On August 25, 2020, U.S. District Judge Maryellen Noreika certified two classes of investors bringing claims against a student loan servicing company (the “Company”), certain of its executives, and the underwriters of two of the Company’s debt offerings. Lord Abbett Affiliated Fund Inc., et al. v. Navient Corp., et al., No. 1:16-cv-00112 (D. Del. Aug. 25, 2020). Plaintiffs asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (“the Exchange Act”) and Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 (“the Securities Act”) alleging that defendants inflated the price of the Company’s securities by concealing problems in its loan servicing practices and other risks. The Court granted plaintiffs’ motion for class certification in part, certifying one class of investors with alleged claims under the Securities Act and a second narrowed class with alleged claims under the Exchange Act.
Plaintiffs sought to certify two classes under Rule 23(b)(3). First, plaintiffs sought certification of a class under the Exchange Act comprising all persons and entities who purchased or otherwise acquired the Company’s publicly traded securities or sold the Company’s put options, from April 17, 2014, through September 29, 2015 (the “Exchange Act class”). Second, plaintiffs sought certification of a proposed class under the Securities Act comprising all persons and entities who purchased or otherwise acquired the Company’s notes from two offerings, from November 3, 2014, through December 28, 2015 (the “Securities Act class”). Defendants did not challenge plaintiffs’ proposed class for the Securities Act claims at that stage. However, defendants argued that the Exchange Act class should not include (1) persons who received shares as part of the Company’s formation through a spin-off or (2) persons who purchased the Company’s notes.
Regarding shares received through the Company’s spin-off, defendants contended that the operative complaint defined the proposed class as “consisting of all those who purchased” the relevant securities and that because shareholders could not be said to have “purchased” their shares in the spin-off, but instead received those shares through a dividend, they could not be included in the class. While acknowledging that “courts in other circuits have held that a plaintiff may only seek to certify a class as defined in a complaint,” the Court noted that “multiple courts in this circuit have rejected th[is] argument” and courts in the Third Circuit “are not bound by the class definition proposed in the Complaint.” The Court thus held that plaintiffs could seek certification of a class that differed from the class definition proposed in the complaint.
Defendants also contended that the shares purchased as part of the spin-off did not meet Section 10(b)’s “purchase or sale” requirement. The Court rejected this argument, however, explaining that such “merits questions may be considered only to the extent that they are relevant to determining whether the Rule 23 prerequisites for class certification are satisfied,” and holding that such relevance had not been shown.
The Court then turned to defendants’ argument that plaintiffs’ Exchange Act class could not satisfy the predominance requirement for the element of reliance as to the notes. The parties disputed whether plaintiffs adequately demonstrated that they were entitled to rely on a presumption of reliance, either based on the “fraud on the market” theory or on a theory that defendants failed to disclose facts they were under a duty to disclose. The Court analyzed each presumption separately.
Defendants argued that plaintiffs were not entitled to a fraud-on-the-market presumption because plaintiffs failed to show that the market for the Company’s notes was efficient. The Court agreed, noting that, “[u]ltimately, it is the Plaintiffs’ burden to show that the market for the securities at issue is efficient.” The Court held that plaintiffs “have not carried their burden here, because they failed to set out in their opening brief the facts and analysis that would show that the market for [the Company’s] notes is efficient” and instead “focused their analysis on the market for [the Company’s] equity securities and then claimed, in conclusory addenda, that the same analysis applied to [the Company’s] notes.” The Court held that such analysis does not establish that an efficient market existed for the Company’s notes, because “the market for stock and debt is not the same.” Finding that plaintiffs failed to sufficiently allege that the Company’s notes traded in an efficient market, the Court held that plaintiffs “cannot rely on a fraud-on-the-market presumption to show reliance as to [the Company’s] notes.”
Finally, the Court considered whether plaintiffs could invoke a presumption of reliance under the Supreme Court’s decision in Affiliated Ute because their claims were based on alleged omissions as to which there was an alleged duty to disclose. In considering the Affiliated Ute analysis, the Court noted that “no presumption arises in cases of alleged misrepresentations” and that “[f]or cases involving both omissions and misrepresentations, which Affiliated Ute did not address, the court may apply the presumption only where the offenses can be characterized primarily as omissions.” Turning to plaintiffs’ allegations, the Court held that “the offenses alleged in Plaintiffs’ second amended complaint can be primarily, if not exclusively, characterized as misrepresentations” and that “[t]he only time Plaintiffs’ complaint alleged that defendants’ ‘failed to disclose’ certain information is to explain why the affirmative misstatements satisfy the falsity element required under the [PSLRA].” The Court further held that the allegations explaining why defendants’ statements were false did not transform the misrepresentations into omissions, because “a claim should not be transformed into an omission simply because the defendants failed to disclose that the allegedly misleading fact was untrue.” Thus, “[b]ecause Plaintiffs’ Exchange Act claims may be primarily characterized as misrepresentations, Plaintiffs are not entitled to rely on the Affiliated Ute presumption to establish reliance.” Accordingly, the Court excluded the purchasers of the Company’s notes from the Exchange Act class.
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