It has been a long while since we have updated this particular blog series, but we’re back again with a look at some of the more recent developments in the set of related litigations targeting certain practices adopted by several stock exchanges (the “Exchange Defendants”) which increase the speed at which high-frequency traders (“HFTs”) can execute their trades. For a full refresher, I’d encourage you to take a peek at our two previous posts on this topic (see here and here), but let it suffice to say here that the investor plaintiffs believe that the Exchange Defendants – motivated by the increased fees associated with the rise of high-frequency trading – created products and services that allowed the HFT firms to prey on other investors via allegedly manipulative trading schemes.
After a motion to dismiss, a trip to the appellate court (and back down), and a renewed motion to dismiss, the Southern District eventually found that “Plaintiffs’ allegations (taken as true, for now) have nudged themselves across the line from conceivable to plausible, and, thus, are sufficient at this stage of the litigation.” Dkt. 313 at 24. This decision was followed by substantial discovery, and, earlier this year, the filing of Plaintiffs’ motion for class certification and three motions (by various defendants) for summary judgment on the grounds of preclusion and lack of Article III standing. All four motions are fully briefed and pending decision; this blog post will cover the motion for class certification, with the summary judgment motions to be covered in a future post.
Class Certification
Plaintiffs’ briefing in support of their class certification motion (linked here) makes [] arguments in favor of certification: first, that the evidence needed to prove Plaintiffs’ allegations of securities law violations are “common or generalized evidence…focused on Defendants’ conduct rather than on any particular firm or investor”; second, that the proposed class representatives (City of Providence, VIGERS, Plumbers and Pipefitters National Pension Fund and Boston Retirement System) are similarly situated as to the other class members insofar as both those plaintiffs and each potential class member not only purchased and sold stocks traded on the relevant Exchanges, but suffered damage as a result of the alleged rigging of the market in favor of the HFT firms.
Requirements of Rules 23(a)
Rule 23(a) requires showings of numerosity, typicality, common questions of law or fact, and whether the named plaintiffs and lead counsel can adequately represent the interests of the proposed class. Plaintiffs posit that numerosity requirements have been met because, “during the Class Period, Defendants’ exchanges listed several thousand companies,” and because “millions of trades of publicly held stock occurred daily on Defendants’ exchanges.”
With respect to the commonality requirement – something Plaintiffs note the Southern District has described as “not demanding” (see Pl. Br. at 13, citing Brooklyn Ctr. for Indep. of the Disabled v. Bloomberg, 290 F.R.D. 409, 418 (S.D.N.Y. 2012) – Plaintiffs argue that “virtually all” questions of law and fact raised by the complaint are common to the class, and that such questions are answerable by way of “generalized class-wide proof.” Those questions include “whether Defendants violated the Exchange Act; whether Defendants implemented the manipulative acts, devices or contrivances or engaged in the alleged fraudulent scheme and course of business; whether Defendants omitted material facts and concealed material information concerning the HFT firms’ use of their products and services; whether Defendants acted with scienter; and whether investors suffered damages as a result of Defendants’ conduct.”
The typicality question is also met, Plaintiffs argue, because the proposed class is comprised of investors who purchased or sold equity on the Exchanges, and both Plaintiffs and the proposed class members suffered the same type of injuries as a result of Defendants’ “prey[ing] on investors’ trades.”
Finally, Plaintiffs are confident that the “adequate representation” requirement has been met, as “Plaintiffs’ interests in establishing Defendants’ liability and maximizing the recovery are aligned with those of the class,” and because Plaintiffs have “followed through with their commitment to take an active role in directing the litigation and overseeing Co-Lead Counsel’s efforts.”
Requirements of Rules 23(b)
Once the requirements of Rule 23(a) have been met, it must be determined if a class action can be maintained under one of the three subsections of Rule 24(b). Plaintiffs here sought class certification under Rule 23(b)(3), which requires a finding that “questions of law or fact common to class members predominate any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.”
Plaintiffs first observe that “predominance is a test readily met in certain cases alleging securities fraud,” and that the inquiry “boils down to whether proposed classes are sufficiently cohesive to warrant adjudication by representation.” This test is met, according to Plaintiffs, because questions of liability will focus on defendants’ conduct, and will turn on questions – and answers – common to all class members. Issues of scienter will also be a common question, Plaintiffs argue, because “Defendants’ state of mind did not differ with respect to individual class members.”
Further, Plaintiffs argue that the fraud-on-the-market doctrine applies here, and, as such, predominance has been met because the Plaintiffs are entitled to a presumption of reliance under Affiliated Ute. That doctrine excuses plaintiffs from offering direct proof of reliance, provided they show an omission of a “material fact” by a defendant, where there existed a duty to disclose. Here, Plaintiffs had alleged that the Exchanges failed to disclose the range or impacts of the services they offered, and that these alleged omissions were material. Plaintiffs also note that materiality is itself a question common to the class, and thus not one that needs to be proved at this stage.
Plaintiffs next address the question of damages, which they explain can be calculated on a class-wide basis. Pointing to certain academic articles, Plaintiffs note that several academics have quantified the economic costs imposed on investors as a result of the advantages the trading Exchanges granted to HFT firms, and that their own experts have applied such principals to develop methodologies for calculating overall damages. Finally, Plaintiffs insist that a class action here satisfies the superiority requirement: the litigation of the claims individually would not be economically viable for most investors in the proposed class, and the concentrating the litigation in a single Court – important, given that the investors are geographically diverse – would both remove the risk of inconsistent adjudication and improve judicial efficiency.
Opposition & Reply
Papers in opposition to the motion to certify were filed in July 2021, with reply papers submitted in September. Unfortunately for us, briefs for both filings were made under (temporary) seal. We’ll be keeping our fingers crossed that Judge Furman unseals the briefs – or at least directs the filing of a redacted version – when the order on the motion is issued.
Until then, thanks for reading, and be sure to subscribe below for future posts and updates.
This post was written by Alexandra M.C. Douglas.