Loftin v. Bande

07-4017-cv (L), 07-4025-cv (CON)
Loftin v. Bande

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT vbn

August Term, 2008

(Argued: April 23, 2009 Decided: July 22, 2009)

Docket Nos. 07-4017-cv (L), 07-4025-cv (CON)

In re Flag Telecom Holdings, Ltd. Securities Litigation

PETER T. LOFTIN, NORMAN H. HUNTER, and JOSEPH COUGHLIN, individually
and on behalf of all others similarly situated,

Plaintiffs-Appellees,

-v-

ANDRES BANDE, EDWARD MCCORMACK, EDWARD MCQUAID, PHILIP
SESKIN, DANIEL PETRI, DR. LIM LEK SUAN, LARRY BAUTISTA, and
CITIGROUP GLOBAL MARKETS INC., formerly known as Salomon Smith Barney
Holdings Inc.,

Defendants-Appellants.

Before: POOLER, HALL, Circuit Judges, and SWEET, District Judge. 


The Honorable Robert W. Sweet, of the United States District Court for the Southern District of New
York, sitting by designation.
 Appeal from an order entered in the United States District Court for the Southern
District of New York (William C. Conner, Judge) certifying a single class of plaintiffs
alleging claims under both the Securities Act of 1933 and the Securities Exchange Act of
1934. Because we find that the district court did not abuse its discretion in concluding
that the requirements of Rule 23 were satisfied with respect to the single class, we
AFFIRM the order granting certification, but we VACATE that portion of the order
which includes as members of the class individuals who sold their shares prior to
February 13, 2002, and REMAND for further proceedings.

ARTHUR R. MILLER, Milberg LLP, New York, NY (Brad N. Friedman,
Matthew A. Kupillas, and Arvind B. Khurana, on the brief) for Plaintiffs-
Appellees.

JEROME S. FORTINSKY, Sherman & Sterling LLP, New York, NY (Daniel H.R.
Laguardia and Jeffrey J. Resetarits, on the brief) for Defendants-Appellants
Andres Bande, Larry Bautista, Lim Lek Suan, Edward McCormack, Edward
McQuaid, Daniel Petri, and Philip Seskin.

DOUGLAS W. HENKIN, Milbank Tweed Hadley & McCloy LLP, New York, NY
(James N. Benedict, C. Neil Gray, and Kevin M. Ashby, on the brief) for
Defendant-Appellant Citigroup Global Markets, Inc.

SWEET, District Judge:

Defendants Andres Bande, Larry Bautista, Dr. Lim Lek Suan, Edward

McCormack, Edward McQuaid, Daniel Petri, and Philip Seskin (the “Individual

Defendants”) and Citigroup Global Markets Inc. (“Citigroup”) (collectively, the

“Defendants”) appeal from an order of the United States District Court for the Southern

District of New York (Conner, J.) certifying the proposed class and appointing Peter T.

Loftin, Norman H. Hunter and Joseph Coughlin (“Plaintiffs”) to serve as class

representatives and Milberg Weiss LLP to serve as class counsel.

This appeal raises issues implicating both the substance of the often

overlapping requirements of typicality and adequacy laid out in Rule 23(a) of the Federal

Rules of Civil Procedure and the correct standard of proof to be applied by courts in this

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context. We conclude that while the district court did not abuse its discretion in granting

certification of a class encompassing members who allege claims under both the

Securities Act of 1933 (the “‘33 Act”) and the Securities Exchange Act of 1934 (the “‘34

Act”), it did err in certifying as members of the class those individuals who sold their

stock prior to the February 13, 2002 close of the class period.

BACKGROUND

In February 2000, Flag Telecom Holdings, Ltd. (“Flag” or the

“Company”), a self-described telecommunications “carriers’ carrier” whose business

involved the sale of access to its telecommunications network, offered its shares to the

public in an initial public offering (“IPO”). See In re Flag Telecom Holdings, Ltd. Sec.

Litig. (“In re Flag”), 245 F.R.D. 147, 151-52 (S.D.N.Y. 2007). In the prospectus, which

was incorporated into the registration statement filed with the U.S. Securities and

Exchange Commission in connection with the IPO, Flag stated that it had obtained $600

million in bank financing and presales of $750 million to construct the Flag Atlantic-1

cable system (the “FA-1 system”), a fiber-optic submarine cable connecting Paris and

London to New York.

According to Plaintiffs, despite an over-supply of fiber optic capacity in

the market generally, Defendants made various misstatements and omissions in the

prospectus and during the two years following the IPO, assuring investors that demand

for Flag’s cable remained strong. On February 13, 2002, the Company disclosed, inter

alia, that approximately 14% of the Company’s GAAP revenues for the year ending

December 31, 2001, were associated with so-called “reciprocal transactions.” Described

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by the lower court as “swaps of telecommunications capacity between competitors,”

reciprocal sales

may be entered into for legitimate reasons, i.e. to acquire
access on networks in a market that a company wishes to
enter in exchange for capacity that has yet to be sold and is
not otherwise in use (“dark fiber”) . . . [or] can also be
utilized by a company seeking to defraud investors or its
creditors to create the impression that the company is
selling capacity when it is merely unloading useless dark
fiber on one of its networks in exchange for useless dark
fiber on a competitor's network.

In re Flag Telecom Holdings, Ltd. Sec. Litig., 352 F. Supp. 2d 429, 461 (S.D.N.Y. 2005).

Following the announcement, Flag stock dropped 46% from its closing price on February

12, 2002, to $0.36 per share on February 13, 2002.

Shortly after, on April 1, 2002, Flag filed its 10-K report for fiscal year

2001, disclosing that the asset value of its FA-1 system was impaired and that it was

forced to recognize an impairment charge of $359 million. On April 12, 2002, the

Company filed its Chapter 11 bankruptcy petition. Before being canceled pursuant to

Flag’s court-approved Chapter 11 plan in September 2002, the Company’s common stock

was trading at $0.002 per share, having traded as low as $0.0001 per share during the

bankruptcy.

The first of several securities class actions was filed against Defendants in

connection with these events in April 2002. In October 2002, the Honorable William C.

Conner consolidated several of the actions and appointed Loftin, who purchased

approximately 1.7 million shares of Flag common stock between July 17, 2000, and

September 22, 2000, Lead Plaintiff and Milberg Weiss Bershad Hynes & Lerach LLP

Lead Counsel. Plaintiffs filed a Consolidated Amended Complaint on March 20, 2003,

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and a Second Consolidated Amended Complaint on December 1, 2003. Judge Conner

dismissed the Second Consolidated Amended Complaint without prejudice, and a Third

Consolidated Amended Complaint was filed on April 14, 2004, adding Hunter, who

purchased 200 shares of Flag stock in the IPO, as a plaintiff.

Plaintiffs bring the instant action on behalf of those who purchased or

otherwise acquired Flag common stock between February 11, 2000, and February 13,

2002 (the “Class Period”) for violations of §§ 11, 12(a)(2), and 15 of the ’33 Act (the

“‘33 Act Plaintiffs”) and §§ 10(b) and 20(a) of the ‘34 Act and Rule 10b-5 promulgated

thereunder (the “‘34 Act Plaintiffs”). Plaintiffs allege that as a result of Defendants’

materially false and misleading statements in the Company’s registration statement, SEC

filings, and press releases, the value of Flag stock was artificially inflated during the

Class Period. Specifically, the ‘33 Act Plaintiffs allege that Defendants’ statements in the

prospectus regarding the FA-1 system and the $750 million in presales were misleading

in that certain of the presales were entered into to ensure financing and did not accurately

represent profit or demand. 1 The ‘34 Act Plaintiffs allege that the Individual Defendants

made false and misleading statements regarding the Company’s profitability, most

notably by falsely reporting the types of reciprocal sales described above.

In an Amended Opinion and Order dated January 23, 2006, Judge Conner

denied Defendants’ motion to dismiss, holding that Defendants had not satisfied their

burden to establish negative causation with respect to the ‘33 Act Plaintiffs’ claims as

required by 15 U.S.C. §§ 77k(e) and 77l(b). See In re Flag Telecom Holdings, Ltd. Sec.

Litig., 411 F. Supp. 2d 377, 383-84 (S.D.N.Y. 2006). The district court rejected

1
Citigroup served as the lead underwriter of the IPO, and the Individual Defendants all served as directors
or officers of Flag around the time of the IPO.

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Defendants’ argument that since the ‘33 Act Plaintiffs did not learn of the allegedly

misleading pre-sale until after the November 2003 filing of a complaint in a related state

court action, 2 at which time Flag common stock had been cancelled and was already

worthless, none of the decline in the stock’s value could be attributed to those

misstatements. The court found that Defendants had not “demonstrate[d] that the decline

was not due, at least in part, to the alleged misrepresentations concerning pre-sales in

Flag’s Prospectus, which presumably inflated the price level attained in the IPO and

thereby heightened the loss when the price fell virtually to zero.” Id. at 384. With the

court’s approval, Plaintiffs filed a Fourth Consolidated Amended Complaint on October

15, 2007.

In September 2007, the district court granted Plaintiffs’ motion for

certification pursuant to Fed. R. Civ. P. 23 and appointed Loftin, Hunter, and Coughlin 3

class representatives and Milberg Weiss LLP class counsel. Judge Conner defined the

certified class as follows:

All persons or entities who purchased common stock of
Flag Telecom Holdings, Ltd. (“Flag” or the “Company”)
between March 6, 2000 and February 13, 2002, inclusive,
as well as those who purchased Flag common stock
pursuant to or traceable to the Company's initial public
offering between February 11, 2000 and May 10, 2000,
inclusive (collectively, the “Class Period”), but shall
exclude: (1) defendants herein, members of each individual
defendants' immediate family, any entity in which any
defendant has a controlling interest, and the legal affiliates,
representatives, heirs, controlling persons, successors and

2
The “Rahl Complaint,” filed in the Supreme Court of New York State, New York County, on November
19, 2003, by the Trustee of the Flag Litigation Trust, asserts various claims for breaches of fiduciary duties
against several defendants, including several of the Individual Defendants named in this action. See Rahl
v. Bande, 316 B.R. 127 (S.D.N.Y. 2004).
3
Coughlin, who purchased 250 shares in the IPO on February 23, 2000, and 100 shares in the market on
July 3, 2001, brings claims under both the ‘33 and ‘34 Acts.

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 predecessors in interest or assigns of any such extended
party; (2) Verizon Communications, Inc.; and (3) entities
that had the right to appoint a director to Flag's Board of
Directors and proceeded to make such an appointment (or,
for reasons unique to them, chose not to exercise such
right), such as Dallah Albaraka Holding Company,
Telecom Asia Corporation Public Co. Ltd., Marubeni
Corporation, the Asian Infrastructure Fund and Tyco
International Ltd.

In re Flag, 245 F.R.D. at 174. In determining that Plaintiffs had established each of the

Fed. R. Civ. P. Rule 23(a) and (b)(3) requirements, the lower court rejected several of

Defendants’ arguments now before us on appeal.

With respect to the typicality requirement of Rule 23(a)(3), Judge Conner

concluded that “the typicality requirement is met because plaintiffs . . . like the putative

class members, will attempt to prove that they purchased Flag common stock during the

Class Period and were injured by defendants’ false and misleading representations made

in the Registration Statement and throughout the Class Period in violation of the

securities laws.” Id. at 159. In so doing, the lower court rejected Defendants’ argument

that a “fundamental conflict” exists between the ‘33 Act and ‘34 Act Plaintiffs. Id.

Recognizing that the ‘33 Act Plaintiffs are subject to a “negative causation” affirmative

defense under 15 U.S.C. §§ 77k(e) and 77l(b), which precludes recovery where

defendants can show “that the decline in Flag’s stock price was due to something other

than the alleged misstatements concerning the pre-sales,” while the ‘34 Act Plaintiffs are

required to prove “loss causation,” or “that the decline in Flag’s stock price was due to,

inter alia, the failure to appropriately disclose the reciprocal transactions that took place

after the IPO,” the district court concluded that “the two sets of claims are not

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antagonistic to each other because proof of one does not negate an essential element of

the other.” Id. at 160.

Judge Conner also rejected Defendants’ several challenges to the

adequacy of the class representatives. Of particular relevance to Defendants’ appeal, the

district court found that the class properly included those purchasers who sold their Flag

shares before February 13, 2002, the last day of the Class Period and the date on which

Plaintiffs allege Flag disclosed the truth behind the alleged misstatements to the public.

According to Judge Conner, Plaintiffs sufficiently demonstrated that the truth regarding

Flag’s financial condition began leaking into the market prior to February 13, 2002.

Based on various allegations and an event study submitted by Plaintiffs’ expert, the

district court held it “conceivable that in-and-out purchasers asserting claims under both

the ‘33 and ‘34 Act may be able to overcome defendants’ affirmative defense of negative

causation and prove loss causation, respectively, notwithstanding that the February 13,

2002 announcement is the most critical corrective disclosure.” Id. at 167.

On September 19, 2007, Defendants sought leave to appeal the district

court’s grant of Plaintiffs’ motion for class certification pursuant to Fed. R. Civ. P. 23(f)

and Fed. R. App. P. 5, which we granted on December 12, 2007.

DISCUSSION

In reviewing class certification under Rule 23, we apply an abuse-of-

discretion standard to both the lower court’s ultimate determination on certification, as

well as to its rulings that the individual Rule 23 requirements have been met. In re Initial

Pub. Offerings Sec. Litig. (“In re IPO”), 471 F.3d 24, 31-32 (2d Cir. 2006). The factual

7
findings underlying the ruling are reviewed for clear error, and we review de novo

whether the correct legal standard was applied. Id. at 40-41. Where, as here, the appeal

challenges the lower court’s grant of class certification, “we accord the district court

noticeably more deference than when we review a denial of class certification.” In re

Salomon Analyst Metromedia Litig., 544 F.3d 474, 480 (2d Cir. 2008) (citation omitted).

Rule 23(a) sets out the requirements for class certification:

(1) the class is so numerous that joinder of all members is
impracticable; (2) there are questions of law or fact
common to the class; (3) the claims or defenses of the
representative parties are typical of the claims or defenses
of the class; and (4) the representative parties will fairly
and adequately protect the interests of the class.

Fed. R. Civ. P. 23(a). We recently set forth the standard of proof governing class

certification as follows:

(1) a district judge may certify a class only after making
determinations that each of the Rule 23 requirements has
been met; (2) such determinations can be made only if the
judge resolves factual disputes relevant to each Rule 23
requirement and finds that whatever underlying facts are
relevant to a particular Rule 23 requirement have been
established and is persuaded to rule, based on the relevant
facts and the applicable legal standard, that the requirement
is met; (3) the obligation to make such determinations is
not lessened by overlap between a Rule 23 requirement and
a merits issue, even a merits issue that is identical with a
Rule 23 requirement; (4) in making such determinations, a
district judge should not assess any aspect of the merits
unrelated to a Rule 23 requirement; . . . .

In re IPO, 471 F.3d at 41. In a later clarification, we further described “the standard of

proof applicable to evidence proffered to meet” the requirements of Rule 23 as a

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“preponderance of the evidence.” Teamsters Local 445 Freight Div. Pension Fund v.

Bombardier Inc., 546 F.3d 196, 202 (2d Cir. 2008).

To establish typicality under Rule 23(a)(3), the party seeking certification

must show that “each class member’s claim arises from the same course of events and

each class member makes similar legal arguments to prove the defendant’s liability.”

Robidoux v. Celani, 987 F.2d 931, 936 (2d Cir. 1993). Adequacy “entails inquiry as to

whether: 1) plaintiff’s interests are antagonistic to the interest of other members of the

class and 2) plaintiff’s attorneys are qualified, experienced and able to conduct the

litigation.” Baffa v. Donaldson, Lufkin & Jenrette Sec. Corp., 222 F.3d 52, 60 (2d Cir.

2000). The focus is on uncovering “conflicts of interest between named parties and the

class they seek to represent.” Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 625, 117

S. Ct. 2231, 2250, 138 L. Ed. 2d 689 (1997). In order to defeat a motion for certification,

however, the conflict “must be fundamental.” In re Visa Check/MasterMoney Antitrust

Litig. (“In re Visa”), 280 F.3d 124, 145 (2d Cir. 2001) (internal quotations and citation

omitted), abrogated in part by In re IPO, 471 F.3d 24.

I. Disabling Intra-Class Conflict

On appeal, Defendants renew their argument that the class suffers from a

fundamental conflict rendering it uncertifiable because “success for the ‘34 Act plaintiffs

necessarily precludes recovery by the ‘33 Act plaintiffs and vice-versa.” Citigroup Br. at

31. We do not find, however, that the district court abused its discretion in concluding

that the typicality requirement is met in this case despite the conflict described by

Defendants. Although Judge Conner did not directly address the conflict issue in

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connection with the adequacy requirement, we also find that the court did not abuse its

discretion in determining that any antagonistic interests with respect to causation do not

constitute the type of “fundamental” conflict that renders the class uncertifiable. See id.

It is well-established that plaintiffs alleging claims under Section 10(b) of

the ‘34 Act must prove loss causation. See 15 U.S.C. § 78u-4(b)(4) (“[T]he plaintiff shall

have the burden of proving that the act or omission of the defendant alleged to violate this

chapter caused the loss for which the plaintiff seeks to recover damages.”); Stoneridge

Inv. Partners, LLC v. Scientific-Atlanta, Inc., 128 S. Ct. 761, 768 (2008) (describing six

elements of typical 10(b) claim as “(1) a material misrepresentation or omission by the

defendant; (2) scienter; (3) a connection between the misrepresentation or omission and

the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5)

economic loss; and (6) loss causation”). To prove loss causation, a plaintiff must

demonstrate “that the misstatement or omission concealed something from the market

that, when disclosed, negatively affected the value of the security.” Lentell v. Merrill

Lynch & Co., 396 F.3d 161, 173 (2d Cir. 2005). By contrast, under the ‘33 Act, it is the

defendant who bears the burden of demonstrating that something other than the

misstatement at issue caused plaintiff’s loss. See 15 U.S.C. §§ 77k(e), 771(b); Akerman

v. Oryx Commc’ns, Inc., 810 F.2d 336, 340-42 (2d Cir. 1987) (describing defendants’

“heavy burden” of proving negative causation under § 11 of the ‘33 Act).

As the lower court recognized, we have repeatedly analogized the concept

of loss causation to proximate cause. See, e.g., Lentell, 396 F.3d at 173 (stating that

although “the tort analogy is imperfect,” “a misstatement or omission is the ‘proximate

cause’ of an investment loss if the risk that caused the loss was within the zone of risk

10
concealed by the misrepresentations and omissions alleged by a disappointed investor”

(emphasis in original)); Emergent Capital Inv. Mgmt., LLC v. Stonepath Group, Inc., 343

F.3d 189, 197 (2d Cir. 2003) (“We have often compared loss causation to the tort law

concept of proximate cause, meaning that the damages suffered by plaintiff must be a

foreseeable consequence of any misrepresentation or material omission.” (internal

quotations and citation omitted)). In relying on this familiar concept, Judge Conner

found fault with Defendants’ argument which, the court concluded, mistakenly

“overlooks that the decline in value of Flag stock may have been caused by both the

alleged fraud relating to the reciprocal transactions and the alleged misstatements relating

to pre-sales found in the Registration Statement.” In re Flag, 245 F.R.D. at 159-60

(emphasis in original).

Defendants take issue with the lower court’s application of proximate

cause to the facts here, namely, its conclusion that the decline in value of Flag stock “may

have been caused by either or both of [the] alleged acts of deception.” In re Flag, 245

F.R.D. at 160. They argue that under the Supreme Court’s holding in Dura

Pharmaceuticals., Inc. v. Broudo, 544 U.S. 336, 125 S. Ct. 1627, 161 L. Ed. 2d 577

(2005), loss causation and negative causation add up to a “zero-sum game,” and that by

establishing loss causation, the ‘34 Act Plaintiffs will necessarily undermine the ‘33 Act

Plaintiffs’ ability to rebut Defendants’ negative causation defense. Individual Defendants

Br. at 20.

We agree with the lower court that the ‘34 Act Plaintiffs can establish “the

causal link between the alleged misconduct and the economic harm ultimately suffered

by the plaintiff,” Emergent Capital Inv. Mgmt., 343 F.3d at 197, without threatening the

11
interests of the ‘33 Act Plaintiffs to such a degree as to render the certified class

representatives atypical or inadequate. Dura stands for the proposition that in fraud-on-

the-market cases, “an inflated purchase price will not itself constitute or proximately

cause the relevant economic loss.” 544 U.S. at 342, 125 S. Ct. 1627. Rather, to establish

loss causation, Dura requires plaintiffs to disaggregate those losses caused by “changed

economic circumstances, changed investor expectations, new industry-specific or firm-

specific facts, conditions, or other events,” from disclosures of the truth behind the

alleged misstatements. Id. at 342-43, 125 S. Ct. 1627; see Lattanzio v. Deloitte &

Touche LLP, 476 F.3d 147, 157-58 (2d Cir. 2007) (finding plaintiffs failed to allege

sufficient facts to show that defendant’s misstatements were the proximate cause of

plaintiffs’ losses where non-party’s misstatements could also have caused the loss and

plaintiffs did not “allege[] facts that would allow a factfinder to ascribe some rough

proportion of the whole loss to [defendant’s] misstatements”).

Although Defendants have contended to the contrary, it is not inconsistent

with Dura to permit both the ‘33 and ‘34 Act Plaintiffs to proceed as a single class in

establishing that each of the misstatements alleged in the complaint was the proximate

cause of some portion of Plaintiffs’ losses. Securities class actions involving more than

one misstatement are far from unusual, and both Plaintiffs and Defendants cite several

post-Dura examples of district courts granting certification where plaintiffs alleged

claims under both the ‘33 and ‘34 Acts. See, e.g., In re Vivendi Universal, S.A. Sec.

Litig., 242 F.R.D. 76 (S.D.N.Y. 2007); In re Initial Pub. Offering Sec. Litig., 243 F.R.D.

79 (S.D.N.Y. 2007); In re Tyco Int’l, Ltd., 236 F.R.D. 62 (D.N.H. 2006). Defendants

attempt to distinguish these cases from the instant case on the grounds that they “involved

12
allegations of misstatements made in a single document or allegations of a series of

misstatements regarding the same subject,” while the allegations here involve unrelated

misstatements. Individual Defendants Br. at 24—25 n.19. While the relatedness of the

alleged misstatements may be relevant to the typicality inquiry generally, see, e.g.,

Robidoux, 987 F.2d at 936-37, we fail to see how this distinction implicates Dura.

Defendants point out that “disaggregation requires that a cause be assigned to each piece

of a stock price decline and precludes assigning two different causes to the same quantum

of loss.” Individual Defendants Br. at 22. This is true; however, in every litigation of

this type, the pool of money available for each individual class member’s recovery is

limited to the loss that the individual actually incurred. We see nothing in the record

before us that indicates that in these circumstances, where certain plaintiffs are subject to

a negative causation affirmative defense, such a requirement precludes the certification of

a single class.

In affirming Judge Conner’s order with respect to certification of a single

class of ‘33 and ‘34 Act Plaintiffs, we do not suggest that the issue described by

Defendants does not deserve the careful and continued attention of the district court, but

merely that it does not inevitably lead at the present time to the decertification of the

class. As the lower court recognized, if Plaintiffs are able to prove loss causation with

respect to both the ‘33 and ‘34 Act claims, then it will be necessary for a jury “to

determine the extent of harm caused by each [misstatement], and “it is here that the

interests of class members could diverge.” In re Flag, 245 F.R.D. at 160. We are

confident in the lower court’s wisdom and ability to utilize the available case

management tools to see that all members of the class are protected, including but not

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limited to the authority to alter or amend the class certification order pursuant to Rule

23(c)(1)(C), to certify subclasses pursuant to Rule 23(c)(5), and the authority under Rule

23(d) to issue orders ensuring “the fair and efficient conduct of the action.” Advisory

Committee Note on Subdivision (d); see Marisol A. v. Giuliani, 126 F.3d 372, 379 (2d

Cir. 1997) (per curiam) (describing “ample tools” available to district court “to fulfill its

responsibility” under Rule 23).

II. In-and-Out Traders

Defendants next argue that the lower court abused its discretion by

including as members of the certified class those investors who sold their stock before the

February 13, 2002 alleged corrective disclosures were made. Class Representative

Hunter, who purchased 200 shares in the IPO and sold them in November 2001, several

months before the February 13, 2002 disclosures, is one such purchaser. We consider

Defendants’ argument with respect to these so-called “in-and-out” traders as implicating

the court’s authority to define the class, pursuant to Fed. R. Civ. P. 23(c)(1)(B), and the

typicality and adequacy of representation requirements of Rule 23(a).

Before addressing whether the lower court erred by certifying in-and-out

traders in this case, we must first briefly address Plaintiffs’ argument that this issue is not

properly before us on Defendants’ Rule 23(f) appeal. Rule 23(f) gives this court the

authority to “permit an appeal from an order granting or denying class-action certification

under this rule.” Fed. R. Civ. P. 23(f). Plaintiffs contend that Defendants’ argument with

respect to the in-and-out traders goes solely to loss causation, a merits issue properly

raised in an appeal of a motion to dismiss or summary judgment order, rather than an

14
appeal of an order granting class certification. We do not agree that Defendants’

arguments with respect to the in-and-out traders in this context can be so cleanly

separated from class certification as to render the issue outside the scope of our Rule

23(f) review.

Given the district court’s careful attention to the issue, the lower court

clearly considered the in-and-out traders’ ability to prove loss causation as relevant to

Plaintiffs’ certification motion. See In re Flag, 245 F.R.D. at 165-68. Under In re IPO,

lower courts have an “obligation” to resolve factual disputes relevant to the Rule 23

requirements and to determine whether the requirements are met, an obligation “not

lessened by overlap between a Rule 23 requirement and a merits issue, even a merits

issue that is identical with a Rule 23 requirement.” 471 F.3d at 41. To the extent the

lower court was required to make factual findings or conclusions of law with respect to

any of the Rule 23 requirements, including the definition of the class, those

determinations are reviewable here. 4 Id. at 42 (“[W]e decline to follow the dictum in

Heerwagen [v. Clear Channel Commc’n, 435 F.3d 219 (2d Cir. 2006)], suggesting that a

district judge may not weigh conflicting evidence and determine the existence of a Rule

23 requirement just because that requirement is identical to an issue on the merits.”).

Defendants again rely on Dura to argue that any purchaser who sold his or

her stock prior to Flag’s February 13, 2002 announcement cannot prove loss causation,

4
Defendants also seek review of the district court’s denial of its motion to dismiss the ‘33 Act Plaintiffs’
claims. See In re Flag Telecom Holdings, Ltd. Sec. Litig., 411 F. Supp. 2d 377. According to Defendants,
we are permitted under Rule 23(f) to “address issues that should have resulted in the dismissal of some or
all claims prior to class certification to the extent that such dismissal would have precluded class
certification.” Citigroup Br. at 25. We disagree. Defendants’ interpretation of the scope of Rule 23(f),
even in light of In re IPO, goes too far, and we therefore do not reach the lower court’s motion to dismiss
on this appeal. See also Regents of the Univ. of Cal. v. Credit Suisse First Boston (USA), Inc., 482 F.3d
372, 380 (5th Cir. 2007) (acknowledging that although “[t]he fact that an issue is relevant to both class
certification and the merits . . . does not preclude review of that issue,” “the text of [Rule 23(f)] makes plain
that the sole order that may be appealed is the class certification”).

15
and is, at minimum, subject to unique defenses. Judge Conner concluded that since it

was “conceivable” that in-and-out traders “may be able” to defeat Defendants’ negative

causation defense and prove loss causation “notwithstanding that the February 13, 2002

announcement is the most critical corrective disclosure,” they were properly included in

the certified class. In re Flag, 245 F.R.D. at 167.

Defendants argue, and we agree, that the district court’s “conceivable”

standard of proof does not satisfy the preponderance of the evidence standard set forth in

In re IPO and its progeny. See Bombardier, 546 F.3d at 202 (“[T]he preponderance of

the evidence standard applies to evidence proffered to establish Rule 23’s

requirements.”). While applying a more rigorous standard to the other Rule 23

requirements, the district court quoted Roth v. Aon, 238 F.R.D. 603, 607-08 (N.D. Ill.

2006), in support of the proposition that courts facing a challenge to the inclusion of in-

and-out traders must only determine whether these traders “could conceivably satisfy the

requirement of loss causation, and [should] therefore [be] included in the proposed class.”

In re Flag, 245 F.R.D. at 167 (quotations and citation omitted) (alterations in original).

While we do not disagree with the premise that it may be “premature for

courts to attempt to determine whether in-and-out traders have suffered losses at the class

certification stage of the game,” Roth, 238 F.R.D. at 608, “In re IPO makes clear that

courts may resolve contested factual issues where necessary to decide on class

certification, and when a claim cannot succeed as a matter of law, the Court should not

certify a class on that issue.” McLaughlin v. Am. Tobacco Co., 522 F.3d 215, 228 (2d

Cir. 2008) (quotations and citation omitted). To the extent that the district court relied on

16
a lesser standard in drawing its conclusion that the in-and-out traders could prove loss

causation as a matter of law, we find it abused its discretion.

Plaintiffs urge us to reject the approach taken by the Fifth Circuit Court of

Appeals in Oscar Private Equity Inv. v. Allegiance Telecom, Inc., 487 F.3d 261 (5th Cir.

2007), requiring proof of loss causation at the class certification stage, and instead follow

the courts in this Circuit that have rejected such attempts by defendants to require such

proof for certification. Compare Oscar Private Equity Inv. v. Allegiance Telecom, Inc.,

487 F.3d 261, 269 (5th Cir. 2007) (“We hold hence that loss causation must be

established at the class certification stage by a preponderance of all admissible

evidence.”), with Wagner v. Barrick Gold Corp., 251 F.R.D. 112, 118-19 (S.D.N.Y.

2008) (concluding that in order to trigger the fraud-on-the-market presumption and

thereby satisfy the predominance requirement of Rule 23(b)(3), plaintiffs need not prove

loss causation at the class certification stage); Darquea v. Jarden Corp., 06 Civ. 722

(CLB), 2008 WL 622811, at *4 (S.D.N.Y. Mar. 6, 2008) (rejecting Oscar and holding

that to show predominance, “[p]laintiff[s] in the Second Circuit may benefit from the

fraud-on-the-market presumption of reliance at the certification stage based solely on a

showing that they made purchases or sales in an efficient market, and need not show that

they specifically relied on the allegedly fraudulent conduct, as reliance-an element of a

10(b) claims-is presumed.”); In re Omnicom Group, Inc. Sec. Litig., No. 02 Civ. 4483

(RCC), 2007 WL 1280640, at *8 (S.D.N.Y. Apr. 30, 2007) (rejecting loss causation

challenge to predominance as “an attempt to litigate class certification on the merits of

the action”). Each of these cases, however, including Oscar, discusses proof of loss

causation in the context of the Rule 23(b)(3) predominance requirement, and the cases

17
cited from this Circuit represent the position that a plaintiff is entitled to a presumption of

reliance at the certification stage that does not require the court to make a conclusive

finding as to loss causation in order to trigger the fraud-on-the-market presumption laid

out in Basic Inc. v. Levinson, 485 U.S. 224, 108 S. Ct. 978, 99 L. Ed. 2d 194 (1988), an

issue that is not before us here.

By contrast, whether or not Plaintiffs here have met their burden in

establishing that the in-and-out traders will be able to show loss causation is relevant to

Rule 23(a) for reasons that do not implicate either predominance or Basic. Since the

lower court appointed Hunter, an in-and-out trader, as Class Representative, Judge

Conner was required to find, by a preponderance of the evidence, that he is both an

adequate and typical representative of the class and not subject to any “unique defenses

which threaten to become the focus of the litigation.” Baffa, 222 F.3d at 59.

Rather than remand this issue to the district court to consider whether the

in-and-out traders were properly included in the class, we conclude that Plaintiffs have

not presented sufficient evidence to demonstrate that the in-and-out traders will even

“conceivably” be able to prove loss causation as a matter of law, and that they therefore

should not have been included in the certified class. See McLaughlin, 522 F.3d at 228.

In Dura, the Supreme Court rejected the view that an inflated purchase

price is sufficient to plead loss causation on 10(b) claims. 544 U.S. at 340, 125 S. Ct.

1627. In so doing, the Court recognized that while “an initially inflated purchase price

might mean a later loss . . . that is far from inevitably so.” Id. at 342, 125 S. Ct. 1627

(emphasis in original). Indeed, “that lower price may reflect, not the earlier

misrepresentation, but changed economic circumstances, changed investor expectations,

18
new industry-specific or firm-specific facts, conditions, or other events, which taken

separately or together account for some or all of that lower price.” Id. at 343, 125 S. Ct.

1627.

The Supreme Court’s holding in Dura did not represent a break from this

Circuit’s approach to loss causation, but rather reaffirmed the analysis we laid out in

Lentell, 396 F.3d at 173 (holding that to prove loss causation, a plaintiff must allege “that

the misstatement or omission concealed something from the market that, when disclosed,

negatively affected the value of the security”). In Lentell, we described the two

requirements necessary to establish loss causation: 1) the loss must be foreseeable, and

2) the loss must have been caused by the materialization of the concealed risk. Id. In

order to satisfy the foreseeability prong, a plaintiff must prove that the risk “was within

the zone of risk concealed by the misrepresentations and omissions alleged by the

disappointed investor.” Id. (emphasis in original).

The standards laid out in Dura and Lentell are relevant to the in-and-out

traders because in order to prove loss causation, any plaintiff who sold their stock prior to

the February 13, 2002 disclosure must prove that the loss they suffered was both

foreseeable and caused by the “materialization of the concealed risk.” The leakage

theory put forth by Plaintiffs, 5 and accepted as “conceivable” by the lower court, is based

on evidence that “the truth regarding Flag’s financial condition began to leak into the

market prior to the February 13, 2002 announcement, causing the value of Flag common

stock to decline.” In re Flag, 245 F.R.D. at 166. In support of this theory, Plaintiffs point

5
We do not take issue with the plausibility of Plaintiffs’ “leakage” theory. Indeed, in Lentell, we explicitly
acknowledged that loss causation can be established by a “corrective disclosure to the market” that
“reveal[s] . . . the falsity of prior recommendations.” Lentell, 396 F.3d at 175 n.4. And nowhere does
either Dura or our precedent suggest that such disclosures must come from the Company itself.

19
to an “event study” prepared by Plaintiffs’ expert, Dr. Hakala, and several “industry

events” that occurred prior to the Company’s own February 13, 2002 announcement, that

they claim sufficiently establish loss causation for the in-and-out traders’ claims. 6 None

of this evidence, however, satisfies Lentell because Plaintiffs have failed to demonstrate

that any of the information that “leaked” into the market prior to February 13, 2002,

revealed the truth with respect to the specific misrepresentations alleged. Lentell, 396

F.3d at 175.

According to Plaintiffs, “the truth about demand and profitability began to

leak into the market as early as February 2001 through ‘industry events’” and “by August

2001, specific news concerning Flag began to leak into the market and depressed Flag’s

share price further.” Plaintiffs Br. at 17-18. However, rather than providing evidence of

corrective disclosures, the industry events cited by Plaintiffs appear in their complaint in

the context of Defendants’ misleading statements themselves. See Third Consolidated

Amended Complaint ¶ 113 (“[D]efendant McCormack’s statements about the Company’s

supposedly ‘enviable’ position were an attempt to inaccurately and misleadingly create

the impression that FLAG was not in the unenviable position of its competitors, who

were being adversely affected by the glut of bandwidth supply, falling prices and raising

costs.”); ¶ 119 (“FLAG’s purpose in providing guidance to analysts to adjust forecasts

upward was to distinguish itself from its competitors who, at the same time, were

providing much gloomier guidance concerning the state of the telecom industry and the

outlook for future results.”); ¶ 172 (“FLAG thus continued to issue false and misleading

statements about its condition and prospects, even though its competitors were beginning

6
According to Plaintiffs’ expert witness, the purpose of the event study was to “assess the reaction of Flag
Telecom’s share price to relevant news events.” Hakala Decl. ¶ 15.

20
to acknowledge the difficulties they were facing.”). Plaintiffs cannot have it both ways.

They cannot allege that Defendants made certain misstatements, namely, that Flag was

doing well compared to its competitors, and simultaneously argue that the misstatement

itself constituted a corrective disclosure, that is, the fact that the other companies were

not doing well exposed the public to the truth about Flag’s misstatements. See Lentell,

396 F.3d at 173. To permit Plaintiffs to do so in this context would “tend to transform a

private securities action into a partial downside insurance policy.” Dura, 544 U.S. at 347-

48, 125 S. Ct. 1627.

Plaintiffs further fail to connect the decline in the price of Flag stock to

any corrective disclosures as required by the second prong of Lentell. While the event

study links the decline in value of Flag common stock to various events, Plaintiffs have

not presented sufficient evidence on which the lower court could conclude that any of the

events revealed the truth about the subject of any of Defendants’ alleged misstatements.

Given that the ‘33 and ‘34 Act Plaintiffs primarily allege misstatements with respect to

the pre-sale and subsequent reciprocal sales, nothing submitted by Plaintiffs link any

disclosure prior to February 13, 2002, to either of these alleged misrepresentations.

Without more, we conclude that Plaintiffs have not put forth sufficient evidence on which

the in-and-out traders could establish loss causation, and they must therefore be excluded

from the certified class. Accordingly, Hunter may not serve as class representative.

III. Remaining Arguments

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 Defendants raise additional issues challenging the lower court’s grant of

certification. Since we find these arguments to have no merit, we address them only

briefly here.

In addition to the challenges to the adequacy of the class representatives

discussed above, Defendants claim that Hunter and Coughlin lack the basic familiarity

and involvement with the class required under Rule 23(a)(4). 7 See Maywalt v. Parker &

Parsley Petroleum Co., 67 F.3d 1072, 1077-78 (2d Cir. 1995) (“[C]lass certification may

properly be denied where the class representatives ha[ve] so little knowledge of and

involvement in the class action that they would be unable or unwilling to protect the

interests of the class against the possibly competing interests of the attorneys.” (internal

quotations and citation omitted) (alteration in original)). Given our general disfavor of

“attacks on the adequacy of a class representative based on the representative’s

ignorance,” Baffa, 222 F.3d at 61, we do not conclude that the lower court abused its

discretion in finding that the class representatives “are sufficiently knowledgeable and

involved to adequately represent the putative class.” In re Flag, 245 F.R.D. at 162.

Similarly, we reject Defendants’ argument that the district court erred in

including in the class ‘33 Act Plaintiffs who purchased common stock in the secondary

market traceable to the Company’s IPO as late as May 10, 2000. 8 Despite Defendants’

evidence that on March 17, 2000 and March 23, 2000, Flag employees exercised “a

significant amount of stock options” pursuant to the Company’s Long Term-Incentive

Plan (“LTIP”), the court concluded that since Defendants had produced no evidence that

7
We have already found that Hunter cannot serve as a class representative for reasons unrelated to his
knowledge and competence. Thus, the remainder of our analysis concerns only Coughlin.
8
Neither party disputes “that shares that are bought on the market after unregistered shares have entered the
market cannot be traced back to the IPO.” In re Flag, 245 F.R.D. at 173.

22
LTIP shares were actually sold in the market prior to the May 10, 2000 cut-off, it was

“inclined to resolve the dispute in favor of plaintiffs.” In re Flag, 245 F.R.D. at 173.

Because we do not conclude that this factual determination constitutes clear error, we

affirm this aspect of the certification order.

Finally, Defendants challenge the fairness of the briefing process below on

due process grounds. We do not find that the lower court abused its “ample discretion”

to limit both discovery and the extent of the hearing on Rule 23 requirements, In re IPO,

471 F.3d at 41, and we therefore also reject Defendants’ due process challenge to the

certification order.

CONCLUSION

For the reasons stated above, the district court’s order granting class

certification is affirmed with the exception of that portion of the order that includes in the

class those individuals who sold their Flag stock prior to February 13, 2002. To the

extent the certified class includes such individuals, that portion of the order is vacated,

and the case is remanded to the district court for further proceedings.

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