It’s not often that we see a securities class action defendant win a judgment on the pleadings, and then appeal. But that’s what General Reinsurance Corporation did in a class action brought by shareholders of American International Group Inc. And while Gen Re won its appeal, a footnote in the court’s ruling might signal trouble for other corporate defendants.
General Re was targeted for its role in helping AIG engage in an allegedly sham reinsurance deal that caused AIG to restate pre-tax income by $3.9 billion in 2005. Even though General Re’s lawyers at Munger, Tolles & Olson won a judgment on the pleadings in 2010 and a favorable class certification ruling, they joined the plaintiffs in appealing the class cert ruling so that their client could settle with the class for $72 million. On Monday, the effort paid off when the U.S. Court of Appeals for the Second Circuit concluded that U.S. District Judge Deborah Batts in Manhattan had improperly denied class certification for purposes of reviewing the proposed settlement.
The court vacated Batt’s rulings and remanded the case. Our affiliate, New York Law Journal, has additional coverage, and you can read the Second Circuit’s full 26-page opinion here.
The Gen Re settlement is just one piece of the massive AIG shareholder litigation that was sparked by AIG’s restatement. The centerpiece of the case is a $725 million settlement with AIG that Batts approved last February.
The (hugely abbreviated) procedural history of the case goes something like this: General Re moved for judgment on the pleadings in 2008, soon after the U.S. Supreme Court sharply curtailed the liability of aiders and abettors of securities fraud in Stoneridge v. Scientific-Atlanta. In 2009, before Batts ruled on the defense motion, General Re and the shareholders announced they had reached a $72 million settlement. Before weighing in on the settlement, Batts denied class certification for the claims against Gen Re. Because Gen Re (unlike AIG) hadn’t made any public statements about the reinsurance transaction, the judge ruled, the plaintiffs couldn’t invoke the fraud-on-the-market presumption to establish class-wide reliance.
Several months later, in 2010, Batts finally granted Gen Re’s motion for judgment on the pleadings. Despite these victories, the company still wanted to pay the plaintiffs $72 million to settle. So it filed a joint appeal with the plaintiffs and their counsel at Labaton Sucharow.
Writing for a unanimous court, Circuit Judge Gerard Lynch held Monday that Batts had applied the wrong standard for weighing class certification. When deciding class cert in the context of a settlement, the court should apply a more lenient test, he held. “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,” Lynch wrote.
The most intriguing part of the Second Circuit’s opinion is buried in a footnote, in which the court offers a theory for why Gen Re was so eager to settle. The court noted that the plaintiffs had made some decent, but untested, arguments for why Stoneridge didn’t wipe out claims against General Re: “Lead Plaintiffs’ arguments seeking to distinguish Stoneridge do not strike us as frivolous, and apparently did not appear so to the Gen Re Defendants, who were willing, after Stoneridge was decided, to agree to a settlement worth $72 million.”
The plaintiffs’ argument, which is found in this opposition to General Re’s motion to dismiss, is that a third-party doesn’t have to make a public misrepresentation to be liable for a scheme to defraud. “The [Supreme] Court did not rule that a non-issuer must make a public misrepresentation as a precondition to liability under Section 10(b), as the General Re Defendants contend,” the plaintiffs lawyers wrote. “To the contrary, Stoneridge affirmed the viability of private causes of action for ‘scheme liability’ under Rule 10b-5(a) and (c) by recognizing that ‘conduct itself can be deceptive’ and is actionable if such deceptive acts are part of a scheme to defraud that is disclosed to investors.”
By not dismissing that argument, the Second Circuit seems willing to consider putting some chinks in the Stoneridge wall.
