Wednesday, July 29, 2009

Desai v. Deutsche Bank Securities (9th Cir. - July 29, 2009)

Today brings us a per curiam opinion with two concurrences, one by Judge O'Scannlain and one by Judge Graber. I'm not sure that anyone needs an additional (divergent) perspective, but I'll nonetheless offer one. Or perhaps even two.

This is a fascinating case in which the defendants allegedly pumped up a stock through manipulation and in which Deutsche Bank allegedly made money through share-loaning. (I know a little bit about this practice in connection with a law review article that Frank Partnoy and I published about it and its effect on shareholder voting.) The question is whether a class should be certified. The district court says no, and the Ninth Circuit affirms, holding that individual questions of reliance would predominate over the common claims.

The best argument that plaintiffs have in response is that they don't have to prove individualized reliance due to the fraud on the market theory, which presumes reliance. The big fight is whether that theory applies when, as here, the deception arises not from material statements or omissions, but rather from direct manipulation of the market -- thereby destroying the presumed "integrity of the market".

On this issue, the per curiam opinion says that the Ninth Circuit is "chary" to adopt such a doctrine, and on that basis affirms the district court's decision not to certify. But Judge O'Scannlain concurs to say: "Look, we can't just be 'chary'. We gotta decide whether or not that's an accurate statement of the law. Because if that is an accurate statement of the law, then the district court erred on a legal matter, and we've got to reverse. Plus we can't hold that individual reliance claims predominate, since they don't if the fraud-on-the-market theory is applicable. Now, as you might predict, I'm more than happy to reject this doctrine on the merits, and I do, so I've got no problem affirming. But you've got to decide; you can't just punk out." To which Judge Graber says (in her own concurrence): "No we don't. We can just say that the district court didn't abuse its discretion in refusing to recognize the new theory, and affirm on that basis. Which is what we do."

For the most part, I think Judge O'Scannlain's correct. If the law, rightly applied, is X, then a district court has to apply X. It doesn't have "discretion" not to. That's true even for novel legal theories. Federal courts can't say: "No one has ever before argued or held that income taxes violate the Privileges and Immunities Clause, so I'm not forced to so hold." That's not how precedent works. So I gotta agree with Judge O'Scannlain on this one.

Mind you, on the underlying merits, I'm not at all sure that I agree with him that the fraud-on-the-market theory is inapplicable. To be honest, I'll have to talk more with Frank about this, whose knowledge in this area is both infinite and infinitely greater than mine. (For proof, watch him on the Daily Show a couple of months ago, and notice that he manages to get a laugh even before Jon Stewart does). But my initial thought is that investors do indeed rely on the integrity of the market -- indeed, centrally so -- and that the fraud-on-the-market theory may properly be even more accurately applied to outright market manipulation than to public misstatements. As a result, I may only be half in Judge O'Scannlain's camp.

That said, let me support Judge Graber's view in a slightly more nuanced manner. I don't think that district courts have discretion to refuse to adopt new theory theories if accurate. But there is nonetheless a limited strain of jurisprudence at the circuit court level that suggests that "immature" torts should not be certified for class resolution; Castano (a Fifth Circuit tobacco case from the mid-90s) is a classic example. Whether those cases are right or not is an open question; they demonstrate extreme hostility to class resolutions, and so I'm not at all sure their assessment of the merits is correct. But this is at least an operative theory on which Judge Graber could rely in saying that the Ninth Circuit need not reach the relevant legal issue. The problem is that these cases are "superiority" cases, not "predominance" cases, so it's hard to affirm the district court's decision on that basis given the particular decision here. But it's at least something, and I think such an approach may make more doctrinal sense than the "discretion" point that Judge Graber asserts.

All in all, an interesting case. And one in which I may have a slightly different perspective than any of the members of the panel.