The Seventh Circuit struck a blow last month for certifying securities fraud cases as class actions — and against the Fifth Circuit's attempt, the panel believed, "to 'tighten the requirements' for class certification" in such cases.

The court held the district court did right by rejecting the defendants' "arguments that if accepted would end the use of class actions in securities cases."  Schleicher v. Wendt, No. 09-2154, slip op. at 4 (7th Cir. Aug. 20, 2010) (per Easterbrook, C.J.).  The arguments?  That "before a class can be certified plaintiffs must prove everything (except falsity) required to win on the merits" and that even then "individual damages questions still predominate and prevent class certification."  Id. at 5.

The panel explained why the fraud-on-the-market doctrine applied to the case under Basic, Inc. v. Levinson, 485 U.S. 224 (1988), in spite of the fact that the price of Conseco stock fell throughout the class period because "fraud could have affected the speed of the fall."  Id. at 8.

Then came the ugly part: 

We could stop here, but for Oscar Private Equity[ Investments v. Allegiance Telecom, Inc., 487 F.3d 261 (5th Cir. 2007)].  The fifth circuit earlier held that, when truthful and false statements are made simultaneously, plaintiffs must establish how much of the price movement can be attributed to the false statements.  See Greenberg v. Crossroads Systems, Inc., 364 F.3d 657, 666-67 (5th Cir. 2004).  Otherwise they can't establish loss causation, which Dura Pharmaceuticals[, Inc. v. Broudo, 544 U.S. 336 (2005)] holds is one element of a securities-fraud claim.  In Oscar Private Equity the fifth circuit held that proof of loss causation is essential not only to success on the merits but also to class certification.  The majority in Oscar Private Equity stated that Basic entitles each circuit to "tighten the requirements" for class certification (487 F.3d at 265) and that the fifth circuit would use this authority to curtail the ability of plaintiffs to put pressure on defendants to settle.  Id. at 266-70.  The right way to show loss causation, the fifth circuit held, is to establish that when the issuer announces the truth "the market reacted to the corrective disclosure."  Id. at 262.

Unlike the fifth circuit, we do not understand Basic to license each court of appeals to set up its own criteria for certification of securities class actions or to "tighten" Rule 23's requirements.  Rule 23 allows certification of classes that are fated to lose as well as classes that are sure to win.  To the extent it holds that class certification is proper only after the representative plaintiffs establish by a preponderance of the evidence everything necessary to prevail, Oscar Private Equity contradicts the decision, made in 1966, to separate class certification from the decision on the merits.  See Eisen v. Carlisle & Jacquelin, 417 U.S. 156 (1974).

Id. at 11-12.  The court added:

Oscar Private Equity represents a go-it-alone strategy by the fifth circuit.  It is not compatible with this circuit's decisional law (Asher, Eckstein, Flamm, and others), and we disapprove its holding.  It has not been adopted by any other circuit, and it has been rejected implicitly by some.  See, e.g., In re Salomon Analyst Metromedia Litigation, 544 F.3d 474, 479, 483 (2d Cir. 2008).

Id. at 14-15.

Will Schleicher arrest the trend towards making plaintiffs prove their case before allowing class certification?  Not in what the panel deemed the "fifth circuit", of course.  But elsewhere?

The court's logic seems sound to Blawgletter.  Weakness on the merits ought not bar class treatment.  And we don't buy the argument — now ubiquitous in the land — that certifying a class dooms defendants to pay Too Much Money to Settle.  Why would they?  Do judges really think defendants lack the wits to value a case correctly, certification or no?

We've written before about our view on the notion of "hydraulic pressure" to settle.  We deem it mythical.  But so long as federal judges beguile themselves with the fictional phenomenon, we fear that Schleicher will prove the exception to the rule.