05-3349-cv Miles v. Merrill Lynch

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

August Term 2005

Argued: June 6, 2006 Decided: December 5, 2006

Petition for rehearing submitted: January 5, 2007 Petition for rehearing decided: April 6, 2007

Docket No. 05-3349-cv

- - - - - - - - - - - - - - - - - - - - - - - - - In Re: INITIAL PUBLIC OFFERING SECURITIES LITIGATION - - - - - - - - - - - - - - - - - - - - - - - - - JOHN G. MILES, SASWATA BASU, MICHAEL HUFF, SEAN ROONEY, KRIKOR KASBARIAN, STATHIS PAPPAS, JAMES COLLINS, DIANE COLLINS, JOSEPH ZHEN, ZITTO INVESTMENTS, J. CHRIS ROWE, VASANTHAKUMAR GANGAIAH, FREDERICK HENDERSON, BARRY LEMBERG, ANITA BUDICH, SPIROS GIANOS, MARY JANE GIANOS, and HARALD ZAGODA, Plaintiffs-Appellees,

v.

MERRILL LYNCH & CO., INC., GOLDMAN, SACHS & CO., MERRILL LYNCH, PIERCE, FENNER & SMITH INC., CREDIT SUISSE FIRST BOSTON LLC, ROBERTSON STEPHENS, INC., MORGAN STANLEY & CO., INC., BEAR STEARNS & CO., INC., THE BEAR STEARNS COMPANIES, INC., J.P. MORGAN SECURITIES INC., DEUTSCHE BANK SECURITIES, INC. (f/k/a Deutsche Banc Alex. Brown, Inc., DB Alex. Brown LLC, and BT Alex. Brown Inc.), LEHMAN BROTHERS, INC., SG COWEN SECURITIES, CORP. (n/k/a SG Cowen & Co., LLC), RBC DAIN RAUSCHER, INC. (f/k/a Dain Rauscher, Inc.) and PRUDENTIAL SECURITIES, INC., Defendants-Appellants. - - - - - - - - - - - - - - - - - - - - - - - - -

Before: NEWMAN, SOTOMAYOR, and HALL, Circuit Judges.

Petition for rehearing of December 5, 2006, decision reversing District Court’s grant of motion for class certification.

Petition denied.

Gandolfo V. DiBlasi, New York, N.Y., Penny Shane, David M.J. Rein, Richard J.L. Lomuscio, Sara L. Manaugh, Sullivan & Cromwell LLP, New York, N.Y., on the brief, for Defendant-Appellant Goldman, Sachs & Co.; Andrew B. Clubok, Brant W. Bishop, Bradley J. Bondi, Jeffrey B. Wall, Kirkland & Ellis LLP, Wash., D.C., on the brief, for Defendant-Appellant Morgan Stanley & Co. Inc.; Randy Mastro, Robert Serio, Mark Holton, Gibson, Dunn & Crutcher LLP, New York, N.Y., on the brief, for Defendants-Appellants Bear, Stearns & Co. and The Bear Stearns Companies, Inc.; Robert B. McCaw, Louis R. Cohen, Fraser L. Hunter, Jr., Mark M. Oh, David S. Lesser, Wilmer Cutler Pickering Hale and Dorr LLP, New York, N.Y., on the brief, for Defendant-Appellant Credit Suisse Securities (USA) LLC (formerly known as Credit Duisse First Boston LLC); Andrew J. Frackman, Brendan J. Dowd, Matthew J. Merrick, O’Melveny & Myers LLP, New York, N.Y., on the brief, for Defendant-Appellant Robertson Stephens, Inc.; Barry R. Ostrager, David W. Ichel, Joseph M. McLaughlin, Simpson Thacher & Bartlett LLP, on the brief, for Defendant- Appellant J.P. Morgan Securities Inc.; Stephen M. Shapiro, Timothy S. Bishop, Joshua D. Yount, Mayer, Brown, Rowe & Maw LLP, Chicago, Il., on the brief for Defendants-Appellants Merrill Lynch & Co., Inc. and Merrill Lynch, Pierce, Fenner & Smith Inc.; George A. Schieren, Mark Holland, Robert G. Houck, Clifford Chance US LLP, New York, N.Y., on the brief, for Defendants-Appellants Merrill Lynch & Co., Inc. and Merrill Lynch, Pierce, Fenner & Smith Inc.; Moses Silverman, Philip Barber, Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, on the brief, for Defendant-Appellant Lehman Brothers Inc.;

-2- A. Robert Pietrzak, Joel M. Mitnick, María D. Meléndez, Sidley Austin Brown & Wood LLP, New York, N.Y., on the brief, for Defendant-Appellant Deutsche Bank Securities Inc. (f/k/a Deutsche Banc Alex. Brown Inc., DB Alex. Brown LLC and BT Alex. Brown Inc.); Jay B. Kasner, Scott D. Musoff, Skadden, Arps, Slate, Meagher & Flom LLP, New York, N.Y., on the brief, for Defendant-Appellant SG Cowen Securities Corp. (n/k/a SG Cowen & Co., LLC); Stewart D. Aaron, Arnold & Porter LLP, New York, N.Y., on the brief, for Defendant-Appellant RBC Dain Rauscher, Inc. (f/k/a Dain Rauscher, Inc.); Stephen L. Ratner, Sarah S. Gold, Proskauer Rose LLP, New York, N.Y., on the brief, for Defendant-Appellant Prudential Securities Inc.

Melvyn I. Weiss, Robert A. Wallner, Ariana J. Tadler, Peter G. Safirstein, Milberg Weiss Bershad & Schulman LLP, New York, N.Y.; Stanley D. Bernstein, Robert J. Berg, Rebecca M. Katz, Felecia L. Stern, Christian P. Siebott, Ann M. Lipton, Bernstein Liebhard & Lifshitz, LLP, New York, N.Y.; Richard S. Schiffrin, David Kessler, Schiffrin Barroway Topaz & Kessler, LLP, Radnor, Penn.; Daniel W. Krasner, Fred Taylor Isquith, Thomas H. Burt, Wolf Haldenstein Adler Freeman & Herz LLP, New York, N.Y.; Jules Brody, Aaron Brody, Stull Stull & Brody, New York, N.Y.; Howard Sirota, Rachell Sirota, Saul Roffe, Sirota & Sirota LLP, New York, N.Y., on the brief, for Plaintiffs- Appellees.

(Theodore M. Shaw, Jacqueline A. Berrien, Norman J. Chachkin, Robert H. Stroup, NAACP Legal Defense and Educational Fund, Inc., New York, N.Y. for amicus curiae NAACP Legal Defense and Educational Fund, Inc. in support of Plaintiffs-Appellees.)

JON O. NEWMAN, Circuit Judge.

-3- The Plaintiffs-Appellees (“Petitioners”) have petitioned for

rehearing of our December 5, 2006, decision reversing the District

Court’s grant of their motion for class certification. See Miles v.

Merrill Lynch & Co. (In re Initial Public Offering Securities

Litigation),

(2d Cir. 2006). The petition asserts three

grounds: (1) our initial decision adopted incorrect standards that a

district court must apply in determining whether to grant class

certification, (2) the decision erred in concluding that the

predominance criterion of Rule 23(b)(3) of the Federal Rules of Civil

Procedure could not be satisfied with respect to the Petitioners’

class, and (3) a remand is appropriate to enable the District Court

to reconsider the class certification motion under the standards we

set forth. We requested and received a response from the Defendants-

Appellants with respect to points (2) and (3).

We see no reason to revisit or revise what we said in our initial

decision concerning the standards for class certification, see

. The Petitioners’ second and third points require some

discussion, which will assume familiarity with our initial decision.

The Petitioners contend that the major flaw in our initial decision

was the ruling that individual issues with respect to class members’

reliance and knowledge precluded a finding that issues common to class

members “predominate over any questions affecting only individual

members.” Fed. R. Civ. P. 23(b)(3). In making this argument, they

contend primarily that non-allocants of shares in the various initial

-4- public offerings (“IPOs”) who purchased shares in the aftermarket, as

distinguished from allocants who purchased shares in the IPOs, would

have relied on the market price of the shares and would have lacked

knowledge of the alleged fraud, which consisted primarily of

requirements that allocants artificially inflate share prices by

purchasing shares in the aftermarket and pay undisclosed compensation

to underwriters in exchange for IPO shares.

This argument, whatever its merit, provides no basis for revising

our ruling with respect to the broad class certified by the District

Court. That class, nearly as extensive as the broad class described

by the Petitioners in their complaint, included, with minor

exceptions, vast numbers of allocants as to whom individual issues of

reliance and knowledge overwhelmed whatever common issues the

Petitioners could identify. The Petitioners, having sought a broad

class, are essentially complaining that we failed to narrow their

class definition to an extent that might have satisfied Rule 23

requirements. Whatever authority we might have had to undertake that

task, we did not think it appropriate to provide legal advice to

experienced class action litigators.

However, our ruling rejected class certification only of the

class as certified by the District Court. Nothing in our decision

precludes the Petitioners from returning to the District Court to seek

certification of a more modest class, one as to which the Rule 23

criteria might be met, according to the standards we have outlined.

-5- District courts have ample discretion to consider (or to decline to

consider) a revised class certification motion after an initial

denial. See Barr-Rhoderick v. Board of Education, No. CIV 04-0327,

, at *51 (D.N.M. Sept. 30, 2005); Meyers

ex rel. Meyers v. Board of Education,

(D. Utah

1995); Kamerman v. Steinberg,

(S.D.N.Y. 1988).

Of course, a district court’s discretion to “alter[] or amend[] [a

class action ruling] before final judgment,” see Fed. R. Civ. P.

23(c)(1)(C), cannot be exercised in conflict with an appellate ruling

after a Rule 23(f) appeal. Some district courts have explicitly

reserved authority to revise a class certification ruling by denying

certification “without prejudice.” See Pierce v. Novastar Mortgage,

Inc., No. C05-5835RJB,

, at *10 (W.D. Wash. Sept. 5,

2006); Barr-Rhoderick,

, at *51. And the

Fifth Circuit has noted that it “specifically invited” a district

court to reconsider a denial of class certification. See Calderon v.

Presidio Valley Farmers Ass’n,

(5th Cir. 1989).

We do not think a district court’s authority to revise a class

certification ruling requires a “without prejudice” reservation of

authority, and we surely are not inviting Judge Scheindlin to certify

a more limited class in the aftermath of our rejection of the broad

class. Rather, we simply conclude that the Petitioners’ attempt to

persuade us to revise our initial decision fails, and we leave it to

the Petitioners in the first instance to seek whatever relief they

-6- deem appropriate from the District Court, which can be expected to

give such a request full and fair consideration.

The petition for rehearing is denied.1

1 To avoid any misunderstanding with respect to the Petitioners’

claims under section 11 of the Securities Act, 15 U.S.C. § 77k, we

clarify our reference to these claims, see Miles,

, to

reflect the general rule that an issuer’s liability under section 11

is absolute, but that it can assert a defense that “the plaintiff knew

of the untruth or omission at the time of his or her acquisition of

the security.” IX Louis Loss & Joel Seligman, Securities Regulation

4258 (3d ed. 2004). “Neither section 11 nor Section 12(a)(2) requires

that plaintiffs allege the scienter or reliance elements of a fraud

cause of action.” Rombach v. Chang,

, 169 n.4 (2d Cir.

2004).

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