The opinion of the court was delivered by: Gerard E. Lynch, Circuit Judge:
In re American International Group, Inc. Securities Litigation
Before: WINTER, KATZMANN, and LYNCH, Circuit Judges.
Appeal from the district court's denial of plaintiffs' motion to certify a settlement class. The court held that the class could not satisfy the predominance requirement of Federal Rule of Civil Procedure 23(b)(3) because the fraud-on-the-market presumption does not apply to the class's securities fraud claims. We hold that, under Amchem Products, Inc. v. Windsor, 521 U.S. 591, 620 (1997), a securities fraud class's failure to satisfy the fraud-on-the-market presumption primarily threatens class certification by creating "intractable management problems" at trial. Because settlement eliminates the need for a trial, a settlement class need not demonstrate that the fraud-on-the-market presumption applies to its claims in order to satisfy the predominance requirement. We therefore VACATE the district court's class certification ruling, its grant of judgment on the pleadings, and its grant of partial final judgment under Federal Rule of Civil Procedure 54(b), and REMAND to the district court for further proceedings.
In this class action case, we face a rare joint appeal from a district court's order. After the parties arrived at a settlement agreement, the district court (Deborah A. Batts, J.) denied plaintiffs' motion to certify a settlement class. The court held that the class could not satisfy the predominance requirement of Federal Rule of Civil Procedure 23(b)(3) because the fraud-on-the-market presumption does not apply to the class's securities fraud claims. We hold that, under Amchem Products, Inc. v. Windsor, 521 U.S. 591, 620 (1997), a securities fraud class's failure to satisfy the fraud-on-the-market presumption primarily threatens class certification by creating "intractable management problems" at trial. Because settlement eliminates the need for trial, a settlement class ordinarily need not demonstrate that the fraud-on-the-market presumption applies to its claims in order to satisfy the predominance requirement. We therefore vacate the district court's class certification ruling, its grant of judgment on the pleadings, and its grant of partial final judgment under Federal Rule of Civil Procedure 54(b), and remand this case to the district court.
In October 2004, a number of securities fraud class actions were filed in the United States District Court for the Southern District of New York against American International Group, Inc. ("AIG") and various other corporate and individual defendants, including the General Reinsurance Corporation and its officers Ronald E. Ferguson, Richard Napier, and John Houldsworth (collectively, "Gen Re" or "Gen Re Defendants").
On February 8, 2005, the district court consolidated those actions and appointed as lead plaintiffs three Ohio public pension funds: the Ohio Public Employees Retirement System, the State Teachers Retirement System of Ohio, and the Ohio Police and Fire Pension Fund (collectively, the "Lead Plaintiffs").*fn2 Because the present appeal arises from the efforts of the Lead Plaintiffs and Gen Re Defendants to obtain approval for their proposed class settlement, we focus primarily on the course of the litigation between them.*fn3
On December 15, 2006, Lead Plaintiffs filed the Consolidated Third Amended Class Action Complaint ("Complaint") on behalf of a putative class consisting of investors who purchased AIG's publicly traded securities between October 28, 1999, and April 1, 2005. The Complaint alleges, in relevant part, that AIG and Gen Re violated Rule 10b-5(a) and (c), promulgated under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), by entering into a sham $500 million reinsurance transaction designed to mislead the market and artificially increase AIG's share price. In particular, the Complaint alleges that in late 2000 and early 2001 AIG and Gen Re entered into a two-part transaction that allowed AIG to book a total of $500 million in premiums revenues and $500 million of claims reserves to its balance sheet in the fourth quarter of 2000 and first quarter of 2001. The terms of the transaction appeared to require AIG to make an additional $100 million of claims payments in the event that additional losses developed. According to the Complaint, however, the additional $100 million of risk was a fiction, having been added by the parties to give the appearance that risk was being transferred in the transaction. In reality, AIG was only obligated to pay a total amount of $500 million in losses, which was equal to the amount of premiums revenues that AIG was receiving from Gen Re. The Complaint alleges that the transaction was therefore not a bona fide reinsurance transaction, which would have required that AIG assume actual insurance risk, but was instead a transaction that would only look like reinsurance for AIG's accounting purposes. The Complaint further alleges that Gen Re did not treat the transaction as reinsurance in its own accounting, but knew that AIG intended to account for the transaction improperly as reinsurance. In exchange for its participation in the transaction, Gen Re received an undisclosed $5.2 million side payment.
The sham reinsurance transaction came, according to the Complaint, at a time when investors were concerned about recent reductions in AIG's loss reserves. The transaction had a significant impact on AIG's financial statements, allowing it to report added loss reserves of $106 million for the fourth quarter of 2000 and $63 million for the first quarter of 2001. As the Complaint noted, the increased reserves were highlighted in a press release issued by AIG and received favorably by investment analysts.
The Complaint further alleges that the true nature of the transaction remained hidden from public view until late 2004 and early 2005, when the Securities and Exchange Commission and the New York Attorney General began to investigate AIG's dealings with Gen Re. Following a series of news reports detailing the results of the investigation, AIG publicly acknowledged on March 30, 2005, that it had improperly treated the Gen Re transaction as reinsurance for accounting purposes. In the wake of that announcement, as well as of the disclosure of numerous other serious accounting improprieties at AIG, the company's stock price dropped substantially. On May 31, 2005, AIG issued a dramatic restatement of its earnings for the previous four years, reducing its reported pre-tax income for that period by more than $3.9 billion.
Just over a year after filing the Complaint, Lead Plaintiffs moved, on February 20, 2008, to certify a class for litigation of its claims against all of the defendants, including the Gen Re Defendants. To demonstrate the element of reliance in their Section 10(b) claim, the Lead Plaintiffs invoked the fraud-on-the-market doctrine of Basic Inc. v. Levinson, 485 U.S. 224 (1988).*fn4 On May 29, 2008, before the district court had ruled on the class certification motion, the Gen Re Defendants moved for judgment on the pleadings based on a then-recent Supreme Court case, Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008), which addressed the availability of the fraud-on-the-market doctrine in circumstances similar to those in the present case.
The Stoneridge plaintiffs had alleged that Charter Communications, Inc., a cable operator, arranged a transaction with two of its suppliers of digital cable set top boxes in which Charter overpaid for each set top box by $20 and the suppliers returned the overpayment by purchasing advertising from Charter at above-market rates. Id. at 154- 55. According to the plaintiffs, the transaction "had no economic substance," and existed solely to "enable Charter to fool its auditor into approving a financial statement showing it met projected revenues and operating cash flow numbers." Id. at 154. The suppliers properly accounted for these transactions in their own financial statements, and were not involved in preparing Charter's fraudulent financial statements. Id. at 155. Nonetheless, the plaintiffs alleged that the suppliers were liable under Section 10(b) of the Exchange Act and Rule 10b-5 because the suppliers knew that Charter intended to use the transactions to issue misleading financial statements. Id.
The Supreme Court held that the Stoneridge plaintiffs' claim failed because the plaintiffs had not adequately alleged reliance under Section 10(b). Id. at 159.*fn5 According to the Court, the fraud-on-the-market presumption of reliance did not apply to the suppliers' conduct because "their deceptive acts were not communicated to the public" and "[n]o member of the investment public had knowledge, either actual or presumed, of [the suppliers'] deceptive acts during the relevant times." Id. at 159.*fn6 As a result, the plaintiffs could not establish their reliance upon the suppliers' actions "except in an indirect chain that we find too remote for liability." Id. The Court also rejected the plaintiffs' "scheme liability" argument, which suggested that the market had relied on the suppliers' actions because the suppliers' conduct was essential to Charter's ability to make its deceptive statements. Id. at 159-160.*fn7
In their motion for judgment on the pleadings, the Gen Re Defendants argued that, under Stoneridge, the Lead Plaintiffs failed to state a Section 10(b) claim against Gen Re because Gen Re made no public statements about the sham reinsurance transaction. The Lead Plaintiffs opposed the motion, arguing, among other things, that their claims against Gen Re survived Stoneridge because key details about the sham transaction - including Gen Re's participation in it and the amount of loss reserves transferred - were disclosed to the market by AIG in state regulatory filings shortly after the transaction was consummated. In these circumstances, Lead Plaintiffs argued, AIG's investors can be presumed, through the fraud-on-the-market doctrine, to have relied on Gen Re's deceptive acts. Thus, the central dispute between the parties was whether Stoneridge bars a Section 10(b) claim ...