On Tuesday, October 14, the U.S. Court of Appeals for the Second Circuit affirmed the denial of class certification in Teamsters Local 445 Freight Div. Pension Fund v. Bombardier Inc. et al. The case was a putative class action arising from the sale of debt securities (Certificates) backed by mobile home loans and leases, and plaintiffs alleged misrepresentations about the integrity of the collateral behind the Certificates.
In August 2006, Judge Shira Scheindlin of the SDNY denied plaintiffs’ motion for class certification, ruling that plaintiffs had failed to demonstrate market efficiency and therefore could not rely on the fraud-on-the-market presumption. Because class members would have to prove reliance individually, the court determined that Teamsters could not satisfy Rule 23(b)(3)’s predominance requirement and class certification was denied.
On appeal, the Second Circuit considered three questions:
- whether the “some showing” or “preponderance of the evidence” standard of proof applies to the Rule 23 requirements in securities class actions;
- whether the district court properly applied the preponderance of the evidence standard to Teamsters’ evidence of predominance; and
- whether the class should be certified because the district court overlooked evidence demonstrating that the Certificates traded in an efficient market, even under a preponderance of the evidence standard.
The Second Circuit affirmed, holding that the preponderance of the evidence standard applies to evidence proffered to establish Rule 23’s requirements, and that the district court therefore applied the correct standard. The Second Circuit also held that
the district court properly used the Cammer factors as an “analytical tool,” Unger v. Amedisys Inc., 401 F.3d 316, 325 (5th Cir. 2005), and made no clear error in determining that Teamsters failed to show by a preponderance of the evidence that the Certificates traded in an efficient market.
In a press release about the case, NERA Economic Consulting noted the work of its President, Dr. Andrew Carron, in the case. Dr. Carron provided analysis and expert testimony critiquing Teamsters’ assertion that the Certificates operated in an efficient market. NERA stated that due to the involvement of securities backed by subprime mortgages, the Bombardier ruling could potentially have important implications for future subprime litigation.