The opinion of the court was delivered by: Shira A. Scheindlin, U.S.D.J.
Teamsters Local 445 Freight Division Pension Fund ("Teamsters") brings this putative class action on behalf of open market purchasers of certain Certificates offered by Bombardier Capital Mortgage Securitization Corporation ("BCM") and Bombardier Capital, Inc. ("BCI"). Teamsters alleges that defendants engaged in a scheme to defraud investors by misrepresenting the integrity of the Certificate collateral.*fn1 Teamsters seeks relief under sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange Commission ("SEC").*fn2
Teamsters seeks an order to certify this action as a class action pursuant to Rule 23(b)(3) of the Federal Rules of Civil Procedure.*fn3 Although several of Teamsters' arguments in favor of class certification are vigorously disputed,*fn4 the linchpin of Teamsters' motion - and the focus of the parties' briefs and expert reports - is the efficiency of the market for the Certificates. If the market is inefficient, then Teamsters may not avail itself of the presumption that investors relied on defendants' misrepresentations, the requirement that common issues predominate over individual issues will not be satisfied, and class certification must be denied. If the market is efficient, then Teamsters may rely on the presumption, common issues will predominate, and class certification will be granted so long as Teamsters satisfies the other Rule 23 requirements.
On May 10, 2002, Teamsters purchased $250,000 par value Series 2000-A Class A-2 Certificates - issued by BCM and BCI - for a total investment of $234,826.*fn5 On February 3, 2006, Teamsters filed a Second Amended Complaint*fn6 pursuant to Rule 23(a) and (b)(3) of the Federal Rules of Civil Procedure, defining a putative class of all open-market purchasers of Series 1998-A, 1998-B, 1998-C, 1999-A, 1999-B, 2000-A, and 2001-A Certificates (the "Certificates"), who purchased their shares between February 7, 2000 and February 7, 2005 (the "Class Period").*fn7
BI is a Canadian corporation principally engaged in the manufacture and sale of aircraft, recreational vehicles, railroad trains, and locomotive engines.*fn8 BCI, a wholly owned subsidiary of BI, is a financial services company principally engaged in the financing and leasing of BI's products, as well as the financing and leasing of manufactured housing (also known as mobile homes) to consumers.*fn9 Plaintiff alleges that the sole purpose of BCM, a wholly owned limited purpose subsidiary of BCI, was to issue the Certificates.*fn10 BI, BCM, and BCI will hereafter be referred to collectively as "Bombardier." The individual defendants were all officers and/or directors of one of the Bombardier entities during at least part of the period in which the alleged fraud took place*fn11
Teamsters alleges that, beginning in 1997, Bombardier rushed to originate mobile home loans and then, between January 1998 and January 2001, packaged these loans for issuance in the asset-backed securities market through a number of separate certificate offerings.*fn12 Each series of Certificates had the same basic structure and was divided into classes, each of which was assigned specific pools of mobile home collateral and matured on different dates.*fn13
From 1998 to 2001, Bombardier allegedly issued false statements to investors regarding the "strict and prudent" underwriting standards used in the origination of the collateral supporting the Certificates*fn14 The Certificate Offering Document, or Prospectus, for each series of Certificates contained an identical description of underwriting standards.*fn15 Each Prospectus stated that Bombardier's Credit Department would adhere, with limited deviation, to certain underwriting guidelines, such as requiring each loan applicant to demonstrate stability of employment and residence, excluding applicants with debt-to-income ratios in excess of forty-five percent, and applying the Fair Isaac Credit Organization ("FICO") credit scoring system*fn16 Each Prospectus also disclosed the delinquency rates for the loans constituting the collateral for the Series 2000-A offering as two percent in 1998 and 8.14% in January 2000.*fn17 These "purported rigorous underwriting standards" and delinquency disclosures contributed to the assignment of high ratings to the Certificates by various rating agencies.*fn18 Additionally, this description of Bombardier's underwriting guidelines, repeated in each Prospectus, was the only description of the origination of Certificate collateral on which purchasers relied.*fn19
Teamsters alleges that, in fact, BCI's senior management disregarded underwriting standards in favor of volume loan purchases, infecting the pool of collateral with loans to "patently uncreditworthy" borrowers.*fn20 Bombardier recruited a senior management team, including Dan Stout, who allegedly directed employees to focus on loan volume and disregard underwriting standards.*fn21 Bombardier systematically purchased "large quantities of facially defective and deficient mobile home loans," including loans to applicants with no assets, no evidence of employment, debt exceeding income, and poor FICO scores.*fn22 Additionally, by linking low reports of delinquencies and repossessions to employee compensation, the management of BCI created incentives for, underreporting.*fn23 At Stout's direction, repossessions were re-categorized as "re-financings" in order to avoid reporting.*fn24 For these reasons, Bombardier's reported delinquency figures were systematically understated, and Bombardier's allegedly systematic practice of purchasing "bad paper" through reckless underwriting led to a rapid increase in the percentage of delinquencies.*fn25
In early 2000, Bombardier replaced its senior management team and disclosed certain understatements of delinquencies, claiming that the problems had been corrected*fn26 Bombardier did not, however, disclose its improper underwriting practices between 2001 and 2003.*fn27 In the Series 2001-A Prospectus supplement, BCI and BCM explained worsened delinquency rates as arising from collection problems.*fn28 In September, 2001, Bombardier left the manufactured housing asset-backed securities industry and, in a press release, attributed the cause of its exit to market conditions.*fn29 In its March 19, 2002 Annual Report, BI explained portfolio downgrades by reference to the "slowdown of the U.S. economy."*fn30
On December 16, 2002, the Series 2000-A Certificates were downgraded below investment grade.*fn31 On December 27, 2002, Certificate prices declined by an average of 13.25%.*fn32 On February 25, 2003, the 1998-C and 1999-A Series Certificates were downgraded below investment grade.*fn33 On March 5, 2003, the Certificates declined an average of twenty-seven percent, resulting in an average price decline of thirty-eight percent from December 24, 2002.*fn34 III. APPLICABLE LAW
A. Class Certification Requirements
Rule 23 of the Federal Rules of Civil Procedure governs class certification. To be certified, a putative class must meet all four requirements of Rule 23(a) as well as the requirements of one of the three subsections of Rule 23(b). In this case, as in most cases seeking money damages, Teamsters bear the burden of demonstrating that the class meets the requirements of Rule 23(a) - referred to as numerosity, commonality, typicality, and adequacy*fn35 - and that the action is "maintainable" under Rule 23(b)(3).*fn36 Under Rule 23(b)(3) the relevant subsection of Rule 23(b) "common" issues of law or fact must "predominate over any questions affecting only individual members," and a class action must be demonstrably "superior" to other methods of adjudication.*fn37
The numerosity requirement mandates that the class be "so numerous that joinder of all members is impracticable."*fn38 Commonality requires a showing that common issues of fact or law affect all class members.*fn39 A named plaintiff's claims are "typical" where each class member's claims arise from the same course of events and each class member makes similar legal arguments to prove the defendants' liability.*fn40 The adequacy requirement demands that "the representative parties will fairly and adequately protect the interests of the class."*fn41 Finally, although "'Rule 23(a) does not expressly require that a class be definite in order to be certified[,] a requirement that there be an identifiable class has been implied by the courts.'"*fn42
"In order to meet the predominance requirement of Rule 23(b)(3), a plaintiff must establish that the issues in the class action that are subject to generalized proof, and thus applicable to the class as a whole . . . predominate over those issues that are subject only to individualized proof."*fn43 The superiority prong of Rule 23(b)(3) requires a court to consider whether a class action is superior to other methods of adjudication.*fn44 The court should consider, inter alia, "the interest of the members of the class in individually controlling the prosecution or defense of separate actions" and "the difficulties likely to be encountered in the management of a class action.*fn45
Although the standard of proof under which the elements of Rule 23 should be analyzed has not been precisely defined, certain basic principles apply. In particular, courts should not assume that the allegations contained in the complaint are true when deciding a motion for class certification.*fn46 Instead, courts must conduct a "rigorous analysis" to determine whether the plaintiffs have satisfied each element of Rule 23.*fn47 This heightened standard requires courts to "probe behind the pleadings" to determine whether class certification is warranted.*fn48 Nevertheless, courts generally must not access the merits of the underlying claims.*fn49
The Second Circuit's recent decision in Heerwagen v. Clear Channel Communications can be read to establish two standards of proof for class certification. Where the particular issue being considered as part of the rule 23 inquiry is "sufficiently independent of the merits to justify weighing the evidence," the plaintiff must prove that issue by a preponderance of the evidence.*fn50 But where the Rule 23 issue being considered is "effectively identical" to the merits,*fn51 the plaintiff must make only "some showing" that the disputed element of Rule 23 is satisfied.*fn52 Under the latter standard, courts "may not weigh conflicting expert evidence or engage in 'statistical dueling' of experts."*fn53 Instead, the sole job of a court in assessing expert evidence is to "ensure that the basis of the [plaintiffs] expert opinion is not so flawed that it would be inadmissible as a matter of law."*fn54
B. Elements of Teamsters' Claims
To state a prima facie case for securities fraud under section 10(b) and Rule 10b-5, a plaintiff must allege that '"the defendant, in connection with the purchase or sale of securities, made a materially false statement or omitted a material fact, with scienter, and that plaintiffs reliance on defendant's action caused injury to the plaintiff. "*fn55 The requisite state of mind, or scienter, in a securities fraud action is "`an intent to deceive, manipulate or defraud.'"*fn56
As already noted, the decisive issue presented by this motion is whether the element of reliance (i.e. transaction causation) can be established through common proof.*fn57 Bombardier challenges Teamsters' proposed class on the grounds that, inter alia, individualized questions of transaction causation will predominate over common questions. "Transaction causation . . . requires only an allegation that 'but for the claimed misrepresentations or omissions, the plaintiff would not have entered into the detrimental securities transaction. "'*fn58 In order to satisfy the predominance requirement of Rule 23(b)(3) on the issue of transaction causation, Teamsters ...