In re American Int’l Group: Fraud-on-the-Market Reliance Not Required for Settlement

In a decision likely to be influential beyond both its jurisdictional and factual settings, the Second Circuit Court of Appeals has held that securities fraud plaintiffs need not prove that fraud-on-the-market applies in order to satisfy the predominance requirement for certification of a settlement class, the Second Circuit Court of Appeals held. In re Am. Int’l Grp., Inc. Secs. Litig., No. 10–4401 (2d Cir. Aug. 13, 2012) (available here). The influential Second Circuit also underscored the pragmatic doctrine whereby settling class action parties, despite being required to establish most elements of certification to the same degree of proof as in a contested certification motion, are not required to establish the manageability of the settled action. See Slip op. at 21 (“with a settlement class, the manageability concerns posed by numerous individual questions of reliance disappear”).

The unanimous opinion, written by Circuit Judge Gerard R. Lynch, explained that “a Section 10(b) settlement class’s failure to satisfy the fraud-on-the-market presumption does not necessarily preclude a finding of predominance,” and “the fact that the plaintiff class is unable to invoke the presumption, without more, is no obstacle to certification.” Id. at 23-24. Judge Lynch was joined by Circuit Judges Ralph K. Winter and Robert A. Katzman. The three-judge panel members were appointed, respectively, by presidents Obama, Reagan, and Clinton.

Though decided in the context of securities litigation, the American Int’l decision will likely function as a potent counterpoint in any circumstance where a class action settlement objector attempts to invoke the irrelevant “manageability” criterion to urge courts to deny motions for settlement approval.