UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
August 1, 2006
TEAMSTERS LOCAL 445 FREIGHT DIVISION PENSION FUND, ON ITS OWN BEHALF AND ON BEHALF OF ALL THOSE SIMILARLY SITUATED, PLAINTIFF,
BOMBARDIER, INC., BOMBARDIER CAPITAL, INC., BOMBARDIER CAPITAL MORTGAGE SECURITIZATION CORPORATION, LAURENT BEAUDOIN, BRIAN PETERS, ROBERT GILLESPIE, AND LAWRENCE ASSELL, DEFENDANTS.
The opinion of the court was delivered by: Shira A. Scheindlin, U.S.D.J.
OPINION AND ORDER
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
1. Elements of Rule 23
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
2. Standard of Proof
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
1. In General
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
2. Transaction Causation
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 must avail itself of a presumption of reliance under either of the following two theories: the Affiliated Ute presumption or the fraud on the market (Basic) presumption.
a. The Affiliated Ute Presumption
Teamsters argues that it is exempt from the requirement to prove reliance based on Affiliated Ute Citizens v. United States, in which the Supreme Court held that in securities fraud cases "involving primarily a failure to disclose, positive proof of reliance is not a prerequisite to recovery . . . [instead, all] that is necessary is that the facts withheld be material in the sense that a reasonable investor might have considered them important in the making of [his or her] decision."*fn59 Distinguishing between omissions and affirmative misstatements, however, is no simple task.*fn60
Thus, in determining whether a claim primarily involves an omission for purposes of the Affiliated Ute exception, "[w]hat is important is to understand the rationale for a presumption of causation in fact in cases like Affiliated Ute, in which no positive statements exist: reliance as a practical matter is impossible to prove.)"*fn61 Where positive statements are central to the alleged fraud, thereby eliminating the evidentiary problems inherent in proving reliance on an omission, the Affiliated Ute presumption does not apply.*fn62
b. The Fraud on the Market (Basic) Presumption
Teamsters also argues that it is entitled to a presumption of reliance under the "fraud on the market" theory, which is based on the hypothesis that, in an open and developed securities market, the price of a company's stock is determined by the available material information regarding the company and its business. . . . Misleading statements will therefore defraud purchasers of stock even if the purchasers do not directly rely on the misstatements. . . . The causal connection between the defendants' fraud and the plaintiffs' purchase of stock in such a case is no less significant than in a case of direct reliance on misrepresentations.*fn63
"The fraud-on-the-market doctrine, as described by the Supreme Court in Basic v. Levinson, creates a rebuttable presumption that (1) misrepresentations by an issuer affect the price of securities traded in the open market, and (2) investors rely on the market price of securities as an accurate measure of their intrinsic value."*fn64
The fraud on the market presumption applies only if the market for the security is open and developed enough so that it quickly incorporates material information into the price of the security, i.e., the market must be efficient.*fn65 Although the Second Circuit has not adopted a test for determining whether the market for a security is efficient, courts typically consult some or all of the following factors:
(1) the average weekly trading volume expressed as a percentage of total outstanding shares; (2) the number of securities analysts following and reporting on the stock; (3) the extent to which market makers and arbitrageurs trade in the stock; (4) the company's eligibility to file SEC registration Form S-3 (as opposed to Form S-1 or S-2); (5) the existence of empirical facts showing a cause and effect relationship between unexpected corporate events or financial releases and an immediate response in the stock price; (6) the company's market capitalization; (7) the bid-ask spread for stock sales; and (8) float, the stock's trading volume without counting insider-owned stock.*fn66
Courts should use these factors as an analytical tool rather than as a checklist.*fn67 Because the resolution of the instant motion depends to a great extent on the efficiency of the market for mortgage-backed securities, it is critical to examine the theory behind market efficiency as well as the relevant factors used by courts to ascertain whether a market is efficient.*fn68
(i) Definition of Market Efficiency
Market efficiency refers to "the flow of information in the relevant market" and its effect on the price of the security.*fn69 An efficient market absorbs misrepresentations into the price of the security; an inefficient market does not.*fn70 The fraud on the market presumption is grounded in two econometric models - the efficient market hypothesis ('EMH") and the market model of investment decision-making.*fn71
As the First Circuit recently explained in In re PolyMedica Corporation Securities Litigation, "the efficient market hypothesis began as an academic attempt to answer the following question: Can an ordinary investor beat the stock market, that is, can such an investor make trading profits on the basis of new information?"*fn72 In an efficient market, the answer is 'no," because the market price already reflects the new information.*fn73 Scholars acknowledge that an 'efficient" market cannot be perfectly efficient, because it takes time for the price of a security to incorporate new information.*fn74 From a legal standpoint, however, defendants are liable for defrauding investors when a misrepresentation caused the price of a security to differ from its efficient price, which 'is presumed to reflect the price at which the security would have traded in the absence of the misleading information."*fn75
Economists have identified three forms of EMH: weak, semi-strong, and strong each of which makes a progressively stronger claim about the kind of information that the security price reflects. Under the weak form, the price of a security reflects historical price data. Under the semi-strong form, the price of a security reflects all public information. Under the strong form, the price of a security reflects all information.*fn76
According to the "prevailing" definition of market efficiency, "an efficient market is one in which market price fully reflects all publicly available information."*fn77 This definition comports with the semi-strong form of the EMH.*fn78 The Supreme Court in Basic, however, held that an "efficient" market is one in which "market professionals generally consider most publicly announced material statements about companies, thereby affecting stock market prices."*fn79
(ii) Characteristics of an Efficient Market
(a) Trading Volume
A high average trading volume suggests market efficiency, because it implies that there is "significant investor interest in the company" and 'a likelihood that many investors are executing trades on the basis of newly available or disseminated corporate information."*fn80 Cammer provides that "'turnover measured by average weekly trading of 2% or more of the outstanding shares would justify a strong presumption that the market for the security is an efficient one; 1% would justify a substantial presumption. "'*fn81
If a large number of financial analysts report on the stock, one can infer that financial statements are "closely reviewed by investment professionals, who would in turn make buy/sell recommendations to client investors."*fn82 Although sporadic commentary by news reporters "cannot substitute for serious attention by professional securities analysts,*fn83 it is not necessary for '"big name' Wall Street companies" to follow the security.*fn84
(c) Market Makers and Arbitrageurs
A market-maker is "one who helps establish a market for securities by reporting bid-and-asked quotations" (the price a buyer will pay for a security and the price a seller will sell a security),*fn85 and who "stands ready to buy or sell at these publicly quoted prices."*fn86 Arbitrageurs are 'professional investors who exploit price differences in different markets by buying and selling identical securities in those markets."*fn87 Market makers and arbitrageurs contribute to market efficiency by "reacting swiftly to company news and reported financial results by buying or selling stock and driving it to a changed price level."*fn88
One way that efficient markets absorb information is through arbitrageurs, whose actions stabilize the market so as to eliminate arbitrage opportunities.*fn89 The capacity of arbitrageurs to "seek out new information and evaluate its effects on the price of securities" distinguishes them from ordinary investors, who 'lack the time, resources, or expertise to evaluate all the information concerning a security," and are thus "unable to act in time to take advantage of opportunities for arbitrage profits."*fn90 In an efficient market, an ordinary investor "who becomes aware of publicly available information cannot make money by trading on it," because the market will have already incorporated the information through the actions of the arbitrageurs.*fn91
(d) SEC Registration Form S-3
Courts have considered a company's eligibility to file an S-3 Registration Statement as 'an 'extremely important' factor in determining whether a company's stock trades in an efficient market."*fn92 Companies permitted by the SEC to file an S-3 Registration Statement, an abbreviated prospectus requiring fewer disclosures than Forms S-1 or S-2, are those that meet the $75 million market capitalization requirement and have filed reports with the SEC for twelve consecutive months.*fn93 By contrast, there is no minimum capitalization requirement to file either Form S-1 or S-2. Courts have found that the SEC permits an S-3 Registration Statement "only on the premise that the stock is already traded on an open and efficient market, such that further disclosure is unnecessary."*fn94 Even though the SEC relaxed its requirements for S-3 eligibility after the Cammer decision,*fn95 courts continue to hold that "S-3 eligibility is still an important factor in determining market efficiency."*fn96
The fifth Cammer factor, the "cause-and-effect relationship between company disclosures and an immediate response in the price of the stock,"*fn97 is "the essence of an efficient market and the foundation for the fraud on the market theory."*fn98 "`An efficient capital market is one in which the price of the [security] at a given time is the best estimate of what the price will be in the future. "'*fn99 Hence, in an efficient market, a security's price remains stable in the absence of news, and changes rapidly as the market receives new and unexpected information.*fn100 Because many variables have the potential to and, in fact, do affect the price of a security,*fn101 "expert testimony may be helpful because of the utility of statistical event analysis" to isolate the true effect of corporate financial disclosures.*fn102
c. Standard of Proof
In the six months since the Second Circuit decided Heerwagen, there has been only one case in which a court applied Heerwagen's apparent dual standard of proof to the transaction causation element of the predominance requirement of Rule 23(b)(3). In In re Salomon Analyst Metromedia Litigation, plaintiffs sought class certification for the class of all purchasers of Metromedia Fiber Network, Inc. in a four-month period.*fn103 Plaintiffs alleged that defendant research analysts engaged in a scheme to defraud purchasers and sellers of Metromedia stock by issuing materially misleading analyst reports.*fn104 The court held that "the question of whether Basic applies is 'effectively identical' to several merits questions - most importantly, it is identical to the question of reliance."*fn105 Because of that conclusion, the court applied the 'some showing" standard to the question of class certification.
In In re Salomon Analyst Metromedia Litigation, there was 'no dispute that Metromedia stock was actively traded on an open, developed, and generally efficient securities market";*fn106 rather, the issue was whether defendants' public statements 'actually had an effect on the value of Metromedia shares."*fn107 The "question of whether Basic applies" in In re Salomon Analyst Metromedia Litigation was therefore a question of causation - a merits issue not of market efficiency - a condition precedent for applying the presumption.*fn108
Not all courts have identified transaction causation as a merits issue. In In re Genesis Intermedia Securities Litigation, a Minnesota district court held that in analyzing whether plaintiff has satisfied the predominance requirement for the transaction causation issue, the court "is not passing on the merits of [plaintiff's] claims."*fn109 In Fogarazzo v. Lehman Brothers, I distinguished two related issues in a motion for class certification under Rule 23(b)(3): first, "whether plaintiffs' allegations [of reliance, etc.] are capable of being proved on a common basis for all class members,"*fn110 and second, '''whether the evidence will ultimately be persuasive.'"*fn111 Although the second issue requires an 'examination of the merits,*fn112 the first issue is independent of the merits and is therefore an appropriate issue on which to offer expert testimony at the class certification stage.*fn113
At the class certification stage, the securities' trading record may create certain rebuttable legal presumptions about market efficiency. If, for example, a security is listed on the NYSE, AMEX, NASDAQ, or a similar national market, the market for that security is presumed to be efficient.'*fn114The defendant may rebut this presumption of efficiency, either at the class certification stage or at trial. If the defendant succeeds, the plaintiff may not benefit from the fraud-onthe-market presumption of transaction causation and will have to rely either on the Affiliated Ute presumption of transaction causation or proceed as an individual action. On the other hand, if a security is traded infrequently or not at all, the market for that security is presumed to be inefficient. The plaintiff must rebut this presumption of inefficiency in order to utilize the fraud on the market theory of reliance.
In sum, whether the plaintiff may take advantage of the presumption of reliance (through either Affiliated Ute or Basic) and whether the plaintiff has proven reliance are distinct inquiries. The former is required for class certification because it is the only way for plaintiff to show that reliance - a material element of the underlying Section 10(b) and Rule 10b-5 material misrepresentation claim - is subject to generalized proof. In other words, without a presumption of transaction causation, plaintiff will have to prove reliance on an individual basis, and the proposed class action will not satisfy the predominance requirement of Rule 23(b)(3). The use of a presumption to prove transaction causation is simply a procedural tool that allows a plaintiff to satisfy the predominance requirement of Rule 23(b)(3). At the certification stage, a court must determine, without conducting an inquiry into the merits of the claim, whether a plaintiff may avail itself of the presumption. Accordingly, because the availability of the presumption is not a merits issue, the Court must determine whether plaintiff has demonstrated the efficiency of the market by the preponderance of the evidence.
A. Teamsters Cannot Rely on the Affiliated Ute Presumption
Teamsters argues that it is entitled to the Affiliated Ute presumption because Bombardier allegedly failed to disclose the following:*fn115 first, that Bombardier materially disregarded its own underwriting standards,'*fn116second, that Bombardier's stated initiative to improve collateral performance would be ineffective;*fn117 and third, that Bombardier's fraudulent underwriting practices, not 'market conditions," caused the poor collateral performance.*fn118 These alleged omissions, however, are simply the flip side of the following affirmative misstatements made by Bombardier: first, that Bombardier adhered to its underwriting standards;*fn119 second, that Bombardier's initiatives were effective;*fn120 and third, that market conditions were the cause of the Certificates' poor performance.*fn121 Moreover, this is certainly not a case 'in which no positive statements exist [and] reliance as a practical matter is impossible to prove."*fn122 On the contrary, there is no shortage of alleged misstatements on which Teamsters may show that it relied when it purchased the Certificates.*fn123 Because positive statements, not omissions, are central to the alleged fraud, Teamsters cannot not rely on the Affiliated Ute presumption.
B. Teamsters Cannot Rely on the Fraud on the Market Presumption
Both Teamsters and Bombardier rely on expert reports in support of their arguments concerning the efficiency of the Certificate market. Dr. Tavy Ronen, Teamsters' expert, is an Associate Professor of Finance at Rutgers University;*fn124 Dr. Andrew Carron, Bombardier's expert, is President of National Economic Research Associates (NERA) Economic Consulting, a subsidiary of Mercer Specialty Consulting.*fn125 As neither party has questioned the qualifications of the other's expert, I turn to the merits of the experts' arguments.
1. The Cammer Factors
a. Trading Volume
Teamsters argues that the trading volume based on the value of the Certificates traded and as a percentage of the outstanding Certificates indicates that the Certificate market was efficient.*fn126 Although the average daily trading volume for those days in which trades occurred is fifteen million dollars,*fn127this figure is misleading some classes of Certificates went months and even years without trading,*fn128 and no Certificates at all traded on 82.3% of the days in the Class Period.*fn129 When the infrequency of Certificate trades is included in the statistics, the data show an average of only 0.026 trades a day per Certificate.*fn130
Cammer measures turnover as the average weekly trading volume as a percentage of the outstanding shares.*fn131 Ronen calculates a turnover value of 1.7, which is the total amount traded in all securities identified in the Second Amended Complaint, divided by the "cross sectional average (across tranches)*fn132 outstanding principal balance,"*fn133 expressed as a weekly figure.*fn134 As Carron notes, however, Ronen calculated turnover by dividing 'the total volume for all tranches by the average size of one tranche,"*fn135 which inflates the turnover value by a factor of twenty.*fn136 Thus, the turnover is 0.085, or 8.5%, which nonetheless supports a finding that the Certificates traded in an efficient market.*fn137 b. Analysts Ronen identifies forty-four financial analysts from twenty-eight firms that specifically reported on BI during the Class Period.*fn138 Because BCI was servicing the collateral for the Certificates, and because BI financially supported BCI, Ronen argues that analysts who followed BI followed the Certificates as well.*fn139 This argument is not persuasive. Teamsters has presented no evidence that analysts specifically followed the Certificates, the value of which is tied to the performance of the underlying mobile homes, and only incidentally to the performance of BI or its subsidiaries.*fn140 The lack of analysts covering the Certificates supports a finding that the Certificates traded in an inefficient market.
c. Market Makers
Ronen argues that the lead underwriter acted as a market maker for each of the Certificate classes,*fn141 but the experts disagree as to the proper definition of a 'market maker." The National Association of Securities Dealers (NASD), the leading private-sector provider of financial regulatory services, defines 'market maker" as "[a] firm that maintains a firm bid and offer price in a given security by standing ready to buy or sell at publicly-quoted prices."*fn142 The SEC defines 'market maker" as "a firm that stands ready to buy and sell a particular stock on a regular and continuous basis at a publicly quoted price."*fn143 Finally, the SEC's regulations define "market maker" as a dealer who, with respect to a particular security, (i) regularly publishes bona fide, competitive bid and offer quotations in a recognized interdealer quotation system; or (ii) furnishes bona fide competitive bid and offer quotations on request; and, (iii) is ready, willing and able to effect transactions in reasonable quantities at his quoted prices with other brokers or dealers.*fn144
Because Certificates are not equities, it makes sense to adopt the general definition of "market maker" given in the SEC's regulations. No firm 'regularly publish[ed]" aids and quotes for the Certificates.*fn145 Moreover, Teamsters has failed to show that there were firms who would furnish bids and quotes on request and who would effect transactions for each Certificate. Teamsters' argument that the Certificates are like equity IPOs (in that the lead underwriter acts as a market maker)*fn146 is unavailing. Rather, as with the question of analyst coverage discussed above, Teamsters must independently address the efficiency of the Certificate market. Because Teamsters has failed to show that there were market makers for each of the Certificates, this factor supports a finding that the Certificates traded in an inefficient market.
d. SEC Registration Form S-3
It is undisputed that for each class of Certificates, Bombardier filed an SEC Registration Form S-3.*fn147 This factor therefore supports a finding that the Certificates traded in an efficient market.
To measure causation, Ronen conducted an event study from which she concludes that several positive and negative announcements were associated with abnormal movements in Certificate prices and excess returns.*fn148 Carron claims that Ronen's event methodology is unsound for two reasons. First, Ronen uses Bloomberg prices, not transaction prices, in conducting her event study.*fn149 Bloomberg prices derive from a proprietary matrix that incorporates not only transaction prices, if there are any, but also current news regarding the company.*fn150 After analyzing both Bloomberg prices and transaction prices for the Certificates, Carron concludes that Bloomberg prices experienced greater variation over time than transaction prices,*fn151 that Bloomberg prices and transaction prices often moved in different directions,*fn152 and that transaction prices did not react to unexpected news as significantly as Bloomberg prices.*fn153
Ronen responds to Carron's critique of Bloomberg prices by arguing that "Bloomberg and other pricing services perform the role of analysts when there are no publicly available prices . . . their 'indications' constitute a reasonable proxy for transaction prices."*fn154 I disagree. Because Bloomberg and other proprietary pricing services presuppose that security prices reflect information about the company (or, in this case, the Certificate collateral), these "prices" assume market efficiency. To use prices that assume market efficiency in an event study designed to determine whether or not that market is efficient is circular reasoning. Where Bloomberg prices materially differ from transaction prices, as they do here, event studies must use transaction prices.
Second, Ronen's event study analyzes price reactions to news solely concerning the financial health of BI, not its mortgage division.*fn155 In fact, BI's stock price and the Certificates' price often moved in opposite directions.*fn156 The news analyzed in event studies must relate to the underlying financial health of the Certificates - news relating to BI generally is not sufficiently material to the financial health of the mobile home installment sales contracts and mortgage loans that constitute the Certificates' collateral.
The reaction of Certificate transaction prices to unexpected news about the Certificate collateral presents a different picture. There were no material price drops in the Certificates after they were downgraded below investment grade in December 2002 and February 2003.*fn157 Because the transaction prices of the Certificates reacted weakly to unexpected downgrades, this factor strongly supports a finding that the Certificates traded in an inefficient market.
2. Comparison to FIPS High-Yield Corporate Bonds
Much of Ronen's analysis centers on comparing the Certificate market to the market for Fixed Income Pricing System ('FIPS") high-yield corporate bonds.*fn158 But Teamsters has not cited a single case in which a market for one type of security was found efficient merely by analogy to another type of security. In order for the Certificate market to be found efficient, that market must independently satisfy at least some of the factors. Indeed, to the extent that the proposed analogy is relevant, then the market on which these Certificates trade should satisfy many, if not all, of the factors.
3. The Totality of the Circumstances
Using the foregoing factors as an analytical tool rather than as a checklist, I conclude that Teamsters has failed to show by a preponderance of the evidence that the market for the Certificates was efficient. Although the Certificates had a high average weekly trading volume and Bombardier filed an SEC Registration Form S-3, the infrequent trades, the absence of analysts following the Certificates, the absence of market makers for the Certificates, and especially the lack of a causal relationship between unexpected news and an immediate response in the price of the Certificates, all tend to establish the inefficiency of the Certificate market. Accordingly, Teamsters cannot rely on the fraud on the market presumption.*fn159 C. Without a Presumption of Reliance, Teamsters Cannot Satisfy the Predominance Requirement
Because Teamsters cannot rely on either the Affiliated Ute or the fraud on the market presumptions of transaction causation, Teamsters cannot prove reliance on a class-wide basis, and each plaintiff will have to prove reliance individually. Although the predominance requirement of Rule 23(b)(3) does not mandate that all issues be capable of generalized proof,*fn160 when plaintiffs must individually prove reliance - an element of their Rule 10b-5 material misrepresentation claim - the putative class action fails the predominance requirement.*fn161 Thus, Teamsters cannot satisfy the predominance requirement of Rule 23(b)(3).*fn162 V. CONCLUSION
For the foregoing reasons, Teamsters' motion for class certification is denied. The Clerk of the Court is directed to close this motion [number 47 on the docket sheet]. A conference is scheduled for August 11, 2006, at 3:00 p.m.