Defendants have not argued that counsel is not adequate. Counsel’s conduct in zealously and efficiently prosecuting this litigation with commitment of substantial resources to that goal evidences those qualities is evident throughout this suit. Since the beginning they have propelled the
Neioby
litigation forward. They have established the website by which attorneys serve and communicate with each other, established the central depository for discovery materials, negotiated an agreed, organized, nonduplicative, and pared-down discovery schedule, and negotiated complex settlements with a number of defendants. Similarly, Liaison Counsel, Schwartz, Junell, Campbell & Oathout LLP is qualified and experienced in prosecution of securities class actions and has assisted Lead Plaintiffs counsel throughout the litigation to vigorously and effectively prosecute this suit over the past several years.
Although common interests and monetary loss shared by the class representatives and class members, even though both groups are a mixture of small individual investors and large institutional investors, have been demonstrated in the satisfaction of the commonality and typicality tests, at issue here is the adequacy of some of the designated class representatives.
In securities fraud suits under the Private Securities Litigation Reform Act of 1995 (“PSLRA”), 15 U.S.C. § 78u-4, Lead Plaintiffs must be highly knowledgeable because of “Congress’s emphatic command that competent plaintiffs, rather than lawyers, direct the cases.”
Berger,
257 F.3d at 481-83 . The PSLRA, 15 U.S.C. § 78u-4(a)(3)(B), requires that the Lead Plaintiff must be “the most sophisticated investor available and willing to serve in a putative securities class action” and “an investor capable of understanding and controlling the litigation.”
Noting that the Supreme Court
42
left the defining of the contours of Rule 23(a)’s adequacy requirement to lower courts, with a resulting lack of uniformity in standards among them, and calling “for rule 23 to be interpreted to accommodate the substantive policies of the governing statute,” the Fifth Circuit in
Berger,
257 F.3d at 479 n. 7, 483, opined that the PSLRA clarified the adequacy standard for class representatives in securities class actions.
43
It found the clarification was in accord with its long established standard in mandating “an inquiry into ... the willingness and ability of the representatives to take an active role in and control the litigation and to protect the interests of the absentees.”
Berger,
257 F.3d at 479 , 482
(citing Horton v. Goose Creek Indep. Sch. Dist.,
690 F.2d
*676
470, 484 (5th Cir.1982),
cert. denied,
463 U.S. 1207 , 103 S.Ct. 3536 , 77 L.Ed.2d 1387 (1983)),
clarified,
279 F.3d at 313-14. A class representative, like the Lead Plaintiff, must have a “sufficient level of knowledge and understanding to be capable of ‘controlling’ or ‘prosecuting’ the litigation”; class representatives do not have to “be legal scholars and are entitled to rely on counsel,” but they “need to know more than that they were ‘involved in a bad business deal.’ ”
Berger,
257 F.3d at 482-83 . “Plaintiffs should understand the actions in which they are involved, and that understanding should not be limited to derivative knowledge acquired solely from counsel.”
Id.
at 483 n. 18. In sum, “competent plaintiffs, rather than lawyers, [must] direct such cases.”
Id.
at 484 .
Lead Plaintiff, which this Court found fully capable in appointing it as such, is one of the designated representatives and has satisfied the requirements for adequacy for all claims except those under § 12(a)(2). Following the class action hearing, at which the Court raised the question of adequacy because of its concerns about other designated class representatives, counsel for the Regents has submitted a Declaration of Christopher M. Patti (# 4551) that reaffirms their adequacy to serve as class representative. The other proposed class representatives will be scrutinized subsequently.
The Court will address the adequacy of some of the designated class representatives below under “IV. Specific Issues.”
C. Rule 23(b)(3)’s Requirements
Aside from the deferred issue of the adequacy of these proposed class representatives, because the Court finds that Rule 23(a) requirements are satisfied, the Court examines whether the proposed class is maintainable under Rule 23(b)(3). Rule 23(b) authorizes certification of a class action
if the prerequisites of subdivision (a) are satisfied, and in addition
(1) the prosecution of separate actions by or against individual members of the class would create a risk of
(A) inconsistent or varying adjudications with respect to individual members of the class which would establish incompatible standards of conduct of the party opposing the class, or
(B) adjudications with respect to individual members of the class which would as a practical matter be dispositive of the interests of other members not parties to the adjudications or substantially impair or impede their ability to protect their interests ....
(2) the party opposing the class has acted or refused to act on grounds generally applicable to the class, thereby making appropriate final injunctive relief or corresponding declaratory relief with respect to the class as a whole; or
(3) the court finds that the questions of law or fact common to the members of the class predominate over any questions affecting only individual members, and that a class action is superior to other available methods for the fair and efficient adjudication of the controversy. The matters pertinent to the findings include: (A) the interest of members of the class in individually controlling the prosecution or defense of separate actions; (B) the extent and nature of any litigation concerning the controversy already commenced by or against members of the class; (c) the desirability or undesirability of concentrating the litigation of the claims in the particular forum; (D) the difficulties likely to be encountered in the management of a class action.
In
Allison v. Citgo Petroleum Corp.,
151 F.3d 402, 412 (5th Cir.1998), the Fifth Circuit observed, “Under Rule 23, the different categories of class actions, with
*677
their different requirements, represent a balance struck in each case between the need and efficiency of a class action and the interests of class members to pursue their claims separately or not at all.” The panel summarized,
The (b)(1) class action encompasses cases in which the defendant is obliged to treat class members alike or where class members are making claims against a fund insufficient to satisfy all of the claims.... The (b)(2) class action, on the other hand, was intended to focus on cases where broad, class-wide injunc-tive or declaratory relief is necessary .... Finally, the (b)(3) class action was intended to dispose of all other classes in which a class action would be “convenient and desirable,” including those involving large-scale, complex litigation for money damages.
Id.
The procedural safeguards provided under (b)(3), i.e., the absolute right to notice and right to opt out of the class, are not available to class members of a(b)(l) or (b)(2) class action, because these two classes are more cohesive and homogenous, while the monetary remedies sought by a(b)(3) class are often related to disparate merits of individual claims of members with divergent interests.
Id.
at 413 . Rule 23(b)(3) applies where “a class action would achieve economies of time, effort, and expense, and promote uniformity of decision as to persons similarly situated, without sacrificing procedural fairness or bringing about other undesirable results.”
Amchem Products, Inc. v. Windsor,
521 U.S. 591, 615 , 117 S.Ct. 2231 , 138 L.Ed.2d 689 (1997).
Lead Plaintiff seeks certification under the last provision, (b) (3). A class may be certified under Rule 23(b)(3) when “common questions predominate over any questions affecting only individual members (predominance requirement)” and “class resolution is superior to other available methods for fair and efficient adjudication of the controversy (superiority requirement).”
Henry,
199 F.R.D. at 570 .
1. Predominance of Common Issues
Although in part similar to the commonality requirement,
44
the predominance element is “ ‘far more demanding’ because it ‘tests whether proposed classes are sufficiently cohesive to warrant adjudication by representation.’”
Unger,
401 F.3d at 320 ,
quoting Amchem Prods., Inc. v. Windsor,
521 U.S. 591, 623-24 , 117 S.Ct. 2231 , 138 L.Ed.2d 689 (1997). “In order to predominate common issues must constitute a significant part of the individual cases.”
Jenkins v. Raymark Indus.,
782 F.2d 468, 472 (5th Cir.1986). In examining the predominance requirement of this Rule, the court should “inquire into the substance and structure of the underlying claims without passing judgment on their merits. Although ‘the strength of a plaintiffs claim should not affect the certification decision,’ the district court must look beyond the pleadings to ‘understand the claims, defenses, relevant facts, and applicable substantive law in order to make a meaningful determination of the certification issues.’”
Robinson v. Texas Automobile Dealers
Assoc., 387 F.3d 416, 421 (5th Cir.2004),
cert. denied,
544 U.S. 949 , 125 S.Ct. 1710 , 161 L.Ed.2d 526 (2005).
*678
Where a “common nucleus of operative fact” exists, the predominance factor is met.
Henry v. Cash Today,
199 F.R.D. at 572 .
See also Newton v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,
259 F.3d 154 , 176 (3d Cir.2001) (“Presuming reliance class-wide is proper when the material nondisclosure is part of a common course of conduct.”);
Schwartz v. TXU Corp.,
No. 3:02-CV-2243-K, et al., 2005 WL 3148350 , *15 (N.D.Tex. Nov.8, 2005) (and cases cited therein). Moreover, the Supreme Court has observed, “Predominance is a test readily met in certain cases alleging ... securities fraud .... ”
Amchem,
521 U.S. at 624 , 117 S.Ct. 2231 .
Nevertheless, as discussed
supra,
in recent years several federal Courts of Appeals, including the Fifth Circuit, have required at the class certification stage particularized analysis of the issue of an efficient market, a requirement to trigger a fraud-on-the-market presumption of reliance for claims under section 10(b) and Rule 10b-5.
See generally
Brian E. Pas-tuszenki, Inez H. Friedman-Boyce, and Goodwin Procter,
Back to Basic
— Chal
lenging the Application of the Efficient Market Hypothesis in Federal Securities Lawsuits,
SK080 ALI-ABA 907, 911, 925-32 (Apr. 28-29, 2005).
a.
Affiliated Ute
and/or Fraud-on-the-Market Presumptions for Section 10(b)/Rule 10b-5 Claims
To establish a claim under § 10(b) and Rule 10b — 5(b),
45
a plaintiff must ultimately prove (1) a material misrepresentation or omission; (2) scienter; (3) a connection between the purchase or sale of the security and the material misrepresentation or omission; (4) reliance [or “transaction causation” in fraud-on-the-market cases]; (5) economic loss; and (6) loss causation,
46
i.e., causal connection between the material misrepresentation or omission and the plaintiffs actual loss.
Dura Pharmaceuticals, Inc. v. Broudo,
544 U.S. 336 , 125 S.Ct. 1627, 1631 , 161 L.Ed.2d 577 (2005). Transaction causation requires a pleading facts showing that “but for” the fraudulent statement or omission the plaintiff would not have entered in the securities transaction at issue, while loss causation requires pleading facts showing that the content of the fraudulent statement or omission was the cause of the plaintiffs actual loss.
47
See, e.g., Livid Holdings Ltd. v. Salomon Smith Barney, Inc.,
416 F.3d 940, 943 (9th Cir.2005);
Leykin v. AT&T Corporation,
423 F.Supp.2d 229, 238-39 (S.D.N.Y.2006);
In re Enron Corp. Sec., Derivative and “ERISA" Litig.,
310 F.Supp.2d 819, 830-31 (S.D.Tex.2004) (and cases cited therein).
“ ‘Transaction causation’ and ‘reliance’ are virtually synonymous.”
In re Mutual Funds Investment Litig.,
384 F.Supp.2d 845, 864 (D.Md.2005). The reliance element for claims for compensatory damages under § 10(b) and Rule 10b-5 serves as the causal connection between the defendant’s action and the plaintiffs loss.
Basic, Inc. v. Levinson,
485 U.S. 224, 243 , 108 S.Ct. 978 , 99 L.Ed.2d 194 (1988);
Finkel v. Docutel/Olivetti Corp.,
817 F.2d 356 , 359
*679
(5th Cir.1987) (“Proof of reliance establishes that the damaged party was induced to act by the defendant’s conduct; it defines the causal link between defendant’s conduct and the plaintiffs decision to buy or sell securities .... It is the generally applied bond between bad conduct and damages.”),
cert. denied,
485 U.S. 959 , 108 S.Ct. 1220 , 99 L.Ed.2d 421 (1988).
A district court may not certify a fraud class where individualized proof of reliance must be shown and thus the requirement of predominance of common issues is defeated. Cas
tano,
84 F.3d at 745 . The Supreme Court has relaxed the requirement of demonstrating individual reliance on material misrepresentations and omissions by providing a presumption of reliance under certain circumstances.
48
Such presumptions, where applicable, circumvent the need for individualized proof of reliance and make class certification more available. The two major doctrines that have evolved to provide such a presumption of classwide reliance are the
Affiliated Ute
presumption and the “fraud on the market” theory. The Fifth Circuit has also adopted a “fraud created the market” presumption in an undeveloped market.
In
Affiliated Ute Citizens of Utah v. United States,
406 U.S. 128, 158 , 92 S.Ct. 1456 , 31 L.Ed.2d 741 (1972),
49
the Supreme
*680
Court examined the language of Rule 10b-5 and observed that it did not expressly require proof of reliance in actions alleging primarily a failure to disclose. Thus it held that in § 10(b) cases based primarily on material omissions, i.e., failure to disclose, reliance on the omitted information may be presumed where such information is material, i.e., where a reasonable investor might have considered it important in his decision to buy or sell securities.
Affiliated Ute Citizens of Utah v. United States,
406 U.S. 128, 153-54 , 92 S.Ct. 1456 , 31 L.Ed.2d 741 (1972) (the “obligation to disclose and this withholding of a material fact establish the requisite element of causation in fact”);
Akin v. Q-L Investments, Inc.,
959 F.2d 521, 529 (5th Cir.1992);
Smith v. Ayres,
845 F.2d 1360, 1363 (5th Cir.1988) (where fraud allegations are based on a failure to disclose, as opposed to a fraudulent misrepresentation, a plaintiff is entitled to a rebuttable presumption of reliance),
cert. denied,
508 U.S. 910 , 113 S.Ct. 2342 , 124 L.Ed.2d 252 (1993). “The presumption is a judicial creature. It responds to the reality that a person cannot rely upon what he is not told.”
Ayres,
845 F.2d at 1363 .
A defendant may rebut the
Affiliated Ute
presumption of reliance by showing that a plaintiffs investment decision would not have been affected even if the defendant had revealed the omitted facts.
Akin,
959 F.2d at 530 ,
citing Rifkin v. Crow,
574 F.2d 256, 262 (5th Cir.1978).
Second, under
Basic, Inc. ’s
fraud-on-the-market theory, drawing on the Ninth Circuit’s earlier opinion in
Blackie v. Barrack,
50
where plaintiff alleges there has been a material misrepresentation, reliance is presumed where investors trade in securities in well developed markets because in efficient markets, the market price of securities purportedly reflects all material, public information and thus the investor may be presumed to rely upon the integrity of the market price. 485 U.S. at 241-49, 108 S.Ct. 978 . In
Basic, Inc.,
the Supreme Court explained,
“The fraud on the market theory is based on the hypothesis that, in an open and developed securities market,
51
the price of a company’s stock is determined by the available material information regarding the company and its business .... Misleading statements will therefore defraud purchasers of stock even if the purchasers do not directly rely on the misstatements.... The causal connection between the defendants’ fraud and the plaintiffs’ purchase of stock in such a case is no less significant
*681
than in a case of direct reliance on misrepresentations.”
Basic, Inc.,
485 U.S. at 241-42 , 108 S.Ct. 978 ,
quoting Peil v. Speiser,
806 F.2d 1154, 1160-61 (3d Cir.1986). Thus the investor may rely on the price of the stock, which reflects all publicly available information. Where reliance is presumed under the fraud-on-the-market theory, reliance can be treated as a common, instead of an individual, issue with regard to proof. The Supreme Court found that the presumption was consistent with congressional policy underlying the Securities Exchange Act of 1934 and was supported by common sense and probability.
Id.
at 246, 108 S.Ct. 978 . The United States Supreme Court further stated, “Any showing that severs the link between the alleged misrepresentation and either the price received (or paid) by the plaintiff, or his decision to trade at a fair market price, will be sufficient to rebut the presumption of reliance.”
Id.
For example the defendant may show that the plaintiff would have made the same investment decision even if he had known about the misstatement or nondisclosure, or that the plaintiff knew of the misstatement or nondisclosure before he traded, or that the material information was incorporated into the market price before the plaintiff bought or sold his securities.
Id.
at 248-49, 108 S.Ct. 978 .
52
Another way to rebut the fraud-on-the-market presumption of reliance is to demonstrate that the market for the security was not efficient, an approach that has recently had some success.
See, e.g.,
Brian E. Pastuszenki, Inez H. Friedman-Boyce, and Goodwin Procter,
Back to Basic
— Challenging
the Application of the Efficient Market Hypothesis in Federal Securities Lawsuits,
SK080 ALI-ABA 907 (Apr. 28-29, 2005).
To determine whether an action is “primarily a nondisclosure case or a positive
*682
misrepresentation case” for the applicability of the
Ute
presumption or the fraud-on-the-market theory, the Fifth Circuit focuses on under which subsection of Rule 10b-5 the misconduct alleged in the pleadings falls.
Finkel v. Docutel/Olivetti Corp.,
817 F.2d 356, 359-60 (5th Cir.1987),
cert. denied,
485 U.S. 959 , 108 S.Ct. 1220 , 99 L.Ed.2d 421 (1988). A plaintiffs claim may give rise to the
Ute
presumption of reliance based on material omission if it arises under Rule 10b-5(a) (“to employ any device, scheme, or artifice to defraud”) and/or (c) (“to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security”).
Ayres,
845 F.2d at 1363 ;
Finkel,
817 F.2d at 360 (“Cases involving primarily a failure to disclose implicate the first and third subsections of Rule 10b — 5; cases involving primarily a misstatement or a failure to state a fact necessary to make the statements made not misleading implicate the second subsection .... ”);
Shores v. Sklar,
647 F.2d 462, 471 (5th Cir.1981)
(en banc)
(12-10),
cert. denied,
459 U.S. 1102 , 103 S.Ct. 722 , 74 L.Ed.2d 949 (1983);
Heller v. Am. Industrial Properties Reit,
No. CivA-SA97CA1315EP, 1998 WL 1782550 , *3 (W.D.Tex. Sept.28, 1998).
In contrast, Rule 10b-5(b) covers eases involving primarily a misstatement or failure to state a fact necessary to make statements made not misleading.'
Finkel,
817 F.2d at 360 . The Fifth Circuit has repeatedly limited the
Ute
presumption to cases with claims based primarily on alleged omissions under subsections (a) and (c).
See, e.g., Finkel,
817 F.2d at 359 (“A court must, therefore, analytically characterize a 10b-5 action as either primarily a nondisclosure case (which would make the presumption applicable), or a positive misrepresentation case.”);
Abell v. Potomac Ins. Co.,
858 F.2d at 1119 (“[T]he Ute presumption is limited to cases, like
Ute
itself, in which the plaintiffs have based their complaint primarily upon alleged omissions.” Such non-disclosure suits are those in which the complaint is grounded primarily in allegations that the defendant has failed to disclose any information whatsoever relating to material facts about which the defendant has a duty to the plaintiff to disclose.
Ute,
however, does not require the burden of persuasion to shift in cases where the plaintiffs allege either that the defendant has made false statements or has distorted the truth by making true, but misleading, incomplete statements. Thus we apply the
Ute
presumption in non-disclosure cases, but not in “falsehood or distortion cases”);
Joseph v. Wiles,
223 F.3d 1155, 1163 (10th Cir.2000) (“Any fraudulent scheme requires some degree of concealment, both of the truth and of the scheme itself. We cannot allow the mere fact of this concealment to transform the alleged malfeasance into an omission rather than an affirmative act. To do otherwise would permit the
Affiliated Ute
presumption to swallow the reliance requirement almost completely.”);
in accord Binder v. Gillespie,
184 F.3d 1059, 1064 (9th Cir.1999) (“the
Affiliated Ute
presumption should not be applied to cases that allege both misstatements and omissions unless the case can be characterized as one that primarily alleges omissions.”),
cert. denied sub nom. Binder v. Wilson,
528 U.S. 1154 , 120 S.Ct. 1158 , 145 L.Ed.2d 1070 (2000). Some cases have required that there be no mixture of the two types of claims.
See Lehocky,
220 F.R.D. at 509-10 (holding that “Plaintiffs may not rely on the
Affiliated Ute
presumption in this mixed context”),
citing Kirkpatrick v. J.C. Bradford & Co.,
827 F.2d 718, 722 (11th Cir.1987) (“[T]he
Affiliated Ute
presumption of reliance is not warranted in a Rule 10b-5 case when the plaintiff alleges both nondisclosures and positive misrepresentations instead of only nondisclosures as in
Affiliated Ute.”); Steiner v. South-
*683
mark Corp.,
734 F.Supp. 269, 276 (the
Ute
presumption applies to cases “grounded primarily upon allegations that the defendant failed to disclose
any information whatsoever”
relating to material facts about which the defendant had a “duty to disclose”),
clarified on other grounds,
739 F.Supp. 1087 (N.D.Tex.1990);
Griffin v. GK Intelligent Systems, Inc.,
196 F.R.D. 298, 305 (S.D.Tex.2000) (“The
Affiliated Ute
presumption applies only to allegations that the defendant company ‘failed to disclose any information whatsoever relating to material facts about which [it] had a duty to disclose’”),
quoting Steiner v. Southmark Corp.,
734 F.Supp. at 275-76 . This Court follows the literal meaning of “primarily” in
Ute,
406 U.S. at 153 , 92 S.Ct. 1456 (“primarily a duty to disclose”),
Finkel,
817 F.2d at 359 , and progeny and concludes a mixed context does not
per se
preclude the application of the
Ute
presumption, but does require the court to find the allegations are primarily of omissions.
53
Financial Defendants have argued that
Affiliated Ute
is inapplicable here because one of its requirements is that the defendant have a duty to disclose to the plaintiff, and they maintain they do not owe such a duty to the
Newby
plaintiffs under the circumstances alleged. The Court agrees that the Financial Institutions did not owe a duty to disclose to plaintiffs. If one assumes for the moment that
Newby
is primarily an omission case, the Fifth Circuit has ruled that for a presumption of reliance, a duty to disclose is relevant only to Rule 10b-5(b) claims of statements that are either false or misleading; in a scheme case brought under Rule 10b-5(a) and (c) (“employ any device, scheme or artifice to defraud” or “engage in any act, practice or course of business that operates or would operate as a fraud”), the Fifth Circuit has indicated that the requisite duty is not a duty to disclose, but a “the duty not to engage in a fraudulent ‘scheme’ or ‘course of conduct’ [that] could be based primarily on an omission.”
Ayres,
845 F.2d at 1363 & n. 8;
in accord Heller v. American Properties Reit,
No. Civ. A. SA97CA1315EP, 1998 WL 1782550 *3 (W.D.Tex. Sept. 28, 1998) (the first and third subsections of Rule 10b-5 create a duty not to engage in a fraudulent scheme or course of conduct a case alleging failure to disclose, in contrast to fraudulent misrepresentation). It appears to this Court that logically and as a matter of law that duty not to engage in a Rule 10b-5 scheme, practice or course of conduct to defraud would be owed to the investing public generally.
At the Class Certification hearing the Financial Institution Defendants complained and demonstrated that Lead Plaintiff did not plead the
Affiliated Ute
presumption of reliance and contended that it therefore could not assert that theory now. Reliance, i.e., the causal link between the defendant’s misconduct and the plaintiffs decision to buy or sell the securities at issue, is an element of a Rule 10b-5 claim that must be pleaded; the
Ute
presumption, like the fraud-on-the-market theory, is a method of proving it.
Heller,
1998 WL 1782550 at *3 (finding that a presumption of reliance is a presumption of proof, not a presumption of pleading). Lead Plaintiff has pleaded the factual underpinnings to trigger the presumption by alleging deception by nondisclosure, i.e., that Plaintiffs relied upon the false picture of financial health of Enron created by the Defendants’ concealed, material conduct in a scheme to defraud. The rebuttable
Ute
presumption may be established at trial or
*684
on summary judgment by proof that the alleged concealed misconduct was material and that the plaintiffs allegations are primarily ones of omission, not of false and/or misleading statements. Thus the Court rejects Defendants’ failure-to-plead argument.
Defendants have argued that the theory of fraud on the market, which serves to provide a presumption of class-wide reliance without having to prove individualized reliance for a § 10(b) claim, only applies to misrepresentations and omissions that make a defendant’s statement misleading, in other words a claim under Rule 10b-5(b). The Fifth Circuit has not limited the theory
54
to statements by a defendant containing misrepresentations and omissions but, at times, intermingled the two presumptions of class-wide reliance under
Ute
and
Basic
for allegations of schemes to defraud or course of business that acts as a fraud.
Finkel,
817 F.2d at 359 (“the
Affiliated Ute
presumption and the ‘fraud on the market’ theory ... interact.”).
The Fifth Circuit’s approach to the fraud-on-the-market theory has evolved over the years. In
Shores v. Sklar,
647 F.2d 462, 471 (5th Cir.1981)
(en
banc) (12-10), ce
rt. denied,
459 U.S. 1102 , 103 S.Ct. 722 , 74 L.Ed.2d 949 (1983), the twelve-judge majority partially reversed the district court’s summary judgment in a putative class action securities suit against participants in the issuance of revenue bonds purportedly to finance construction of a mobile home manufacturing plant in Alabama. The suit was brought by Charles E. Bishop, Jr., alleging that he was the victim of a pervasive scheme to defraud members of the investing public by means of the fraudulently marketed
55
industrial
*685
development bonds for which a misleading Offering Circular was issued. The bonds were to be repaid from sales proceeds of the mobile homes, but the lessee of the industrial business premises defaulted after two payments and the bonds became worthless. The district court had entered summary judgment for the defendants because Bishop’s answers to interrogatories demonstrated that he had not seen nor even been aware of the Offering Circular, but had purchased the bonds based on his broker’s oral representation that the bonds were a good investment.
In
Shores ,
on appeal the majority of the Fifth Circuit, sitting
en banc,
focused on the text of the three separate subsections of Rule 10b-5. It affirmed the lower court’s summary judgment for the defendants to the extent that Bishop had unsuccessfully asserted a misrepresentation or omission claim under Rule 10b—5(b) in light of Bishop’s admission that he did not rely on the Offering Circular, noting that even if the
Ute
presumption applied to the nondisclosures in the Offering Circular, Bishop’s admission that he did not know about the document rebutted the presumption. But the majority, emphasizing that the policy behind the federal securities acts and Rule 10b-5 was to protect investors from fraud, found the Rule’s provisions also authorized a cause of action beyond misrepresentations and omissions in statements and “reach[ed] complex fraudulent schemes” such as the alleged “elaborate scheme to create a bond issue that would appear genuine, but was so lacking in basic requirements that the Bonds would never have been approved by the Board nor presented by the underwriters had any one of the participants in the scheme not acted with intent to defraud or in reckless disregard of whether the other defendants were perpetrating a fraud.” 647 F.2d at 470, 468 . The majority observed that Bishop’s complaint tracked the language of all three subsections of Rule 1 Ob-5, including (a) and (c), in alleging “a course of business” or “device, scheme or artifice that operated as a fraud” upon Bishop in connection with the sale of bonds.
Id.
at 469, 471-72 . (The same is true of the
Newby
pleadings.) The Fifth Circuit concluded that even in an undeveloped market Bishop could satisfy the causation element of his claim by proving that the alleged scheme was intended to and did bring the bonds onto the market fraudulently and that he had relied on the integrity of the offerings of the securities market, rather than the statements in the Offering Circular.
Id.
at 469 . Thus Bishop bore the burden of proving that (1) the defendants, with the intent to defraud purchasers, knowingly conspired to bring securities “which were not entitled to be marketed” onto the market; (2) that Bishop “reasonably relied on the Bonds’ availability on the market as an indication of their apparent genuineness”; and (3) that Bishop suffered a loss as a result of the scheme.
Id.
at 469-70 .
56
Furthermore,
*686
the majority emphasized,
Whenever the rule 10b-5 issue shifts from misrepresentation or omission in a document to fraud on a broader scale, the search for causation must shift also. The “reliance” that produces causation in the latter type of case cannot come from reading a document. It may arise from the duty to speak as in
Ute ,
a scheme to manipulate the market at a time when a merger had forced a sales as in Schlick,
57
a scheme to inflate common stock prices by misleading statements as in
RifIcin,
58
or a claim by a bond buyer that he relied on the market to provide securities that were not fraudulently created as we have here. The most significant common thread in all these precedents is that rule 10b-5 is not limited to a narrow right to recover for knowing fraudulent misrepresentations or omissions in disclosure documents which mislead a securities buyer. The rule is recognized also to provide the basis for a federal cause of action for more elaborate, intentional schemes which deceive or defraud purchasers of securities.
Id.
at 472.
See also Abell v. Potomac Ins. Co.,
858 F.2d 1104, 1120 (5th Cir.1988) (“A fraud on the market is any deceit that successfully disseminates false or misleading information into the securities market or withholds vital information from that market. The theory holds that such a deceit defrauds investors even when they are unaware of misrepresentations or omissions that skew the market price, because investors depend upon the integrity of the market price.”),
vacated on other grounds,
492 U.S. 914 , 109 S.Ct. 3236 , 106 L.Ed.2d 584 (1989).
Subsequently in
Finkel v. Docutel/Olivetti Corp.,
817 F.2d 356, 359 (5th Cir.1987), ce
rt. denied,
485 U.S. 959 , 108 S.Ct. 1220 , 99 L.Ed.2d 421 (1988), observing that the
Ute
presumption and the fraud on the market theory “interact,” the panel noted there was disagreement over “what
Shores
means.”
Id.
at 361. Without highlighting the fact that Bishop expressly stated that he had not read the Offering Circular, the panel held,
“Shores
permits a plaintiff to assert a fraud on the market theory under 10b-5(a) and (c) but not under 10b-5(b).” 817 F.2d at 362 . While noting that “[o]ther Circuits have gone even farther and recognize the fraud on the market theory under 10b-5(b),” they stated, “We do not because
Shores
does not.”
Id.
at 362-63. Based on
Ute ,
the appellate panel opined that the language of Rule 10b-5 requires that the court must, as a threshold matter, “analytically characterize a 10b-5 action as either primarily a nondisclosure case (which would make the
{Ute
] presumption [of reliance] applicable, or a positive misrepresentation case.... Cases involving primarily a failure to disclose implicate the first and third subsections of Rule 10b-5; cases involving primarily a misstatement or failure to state a fact necessary to make statements made not misleading implicate the second subsection (which is the only subsection of the Rule that specifically mentions the active misrepresentation concept of prohibited conduct)).”
Id.
at 359-60. The case need only be primarily one
*687
of nondisclosure, not a case of pure nondisclosure, for the
Ute
presumption of reliance to apply for scheme or course of business liability under Rule 10b-5(a) and (c).
Id.
at 363. Further, the panel noted part of the holding in
Shores
was “tailored to the facts of the case”: because it was unclear whether Bishop bought in the primary or the secondary market, and, more important, because the market for bonds in
Shores
was not “the active efficient market for which the fraud on the market theory was initially conceived,”
Shores’
“limitation of Bishop’s claim to proof that the bonds were unmarketable is simply a rule formulated for newly issued securities.”
Id.
at 364. Thus the “majority in
Shores
simply recognized that a Rule 10b-5 action based on the fraud on the market theory could embrace a claim for a fraud that resulted in the issuance of worthless securities as well as a fraud that inflated the price of a security.”
Id.
at 364.
59
The
Finkel
panel followed its interpretation of
Shores
as not allowing the theory of iraud on the market for claims of misrepresentation under Rule 10b-5(b) where the plaintiff failed to allege that she read or relied on any of the documents containing the alleged misrepresentation or omission, but allowing the theory for scheme and course of business fraud claims under 10b-5(a) and (c). The majority reversed the district court’s dismissal of those claims and remanded the case for further proceedings, including the opportunity for defendants to rebut the
Ute
presumption of reliance established by proof of materiality of the alleged misconduct “1) by showing, upon the shifting of the burden to the defendant, that the nondisclosures did not affect the market price; or 2) that plaintiff would have purchased the stock at the same price even if she had known the information that was not disclosed, or that she actually knew the information that was not disclosed to the market.”
Id.
at 364-65.
Shortly thereafter, in 1988 the Supreme Court issued
Basic, Inc.,
in which the Supreme Court “announced its support for a new, largely undefined version of this presumption of reliance,” and implicitly “vitiated part of [the Fifth Circuit’s] fraud-on-the-market jurisprudence.”
Abell,
858 F.2d at 1120 . In
Abell ,
the Fifth Circuit explained that until
Basic,
it had allowed “the fraud-on-the-market presumption, like the
Ute ,
[to be] available only to plaintiffs who based their rule 10b-5 claims primarily upon non-disclosure.”
Id. Basic
held that plaintiffs “alleging active misrepresentation (i.e., making false statements and failing to correct distorted statements) may also assert a fraud-on-the. market theory of reliance.”
Id.
(emphasis added by this Court).
60
See Basic, Inc.
485 U.S. at 247 , 108 S.Ct. 978 (“An investor who buys or sells stock at the price set by the market does so in reliance on the integrity of that price. Because most publicly available information is reflected in the market price, an investor’s reliance on any public material misrepresentations, therefore, may be presumed for purposes of a Rule
*688
10b-5 action.”)-
See also Steiner v. Southmark Corp.,
734 F.Supp. 269, 277 (“The effect of
[Basic, Inc.]
was to vitiate the prior distinction cabining fraud-on-the-market to nondisclosure cases and to give the presumption potential applicability to any Rule 10b-5 action involving openly traded securities.”),
clarified on other grounds,
789 F.Supp. 1087 (N.D.Tex.1990). In
Basic, Inc.,
furthermore, the Supreme Court left “each of the circuits room to develop its own fraud-on-the-market rules.”
Abell,
858 F.2d at 1120 . Thus ironically, while Defendants in
Newby
object that the fraud-on-the-market theory applies only to misrepresentations in statements and documents under Rule 10b-5(b), which they claim not to have made, until
Basic, Inc.
overruled the Fifth Circuit, the Fifth Circuit in
Sklar
refused to apply the fraud-on-the-market theory only to that second subsection of Rule 10b-5, but did apply it to allegations of a generalized scheme to defraud investors under Rule 10b-5(a) and (c).
Addressing
Finkel, post-Basic, Inc.,
the panel in
Abell
summarized the Fifth Circuit’s approach, in stating that fraud on the market can be established by a plaintiff in two ways: (1) by showing that the securities at issue were “traded on an active secondary market, such as a public exchange,” and proving that the defendant’s nondisclosures materially affected the market price of the security; and (2) where there is no active, efficient secondary market, by proving that the defendants conspired to bring securities that were not entitled to be marketed, were fraudulently marketed
61
(would never have been issued or marketed were it not for defendants’ fraudulent scheme).
Abell, 858
F.2d at 1120. As noted earlier, the latter theory is generally known as the fraud-created-the-market theory and does not apply under the facts here.
62
See also T.J. Raney & Sons, Inc. v. Fort Cobb, Oklahoma Irrigation Fuel Authority,
717 F.2d 1330, 1333 (10th Cir.1983) (defining “unmarketability” of the Fifth Circuit’s standard for “fraud-created-the market” as “unlawfully issued,” and allowing reliance on existence of securities on the market as evidence that they were lawfully issued),
*689
cert. denied,
465 U.S. 1026 , 104 S.Ct. 1285 , 79 L.Ed.2d 687 (1984).
Important for the
Newby
class action, there appears to have been no modification nor implied overruling to
Shores’
holding that the fraud-on-the-market and the
Ute
presumptions of reliance may apply to claims of a scheme or course of business to defraud in connection with the sale of securities under Rule 10b-5(a) and (c).
Moreover, the district court in
Lincoln Savings,
140 F.R.D. at 432-33, upon which Lead Plaintiff heavily relies, followed the reasoning in
Shores
to support a fraud-on-the-market theory of reliance. It concluded,
[T]he justification for this authority
[Shores
] is consistent with the materiality and reliance principles endorsed by
Basic.
If an enterprise is so laden with fraud that its entire public image is distorted, it is sensible to presume that reasonable investors relied on many material misrepresentations which, in aggregate, created a false image. In this situation, the offending misrepresentations are not merely presumed to compete successfully for the investor’s attention amidst a mix of material, undistorted facts. Rather, the entire picture of the company’s economic health and lawful character is skewed.... [Tjhere is virtually nothing more material to a decision to invest in the subordinated debt of a company than a reliable, undistorted picture of its financial integrity.
Id.
at 432-33.
Nevertheless part of the rationale of
Lincoln Savings
is based on a presumption not recognized by this Circuit.
63
The
Lincoln Savings
district court also relied on a Ninth Circuit doctrine for a presumption of reliance based “on the integrity of the regulatory process and the truth of any representations made to the appropriate agencies and the investors at the time of the original issue” of securities “to ensure that at a fundamental level the securities were entitled to be marketed.”
Lincoln Savings,
140 F.R.D. at 433-34,
citing Arthur Young & Co. v. U.S. District Court,
549 F.2d 686, 695 (9th Cir.),
cert. denied,
434 U.S. 829 , 98 S.Ct. 109 , 54 L.Ed.2d 88 (1977).
64
The
Lincoln Savings
court found, “Plaintiffs here are entitled to a presumption
of
reliance if a network of misrepresentations or omissions to the Federal Home Loan Bank Board or other federal and state regulators enabled the
*690
bond sales to go forward.” 140 F.R.D. at 434.
The Fifth Circuit has heightened the requirements for applying fraud on the market for a presumption of reliance in a misrepresentation case under Rule 10b-5(b) at the summary judgment stage.
Greenberg v. Crossroads Systems, Inc.,
364 F.3d 657 (5th Cir.2004). In light of the Fifth Circuit’s recent requirement of a rigorous analysis for class certification and the fact that discovery in
Newby
is largely complete, this Court concludes that
Green-berg
has relevance at class certification time also. For class claims seeking money damages under § 10(b) for material misrepresentations,
65
where private plaintiffs seek to satisfy the statutory element of reliance with a rebuttable presumption of class-wide reliance under the fraud-on-the-market theory of
Basic, Inc.,
66
the plaintiff must show that “(1) the defendant made public material misrepresentations, (2) the defendant’s shares were traded in an efficient market, and (3) the plaintiffs traded shares between the time the misrepresentations were made and the time the truth was revealed.”
Greenberg v. Crossroads Systems, Inc.,
364 F.3d 657, 661 (5th Cir.2004),
citing Basic, Inc.,
485 U.S. at 247 n. 47, 108 S.Ct. 978 . Furthermore to satisfy Rule 23(b)(3)’s predominance requirement, the Fifth Circuit mandates that plaintiffs do more than conclusorily plead market efficiency for purposes of class certification; they must demonstrate by a rigorous, though preliminary, standard of proof
67
that the market for a company’s stock was efficient.
Bell v. Ascendant So
*691
lutions, Inc.,
422 F.3d 307 , 311 & n. 7 (5th Cir.2005).
68
At the class certification hearing and in the record we have the proverbial battle of experts regarding the efficiency of the market(s) for Enron securities. The Court notes that
The Manual for Complex Litigation Fourth
§ 21.21 at 267-68, states,
Expert witnesses play a limited role in class certification hearings; some courts admit testimony on whether Rule 23 standards, such as predominance and superiority, have been met. The judge need not decide at the certification stage whether such expert testimony satisfies standards for admissibility at trial.... A judge should not be drawn prematurely into a battle of competing experts.
The
Manual, id.
at 268 n. 817, cites
In re Visa Check/MasterMoney Antitrust Litigation,
280 F.3d 124, 135 (2d Cir.2001),
cert. denied sub nom. Visa U.S.A., Inc. v. Wal-Mart Stores, Inc.,
536 U.S. 917 , 122 S.Ct. 2382 , 153 L.Ed.2d 201 (2002), for the propositions that a district court “must ensure that the basis of the expert opinion is not so flawed that it would be inadmissible as a matter of law”; that it “may not weigh conflicting expert evidence or engage in a ‘statistical dueling’ of experts”; and that its role is to decide “whether plaintiffs expert evidence is sufficient to demonstrate common questions of fact warranting certification of the proposed class, not whether the evidence will ultimately be persuasive.”
In a case focusing on the fraud-on-the-market presumption of reliance in a class certification context, the First Circuit, relying on the Fifth Circuit’s opinions in
Castaño
and
Unger ,
with which the majority of courts agree, recently rejected the Second Circuit’s approach.
In re Po-lyMedica Corp. Securities Litig.,
432 F.3d at 5 (“[T]he majority of courts of appeals that have addressed this issue ... [have ruled that] a district court is not limited to the allegations raised in the complaint and should instead make whatever legal and factual inquiries are necessary to an informed determination of the certification issues.”) (citing also
Cooper v. Southern Co.,
390 F.3d 695, 712 (11th Cir.2004);
Gariety v. Grant Thornton LLP,
368 F.3d 356, 365 (4th Cir.2004);
West v. Prudential Sec., Inc.,
282 F.3d 935 , 938 (7th Cir.2002);
Johnston v. HBO Film Mgmt., Inc.,
265 F.3d 178 , 189 (3d Cir.2001); and
Wagner v. Taylor,
836 F.2d 578, 587 (D.C.Cir.1987)). This Court will follow the more demanding rule of the Fifth Circuit.
The Fifth Circuit has stated that “although ‘[t]here is no requirement for expert testimony on the issue of market efficiency ... many courts have considered it when addressing this [predominance] determination, which may often benefit from statistical, economic, and mathematical analysis.’ ”
Bell v. Ascendant Solutions, Inc.,
422 F.3d 307 , 314 n. 13 (5th Cir.2005) (approving consideration of “at least the reliability of expert testimony on market efficiency at the class certification stage”) (quoting
Unger,
401 F.3d at 323 n. 6).
In
Basic, Inc.,
the Supreme Court failed to address how to apply fraud on the market, but left the lower courts to decide what constitutes an “open and developed” market, in other words an “efficient” market, a prerequisite to triggering the theory’s presumption of reliance. The result has been a lack of a uniform standard for determining efficiency.
See, e.g.,
Pastusz-enki,
et al., Back to Basic
— Challenging
the Application of the Efficient Market Hypothesis in Federal Securities Law
*692
suits,
SK080 ALI-ABA at 921. The Supreme Court in
Basic, Inc.
stated, “By accepting this rebuttable [fraud-on-the-market] presumption, we do not intend conclusively to adopt any particular theory of how quickly and completely publicly available information is reflected in market price.” 485 U.S. at 248 n. 28, 108 S.Ct. 978 .
Adopting and supplementing the most widely accepted multi-factor test first developed in
Cammer v. Bloom,
711 F.Supp. 1264, 1276-77 (D.N.J.1989),
appeal dismissed,
993 F.2d 875 (3d Cir.1993), the Fifth Circuit has identified, in a non-exhaustive list, a variety of factors also used by other courts to determine whether the stock at issue traded in an efficient market, although it ruled that not every one must be addressed:
(1) the average weekly trading volume expressed as a percentage of total outstanding shares
69
; (2) the number of securities analysts following and reporting on the stock
70
; (3) the extent to which market makers
71
and arbitrag
*693
eurs trade in the stock; (4) the company’s eligibility to file SEC registration Form S-3 (as opposed to Form S-l or S-2)
72
; (5) the existence of empirical facts “showing a cause and effect relationship between unexpected corporate events or financial releases and an immediate response in the stock price”
73
; (6) the company’s market capitalization
74
; (7) the bid-ask spread for stock sales
75
; and (8) float, the stock’s trading
*694
volume without counting insider-owned stock.
76
Bell,
422 F.3d at 313 n. 10,
citing Unger,
401 F.3d at 323 , and
Cammer,
711 F.Supp. at 1286-87 .
See also Krogman v. Sterritt,
202 F.R.D. at 476-78 (discussing and applying all eight factors and concluding that the plaintiffs in
Krogman
had failed to establish that the market was efficient). In
Unger ,
the Fifth Circuit made clear that these factors “must be weighed analytically, not merely counted, as each of them represents a distinct facet of market efficiency.” 401 F.3d at 323 . These factors were referenced in Dr. Blaine Nye’s expert report (# 4390)
77
and by counsel during the class certification hearing as the
“Cammer/Unger/Bell
Factors," a term this Court will adopt in its analysis of the evidence relating to market efficiency.
Although in
Basic, Inc.
the Supreme Court presumed that the securities at issue traded in an efficient market because they were traded on the New York Stock Exchange, 485 U.S. at 227-28, 108 S.Ct. 978 , the Fifth Circuit has stated that “the mere fact that a stock trades on a national exchange does not necessarily indicate that the market for that particular security is efficient”: “[w]hile the location of where a stock trades might be relevant, it is not dispositive of whether the current price reflects all available information,’ ... the hallmark of an efficient capital market.”
Bell,
422 F.3d at 313-14 .
See also Unger,
401 F.3d at 322 (“In many cases, where heavily traded or well known stocks are the target of suits, market efficiency will not even be an issue.”). As for trading volume, it is not the average trading volume that is key, but the turnover measured as a percentage of outstanding shares.
Bell,
422 F.3d at 316 . Expert testimony may be considered but is not required.
Id.
at 314 n. 13, discussing
Unger,
401 F.3d at 323 n. 6. “Absent an efficient market, individual reliance by each plaintiff must be proven, and the proposed class will fail the predominance requirement.”
Unger,
401 F.3d at 322 . Nevertheless, “[i]n many cases, where heavily-traded or well known stocks are the target of suits, market efficiency will not even be an issue.”
Unger,
401 F.3d at 322 .
It should be noted that under the case law in which they were developed, these factors expressly relate to stock. Dr. Nye found that some are relevant to evaluating the efficiency of the market for Enron bonds, preferred securities, and Foreign Debt Securities and discussed them accordingly. # 4390 at 15.
78
*695
The Fifth Circuit has held that the presumption of reliance under the fraud-on-the-market theory “may be rebutted by ‘[a]ny showing that severs the link between the alleged misrepresentation and ... the price received (or paid) by the plaintiff.’ ”
Nathenson v. Zonagen,
267 F.3d 400, 414 (5th Cir.2001),
quoting Basic,
485 U.S. at 248 , 108 S.Ct. 978 . The Fifth Circuit opined that the link may be severed by “a showing that ‘the market price would not have been affected by’ the alleged ‘misrepresentations,’ as in such a case ‘the basis for finding that the fraud had been transmit

[Text truncated at 120,000 characters. The full text is on the page linked above.]

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/2355427. Public record. Not legal advice.