In In re Kosmos Energy Ltd. Securities Litigation, No. 3:12-CV-373-B, 2014 U.S. Dist. LEXIS 36365 (N.D. Tex. Mar. 19, 2014), the United States District Court for the Northern District of Texas (Boyle, J.) denied lead plaintiff’s class certification motion in a consolidated action alleging claims under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 (“1933 Act”), 15 U.S.C. §§ 77k, 77l(a)(2), 77o. The 1933 Act regulates registration and offering statements by holding issuers and other offering participants strictly liable for material misstatements and omissions. Reliance is not an element of the claim. Plaintiff’s class certification motion rested on the notion that 1933 Act claims presumptively deserve class treatment. The district court, however, rejected the continued vitality of this notion in light of the recent “evolution of the case authority on class certification” requiring “a more skeptical view with a more exacting review process.” The district court’s decision recognizes that, as with other substantive areas of law, this “evolution” applies in securities law cases. Hence, historically “pro-plaintiff” approaches to class certification in securities cases (including cases based on 1933 Act claims) must yield to the newly evolved class certification standards.
Defendant Kosmos Energy Ltd. issued a registration statement in connection with its IPO that allegedly misstated the performance of an offshore oil field. Plaintiff, a pension plan, which purchased stock in the IPO, brought 1933 act claims against Kosmos, the underwriting banks, and others. It also sought to certify a class of persons who purchased Kosmos stock “pursuant to or traceable to the IPO,” alleging a class period from May 10, 2011, the IPO date, to January 10, 2012, the date of the first lawsuit.
Defendants argued plaintiff failed to show it could adequately represent the putative class and that common questions of law and fact predominated over questions affecting only individual class members. Before addressing these grounds, the district court reviewed recent U.S. Supreme Court class-action developments. In its view, class certification has “evol[ved]” from a “presumptively pro-plaintiff” approach, allowing certification “based solely on the pleadings or on a modicum of evidentiary support,” to an entirely evidentiary-driven inquiry. It identified the U.S. Supreme Court’s opinion last year in Comcast v. Behrend, 133 S. Ct. 1426 (2013), as “the culmination of this movement.”
Turning to the question of adequacy, the district court agreed that some precedents had “presumptively favored finding class representatives adequate.” It, declared, however, that the U.S. Supreme Court’s decisions in Comcast and Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011), “leave no doubt that plaintiffs can no longer rely upon the lax adequacy standards employed at times in the past. Instead plaintiffs seeking certification must produce actual, credible evidence that the proposed class representatives are informed, able individuals, who are themselves — not the lawyers –– actually directing the litigation.” Plaintiff did not do this. The district court blamed this failure on plaintiff’s misguided view that the new, stricter approach to class certification did not apply to its 1933 Act claims: “Ultimately, the Plan’s fatal mistake was that it apparently presumed its task here is lessened because of the securities law provisions under which this case is filed.”
The district court next addressed predominance. Plaintiff invoked precedents showing district courts favorably disposed to certifying classes in securities cases, arguing that Comcast’s evidence-based approach to Rule 23 was limited to antitrust and other non-securities cases. The court disagreed. “While it is true that courts have, at times, noted that cases brought pursuant to §§ 11 and 12 of the 1933 Act are ‘especially amenable’ to class certification and resolution, ‘it does not follow’ from such isolated statements ‘that a court should relax its certification analysis, or presume a requirement for certification is met, merely because a plaintiff’s claims fall within [the same] substantive categor[y].’”
The district court noted that plaintiff proffered no evidence showing common-question predominance. In contrast, defendants introduced evidence suggesting the availability of a limited, 1933 Act affirmative defense — investor knowledge of the alleged untruth or omission at the time of purchase — that, if adjudicated, would cause issues to predominate over common questions. Specifically, via an expert’s report, defendants introduced an event study showing 14 instances of negative, new information regarding the oil field’s performance entering the market after the IPO date but before the close of the class period, suggesting varying degrees of investor knowledge across the class period. The court noted that the need for individualized affirmative defense inquiries ordinarily cannot defeat class certification where evidence otherwise shows predominance. Here, however, plaintiff had presented “zero-evidence.” The district court denied plaintiff’s class certification motion.
Kosmos makes an emphatic point regarding the application of recent Supreme Court class action decisions to securities cases generally. It specifically identifies Comcast as foreclosing “presumptive” approaches to Rule 23 in securities cases. In other words, it recognizes that any approach that relieves the plaintiff of the Rule 23 evidentiary burden it would otherwise bear stands at odds with Comcast. This observation is particularly cogent as the Supreme Court will soon decide in Halliburton Co. v. Erica P. John Fund, Inc., No. 13-317 [see blog article here], whether to overrule or modify Basic Inc. v. Levinson, 485 U.S. 224 (1988), which adopted the fraud-on-the-market presumption of reliance to permit class actions in cases brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b).