Petition for Writ of Certiorari — Pacific Investment Management Co. v. Hershey

Supreme Court, U.S.

FILED

09-517 OCT 2 9 2009

No. _ OFFICE QF THE CLERK

Jn the

Supreme Court of the Anited States

PACIFIC INVESTMENT MANAGEMENT COMPANY LLC

AND PIMCO FUNDS,

Petitioners,

V.

RICHARD HERSHEY, et al.,

Respondents.

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

PETITION FOR A WRIT OF CERTIORARI

DAVID BOIES GREGORY G. GARRE

BOIES, SCHILLER & Counsel of Record

FLEXNER LLP MAUREEN E. MAHONEY

333 Main Street J. SCOTT BALLENGER

Armonk, NY 10504 LORI ALVINO MCGILL

(914) 749-8200 LATHAM & WATKINS LLP

555 11th Street, NW

Suite 1000

Washington, DC 20004

(202) 637-2200

Counsel for Petitioner Pacific Investment Management Co.

(Additional counsel listed on reverse)

DAVID A. KOTLER

DECHERT ILLP

902 Carnegie Center

Suite 500

Princeton, NJ 08540

(609) 955-3200

Counsel for Petitioner PIMCO Funds

QUESTIONS PRESENTED

In large-scale class actions alleging securities,

antitrust, or commodities violations, the class

certification determination under Federal Rule of Civil

Procedure 23 is typically pivotal because, regardless of

the merits of the underlying claims, certification

creates an inexorable pressure on defendants to settle

given the costs of defending against such actions and

the risk of potentially devastating liability. This case

involves a class action under the Commodity Exchange

Act alleging price manipulation and seeking more than

$600 million in damages. The Seventh Circuit upheld

the certification of a class that sweeps up numerous

plaintiffs who actually benefited from the alleged

misconduct, as well as plaintiffs who were on opposite

sides of the same trading activity and thus have

diametrically opposed interests on how the evidence

should be shaped. The questions presented are:

1. Whether or to what extent Rule 23 permits the

certification of a class that includes uninjured plaintiffs

who actually benefited from the alleged misconduct.

2. Whether or to what extent Rule 23 permits the

certification of a class beset by inherent conflicts of

interest that affect how the evidence should be shaped.

3. Whether or to what extent a court may certify a

class without resolving questions of material fact and

finding that plaintiffs have met their burden of proving

that each element of Rule 23 is met.

ii

LIST OF PARTIES

1. Petitioner Pacific Investment Management

Company, LLC was a defendant in the district court

and an appellant in the court of appeals.

2. Petitioner PIMCO Funds was a defendant in the

district court and appellant in the court of appeals.

3. Respondents Breakwater Trading LLC and

Richard Hershey were plaintiffs in the district court

and appellees in the court of appeals.

RULE 29.6 STATEMENT

Pacific Investment Management Company LLC is

owned by its employees and Allianz Global Investors of

America L.P. Allianz Global Investors of America L.P.

is an indirect subsidiary of Allianz AG, a publicly-held

company.

PIMCO Funds does not have a parent corporation,

and no publicly-held corporation owns 10% or more of

PIMCO Funds’ stock.

iil

TABLE OF CONTENTS

Page

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I aeinintibheeseiastenminciibicnisateveniesaitenimnciieeiiud 1

STATUTORY PROVISIONS INVOLVED................... 1

STATEMENT OF THE CASE.,Q....... ccc eccesseeeesceeeneeees 1

REASONS FOR GRANTING THE WRIT................... 8

I. CERTIORARI IS WARRANTED TO

REVIEW THE SEVENTH CIRCUIT’S

DECISION THAT THE INCLUSION OF

NUMEROUS UNINJURED PLAINTIFFS

DOES NOT PRECLUDE CLASS

ee ee eT sintanisttacctanniidstactiniinisinnatiniilicniies 11

A. The Decision Below Conflicts With The

Decisions Of Other Circuits Holding

That Certification Of Such An

Overbroad Class Is Improper......................00+ 11

B. The Decision Below Conflicts With

This Court’s Decisions Recognizing

That Rule 28 May Not Be Used To

Expand Substantive Rights.....................ce. 15

iv

TABLE OF CONTENTS—Continued

Page(s)

C. The Decision Below Conflicts With The

Decisions Of This Court And Other

Circuits On The Inquiry Demanded

Before Certification

CERTIORARI IS WARRANTED TO

REVIEW THE SEVENTH CIRCUIT'S

DECISION THAT THE INHERENT

CONFLICTS OF INTEREST DO NOT

PRECLUDE CERTIFICATION

A. The Decision Below Conflicts With The

Decisions Of This Court And Other

Circuits On The Basic Requirements

Of Rule 23(a)(4)

The Decision Below Exacerbates The

Conflict Among The Lower Courts On

The Duty to Address Conflicts Before

Certification

Ill. THE QUESTIONS PRESENTED ARE

EXCEPTIONALLY IMPORTANT..........00..0...... 30

CONCLUSION

APPENDIX TABLE OF CONTENTS

Opinion of the United States Court of Appeals

for the Seventh Circuit, Kohen v. Pacific

Investment Management Co., LLC, 571

F.3d 672 (7th Cir. July 7, 2009)

V

APPENDIX TABLE OF CONTENTS—Continued

Opinion of the United States District Court for

the Northern District of Illinois, Kohen v.

Pacific Investment Management Co., LLC,

244 F'.R.D. 469 (N.D. Ill. July 31, 2007)

Order of the United States Court of Appeals for

the Seventh Circuit Granting Permission to

Appeal Pursuant to Fed. R. Civ. P. 23(), In

re: Pacific Investment Management Co.

and PIMCO Funds, No. 07-8024 (7th Cir.

Dec. 10, 2007)

Order of the United States Court of Appeals for

the Seventh Circuit Denying Rehearing,

Kohen et al. v. Pacific Investment

Management Company LLC and PIMCO

Funds, No. 08-1075 (7th Cir. July 31, 2009)

7 U.S.C. §18(a)(2)

7 U.S.C. §25(a)(1)-(3)

rn I cai sts asada eadessadiabaan eessesonaiiasouunadaeeine

Federal Rule of Civil Procedure 23(a), (b), (f)

Figure 1 of Appendix 3 to Second Amended

Report of John J. Merrick, Jr., Ph.D., Kohen

v. Pacific Investment Management Co.

LLC, No. 05 C 4681 (N.D. Ill. filed June 12,

2007) [Docket No. 277]

Page

eree

vl

TABLE OF CONTENTS—Continued

Page

Exhibit 9 to Expert Report of Dr. Craig

Pirrong, Kohen v. Pacific Investment

Management Co. LLC, No. 1:05-cv-04681

(N.D. Ill. filed Feb. 6, 2008) [CASA 437].............. 63a

vii

TABLE OF AUTHORITIES

Page(s)

Allied Orthopedic Appliances, Inc. v. Tyco

Healthcare Group L.P.,

DET Fake: Te Cases CAs BO ED ccsccststintcnentnccensiccanvones 12

Amchem Products, Inc. v. Windsor,

ee iis Se CITE ccsccdntcteecncciiaecsndnnsaaetobenaieadine passim

In re American Medical Systems, Inc.,

TE FG ORD CORR CEP. TOG) sc cccinecstacccsincsnnstecsssesssaseons 20

Ballan v. Upjohn Co.,

159 F.R.D. 473 (W.D. Mich. 1994) ................secccesserees 28

Bell Atlantic Corp. v. AT&T Corp.,

339 F.3d 294 (Sth Cir. 2003) .........cccsccccesroeeees 14, 15, 21

Brown v. American Honda (In re New Motor

Vehicles Canadian Export Antitrust

Litigation),

Se ee Oe Cis Be varctnsnsesencescnveccoissiccetionsioes 17

Centurions v. Ferruzzi Trading International,

S.A.,

No. 89 C 7009, 1994 WL 114860 (N.D. Ill.

BODE, TF, WT cnisnccsaciasinioteatesenteeneainaanemncniemmiassangcae 28

Damato v. Merrill Lynch, Pierce, Fenner &

Smith, Inc., 873 F. Supp. 1156

Cte; Bs PII Pisncssaconschipnslisutsccsdeasendsocsioucenioanmeammamne 16

Dunn v. CFTC,

BR UT a, ee Ce D kccciccsscsinnsiscetctiaieseemadeaiimtaaaaaeanan

Vili

TABLE OF AUTHORITIES—Continued

Page(s)

Dura Pharmaceuticals, Inc. v. Broudo,

cscs cssccsscscosoucescoecccsensesonesssecs 6

East Texas Motor Freight System, Inc. v.

Rodriguez,

as scsccnsssnevoosevecevccsvocenoscscsevees 24

Inre Gaming Lottery Securities Litigation,

58 F’. Supp. 2d 62 (S.D.N.Y. 1999).......cccccsccssssssseerees 29

Gariety v. Grant Thornton, LLP,

gS | 18

General Telephone Co. of the Southwest v.

Falcon,

TE Tiss ca csstascnssoncecccocvecsescosccoccecce 17, 32

Hartford Accident & Indemnity Co. v. Beaver,

466 F.3d 1289 (11th Cir. 2006) ....................... SO

In ve Hydrogen Peroxide Antitrust Litigation,

552 F.3d 305 (8d Cir. 2009)..........ccecssrrerereereees passim

Kolbeck v. LIT America, Inc.,

923 F’. Supp. 557 (S.D.N.Y. 1996) .0...... ce eeeeeeeeeees 16

Langbecker v. Electronic Data Systems Corp.,

476 F.3d 299 (Sth Cir, 2007) ......cccsorsssrscssercsrercoeee 24, 25

Loftin v. Bande (In re Flag Telecom Holdings

Ltd. Securities Litigation),

| ae) 17, 18, 21

ix

TABLE OF AUTHORITIES—Continued

Page(s)

Lozano v. AT&T Wireless Services, Inc.,

ee he [Le oS.) ee 21

McCullough v. Ferruzzi Trading International,

No. 90 C 1138, 1993 WL 795256 (N.D. IIl.

PR Fe 5 RRR creer ne Ee oO EC 28

Merrill Lynch, Pierce, Fenner & Smith, Inc. v.

Curran,

RE 8 eT

Miles v. Merrill Lynch & Co. (In re Initial

Public Offering Sec. Litigation),

ge > Ss fo Ss eee 17, 27

Newton v. Merrill Lynch, Pierce, Fenner &

Smith, Inc.,

259 F.3d 154 (38d Cir. 2001)............ecssccseeees 1, 13, 14, 16

Ortiz v. Fibreboard Corp.,

RG ek ee EID nccsccccncbidsccnsdnssiasetnanniiescianiinbiaanbiines 15, 33

Oscar Private Equity Investments v. Allegiance

Telecom, Inc.,

GF Fee ee Ce Ge. OTD scttientitriaestettticienn 18

Phillips v. Klassen,

502 F.2d 362 (D.C. Cir.), cert. denied,

Gay Rois Ce ED secceconssuntecebebibnandctiaintissatesiednengation 13

xX

TABLE OF AUTHORITIES—Continued

Page(s)

In re Physician Corporation of America

Securities Litigation,

No. 97-3678-CIV, 2003 WL 25820056 (S.D.

i, Scie ciiescctatacie sounteensstsrensementenes 28

Pickett v. lowa Beef Processors,

209 F.3d 1276 (11th Cir. 2000) ..............secccecereeeees 12,13

Premium Plus Partners, L.P. v. Davis,

No. 04 C 1851, 2008 WL 3978340 (N.D. Ill.

ee ii iinisdniidantnsishheeietnseieninkieensnccieeeniaisitiionses 28

Reed v. Advocate Health Care,

No. 06-C-3337, 2009 WL 3146999 (N.D. II1.

In re Rhone-Poulenc Rorer Inc.,

51 F.3d 1293 (7th Cir.) , cert. denied, 516 U.S.

Sie III cin dcecidsaledenaeehindsinciamenannnnts idelamnianacthaaateiniel 31

Richards v. Delta Air Lines, Inc.,

ee re ee ie Ce BED ctnicccenccnsnnccscencscenecteconons 21

In re Scientific-Atlanta, Inc. Securities

Litigation,

571 F. Supp. 2d 1315 (N.D. Ga. 2007) ...........cceeceeeees 29

In re Seagate Technology II Securities

Litigation,

843 F’. Supp. 1341 (N.D. Cal. 1994)... 27, 28

xi

TABLE OF AUTHORITIES—Continued

Page(s)

Szabo v. Bridgeport Machines, Inc.,

Ee Fee SEs CV Gs EE) sacscceseccccnercncscsveseresecerscoce 18

Three Crown Ltd. Partnership v. Caxton Corp.,

817 F. Supp. 1033 (S.D.N.Y. 1998)..........sccssccsersssseene 16

Tracinda Corp. v. DaimlerChrysler AG (In re

DaimlerChrysler AG Sec. Litigation),

BOF eee IE Chis EPO is OU Pentcestesccencesnscsenscccsessecieses 29

Valley Drug Co. v. Geneva Pharmaceuticals.,

Inc.,

350 F.3d 1181 (11th Cir. 2003) ............. 9, 12, 20, 25, 27

Wal-Mart Stores, Inc. v. Visa U.S.A. Inc. (In re

Visa Check/MasterMoney Antitrust

Litigation),

280 F.3d 124 (2d Cir. 2001), cert. denied, 536

SI accra is cilteaia us deine taicancehheneantnebeiniasiocnn 18

Warth v. Seldin,

ee 8 os cusaseseaudonsenienvente 16

Weikel v. Tower Semiconductor Ltd.,

Se ee Ee Ge ae BID ccnceecndsdcncccscessassessnsecsscess 29

Windham v. American Brands, Inc.,

565 F.2d 59 (4th Cir. 1977), cert. denied, 435

co acai dagpesebenbipeanaenonense 16

Ziemack v. Centel Corp.,

SE OF Bes Oe CPEs Bile RUDE) copesccstcccsssusscesusesssnsosece 28

xii

TABLE OF AUTHORITIES—Continued

Page(s)

STATUTES

Be ee ee OE ciissscicassuiivarnsaspccnpunnsenciincddsamvasiscedemaditenasased 2

Fe i iteinkiinmadinncambivnciiaiadiemeanias 16

ee ia ss, se cangandcacstacenvntontanvranins’ 4

See IIE Fc aiicini ionidianceniprsplonadeaddaendapmiestsrapsenincnbamnenies 1

Be eee II ca iss seicheneidasdeniiascsoinakeheaseepsaumncscacuibieh 9,15

Futures Trading Act of 1982, Pub. L. No. 97-

CO, BE CE, Fe CE) ininsensinesscsvscicnsesnscesenssonsonseunns 3

OTHER AUTHORITY

Cornerstone Research, Securities Class Action

Filings, 2008: A Year in Review (2009),

available at

http://securities.stanford.edu/clearinghouse_

research/2008_Y1IR/20090106_YIRO8_Full_

I NIE seiseiuniensassinavecesceupasaneciusuninebsmannabsieniinaninensives 31

Fed. R. Civ. P. 23 emt. to 1998 amendments.................... 8

Henry J. Friendly, Federal Jurisdiction: A

CPE Fe © PIE bas icsscsiersneverssssecersetnccnssivnsevsstaiacsag te

xiii

TABLE OF AUTHORITIES—Continued

Page(s)

Robert W. Kolb & James A. Overdahl,

Understanding Futures Markets (6th ed.

Alfred J. Lechner, Jr. & Helena A. Lynch, New

Defense Strategies for Class Certification

Hearings, 6 Sec. Litig. Rep. 1 (2009)

1 Philip McBride Johnson & Thomas Lee Hazen,

Derivatives Regulation (2004)

Richard A. Nagareda, Class Certification in the

Age of Aggregate Proof, 84 N.Y.U. L. Rev.

97 (2009)

William B. Rubenstein, A Transactional Model

of Adjudication, 89 Geo. L.J. 371 (2001)

Ellen M. Ryan & Laura E. Simmons,

Cornerstone Research, Securities Class

Action Settlements, 2009 Review and

Analysis, available at

http://securities.stanford.edu/Settlements/R

EVIEW_1995-2008/Settlements_

Through_12_2008.pdf

Thomas E. Willging & Shannon R. Wheatman,

Federal Judicial Center, An Empirical

Examination of Attorneys’ Choice of Forum

in Class Action Litigation (2005) ......2.......::cceeeeeeeee OL

XIV

TABLE OF AUTHORITIES—Continued

Page(s)

Thomas E. Willging et al., An Empirical

Analysis of Rule 23 To Address the

Rulemaking Challenges, 71 N.Y.U. L. Rev.

74 (1996)

OPINIONS BELOW

The opinion of the court of appeals (Pet.App.la-16a)

is reported at 571 F.3d 672. The opinion of the district

court (Pet.App.17a-49a) is reported at 244 F.R.D. 469.

JURISDICTION

The Seventh Circuit entered its opinion and

judgment on July 7, 2009. PIMCO filed a timely

petition for panel rehearing or rehearing en banc on

July 21, 2009. The Seventh Circuit denied PIMCO’s

petition on July 31, 2009. This Court has jurisdiction

under 28 U.S.C. §1254(1).

STATUTORY PROVISIONS INVOLVED

Pertinent statutory provisions are set forth in the

appendix hereto. Pet.App.54a-58a.

STATEMENT OF THE CASE

The class action is an important procedural device

that both facilitates the litigation of complex cases and

presents an enormous potential for abuse. Large-scale

class actions alleging securities, antitrust, or

commodities violations are a particularly fertile ground

for plaintiffs’ lawyers seeking to extract huge

settlements. Class certification is typically the pivotal

event in these cases because, regardless of the merits

of the underlying allegations, the certification of a

putative class creates an “inordinate or hydraulic

pressure on defendants to settle” lest they “bet the

company” at trial. Newton v. Merrill Lynch, Pierce,

Fenner & Smith, Inc., 259 F.3d 154, 164 (8d Cir. 2001).

This case presents the Court with a timely opportunity

to resolve multiple circuit conflicts and provide much

needed guidance on the proper procedures and

standards for class certification under Rule 23.

2

At issue is the certification of a class of traders

alleging price manipulation under the Commodity

Exchange Act (“CEA”), 7 U.S.C. §1 et seg. and seeking

more than $600 million in damages. The district court

certified a class without resolving key factual questions

as to whether the inclusion of uninjured plaintiffs in the

proposed class or conflicts of interest among class

members defeated Rule 23. The Seventh Circuit

affirmed, holding that the acknowledged presence of

uninjured plaintiffs did not present a problem because

defendants failed to prove that the “extent” of the

overbreadth precluded certification, Pet.App.11la-14a;

and that the inherent conflicts of interest among class

members on different sides of the same trades were

merely “hypothetical” and could be addressed later in

the case, Pet.App.14a-16a. Like the district court, the

Seventh Circuit simply assumed that plaintiffs’ bare

allegations were sufficient t> prove that each element

of Rule 23 was met. That decision conflicts with the

decisions of this Court and other circuits in several

fundamental respects, and warrants plenary review.

The Commodities Futures Market

A futures contract is a promise to deliver a

particular quantity of a commodity at a certain price on

a certain future date. The party contracting to sell the

underlying commodity is said to “sell” the futures

contract and is called the “short.” See generally 1

Philip McBride Johnson & Thomas Lee Hazen,

Derivatives Regulation §1.02[3) (2004). The party

contracting to buy the underlying commodity is said to

“buy” the futures contract and is called the “long.” Jd.

To satisfy a futures contract, a trader may either

deliver or take delivery of the underlying commodity

or “offset” or “liquidate” the contract by acquiring an

3

equal opposing position. /d. §§1.02[3]-[4] & n.97. The

commodities futures market has been called “volatile

and esoteric.” Dunn v. CFTC, 519 U.S. 465, 468-69

(1997) (internal quotation marks omitted).

Whether a trader realizes a gain or loss on a

particular offsetting transaction “depends on the

nature of his first contract and the direction in which

market prices have moved in the period between the

first and second transactions.” Johnson & Hazen,

supra, §1.02(4]. For example, a short trader who later

offsets by buying back the position will make money if

the contract price has fallen but lose money if the price

has risen. “Since every long position comes into being

only if there is a countervailing short position (and vice

versa) and since one position’s gain is necessarily the

other position’s loss, the gains and losses at any given

time net out to zero.” Jd. §1.02[13] n.535.

Statutory Background

Section 9(a) of the CEA makes price manipulation

in the commodities markets unlawful. In Merrill

Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456

U.S. 353, 394-95 (1982), this Court held that the CEA

contained an implied private right of action but left

open its contours. On the heels of Merrill Lynch, and

in response to this Court’s observation that there were

potentially significant “interstices” to be filled for the

newly created cause of action, 7d., Congress amended

the CEA to include an express private right of action.

But Congress explicitly limited that right to individuals

who suffered “actual damages” from the alleged CEA

violation. Futures Trading Act of 1982, Pub. L. No. 97-

444, §235, 96 Stat. 2294, 2322-23 (1983) (codified as

amended at 7 U.S.C. §25).

Factual Background

Petitioner PIMCO is an investment management

firm that has focused since 1971 on fixed-income

investments. PIMCO manages the retirement assets

for employees of private and public institutions.

PIMCO also manages the bond portfolios of many

governments, endowments, charitable entities,

corporations and mutual! funds, including petitioner

PIMCO Funds.!

Plaintiffs Breakwater Trading LLC and Richard

Hershey (“Plaintiffs”) purport to represent a class of

investors who established short positions in the June

2005 10-year Treasury note futures contract (“June

2005 Contract” or “the Contract”) trading on the

Chicago Board of Trade. Plaintiffs claim that PIMCO

is responsible for trading losses allegedly suffered

when they liquidated short positions at allegedly

inflated prices, and seek more than $600 million in

damages. Plaintiffs assert that PIMCO aartificially

increased the price of the Contract from May 9, 2005 to

June 30, 2005 (“the class period”). Pet.App.7a.

District Court Proceedings

In August 2005, Plaintiffs filed a class action in the

District Court for the Northern District of Illinois,

alleging that PIMCO violated Section 9(a) of the CEA

1 Petitioner PIMCO Funds is a series of mutual funds that is

registered under the Investment Company Act of 1940, 15 U.S.C.

§80a-1, et seq., and is governed by its own board of trustees (the

majority of whom are not affiliated with PIMCO). As a registered

investment company, PIMCO Funds engages PIMCO as its

independent investment advisor to manage its pool of assets.

Although PIMCO and PIMCO Funds are separate and distinct

entities, the arguments presented herein are identical to both, and

they are collectively referred to herein as “PIMCO.”

5

by manipulating the price of the Contract. Pet.App.

18a. Plaintiffs sought certification under Rule 23 of a

class of “{aJll persons who purchased [during the class

period] a June 10-year Treasury note futures contract

in order to liquidate a short position, or who delivered

on the June 2005 futures contract in order to satisfy a

short position.”’ Pet.App.24a (citation omitted).

The evidence indicated that the proposed class was

overbroad and suffered from serious internal conflicts

of interest that precluded certification. For example,

PIMCO demonstrated that—according to artificiality

“ribbons” created by plaintiffs’ own experts,

purportedly showing fluctuating levels of inflation in

the Contract price—a majority of the class members

for whom there is trading data in the record actually

benefited from the alleged manipulation, making them

“net gainers” and therefore unable to show “actual

damages” as required to state a claim under the CEA.

Pet.App.62a-63a; see Seventh Circuit Court of Appeals

Separate Appendix of Appellants (“CASA”) 206-08,

219-20, 255-71, 340-68, 409-42. Indeed, PIMCO

demonstrated that the class is replete’ with

sophisticated institutional traders who switched back

and forth between long and short positions throughout

the class period, while artificiality (as alleged by

plaintiffs’ experts) jigged up and down on a daily basis.

CASA 124-25, 327-31, 340-68. Accordingly, there are

many purported class members who, while they may

have liquidated short positions during the class period,

actually benefited from the alleged artificiality.

In addition, the trading data in the record showed

that class members frequently were on opposite sides

of the same trading activity during the relevant period.

For example, class representative Hershey held a long

6

position on days when Breakwater Trading, the other

class representative, alleges price artificiality peaked

and it suffered damages. CASA 163-65. Similarly,

Hershey’s long position put him on the opposite side of

trading from another class member, Josef Kohen, who

initiated and closed a short position at the same time.

CASA 164. PIMCO showed that such class members

have diametrically opposed interests in characterizing

the degree of alleged price artificiality at particular

times (or whether there was any artificiality at all), and

therefore would have conflicting interests about how

the evidence should be shaped, including evidence

related to whether there was any wrongful conduct by

PIMCO. See, e.g., CASA 129-35, 329-30.

In July 2007, the district court granted Plaintiffs’

certification motion. Without resolving these serious

factual issues, the court rejected PIMCO’s arguments

that certification was improper because the defined

class included numerous plaintiffs who suffered no

economic injury under the loss causation rules

recognized in Dura Pharmaceuticals, Inc. v. Broudo,

544 U.S. 336 (2005),2 Pet.App.23a-26a, 35a-39a, and

because the class was beset by inherent conflicts of

interest among class members, Pet.App.33a-35a.

Rather, the court simply assumed for purposes of class

certification that “all members of the class have

suffered injury,” Pet.App.26a, and held that, “[a]t this

stage of the litigation, it would be premature to deny

plaintiffs the opportunity to unify in their task to prove

2 In Dura, this Court held that whether a plaintiff who has

both bought and sold a security at an inflated price has suffered

economic loss must be determined by examining both sides of his

transactions. 544 U.S. at 342-43, 347. As the Seventh Circuit

recognized, the same analysis governs here. Pet.App.14a.

7

that defendants engaged in a common course of

conduct that negatively affected all members of the

proposed class,” Pet.App.25a.

Seventh Circuit Proceedings

After one panel of the Seventh Circuit granted

PIMCO’s petition for interlocutory review pursuant to

Rule 23(f), Pet.App.50a-5la, a different panel of the

court affirmed. Pet.App.la-16a.

The court of appeals recognized that even Plaintiffs

acknowledged that the class included traders who

actually benefited from the alleged misconduct,

Pet.App.7a, and that other courts have held that “it

must be reasonably clear at the outset that all class

members were injured by the defendant’s conduct,”

Pet.App.10a. But the court concluded that the

inclusion of such net gainers did not preclude class

certification (or defeat Article III standing, an

argument PIMCO never made) “as long as one member

of a certified class has a plausible claim to have

suffered damages.” Pet.App.8a-9a. Moreover, the

court assumed, based on the allegations of the

complaint, that “plaintiffs sold short, so prima facie at

least ... they were injured if the price of cover was

artificially inflated during the class _ period.”

Pet.App.14a. The court further held that any inquiry

into injury should be deferred to “the damages stage of

the litigation.” Pet.App.7a-8a.

The court observed that, “if the class definition

clearly were overbroad, this would be a compelling

reason to require that it be narrowed.” Pet.App.12a.

But the court concluded that “this has not yet been

shown.” /d. In reaching that conclusion, the Seventh

Circuit placed on PIMCO (2.e., defendants) the burden

to prove that the class was overbroad, and suggested

8

that PIMCO should have sought to “depose a random

sample of class members to determine how many were

net gainers from the alleged manipulation and

therefore were not injured.” Pet.App.14a.

The Seventh Circuit also rejected PIMCO’s

argument that inherent conflicts of interest precluded

certification. Pet.App.14a-16a. The court

acknowledged that class members would have

competing interests in shaping the evidence and, in

particular, in calculating and showing artificiality based

on when short positions were offset. Pet.App.15a.

Rather than requiring the district court to make

findings as to whether such conflicts existed, the

Seventh Circuit held that, “{a]t this stage in the

litigation, the existence of such conflicts. is

hypothetical.” Jd. The court added that any “real”

conflicts could be addressed (if at all) later through use

of subclasses. Pet.App.15a-16a.?

REASONS FOR GRANTING THE WRIT

Class certification is critical in the high-stakes

arena of class litigation alleging federal securities,

antitrust, or commodities violations. Because “[a]n

order granting certification ... may force a defendant to

settle rather than incur the costs of defending a class

action and run the risk of potentially ruinous liability,”

Fed. R. Civ. P. 28 cmt. to 1998 amendments, the

gateway requirements of Rule 23 are critical to

ensuring that the class action device is not abused. The

Seventh Circuit’s decision in this case raises several

3 On August 5, 2009, PIMCO moved the district court for

permission to depose class members to further determine, among

other things, how many class members were uninjured. The

district court denied that request.

9

fundamental and interrelated questions on which the

lower courts are split concerning the requirements of

Rule 23 and the duty of the courts to ensure that those

requirements are met before certification.

The first question concerns whether or to what

extent Rule 23 permits the certification of a putative

class that includes plaintiffs who not only were

uninjured by, but actually benefited from, the alleged

misconduct. Until the Seventh Circuit’s decision

below, “no circuit ha[d] approved of class certification

where some class members derive[d] a net economic

benefit from the very same conduct alleged to be

wrongful.” Valley Drug Co. v. Geneva Pharms., Inc.,

350 F.3d 1181, 1190 (11th Cir. 2003). Rather, other

circuits had barred certification in such circumstances.

Moreover, this Court has held that Rule 23 may not be

interpreted to “abridge, enlarge or modify any

substantive right,”” Amchem Prods., Ine: v. Windsor,

521 U.S. 591, 613 (1997) (quoting 28 U.S.C. §2072(b)).

But that is exactly what happens when Rule 23 is read

to permit the certification of a class including numerous

plaintiffs who by definition lack a cause of action

(because they were not injured by the conduct at

issue). This issue is recurring and important in

antitrust, securities, and commodities class actions

given the incentive for plaintiffs to draw classes as big

as they can to force lucrative settlements.

The decision below also raises a fundamental and

frequently recurring question concerning the scope of

Rule 23’s adequacy-of-representation requirement and

the proper treatment of intra-class conflicts at the

certification stage. While the Seventh Circuit

acknowledged that the inherent intra-class conflicts

among class members on different sides of the same

10

transactions gave class members opposing interests in

how the evidence should be shaped, the court held that

those conflicts did not preclude certification on the

ground that the conflicts were merely “hypothetical” at

this time and could be addressed at some later point.

Pet.App.15a-l6a. That holding conflicts with this

Court’s decisions (e.g., Amchem) stressing the

importance of Rule 23’s adequacy-of-representation

requirement, and with decisions of other circuits

holding that analogous conflicts precluded certification.

And the Seventh Circuit’s resolution of these issues

raises a recurring and over-arching question

concerning the procedures governing the Rule 23

determination. The court approved class certification

even though the evidence, at a minimum, raised serious

questions about whether the class was overbroad or

beset by intra-class conflicts. In doing so, the court

simply assumed (despite the contrary evidence) the

truth of plaintiffs’ allegations on class injury and

deferred any factual inquiry into the degree of intra-

class conflicts until a later day. Moreover, the court

placed on defendants the burden of proving that the

requirements of Rule 23 were not met. That decision

conflicts with the decisions of other circuits holding

that courts must ensure that the record in fact

supports each Rule 23 requirement before certification

(informed by evidentiary proceedings and discovery, if

necessary), and that plaintiffs bear the burden of

proving that the requirements of Rule 23 are met.

Certiorari is warranted to resolve these conflicts of

authority, to provide guidance to lower courts, and to

ensure the faithful application of Rule 23 to the class

certification decision. The decision below is already

being invoked by lower courts and class action

ll

plaintiffs to support certification of ever more

adventurous and bloated classes. And if, as the

Seventh Circuit held, this class on this record satisfies

Rule 23, then only the rare antitrust, securities, or

commodities class will flunk Rule 28. Such a radical

and unsettling revision of Rule 23’s_ gateway

requirements warrants this Court’s review.

I. CERTIORARI IS WARRANTED TO

REVIEW THE SEVENTH CIRCUIT'S

DECISION THAT THE INCLUSION OF

NUMEROUS UNINJURED PLAINTIFFS

DOES NOT PRECLUDE CLASS

CERTIFICATION

The Seventh Circuit held that certification was

warranted even though the record indicated that the

defined class includes numerous plaintiffs who not only

were uninjured by the conduct at issue, but actually

benefited from that conduct. That decision directly

conflicts with the decisions of this Court and other

circuits on both the substantive requirements of Rule

23 and the inquiry demanded before a class is certified.

A. The Decision Below Conflicts With

The Decisions Of Other Circuits

Holding That Certification Of Such

An Overbroad Class Is Improper

1. The certified class at issue undeniably includes

numerous plaintiffs who actually benefited from any

distortion in futures pricing. The extremely active

trading patterns in this market, and the erratic

fluctuations in the artificiality alleged by plaintiffs,

make it inevitable that the alleged misconduct, if true,

produced winners as well as losers—including among

those who sold _ short. Indeed, at the time of

certification, a majority of class member traders/

12

accounts for whom trading data is in the record were

net gainers according to plaintiffs’ own experts. Class

representative Hershey, for example, engaged in three

transactions during the Class Period: two purchases on

May 11, 2005 (one of which closed out a pre-existing

short position) and a sale on May 27, 2005 to liquidate

his remaining long position. CASA 206-08, 219-20.

Based on Plaintiffs’ own artificiality ribbons, these

trades netted an economic gain for Hershey from the

alleged artificiality. The same goes for other class

members, including large institutional investors that

engaged in many trades daily. CASA 255-71, 340-68.

2. The Seventh Circuit acknowledged that “some

of the class members probably were net gainers from

the alleged manipulation,” Pet.App.12a, but held that

class certification was proper. That decision directly

conflicts with the decisions of other circuits. Indeed,

until the decision below, “no circuit ha[d] approved of

class certification where some class members derive[d]

a net economic benefit from the very same conduct

alleged to be w~ongful by the named representatives of

the class.” Valley Drug Co. v. Geneva Pharms., Inc.,

350 F.3d 1181, 1196 (11th Cir. 2003); see also Allied

Orthopedic Appliances, Inc. v. Tyco Healthcare Group

L.P., 247 F.R.D. 156, 177 (C.D. Cal. 2007) (“[N]Jo circuit

approves of class certification where some class

members derive a net economic benefit from the very

same conduct alleged to be wrongful by the named

representatives of the class, let alone where some

named plaintiffs derive such a benefit.”).

Pickett v. Iowa Beef Processors, 209 F.3d 1276 (11th

Cir. 2000)—which the Seventh Circuit recognized, but

declined to follow, Pet.App.15a—illustrates the

approach taken by other circuits. That case involved a

13

class action alleging price manipulation in the market

for cattle. 209 F.3d at 1277-78. As the Eleventh

Circuit recognized, however, the defined class at issue

“include[d] those who claim harm from the very same

acts from which other members of the class have

benefttted [sic].” Id. at 1280 (emphasis added). The

Eleventh Circuit therefore reversed the district court’s

certification order, holding that “a class cannot be

certified ... when it consists of members who benefit

from the same acts alleged to be harmful to other

members of the class.” Jd. As the court explained,

such a “plaintiff class cannot satisfy the adequacy

requirement of Rule 23(a)(4).” Id.

Likewise, in Phillips v. Klassen, 502 F.2d 362, 367-

68 (D.C. Cir.), cert. denied, 419 U.S. 996 (1974), the D.C.

Circuit held that a class of retired government

employees could not maintain a class action for coerced

retirement where some members of the class gained

from the alleged wrongdoing. As the court explained,

“(wlhen, as here, there is complaint as to injury from

an allegedly invalid action of a Government official and

the action may be taken as conferring economic

benefits or working economic harm, depending on the

circumstances of the individual, the foundations of

maintenance of a class action are undermined.” /d. at

367 (emphasis added). Because there would be

“divergent views among the” plaintiff class “as to

whether they have been injured or benefited,” the

court affirmed the deniai of class certification. Jd.

Other circuits also have held that Rule 23(b)(3)’s

predominance requirement cannot be met where it is

apparent at the certification stage that the class

includes both injured and uninjured members. For

example, in Newton v. Merrill Lynch, Pierce, Fenner &

14

Smith, Inc., 259 F.3d 154 (8d Cir. 2001), the Third

Circuit held that certification of a class of securities

traders was improper where plaintiffs’ claims required

“an economic injury determination for each trade” to

determine “whether securities violations occurred.”

Id. at 190. Like the alleged price manipulation here,

the trading at issue in Newton “did not necessarily

injure each class member,” so some members suffered

economic injury and others did not. Jd. at 187.

In In re Hydrogen Peroxide Antitrust Litigation,

552 F.3d 305, 311-12 (8d Cir. 2009), the Third Circuit

similarly recognized that proof of injury “often is

critically important” in large-scale class actions, and

held that plaintiffs must demonstrate at class

certification that the fact of injury “is capable of proof

at trial through evidence that is common to the class

rather than individual to its members.” Rejecting the

notion that class certification required plaintiffs to

make only “‘a threshold showing that the element of

impact [2.e., fact of damage] will predominantly involve

generalized issues of proof,” id. at 321 (citation

omitted), Chief Judge Scirica explained for the court

that Rule 23 requires “a careful, fact-based approach,

informed, if necessary by discovery,” id. at 326, and

vacated the district court’s class certification order.

And, in Bell Atlantic Corp. v. AT&T Corp., the

Fifth Circuit held that two classes of plaintiffs alleging

harm “by the refusal of [AT&T] to permit the passage

of caller identification ... data across its long-distance

telephone network” did not satisfy Rule 23(b)(3)’s

predominance requirement. 339 F.3d 294, 296 (5th Cir.

2003). “Establishing causation, or ‘fact of damage’,

requires the plaintiff to demonstrate a causal

connection between the specific antitrust violation at

15

issue and an injury to the business or property of the

antitrust plaintiff.” /d. at 302. The Fifth Circuit held

that such a showing could not be made—despite the

plaintiffs’ proposed “formula” to calculate damages—

because “[t]he record indicates that ... any adequate

estimation of actual damages suffered would require”

“individualized inquiries.” Jd. at 304-07.

The Seventh Circuit’s decision in this case cannot

be reconciled with these holdings. The undisputed fact

that “some of the class members probably were net

gainers,” Pet.App.12a, directly impacts the Rule

23(b)(3) determination because it means that the fact of

injury—an essential element of the CEA cause of

action—must be established on an individualized trade-

by-trade basis, as in Newton. And by glossing over this

defect, the Seventh Circuit failed to require that “a

careful, fact-based approach, informed, if necessary by

discovery,’ Hydrogen Peroxide, 552 F.3d at 326, was

undertaken to ensure that Rule 23 was satisfied.

B. The Decision Below Conflicts With

This Court’s Decisions Recognizing

That Rule 23 May Not Be Used To

Expand Substantive Rights

The Seventh Circuit’s decision upholding the

certification of the overbroad class here conflicts with

this Court’s decisions as well. In Amchem Products,

Inc. v. Windsor, 521 U.S. 591 (1997), the Court stressed

that “Rule 23’s requirements must be interpreted in

keeping ... with the Rules Enabling Act, which

instructs that rules of procedure ‘shall not abridge,

enlarge or modify any substantive right.”’ Jd. at 613

(quoting 28 U.S.C. §2072(b)); see also id. at 629; Ortiz v.

Fibreboard Corp., 527 U.S. 815, 845 (1999) (“{NJo

reading of [Rule 23] can ignore the Act’s mandate that

16

‘rules of procedure “shall not abridge, enlarge or

modify any substantive right.”””) (quoting Amchem,

521 U.S. at 618). The Seventh Circuit flouted that

mandate in upholding certification of the class at issue.

The CEA’s express private right of action extends

only to those who have suffered “actual damages” from

the alleged manipulation. 7 U.S.C. §25(a)(1). “[A]ctual

damages’ is therefore an essential element of the cause

of action. See, e.g., Damato v. Merrill Lynch, Pierce,

Fenner & Smith, Inc., 878 F. Supp. 1156, 1160-61 (N.D.

Ill. 1995); Kolbeck v. LIT Am., Inc., 923 F. Supp. 557,

566-67 (S.D.N.Y. 1996); Three Crown Ltd. P’ship v.

Caxton Corp., 817 F. Supp. 1038, 1042 & n.14 (S.D.N.Y.

1993). Indeed, as noted, Congress added the “actual

damages” element of the CEA precisely to limit the

scope of the cause of action. Plaintiffs who ca:inot show

“actual damages” lack a private right of action—and

therefore lack “statutory standing,” see Warth v.

Seldin, 422 U.S. 490, 500 (1975)—under the CEA.

Certifying a class of uninjured CEA plaintiffs

contravenes this Court’s decisions, the Rules Enabling

Act, and Rule 23 by enlarging the substantive rights of

these class members. That is not a mere “damages”

issue, as the Seventh Circuit held, Pet.App.7a-8a; it

goes to the availability of the cause of action vel non.

See Hydrogen Peroxide, 552 F.3d at 311 (“Proof of

injury ... must be distinguished from calculation of

damages.””’) (citation omitted); Newton, 259 F.3d at 189

(establishing economic loss goes not to “the calculation

of damages but whether or not class members have any

claims at all”); Windham v. Am. Brands, Inc., 565 F.2d

59, 66 (4th Cir. 1977) (presuming class-wide proof of

injury in an antitrust class action would “contravene

the mandate of the Rules Enabling Act”), cert. denied,

17

435 U.S. 968 (1978). The fact that the Seventh Circuit

sanctioned a result forbidden by this Court’s decisions

is reason enough to grant review.

C. The Decision Below Conflicts With

The Decisions Of This Court And

Other Circuits On The Inquiry

Demanded Before Certification

The Seventh Circuit compounded its errors and

exacerbated the circuit conflict by concluding that the

record was sufficient to support certification and by

placing on defendants the burden to show that

certification was improper. Pet.App.12a-14a.

1. In General Telephone Co. of the Southwest v.

Falcon, 457 U.S. 147, 161 (1982), the Court held that a

class “may only be certified if the trial court is satisfied,

after a rigorous analysis, that the prerequisites of Rule

23(a) have been satisfied.” As illustrated by the

decision below, in the 25 years since General

Telephone, the lower courts have developed conflicting

standards on what that “rigorous analysis” should

entail. See Loftin v. Bande (In re Flag Telecom

Holdings Ltd. Sec. Litig.), 574 F.3d 29, 39-40 (2d Cir.

2009) (discussing different approaches); Brown v. Am.

Honda (In re New Motor Vehicles Canadian Export

Antitrust Litig.), 522 F.3d 6, 25-26 (1st Cir. 2008).

The Seventh Circuit’s decision upholding

certification on the record here conflicts with the

decisions of other circuits holding that “the decision to

certify a class calls for findings by the court, not merely

a ‘threshold showing’ by a party, that each requirement

of Rule 23 is met,” and that “[flactual determinations

supporting Rule 23 findings must be made by a

preponderance of the evidence.” Hydrogen Peroxide,

552 F.3d at 307; see Miles v. Merrill Lynch & Co. (In re

18

Initial Pub. Offering Sec. Litig.), 471 F.3d 24, 41 (2d

Cir. 2006) (Certification is not appropriate unless a

court “receive[s] enough evidence, by affidavits,

documents, or testimony, to be satisfied that each Rule

23 requirement has been met.”); see also Flag Telecom,

574 F.3d at 38 (“{Ljower courts have an ‘obligation’ to

resolve factual disputes relevant to the Rule 23

requirements, and to determine whether the

requirements are met ....”); Oscar Private Equity Invs.

v. Allegiance Telecom, Inc., 487 F.3d 261, 266-68 (5th

Cir. 2007) (plaintiff has burden of proving loss

causation at certification stage to establish that

predominance requirement is met); Gariety v. Grant

Thornton, LLP, 368 F.3d 356, 365 (4th Cir. 2004).4

As Chief Judge Scirica explained for the court in

Hydrogen Peroxide, “the requirements set out in Rule

4 Im re IPO alone illustrates how the standards for class

certification have perplexed the lower courts. In In re IPO, the

Second Circuit carefully reconsidered and distanced itself from

earlier cases upholding class certification, including Wal-Mart

Stores, Inc. v. Visa U.S.A. Inc. (In re Visa Check/MasterMoney

Antitrust Litig.), 280 F.3d 124, 139-40 (2d Cir. 2001), cert. denied,

536 U.S. 917 (2002). In Szabo v. Bridgeport Machines, Inc., 249

F.3d 672, 676 (7th Cir. 2001), the Seventh Circuit observed that,

“(bjefore deciding whether to allow a case to proceed as a class

action, ... a judge should make whatever factual and legal

inquiries are necessary under Rule 23.” In contrast to the

decisions of other circuits (¢.g., /n re [PO and Hydrogen Peroxide),

however, Szabo provided no guidance as to what “factual and legal

inquiries” are “necessary under Rule 23” and, instead, left this

determination almost entirely up to the district judge. Jd. at 676-

77. As a result, both the district court in this case (which

recognized Szabo, Pet.App.27a) and the Seventh Circuit (which

saw no need even to mention Szabo) concluded—in conflict with

the decisions of other circuits—that the record supported

certification without resolving the disputed facts concerning the

degree of overbreadth and intra-class conflicts.

19

23 are not mere pleading rules.” 552 F.3d at 316.

Therefore, courts must go beyond the pleadings and

engage the facts through discovery and evidentiary

proceedings in order to ensure that certification is

proper. See zd. at 316-21. That approach takes into

account the touchstone significance of the certification

decision on the course of class litigation, as well as

recent amendments to Rule 23. See id. at 310, 318-19.

The decision below is the antithesis of the approach

mandated by other circuits to protect against off-the-

cuff class certifications. Indeed, rather than ensuring

that plaintiffs had established each element of Rule 23

by a preponderance of the evidence before the class

was certified, the Seventh Circuit simply speculated

that there were “probably” not so “many” net gainers

as to preclude certification. Pet.App.12a. And to

generate the premises for that speculation, the

Seventh Circuit assumed that plaintiffs’ ultimate

allegations of price manipulation were true, an

approach rejected in the cases cited above. Armchair

5 The Seventh Circuit reasoned that there were “probably not

many” class members who were net long because in the absence of

“a great many net short sellers ... PIMCO could not have driven

its price to an artificially high level.” Pet.App.13a. But that

erroneously equates net gainers with traders who were net long

and impermissibly accepts Plaintiffs’ ultimate allegations of price

manipulation. Likewise, the Seventh Circuit assumed that any

net gainers would have to be both short (to be in the class) and

long {19 benefit from the alleged manipulation), that any such

traders must have been pursuing hedging strategies, and that

traders rarely hedge their positions completely. Pet.App.12a-13a.

But that reasoning ignores the fact that the market includes

commodities traders who frequently switch back and forth

between net long and net short—not to “hedge,” but to

“speculate.” Robert W. Kolb & James A. Overdahl,

Understanding Futures Markets 154-57 (6th ed. 2006). Class

20

economics and naked assumptions about the plaintiffs’

theory of the case or the likely members of a class are

no substitute for the factual findings required before a

court may certify a class under Rule 23.

2. Rather than recognizing that plaintiffs had

failed to meet their burden in proving that each

requirement of Rule 23 was met, the Seventh Circuit

flipped the burden onto defendants and held that

certification was warranted because defendants had

not “depose[d] a random sample of class members to

determine how many were net gainers from the alleged

manipulation.” Pet.App.14a. That holding also conflicts

with the decisions of this Court and other circuits.

In Amchem, this Court held that “parties seeking

class certification must show that the action is

maintainable under Rule [23].” 521 U.S. at 614. Other

circuits have recognized and applied that rule. See, e.g.,

Valley Drug Co., 350 F.3d at 1196 (““[U]nder Rule 23 it

is the plaintiffs, as the moving party, who bear the

burden of proving that class certification is

appropriate.”); Hydrogen Peroxide, 552 F.3d at 315-16

(“[I}t is clear that the party seeking certification must

convince the district court that the requirements of

Rule 23 are met ....”); In re Am. Med. Sys., Inc., 75

F.3d 1069, 1086 (6th Cir. 1996) (reversing where

district court had “ordered defendants to ‘show cause

representative Hershey, for example, switched from being short

to long and benefited more from the alleged artificiality on his long

position than he lost on his short position. And trading data

showed institutional traders who engaged in numerous trades

daily (short and long) to exploit market conditions. Regardless,

class members did not benefit from the alleged artificiality only on

long positions. The erratically fluctuating artificiality alleged by

plaintiffs would have benefited many short positions as well.

21

why [the court] shouldn’t certify a class,” thereby

“plac[ing] the burden on defendants to disprove

plaintiffs’ ‘entitlement’ to class certification”); accord

Flag Telecom, 574 F.3d at 39-40; Lozano v. AT&T

Wireless Servs., Inc., 504 F.3d 718, 724 (9th Cir. 2007);

Richards v. Delta Air Lines, Inc., 453 F.3d 525, 529

(D.C. Cir. 2006); Bell Atl. Corp., 339 F.3d 294, 301 (5th

Cir. 2003).

The Seventh Circuit’s decision upholding class

certification on the ground that defendants failed to

prove “the extent to which” the defined class is

overbroad, Pet.App.13a (emphasis added), turns the

required burden of proof on its head. It was Plaintiffs’

burden to prove that the defined class—despite its

obvious structural flaws—meets the requirements of

Rule 23. To satisfy that burden, Plaintiffs were

obligated to present evidence showing that the class

was not overbroad. The Seventh Circuit’s contrary

ruling is seriously misguided and warrants review.

Indeed, putting the burden on defendants was

particularly inappropriate on this record, which showed

that a majority of the plaintiffs for whom there was

trading data, including named plaintiff Hershey (who

plaintiffs presumably thought had among the strongest

claims), had no net loss. If anything, such a record

justifies giving Plaintiffs’ evidence closer scrutiny.

II. CERTIORARI IS WARRANTED TO

REVIEW THE SEVENTH CIRCUIT'S

DECISION THAT THE INHERENT

CONFLICTS OF INTEREST DO NOT

PRECLUDE CERTIFICATION

Certiorari is also warranted to review the Seventh

Circuit’s decision that class certification was proper

despite the evidence that class members were on

22

opposite sides of the same transactions and therefore

had diametrically opposed interests on how the

‘evidence should be shaped. That decision conflicts with

the decisions of this Court and other circuits on the

demands of Rule 23’s adequacy-of-representation

requirement and exacerbates a conflict over the extent

to which a court is required to scrutinize the severity of

such intra-class conflicts before certification.

A. The Decision Below Conflicts With

The Decisions Of This Court And

Other Circuits On The Basic

Requirements Of Rule 23(a)(4)

1. The class at issue is defined to include any

trader who liquidated a short position during the class

period, regardless of when the trader established the

short position or offset or liquidated that position and

regardless of the trader’s other transactions during the

class period. The defined class thus crudely sweeps up

large institutional traders who were net long at various

times during the class period with traders who were

net short, and even traders who purchased and sold on

opposite sides of the same transactions.

Because each class member’s showing of injury will

depend on establishing that any artificial inflation in

the price was lower when they sold short than when

they bought to liquidate the short position, individual

class members have diametrically opposed interests in

how the evidence should be shaped and, in particular,

how the artificiality curve is defined. Class members

who offset the bulk of their short positions early in the

class period and were predominantly long or neutral

thereafter would want to show that the alleged

“inflation” in the price peaked early, and that the later

increases in price were “due to market forces for which

23

PIMCO was not responsible.” Pet.App.l15a. Class

members who were predominantly short later in the

period would want to prove the opposite. And at the

level of specific transactions, class members who

bought at a particular time would want to maximize the

calculation of artificiality, while class members who

sold would want to minimize it.6

These conflicts are not merely “hypothetical,” id.,

but are actual and already inflicting harm. Plaintiffs

presented their theories and evidence about the

fluctuations of alleged price artificiality through the

artificiality “ribbons” constructed by their experts

before the certification decision. Pet.App.62a-63a. The

class representatives thus have already committed to a

position on this central issue on which the interests of

class members conflict, and as a result some class

members already have been prejudiced. The

contradictory outcomes generated by applying the

differing “ribbons” propounded by plaintiffs’ own

experts to identical trading patterns underscore this

conflict. See, e.g.,id.; CASA 219-20, 337, 340-68, 370.

The only thing not known at this point is which

class members fall into the opposing camps. The

essence of the Seventh Circuit’s holding, therefore, is

that the obvious prejudice to some class members can

be ignored at class certification—notwithstanding Rule

23(a)(4)’s adequacy-of-representation requirement—so

6 For example, class representative Hershey held a long

position when Breakwater Trading, the other class

representative, alleges price artificiality peaked and it suffered

damages. CASA 163-65. Similarly, Hershey’s long position put

him on the opposite side of trading from another class member,

Josef Kohen, who initiated and closed a short position at the same

time. CASA 164.

24

long as we do not know who they are. In other words,

under the Seventh Circuit’s decision, a “potential”

conflict does not become “actual” until it is clear

precisely whose ox is being gored.

2. In Amchem, this Court explained that “(t]he

adequacy inquiry under Rule 23(a)(4) serves to uncover

conflicts of interest between named parties and the

class they seek to represent.” 521 U.S. at 625. The

Court then held that the obvious conflicts of interests

among a settlement class of “current and future

asbestos-related claims” precluded certification. Jd. at

597, 627-28. As the Court explained, the “critical goal”

of the “currently injured” class members was to obtain

“generous immediate payments,” whereas the goal of

the “exposure-only plaintiffs” was to “ensurie] an

ample, inflation-protected fund for the future.” Jd. at

626. The conflict of interest is at least as strong here,

where, as explained above, class members are on

opposite sides of the same trades and have

diametrically opposed interests in characterizing the

degree of alleged price artificiality at particular times.’

The Seventh Circuit’s decision also conflicts with

the decisions of other circuits. For example, in

Langbecker v. Electronic Data Systems Corp., 476 F.3d

299, 315-16 (5th Cir. 2007), the Fifth Circuit held that a

class of 401(k) investors could not be certified because

class members had pursued different trading strategies

7 The Seventh Circuit’s decision also conflicts with this Court's

decision in East Texas Motor Freight System, Inc. v. Rodriguez,

431 U.S. 395, 403 (1977). In that case, the Court held that

individuals who “could have suffered no injury as a result of [the

conduct at issue)” were “simply not eligible to represent a class of

persons who did allegedly suffer injury.” Jd. at 403-04. As

explained, class representative Hershey was not injured.

25

and therefore had different interests in shaping the

evidence. The Fifth Circuit explained that the class

members “were affected by the drop in price in

dramatically different ways,” with some class members

profiting and some losing money. /d. at 315. The same

goes here, where class members were on opposite sides

of the same trades on the same day—some

experiencing a loss and others a net gain, depending on

how artificiality is characterized.

Valley Drug, 350 F.3d at 1184-86—which the

Seventh Circuit recognized, but declined to follow,

Pet.App.14a—is to the same effect. That case involved

an antitrust class action attacking the delay in the

introduction of a drug into the market. Numerous

members “of the certified class arguably experienced a

net gain from the conduct alleged to be illegal by the ©

named representatives.” 350 F.3d at 1188. The court

held that “{a] fundamental conflict exists where some

members claim to have been harmed by the same

conduct that benefited other members of the class.” Id.

at 1189. Despite undeniable evidence of the same kind

of “fundamental conflict” here, the Seventh Circuit

upheld class certification and called PIMCO’s

objections “ill conceived.” Pet.App.16a.

B. The Decision Below Exacerbates

The Conflict Among The Lower

Courts On The Duty to Address

Conflicts Before Certification

1. Instead of holding that such obvious conflicts of

interest among class members precluded certification,

the Seventh Circuit upheld certification and observed

that, “{ijf and when” the conflicts “become real, the

district court can certify subclasses with separate

representation of each.” Pet.App.1l5a. But as

26

discussed, the conflicts here already are “real.” And,

more to the point, the Seventh Circuit’s conclusion that

certification was warranted without any evidentiary

inquiry at this stage into the severity of the conflicts of

interest splits with the decisions of other circuits.

Many large-scale securities, commodities, and

antitrust class actions involve intra-class conflicts of

some kind. Nonetheless, there can be material

differences in both the degree and kind of conflicts that

may exist. For example, a securities class action may

be dominated by “buy and hold” investors. “In and

out” traders may be rare, and short sellers excluded

entirely. The alleged price “artificiality” often is

created by a misrepresentation and then remains

constant or moves only in one direction, until it is

dispelled by a corrective disclosure. In those

circumstances, the class is more likely to share a basic

unity of interest, even if some of their interests conflict

on relatively minor matters. And if subclasses are

needed, they often can be defined by a few simple,

objective criteria—such as those who purchased before

or after a particular corrective disclosure.

Here, by contrast, the class includes sophisticated

institutional traders who switched back and forth

between long and short positions throughout the class

period, often taking positions opposite each other at the

same times while the artificiality ribbons (as alleged by

Plaintiffs’ experts) went up and down on a daily basis.

Pet.App.62a-63a; CASA 340-68. In such a purported

class, there is no predictable unity of interest or

adequacy of representation—only chaos, and an

opportunity for class counsel to earn a windfall by

settling the claims of hundreds of class members whose

actual interests vary greatly.

27

2. Despite the importance of such distinctions, the

lower courts have taken widely divergent approaches

to investigating conflicts issues at the certification

stage. Consistent with the teachings of this Court’s

decisions and the circuit cases discussed above, some

courts have recognized that the severity of intra-class

conflicts of interest must be tested before certification.

For example, in Valley Drug the Eleventh Circuit

admonished that “we do not believe that it is unduly

burdensome to require the named representatives to

bring forth evidence to the court that no fundamental

conflict exists among the class members, especially in

view of the fact that under Rule 23 it is the plaintiffs, as

the moving party, who bear the burden of proving that

class certification is appropriate.” 350 F.3d at 1196.

That approach squares with the circuits that have held

that “the district judge must receive enough evidence

... to be satisfied that each Rule 23 requirement has

been met”—before certifying a class. In re IPO, 471

F.3d at 41; see pp. 17-18, supra. In stark contrast, the

Seventh Circuit relieved plaintiffs of their burden to

bring forth evidence that “no fundamental conflict

exists” and held that testing the conflicts now “would

be premature.” Pet.App.16a.

This conflict is entrenched in the district courts,

whose class certification decisions are often no’

reviewed at the circuit level because of settlements. In

In re Seagate Technology II Securities Litigation, 843

F. Supp. 1341, 1359 (N.D. Cal. 1994), Judge Walker

refused to defer consideration cf the intra-class

conflicts presented by a putative securities class

including traders who purchased and sold during the

class period (“in/out traders”). As the court explained,

such a conflict “presents not only an eventual problem

28

with the damages element, but also an immediate

problem” as to the development of evidence. Id. at

1358-59. Moreover, the court explained, subclasses are

often not a realistic solution to conflicts in price

manipulation cases where the alleged artificiality and

trading patterns are complex, because of the prospect

of an unmanageable number of subclasses. Jd. at 1361-

62. Accordingly, the court held that “the precise

composition of the plaintiff class, and the resultant

extent and severity of class conflicts, are factual

inquiries which must be made [before certification] on a

case-by-case basis.” Jd. at 1865. Judge Walker further

suggested that a court armed with a real factual

understanding of the structure of the class could then

seek to strike a sensible balance between conflicts

issues and the utility of the class action device—for

example narrowing the class to minimize conflicts

problems when that could be done at acceptable cost to

other jurisprudential interests.

Seagate’s analysis has been expressly adopted by

several lower courts that have refused to certify

classes beset by conflicts of interest analogous to the

ones here. See, ¢.g., In re Physician Corp. of Am. Sec.

Litig., No. 97-3678-CIV, 2003 WL 25820056, at *10

(S.D. Fla. May 21, 2003); Ziemack v. Centel Corp., 163

F.R.D. 530, 542 (N.D. Ill. 1995); Ballan v. Upjohn Co.,

159 F.R.D. 473, 485-86 (W.D. Mich. 1994). Other courts

have simply refused to certify classes because of such

conflicts in similar cases without explicitly citing

Seagate. See, eg., Premium Plus Partners, L.P. v.

Davis, No. 04 C 1851, 2008 WL 3978340, at *4-6 (N.D.

Ill. Aug. 22, 2008); Centurions v. Ferruzzi Trading

Int'l, S.A., No. 89 C 7009, 1994 WL 114860, at *9-17

(N.D. Ill. Jan. 7, 1993); McCullough v. Ferruzzi

29

Trading Int'l, No. 90 C 1138, 1998 WL 795256, at *4-5

(N.D. Ill. Jan. 7, 1993).

Other lower courts, however, have assumed that

intra-class conflicts can be managed later by defining

sub-classes, or by severing the trial into separate

liability and “damages” phases. Most of these

decisions, like the Seventh Circuit’s here, improperly

seek to side-step the issue of conflicts under Rule

23(a)(4) entirely, by deeming it somehow “premature,”

or relevant only to the determination of damages. See,

e.g., In re Scientific-Atlanta, Inc. Sec. Litig., 571 F.

Supp. 2d 1315, 1835 (N.D. Ga. 2007); Tracinda Corp. v.

DaimlerChrysler AG (In re DaimlerChrysler AG Sec.

Litig.), 216 F.R.D. 291, 297 (D. Del. 2003); In re

Gaming Lottery Sec. Litig., 58 F. Supp. 2d 62, 69-71

(S.D.N.Y. 1999); Weikel v. Tower Semiconductor Ltd.,

183 F.R.D. 377, 394-95 (D.N.J. 1998). And like the

decision below, most of these decisions simply hold out

the prospect of subclasses down the road as a means of

deferring the conflicts issue, without any meaningful

analysis of whether subclasses would be practical. E.g.,

Scientific-Atlanta, 571 F. Supp. 2d at 1335; Tracinda

Corp., 216 F.R.D. at 297. Because certification often

forces settlement of class actions, that assumption is

rarely tested in the crucible of actual trial

management, or reviewed on appeal.

The conflicts-of-interest problem is pervasive in

large-scale class actions such as this and frequently

litigated, yet the lower courts are divided about

whether and to what extent such conflicts must be

tested at the certification stage under Rule 23. And

this division underscores the broader question of the

duty of the courts to ensure that the record supports

each requirement of Rule 23 before certifying a class.

30

Particularly given the stark intra-class conflicts

discussed above, this case presents an ideal vehicle for

the Court to provide guidance on these questions.

III. THE QUESTIONS PRESENTED ARE

EXCEPTIONALLY IMPORTANT

“(T]he fight over class certification is often the

whole ball game” in class action litigation, given the

“high stakes involved in class certification decisions”

for defendants as well as plaintiffs. Hartford Accident

& Indem. Co. v. Beaver, 466 F.3d 1289, 1294 (11th Cir.

2006). As a result, “[flew pretrial motions in our civil

justice system elicit as much controversy as those for

the certification of class actions.” Richard A.

Nagareda, Class Certification in the Age of Aggregate

Proof, 84 N.Y.U. L. Rev. 97, 97 (2009). In large-scale

securities, antitrust, and commodities class actions, the

certification fight often turns on whether the defined

class is overbroad because of the inclusion of uninjured

plaintiffs, and whether conflicts of interest among class

members preclude certification. And the burden of

proof and evidentiary requirements at certification are

often dispositive. Given the touchstone importance of

the certification determination, the proper resolution of

the questions presented is key to ensuring that the

class action procedure is not abused.

As this Court has recognized, “class action practice

has become ever more ‘adventuresome’”” in the decades

since Rule 23 was adopted. Amchem, 521 U.S. at 617.

Antitrust, securities, and commodities class actions

have long been a particularly fertile ground for

plaintiffs’ lawyers, because of the lucrative settlements

they frequently yield irrespective of the merits of the

31

claims.’ In practice, “[a}lmost all certified class actions

settle.” Thomas E. Willging & Shannon R. Wheatman,

Federal Judicial Center, An Empirical Examination

of Attorneys’ Choice of Forum in Class Action

Litigation 48 (2005). The amount of money spent each

year in settling these class actions is enormous. In

2007, for example, the average settlement value of

securities class actions was $62.7 million. Ellen M.

Ryan & Laura E. Simmons, Cornerstone Research,

Securities Class Action Settlements, 2009 Review and

Analysis 2, available at http://securities.stanford.edu/

Settlements/RE VIE W_1995-2008/Settlements_

Through_12_2008.pdf. From 1996 through 2007,

defendants spent $53.6 billion settling securities class

actions. Jd. As a result, as one commentator has

observed, large-scale class actions “have more in

common with business deals than they do with

traditional adversarial litigation,” making’ the

courthouse a “site for large financial transactions.”

William B. Rubenstein, A Transactional Model of

Adjudication, 89 Geo. L.J. 371, 372 (2001).

This phenomenon is not new. “Judge Friendly, who

was not given to hyperbole, called settlements induced

by a small probability of an immense judgment in a

class action ‘blackmail settlements.” In re Rhone-

Poulenc Rorer Inc., 51 F.8d 12938, 1298 (7th Cir.)

(quoting Henry J. Friendly, Federal Jurisdiction: A

8 In 2008, 210 federal securities class actions were filed—a 19%

increase over the number of 2007 filings and 9% increase over the

previous ten-year average. Cornerstone Research, Securities

Class Action Filings, 2008: A Year in Review 2 (2009), available

at http://securities.stanford.edu/clearinghouse_research/2008_YIR

/20090106_YIRO8_Full_Report.pdf. Even more class actions may

be sparked by the financial crisis of 2008.

32

General View 120 (1973)), cert. denied, 516 U.S. 867

(1995). In the 36 years since Judge Friendly made that

observation, the problem of “blackmail settlements” in

federal class actions has only grown as courts, like the

Seventh Circuit below, have misapplied and eroded

Rule 23’s requirements.

The empirical evidence underscores that, despite

the importance of certification, courts are not

subjecting certitication motions to the “rigorous

analysis” demanded by Rule 23. Hydrogen Peroxide,

552 F.3d at 309 (quoting Gen. Tel. Co., 457 U.S. at 161).

For example, one recent Federal Judicial Center

empirical study examined the certification decisions of

four representative district courts over a two-year

period and found that Rule 23(b)(8) classes were

“certified in 94% to 100% of the securities cases,” even

though “{iJn ail or nearly all” of such cases defendants

opposed certification, often because of conflicts of

interests. Thomas E. Willging et al., An Empirical

Analysis of Rule 28 To Address the Rulemaking

Challenges, 71 N.Y.U. L. Rev. 74, 89-90 (1996).

The Seventh Circuit’s decision in this case further

degrades Rule 23’s requirements and invites ever-more

adventurous class action litigation. Indeed, class action

plaintiffs are already pointing to the decision below to

argue that injury is irrelevant to the Rule 23 inquiry,

see, e.g., Reed v. Advocate Health Care, No. 06-C-3337,

2009 WL 3146999, at *6 n.7 (N.D. Ill. Sept. 28, 2009);

Kreger v. General Steel Corp., Memorandum in

Support of Motion To Certify the Class, 2009 WL

2492895 (E.D. La. July 27, 2009) (No. 07-575), and to

argue that courts should shift to the defendants the

burden to prove that a class is overbroad, Christopher

L. Lebsock, PIMCO: Another Guidepost for Class

33

Certification, Law 360 (Sept. 23, 2009), at

http://competition.law360.com/articles/123912.

It has been nearly a decade since this Court has

comprehensively addressed Rule 23. See Ortiz, 527

U.S. 815; Amchem, 521 U.S. 591. And as courts and

commentators have recognized, the Court has yet to

resolve critical issues concerning the certification

determination. See, e.g., Hydrogen Peroxide, 552 F.3d

at 316 (“The Supreme Court has described the [Rule

23] inquiry as a ‘rigorous analysis,’ and ‘close look,’ but

it has elaborated no further.”) (citations omitted);

Alfred J. Lechner, Jr. & Helena A. Lynch, New

Defense Strategies for Class Certification Hearings, 6

Sec. Litig. Rep. 1 (2009) (“[T]he [Supreme] Court has

not addressed the precise standard of proof for class

certification.”); Class Certification in the Age of

Aggregate Proof, 84 N.Y.U. L. Rev. at 99 (“With so

much riding on the class certification determination,

one would think that procedural law would have

arrived quickly at a clear and broadly shared

understanding of the nature of that determination and

the permissible parameters for inquiry by the court.

That, however, has not been so.”). In the absence of

such guidance, the lower courts have divided on critical

questions concerning the class certification inquiry.

This case provides an ideal vehicle for the Court to

provide overdue guidance in this important area of law.

34

CONCLUSION

For the foregoing reasons, the petition for a writ of

certiorari should be granted.

Respectfully submitted,

DAVID BOIES GREGORY G. GARRE

BOIES, SCHILLER & Counsel of Record

FLEXNER LLP MAUREEN E. MAHONEY

333 Main Street J. SCOTT BALLENGER

Armonk, NY 10504 LORI ALVINO MCGILL

(914) 749-8200 LATHAM & WATKINS LLP

555 11th Street, NW

Suite 1000

Washington, DC 20004

(202) 637-2200

Counsel for Petitioner Pacific Investment

Management Co.

DAVID A. KOTLER

DECHERT LLP

902 Carnegie Center

Suite 500

Princeton, NJ 08540

(609) 955-3200

Counsel for Petitioner PIMCO Funds