Flag Telecom's stock price sank when its undersea cable business took a dive. The price dropped to the bottom. Verily, it slept with the fishes.
One group of stock buyers — let's call it Group A — overpays for a company's stock because the company – Flag Telecom – told a lie — which we'll name Lie A — that misled the market into overvaluing the Flag stock.
Group B — another set of purchasers – also pays too much for the same stock but does so months later and after Flag utters Lie B.
Later still, the stock price tanks, the company goes belly up, and both Group A and Group B hire lawyers.
Except that Groups A & B retain the SAME lawyers, who proceed to file a class action under federal securities laws to recoup the investors' losses.
The district court grants a motion to certify a single class. The class includes both groups. The Flag defendants ask for and win review by the court of appeals (under Rule 23(f) of the Federal Rules of Civil Procedure, which rule allows midstream testing of orders on class certification). The Flagistas then argue error on the ground that a terrible conflict hived the class in twain.
The grievous gap, the colossal chasm, the heinous hostility? That members of Group A might maximize their damages by proving that Lie B didn't cause the drop in the company's stock price — Lie A and Lie A alone made that happen. Likewise, Group B members might get the biggest payback if they minimize Lie A and insist that Lie B did all the damage.
The Second Circuit held the conflict less than "fundamental" and therefore not enough to mandate reversal of the district court's ruling. The trial judge, the court said, could use tools like subclasses to deal with the potential conflict. The court thus largely upheld the decision to certify a single class. Loftin v. Bande (In re Flag Telecom Holdings, Ltd. Securities Litig.), No. 07-4017 (2d Cir. July 22, 2009).
