Yesterday’s Fifth Circuit decision (with one judge concurring in the result) does some things that class action and securities lawyers ought to know about. Regents of the University of California v. Credit Suisse First Boston (USA), Inc., No. 06-20856 (5th Cir. Mar. 19, 2007). Blawgletter offers this early assessment:
- We’ve created a monster. Rule 23(f) of the Federal Rules of Civil Procedure has, since December 1, 1998, given courts of appeals discretion to review orders granting or denying class certification. What considerations limit that discretion? In Regents, the majority cited pressure on the defendants to fork over money and "unsettled" questions of law. One may question whether the defendants felt much money-forking pressure, having resisted it since December 2001. As for the second factor, Blawgletter respectfully suggests that a court of appeals will always deem a legal question "unsettled" if it disagrees with how the district court resolved it. No, Blawgletter takes the Rule 23(f) advisory committee at its word when it said the rule provides "unfettered discretion" to grab a class certification ruling for interlocutory ravishment.
- The monster has an appetite. As the concurrence in Regents emphasizes, the court needn’t have reached the question of whether Rule 10b-5 imposes liability for the kind of fraudulent conduct that the plaintiffs alleged. Can you imagine an issue more central to the "merits", from resolving which courts have shied for decades in dealing with class certification motions. And consider that the liability question didn’t directly bear on class certification. The majority had to conclude, first, that no liability exists under Rule 10b-5; second, that the absence of liability precluded the district court from presuming that all class members relied on the defendants’ fraudulent conduct; and that, without the presumption, the class didn’t satisfy the requirements for class certification.
- The monster will eat you. The Regents majority took a strikingly narrow view of Rule 10b-5 liability. Defendants who knowingly scheme with others to defraud investors stand beyond the law’s reach, the court held, unless the defendants themselves made misrepresentations or violated a duty to disclose or engaged in manipulative trading in the underlying security. Everything else amounts to "aiding and abetting" — liability for which the Supreme Court foreclosed in Central Bank, N.A. v. First Interstate Bank, N.A., 511 U.S. 164 (1994).