Plaintiffs in a securities fraud class action containing over 2,000 individual investors were unable to convince a New York District Court that the reliance element of their claims was susceptible to a common method of proof for all putative class members thereby precluding certification under Rule 23(b)(3).

Plaintiffs alleged that defendants misrepresented the involvement a certain individual, known for his investment expertise, would have in the management of their portfolios. Plaintiffs claimed that they and other putative class members relied on those representations in deciding to purchase defendants’ securities, that the representations were false, and that they lost millions of dollars as a result.  Plaintiff’s recognized that proving reliance, or “transaction causation” in the court’s parlance, is usually an individualized inquiry that presents an obstacle to class certification.   Therefore, Plaintiffs proposed two common methods of proving reliance on a class-wide basis:  the Affiliated Ute presumption; and circumstantial evidence of class-wide reliance.

The court found that the specific facts at issue failed to satisfy either of these methods. First, the court observed that the Supreme Court’s Affiliated Ute presumption applies only to cases in which the defendant’s alleged fraud consists primarily of omitted facts as to which reliance is practically impossible to demonstrate.  In contrast, the court found that the crux of Plaintiffs’ case was primarily defendants’ positive misrepresentations not warranting the Affiliated Ute presumption.  Second, the court observed that the circumstantial evidence method of class-wide reliance required proof that each class member’s awareness of the misrepresentation and reliance to be “almost inescapable.”  The court, noting that none of the cases applying this method before involved securities fraud, could not find that same degree of confidence in concluding that all members of the putative class invested with defendants in reliance on their purported misrepresentations.

Because plaintiffs could not establish their reliance via a common method of class-wide proof, the court held that individualized issues predominate and denied Plaintiffs’ motion for class certification.

Goodman v. Genworth Financial Wealth Management, Inc., et al., Case No. 2:09-cv-05603 (E.D. N.Y. Apr. 15, 2014)