Argued: November 2, 2016
from an order of the United States District Court for the
Southern District of New York (Rakoff, J.)
certifying two classes under Federal Rule of Civil Procedure
23(b)(3): one asserting claims under the Securities Exchange
Act of 1934 (the "Exchange Act"), and the second
asserting claims under the Securities Act of 1933 (the
"Securities Act"). Appellants assert two
Appellants challenge both class definitions insofar as they
include all otherwise eligible persons who purchased debt
securities in "domestic transactions, " as defined
in Morrison v. National Australia Bank Ltd., 561
U.S. 247 (2010). Because the district court must verify the
domesticity of individual over- the-counter transactions in
globally traded notes, Appellants argue that both classes
fail to satisfy the requirements for certification under Rule
23. We hold that the district court committed legal error by
failing to address the need for such Morrison
inquiries in its analysis of predominance under Rule
23(b)(3). We therefore vacate this portion of the district
court's order and remand for further proceedings. In
addition, we clarify the narrow scope of the
"implied" Rule 23 requirement of
Appellants assert that the district court erred in finding
that the Exchange Act class was entitled to a presumption of
reliance under Basic Inc. v. Levinson, 485 U.S. 224
(1988). We find no abuse of discretion in the district
court's blended analysis of direct and indirect evidence
of market efficiency. We therefore affirm as to this issue.
A. Lieberman, Mark I. Gross, Emma Gilmore, John A. Keho &
Brenda F. Szydlo (on the brief), Pomerantz LLP, New York, NY,
for the Plaintiffs-Appellees.
J. Liman, Jared Gerber & Mitchell A. Lowenthal (on the
brief), Cleary Gottlieb Steen & Hamilton LLP, New York,
NY, for Defendants- Appellants Petróleo Brasileiro
S.A. - Petrobras, Theodore Marshall Helms, Petrobras Global
Finance B.V., and Petrobras America Inc.
Kasner, Boris Bershteyn, Scott D. Musoff & Jeremy A.
Berman (on the brief), Skadden, Arps, Slate, Meagher &
Flom LLP, New York NY, for Defendants-Appellants BB
Securities Ltd., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Bank of China (Hong Kong) Limited, Banca IMI,
S.p.A., Scotia Capital (USA) Inc., Citigroup Global Markets
Inc., Itau BBA USA Securities, Inc., J.P. Morgan Securities
LLC, Morgan Stanley & Co. LLC, Mitsubishi UFJ Securities
(USA), Inc., HSBC Securities (USA) Inc., Standard Chartered
Bank, and Banco Bradesco BBI S.A.
Before: Hall, Livingston, Circuit Judges, and Garaufis,
District Judge. [*]
Garaufis, District Judge.
expedited appeal arises out of an order entered in the United
States District Court for the Southern District of New York
(Rakoff, J.) certifying two classes in this
securities fraud action against Petróleo Brasileiro
S.A. - Petrobras ("Petrobras") and various other
defendants. See In re Petrobras Sec. Litig. (the
"Certification Order"), 312 F.R.D. 354
is a multinational oil and gas company headquartered in
Brazil and majority-owned by the Brazilian government. Though
Petrobras was once among the largest companies in the world,
its value declined precipitously after the exposure of a
multi-year, multi-billion-dollar money-laundering and
kickback scheme, prompting a class action by holders of
Petrobras equity and debt securities ("Plaintiffs")
against multiple defendants ("Defendants"):
Petrobras and certain wholly owned subsidiaries (the
"Subsidiaries"; collectively with Petrobras, the
"Petrobras Defendants"); former officers and
directors of the Petrobras Defendants; several underwriters
of Petrobras debt securities (the "Underwriter
Defendants"); and Petrobras's independent auditor.
district court certified two classes (the
"Classes") for money damages under Federal Rule of
Civil Procedure 23(b)(3): the first asserts claims under the
Securities Exchange Act of 1934 (the "Exchange
Act"), 15 U.S.C. §§ 78a et seq.; and
the second asserts claims under the Securities Act of 1933
(the "Securities Act"), 15 U.S.C. §§ 77a
et seq. On appeal, the Petrobras Defendants and
the Underwriter Defendants (collectively,
"Appellants") contest the Certification
Order on two grounds.
Appellants challenge both class definitions insofar as they
include all otherwise eligible persons who purchased
Petrobras debt securities in "domestic
transactions." Because Petrobras's debt securities
do not trade on a domestic exchange, the district court must
assess each class member's over-the-counter transactions
for markers of domesticity under Morrison v. National
Australia Bank Ltd., 561 U.S. 247 (2010). Appellants
assert that the need for such assessments precludes class
certification, particularly in light of concerns over the
availability and content of the necessary transaction
records. We first address Appellants' arguments regarding
the "implied" Rule 23 requirement of
"ascertainability, " taking this opportunity to
clarify the scope of the contested ascertainability doctrine:
a class is ascertainable if it is defined using objective
criteria that establish a membership with definite
boundaries. That threshold requirement is met here. However,
we next hold that the district court committed legal error by
finding that Rule 23(b)(3)'s predominance requirement was
satisfied without considering the need for individual
Morrison inquiries regarding domestic transactions.
We therefore vacate this portion of the Certification
with regard to the Exchange Act Class, the Petrobras
Defendantschallenge the district court's finding
that Plaintiffs were entitled to a presumption of reliance
under the "fraud on the market" theory established
in Basic Inc. v. Levinson, 485 U.S. 224 (1988). We
find no abuse of discretion in the district court's
determination that Plaintiffs met their burden under
Basic with a combination of direct and indirect
evidence of market efficiency. We therefore affirm as to this
reasons set forth below, we AFFIRM IN PART and VACATE IN PART
the judgment of the district court and REMAND the case for
further proceedings consistent with this opinion.
provide here a brief summary of the proceedings below as
relevant for the issues on appeal. For additional background
on Plaintiffs' allegations and causes of action, see the
district court's prior orders. See In re Petrobras
Sec. Litig. (the "July 2015 Order"),
116 F.Supp.3d 368, 373-77 (S.D.N.Y. 2015) (summarizing the
original consolidated complaint); In re Petrobras Sec.
Litig. (the "December 2015 Order"),
150 F.Supp.3d 337 (S.D.N.Y. 2015) (discussing new allegations
in the amended pleadings).
Plaintiffs' Allegations of Corruption at
claims arise out of a conspiracy that began in the first
decade of the new millennium, at which time Petrobras was
expanding its production capacity. The company used a
competitive bidding process for major capital expenditures,
including the construction and purchase of oil refineries.
Over a period of several years, a cartel of contractors and
suppliers coordinated with corrupt Petrobras executives to
rig Petrobras's bids at grossly inflated prices. The
excess funds were used to pay billions of dollars in bribes
and kickbacks to the corrupt executives and to government
officials. In addition, the inflated bid prices artificially
increased the carrying value of Petrobras's assets.
Plaintiffs allege that Petrobras knew about the kickback
cartel, and was complicit in concealing information from
investors and the public.
Federal Police discovered the scheme during a
money-laundering investigation, and ultimately arrested a
number of the individuals involved. As details of the scandal
emerged, Petrobras made corrective disclosures that,
according to Plaintiffs, significantly understated the extent
of incorrectly capitalized payments and inflated asset
values. Even so, the value of Petrobras's securities
declined precipitously. Plaintiffs allege that, "[a]t
its height in 2009, Petrobras was the world's
fifth-largest company, with a market capitalization of $310
billion"; by early 2015, its worth had allegedly
declined to $39 billion. 4th Am. Compl. ¶ 2.
common and preferred shares trade on a Brazilian stock
exchange, the BM&F BOVESPA. The company sponsors American
Depository Shares ("ADS") that represent its common
and preferred shares. Those ADS are listed and trade on the
New York Stock Exchange ("NYSE").
addition, Petrobras has issued multiple debt securities (the
"Notes"; collectively with ADS, "Petrobras
Securities") underwritten by syndicates of domestic and
foreign banks. The Notes do not trade on any U.S. exchange.
Investors trade Notes in over-the-counter transactions,
whether in connection with an initial debt offering or in the
global secondary market.
December 2014 and January 2015, Petrobras investors filed
five putative class actions asserting substantially similar
claims against Petrobras and other defendants. The district
court consolidated those actions in February 2015 and
certified the Classes in February 2016. The district court
also presided over several individual actions involving
Plaintiffs' Causes of Action
relevant for this appeal, Plaintiffs assert a cause of action
under the Exchange Act against the Petrobras Defendants, and
three causes of action under the Securities Act against
various Petrobras and Underwriter Defendants.
Claims Under the Exchange Act
Exchange Act claims are brought against Petrobras and the
Subsidiaries on behalf of holders of Petrobras ADS and Notes.
Plaintiffs assert that, during the class period of January
22, 2010, to July 28, 2015, the Petrobras Defendants made two
types of false and misleading statements in violation of
Section 10(b) of the Exchange Act and Rule 10b-5.
See 15 U.S.C. § 78j(b); 17 C.F.R. §
240.10b-5. First, the Petrobras Defendants produced financial
statements with inflated asset values. Second, they assured
Petrobras investors that the company adhered to ethical
management principles and maintained strict financial
controls to prevent fraud and corruption.
Claims Under the Securities Act
rely on similar factual allegations in their claims under the
Securities Act, brought on behalf of Petrobras Noteholders.
Plaintiffs allege that the Petrobras Defendants and the
Underwriter Defendants made materially false representations
in registration statements and other documents connected with
offerings of Petrobras Notes in May 2013 and March 2014 (the
"Offerings"), thereby establishing liability under
Sections 11, 12(a)(2), and 15 of the Securities Act.
See 15 U.S.C. §§ 77k, 77l(a)(2),
The Certification Order
February 2, 2016, the district court granted Plaintiffs'
motion to certify two classes under Rule 23(b)(3), one
asserting claims under the Exchange Act and the other
asserting claims under the Securities Act. Certification
Order, 312 F.R.D. 354.
Petrobras Notes do not trade on any U.S.-based exchange,
Noteholders in both Classes are only entitled to assert
claims under the Exchange Act and the Securities Act if they
can show that they acquired their Notes in "domestic
transactions." Morrison, 561 U.S. at 267. To
ensure compliance with Morrison, the district court
limited both class definitions to "members [who]
purchased Notes in domestic transactions."
Certification Order, 312 F.R.D. at 360.
Exchange Act Class is defined, in relevant part,
[A]ll purchasers who, between January 22, 2010 and July 28,
2015, . . . purchased or otherwise acquired [Petrobras
Securities], including debt securities issued by [the
Subsidiaries] on the [NYSE] or pursuant to other domestic
transactions, and were damaged thereby.
Id. at 372.
Securities Act Class is defined, in relevant part, as:
[A]ll purchasers who purchased or otherwise acquired [Notes]
in domestic transactions, directly in, pursuant and/or
traceable to [U.S.-registered public offerings on May 15,
2013, and March 11, 2014] . . ., and were damaged
Id. The Securities Act Class definition is
temporally limited to purchases made "before Petrobras
made generally available to its security holders an earnings
statement covering a period of at least twelve months
beginning after the effective date of the offerings."
Id. This language conforms to the limitations
inherent in Section 11, given the absence of any allegation
that Plaintiffs relied on any such earnings
statement. See 15 U.S.C. § 77k(a).
The Instant Appeal
15, 2016, a panel of this Court granted Appellants'
timely filed petition for permission to appeal the
Certification Order under Federal Rule of Civil
Procedure 23(f) and Federal Rule of Appellate Procedure 5(a).
On August 2, 2016, a separate panel granted Appellants'
motion for a stay pending resolution of this expedited
plaintiff seeking certification of a Rule 23(b)(3) class
action bears the burden of satisfying the requirements of
Rule 23(a)-numerosity, commonality, typicality, and adequacy
of representation-as well as Rule 23(b)(3)'s
requirements: (1) that "the questions of law or fact
common to class members predominate over any questions
affecting only individual members" (the
"predominance" requirement); and (2) that "a
class action is superior to other available methods for
fairly and efficiently adjudicating the controversy"
(the "superiority" requirement). Fed.R.Civ.P.
23(a), (b)(3); In re U.S. Foodservice Inc. Pricing
Litig., 729 F.3d 108, 117 (2d Cir. 2013) ("To
certify a class, a district court must . . . find that each
[Rule 23] requirement is 'established by at least a
preponderance of the evidence.'" (quoting Brown
v. Kelly, 609 F.3d 467, 476 (2d Cir. 2010))). This Court
has also "recognized an implied requirement of
ascertainability in Rule 23, " which demands that a
class be "sufficiently definite so that it is
administratively feasible for the court to determine whether
a particular individual is a member." Brecher v.
Republic of Argentina, 806 F.3d 22, 24 (2d Cir. 2015)
(internal quotation marks and citations omitted).
do not challenge the district court's findings with
regard to the class certification elements under Rule 23(a).
Rather, they assert two arguments under Rule 23(b)(3).
Appellants first argue that both Classes fail to satisfy
ascertainability, predominance, and superiority because
putative class members must establish, on an individual
basis, that they acquired their securities in "domestic
transactions." The Petrobras Defendants assert a second
predominance challenge specific to the Exchange Act Class:
they argue that the district court erred in finding that
Plaintiffs successfully established a class-wide presumption
of reliance under the "fraud on the market" theory.
Standard of Review
review a district court's conclusions as to whether the
requirements of Federal Rule of Civil Procedure 23 were met,
and in turn whether class certification was appropriate, for
abuse of discretion." In re Vivendi, S.A.
Sec. Litig., 838 F.3d 223, 263 (2d Cir. 2016)
(citations omitted). "While we review the district
court's construction of legal standards de novo,
we review the district court's application of those
standards for whether the district court's decision falls
within the range of permissible decisions." Roach v.
T.L. Cannon Corp., 778 F.3d 401, 405 (2d Cir. 2015)
(citing Myers v. Hertz Corp., 624 F.3d 537, 547 (2d
Cir. 2010)). "To the extent that the district
court's decision as to class certification is premised on
a finding of fact, we review that finding for clear
error." UFCW Local 1776 v. Eli Lilly & Co.,
620 F.3d 121, 130-31 (2d Cir. 2010) (citing In re Initial
Pub. Offering Sec. Litig. ("In re
IPO"), 471 F.3d 24, 40-41 (2d Cir. 2006)); see
also In re Vivendi, 838 F.3d at 263.
"Domestic Transactions" as a Condition for Class
certified Classes include all claims arising out of Petrobras
Notes purchased in "domestic transactions" during
the class period, thereby capturing the broadest membership
possible under Morrison. Appellants argue that the
difficulties inherent in assessing putative class
members' transaction records make the Classes
uncertifiable for several reasons, the most important of
which, for our purposes, are (1) the ascertainability
doctrine, which has seen recent developments in this Circuit
and others; and (2) predominance. We hold that both class
definitions satisfy the ascertainability doctrine as it is
defined in this Circuit. We further hold, however, that the
district court erred in conducting its predominance analysis
without considering the need for individualized
Morrison inquiries. On that basis, we vacate the
district court's certification decision and remand for
Extraterritoriality and Federal Securities Law
Defining "Domestic Transactions": Morrison and
is a longstanding principle of American law that legislation
of Congress, unless a contrary intent appears, is meant to
apply only within the territorial jurisdiction of the United
States." Morrison, 561 U.S. at 255 (internal
quotation marks and citation omitted). Based on that
presumption against extraterritoriality, the Supreme Court
held in Morrison that the reach of U.S. securities
law is presumptively limited to (1) "transactions in
securities listed on domestic exchanges, " and (2)
"domestic transactions in other securities."
Id. at 267 (discussing Section 10(b) of the Exchange
Act); see also id. at 268 (noting that "[t]he
same focus on domestic transactions is evident in the
noted in the margin, we assume that a purchase of Petrobras
ADS qualifies under Morrison's first prong as
long as the transaction occurs on the NYSE, a "domestic
exchange." See City of Pontiac Policemen's &
Firemen's Ret. Sys. v. UBS AG, 752 F.3d 173, 180-81
(2d Cir. 2014) (holding that mere listing on a
domestic exchange is not sufficient to establish domesticity
if the relevant securities transaction did not occur
on a domestic exchange). The Notes, however, do not trade on
any domestic exchange. Therefore, to assert claims under