Kenneth E. Newton v. Merrill Lynch, Pierce, Fenner & Smith, Inc.

In this putative class action under S 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, thousands of investors sued their broker-dealers, who traded on the National Association of Securities Dealers Automated Quotation System (NASDAQ), for breaching their duty of best execution. Despite the broker-dealers' duty to execute trades under the most "favorable terms reasonably available," the investors charge the defendants executed orders at the price offered on the central National Best Bid and Offer system (NBBO), failing to investigate other feasible alternatives that potentially offered better prices. With hundreds of thousands of investors in the putative class, this alleged practice affected hundreds of millions of transactions.

The crux of this interlocutory appeal under Fed. R. Civ. P. 23(f) is whether plaintiffs' securities fraud claims satisfy the requirements for class certification under Fed. R. Civ. P. 23. The District Court denied plaintiffs' petition for class certification. We will affirm.

The District Court had jurisdiction over the federal claims arising under the Securities Exchange Act of 1934, 15 U.S.C. S 78j(b), and 28 U.S.C. S 1331, as well as supplemental jurisdiction over the state law claims under 28 U.S.C. S 1367. Plaintiffs filed a petition for permission to appeal the denial of class certification under Fed. R. Civ. P. 23(f) which we granted. As an interlocutory appeal, we have jurisdiction under 28 U.S.C. S 1292(e).

In 1998, the Supreme Court responded to the risk of improvident and largely unreviewable class certification decisions by amending Fed. R. Civ. P. 23 to provide for interlocutory appeal by permission of the court of appeals.1 Recognizing that denying or granting class certification is often the defining moment in class actions (for it may sound the "death knell" of the litigation on the part of plaintiffs, or create unwarranted pressure to settle non-meritorious claims on the part of defendants), the Rule acknowledges the extraordinary nature of class actions and permits the appellate courts to develop a coherent body of jurisprudence in this area.2

The new Rule provides that "[a] court of appeals may in its discretion permit an appeal from an order of a district court granting or denying class action certification under this rule if application is made to it within ten days after entry of the order." Fed. R. Civ. P. 23(f). Before its adoption, courts were hesitant to invoke an alternative grant of appellate jurisdictional authority under 28 U.S.C.S 2072(c), which enabled the Supreme Court by rule to "define when a ruling of a district court is final for the purposes of appeal under section 1291." 28 U.S.C. S 2072(c); see also Blair v. Equifax Checking Servs., Inc., 181 F.3d 832, 833 (7th Cir. 1999) (noting this authority "had gone unused, in part because it invites the question whether a particular rule truly `defines' or instead expands appellate jurisdiction"); 7B Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure S 1802, pp. 105-06 (West Supp. 2000) (hereinafter Wright, Miller & Kane) ("[Rule 23(f)] is modelled on Section 1292(b), but differs in significant respects from that device in that it requires only appellate court approval of the appeal and it does not require that the district court's decision involve `a controlling question of law' about which the courts are divided."). On occasion, courts granted writs of mandamus to review certification decisions but with an uneasiness that their actions stretched the writ's traditionally restrictive parameters. See 5 James Wm. Moore et al., Moore's Federal Practice S 23.61[9][c] (discussing standard and cases); see also, e.g., In re Rhone-Poulenc Rorer Inc. , 51 F.3d 1293 (7th Cir. 1995) (granting order of mandamus to rescind class certification). Although we have issued rulings on Rule 23(f) motions, we have yet to articulate standards for granting or denying permission to appeal.3

The Committee Note is always a good starting point. It emphasizes that "[t]he court of appeals is given unfettered discretion whether to permit the [interlocutory] appeal, akin to the discretion exercised by the Supreme Court in acting on a petition for certiorari." Comm. Note, Fed. R. Civ. P. 23(f). The Note also sketches a rough outline of the types of cases courts of appeals should review: "Permission is most likely to be granted when the certification decision turns on a novel or unsettled question of law, or when, as a practical matter, the decision of certification is likely dispositive of the litigation."4 Id.; see also 5 Moore's Federal Practice S 23.61[9][b]. To provide further guidance on how to separate the wheat from the chaff, the Note instructs that

several concerns justify expansion of present opportunities to appeal. An order denying certification may confront the plaintiff with a situation in which the only sure path to appellate review is by proceeding to final judgment on the merits of an individual claim that, standing alone, is far smaller than the costs of litigation. An order granting certification, on the other hand, may force a defendant to settle rather than incur the costs of defending a class action and run the risk of potentially ruinous liability.

Comm. Note, Fed. R. Civ. P. 23(f). We can glean from the Note, therefore, at least three principles to guide the appellate courts in their exercise of discretionary jurisdiction: (1) when denial of certification effectively terminates the litigation because the value of each plaintiff's claim is outweighed by the costs of stand-alone litigation; (2) when class certification places inordinate or hydraulic pressure on defendants to settle, avoiding the risk, however small, of potentially ruinous liability; and (3) when an appeal implicates novel or unsettled questions of law; in this situation, early resolution through interlocutory appeal may facilitate the orderly development of the law.5

But interlocutory review is not cabined by these circumstances. The Note signals that the new Rule gives appellate courts broad discretion. For example, an error in the class certification decision that does not implicate novel or unsettled legal questions may still merit interlocutory review given the consequences likely to ensue. To put it another way, if the appellant demonstrates that the ruling on class certification is likely erroneous, " `taking into account the discretion the district judge possesses in implementing Rule 23, and the correspondingly deferential standard of appellate review,' " Mowbray, 208 F.3d at 293 (quoting Blair, 181 F.3d at 835), interlocutory review may be proper.

Furthermore, as explained in the Note, interlocutory review is not constrained by the potentially limiting requirement of 28 U.S.C. S 1292(b) that the district court order "involve[ ] a controlling question of law as to which there is a substantial ground for difference of opinion and that an immediate appeal from the order may materially advance the ultimate termination of the litigation." Yet if allowing the litigation to follow its natural course would provide the moving party with an adequate remedy, interlocutory review will generally prove unnecessary. In the end, however, the courts of appeals are afforded wide latitude as "[p]ermission to appeal may be granted or denied on the basis of any consideration that the courts of appeals finds persuasive." Comm. Note, Fed. R. Civ. P. 23(f).

We believe these principles provide a useful template for courts to work from when evaluating petitions under Rule 23(f). It is, of course, difficult to foresee all the permutations to which this rule will apply, and courts will have the task of exercising their best judgment in making these decisions. See Lienhart, 255 F.3d at 144-45 (rejecting "stringent standards" for review of Rule 23(f) petitions); Blair, 181 F.3d at 834 ("[I]t would be a mistake for us to draw up a list that determines how the power under Rule 23(f) [should] be exercised. Neither a bright-line approach nor a catalog of factors would serve well--especially at the outset, when courts necessarily must experiment with the new class of appeal."); see also Comm. Note, Fed. R. Civ. P. 23(f) ("The courts of appeals will develop standards for granting review that reflect the changing areas of uncertainty in class litigation."). Further, as the Committee Note mentions, class certification decisions often involve "familiar and almost routine issues" that do not necessitate interlocutory appeal. If granting the appeal, however, would permit us to address (1) the possible case-ending effect of an imprudent class certification decision (the decision is likely dispositive of the litigation); (2) an erroneous ruling; or (3) facilitate development of the law on class certification, then granting the motion would be appropriate. But these instances should not circumscribe our discretion; there may also be other valid reasons for the exercise of interlocutory review. Again, we emphasize that the courts of appeals have been afforded the authority to grant or deny these petitions "on the basis of any consideration that the court of appeals finds persuasive."6 Comm. Note, Fed. R. Civ. P. 23(f).

The claims here touch on several reasons justifying interlocutory appeal. On the one hand, some of the securities claims pressed by the putative class members may be too small to survive as individual claims. On the other, certifying the class may place unwarranted or hydraulic pressure to settle on defendants. Either way, an adverse certification decision will likely have a dispositive impact on the course and outcome of the litigation. Moreover, this case raises fundamental questions about what type of private securities claims merit class certification. For these reasons, the motion was properly granted.

We review a decision granting or denying class certification for abuse of discretion. In re LifeUSA Holding Inc., 242 F.3d 136, 143 (3d Cir. 2001); Holmes v. Pension Plan of Bethlehem Steel Corp., 213 F.3d 124, 136 (3d Cir. 2000). The district court abused its discretion if its decision " `rests upon a clearly erroneous finding of fact, an errant conclusion of law or an improper application of law to fact.' "7 In re General Motors Corp. Pick-Up Truck Fuel Tank Prods. Liab. Litig., 55 F.3d 768, 783 (3d Cir. 1995) (hereinafter "G.M. Trucks") (quoting Int'l Union, UAW v. Mack Trucks, Inc., 820 F.2d 91, 95 (3d Cir. 1987)). A class certification decision requires a thorough examination of the factual and legal allegations. Barnes v. Am. Tobacco Co., 161 F.3d 127, 140 (3d Cir. 1998), cert. denied, 526 U.S. 1114 (1999). For this purpose, "it may be necessary for the court to probe behind the pleadings before coming to rest on the certification question." General Tel. Co. of Southwest v. Falcon, 457 U.S. 147, 160 (1982); see also Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 634-35 (1997) (Breyer, J., concurring in part and dissenting in part); 7B Wright, Miller & Kane, S 1785, p. 16 (West Supp. 2000). "Before deciding whether to allow a case to proceed as a class action, . . . [courts] should make whatever factual and legal inquiries are necessary under Rule 23." Szabo v. Bridgeport Machs. Inc., 249 F.3d 672, 676 (7th Cir. 2001); see also 5 Moore's Federal Practice S 23.46[4] ("[B]ecause the determination of a certification request invariably involves some examination of factual and legal issues underlying the plaintiffs' cause of action, a court may consider the substantive elements of the plaintiffs' case in order to envision the form that a trial on those issues would take.") (footnotes omitted).

Over twenty-five years ago in Eisen v. Carlisle & Jacquelin, the Supreme Court cautioned against going beyond the pleadings in class certification decisions. 417 U.S. 156, 177 (1974) ("[N]othing in either the language or history of Rule 23 . . . gives a court any authority to conduct a preliminary inquiry into the merits of a suit in order to determine whether it may be maintained as a class action."). But this admonition must be examined in context. At the time, it was ancillary to the principal issue of whether Fed. R. Civ. P. 23 required a class representative in a securities class action to provide notice to all class members. With a claim that amounted to no more than seventy dollars, the plaintiff in Eisen sought to shift his notice burden to the defendant because providing notice to the 2.25 million potential class members was extraordinarily costly (roughly $225,000). The district court held that the defendant should bear 90% of the cost, because the plaintiff was "more than likely" to "prevail on his claims." Holding this burden could not be shifted, the Supreme Court affirmed the reversal by the court of appeals.

Not long after Eisen, the Court stepped away from this bright-line declaration in Coopers & Lybrand v. Livesay, when it held that

[e]valuation of many of the questions entering into determination of class action questions is intimately involved with the merits of the claims. The typicality of the representative's claims or defenses, the adequacy of the representative, and the presence of common questions of law or fact are obvious examples. The more complex determinations required in Rule 23(b)(3) class actions entail even greater entanglement with the merits . . . .

437 U.S. 463, 469 n.12 (1978) (quotation and citation omitted). Subsequently, in General Tel. Co. of Southwest v. Falcon, the Court appeared to move even further away from Eisen, recognizing that

[s]ometimes the issues are plain enough from the pleadings to determine whether the interests of the absent parties are fairly encompassed within the named plaintiff's claim, and sometimes it may be necessary for the court to probe behind the pleadings before coming to rest on the certification question . . . . [A]ctual, not presumed conformance with Rule 23(a) remains . . . indispensable.

Falcon, 457 U.S. at 160. This reasoning applies with equal force to certification questions surrounding Fed. R. Civ. P. 23(b)(3). Szabo, 249 F.3d at 677. As the Court concluded in Livesay, class certification may require courts to answer questions that are often " `enmeshed in the factual and legal issues comprising the plaintiff's cause of action.' " 437 U.S. at 469 (quoting Mercantile Nat'l Bank v. Langdeau, 371 U.S. 555, 558 (1963)). To address these questions, courts may "delve beyond the pleadings to determine whether the requirements for class certification are satisfied." 5 Moore's Federal Practice S 23.61[5]; Szabo, 249 F.3d at 677 (holding courts may "look[ ] beneath the surface of a complaint" to "make a preliminary inquiry into the merits"); see also Amchem, 521 U.S. at 615 (Fed. R. Civ. P. 23(b)(3) invites a "close look" before determining class certification); 7B Wright, Miller & Kane, S 1785, p.16 (West Supp. 2000) (courts not precluded from "necessary inquiry into the underlying elements of the case in order to evaluate whether Rule 23 has been met"); Moore's Federal Practice, Manual For Complex Litigation (Third) S 30.1 ("The decision on whether or not to certify a class, therefore, can be as important as decisions on the merits of the action and should be made only after consideration of all relevant evidence and arguments presented by the parties.").

Since Eisen was decided, the nature of class actions and how they are litigated have undergone a sea change. Irrespective of the merits, certification decisions may have a decisive effect on litigation. As mentioned, if individual claims are small, then plaintiffs may not have the incentive or resources to pursue their claims if certification is denied --sounding the "death knell" to the litigation.8 On the other hand, granting certification may generate unwarranted pressure to settle non-meritorious or marginal claims. Rhone-Poulenc, 51 F.3d at 1299-1300 (granting order of mandamus to rescind certification based in part on the "the demonstrated great likelihood that the plaintiffs' claims, despite their human appeal, lack legal merit"); see also G.M. Trucks, 55 F.3d at 784-85 (vacating class certification for settlement and remanding for further development on the record). In a similar vein, the Court of Appeals for the Fifth Circuit has concluded that "[g]oing beyond the pleadings is necessary, as a court must understand the claims, defenses, relevant facts, and applicable substantive law in order to make a meaningful determination of the certification issues." Castano, 84 F.3d at 744 (decertifying class that sued tobacco manufacturers for nicotine addiction). In Castano, the court held that

a mass tort cannot be properly certified without a prior track record of trials from which the district court can draw the information necessary to make the predominance and superiority analysis required by rule 23. This is because certification of an immature tort results in a higher than normal risk that the class action may not be superior to individual adjudication.

Id. at 747. Other courts have followed similar approaches. Szabo, 249 F.3d at 675-78; see also Rutstein v. Avis Rent-A-Car Sys., Inc., 211 F.3d 1228, 1234 (11th Cir. 2000); Hanon v. Dataproducts Corp., 976 F.2d 497, 508-09 (9th Cir. 1992).

In reviewing a motion for class certification, a preliminary inquiry into the merits is sometimes necessary to determine whether the alleged claims can be properly resolved as a class action.9 This is such an instance. We must probe beyond the surface of plaintiffs' allegations in performing our review to assess whether plaintiffs' securities claims satisfy Fed. R. Civ. P. 23's requirements.)

This case is before us for the second time. We have already provided a succinct description of the facts, including the operation of the NASDAQ market and defendants' role.10 Newton v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 135 F.3d 266 (3d Cir. 1998) (en banc) (hereinafter "Newton").

Plaintiff-Appellants are investors who purchased and sold securities on the NASDAQ market, the major electronic market for "over-the-counter" securities, during the . . . period from November 4, 1992 to [August 28, 1996] ("the class period"). The defendants are NASDAQ market makers. NASDAQ is a self-regulating market owned by the National Association of Securities Dealers ("NASD"), subject to oversight by the Securities and Exchange Commission ("SEC").

An "over-the-counter" market like NASDAQ differs in important respects from the more familiar auction markets, like the New York and American Stock Exchanges. The NYSE and AMEX markets are distinguished by a physical exchange floor where buy and sell orders actually "meet," with prices set by the interaction of those orders under the supervision of a market "specialist." In a dealer market like NASDAQ, the market exists electronically, in the form of a communications system which constantly receives and reports the prices at which geographically dispersed market makers are willing to buy and sell different securities. These market makers compete with one another to buy and sell the same securities using the electronic system; NASDAQ is, then, an electronic inter-dealer quotation system.

In a dealer market, market makers create liquidity by being continuously willing to buy and sell the security in which they are making a market. In this way, an individual who wishes to buy or sell a security does not have to wait until someone is found who wishes to take the opposite side in the desired transaction. To account for the effort and risk required to maintain liquidity, market makers are allowed to set the prices at which they are prepared to buy and sell a particular security; the difference between the listed "ask" and "bid" prices is the "spread" that market makers capture as compensation.

The electronic quotation system ties together the numerous market makers for all over-the-counter securities available on NASDAQ. All NASDAQ market makers are required to input their bid and offer prices to the NASD computer, which collects the information and transmits, for each security, the highest bid price and lowest ask price currently available. These prices are called the "National Best Bid and Offer," or NBBO. The NASD computer, publicly available to all NASDAQ market makers, brokers and dealers, displays and continuously updates the NBBO for each offered security.

Plaintiffs allege that technological advances made it feasible during the class period for the defendant market makers to execute orders at prices quoted on private on-line services like SelectNet and Instinet and that those prices were frequently more favorable to their investor clients than the NBBO price. According to plaintiffs, the defendants regularly used these services and knew that prices better than NBBO were often available through them. Even though they knew that their investor clients expected them to secure the best reasonably available price, plaintiffs say, the defendants executed plaintiffs' orders at the NBBO price when they knew that price was inferior and when they, at the same time, were trading at the more favorable price for their own accounts. In this way, they were able to inflate their own profit margins at the expense of their investor clients. This practice is alleged to violate section 10 of the Securities [Exchange] Act of 1934, 15 U.S.C. S 78j, and Rule 10b-5 promulgated thereunder, 17 C.F.R. S 240.10b-5.

The plaintiffs also charge defendants with two other violations of section 10 and Rule 10b-5. Market makers who simultaneously hold a market order for both sides of a transaction may obtain more favorable prices than the NBBO by "crossing" these in-house orders. Transactions handled in this way are executed within the spread, giving both the purchaser and the seller a better price. Similarly, a customer order can be matched by a market maker with an in-house limit order on the other side of the transaction. Since a limit order specifies a particular price at which to execute a transaction, matching another customer order at that price may beat the currently displayed NBBO quote for that security. Plaintiffs allege that the failure of the defendants to execute orders of their clients in these ways when feasible constitutes a fraudulent practice because, by executing at the NBBO rather than matching customer orders, the defendants capture the full market "spread" as a fee for their services without incurring any actual risk in the transaction.11

Since the initiation of this action, the Securities and Exchange Commission has promulgated new rules that effectively end the alleged improper practice by the defendants. See Order Execution Obligations, Exchange Act. Rel. No. 34-37619A, 61 Fed. Reg. 48290, 48306-16, 48322-23 (Sept. 12, 1996) ("While in the past quote-based executions in OTC [over the counter] securities were generally recognized as satisfying best execution obligations, the development of efficient new facilities has altered what broker dealers must consider in seeking execution of customer orders."); see also Newton, 135 F.3d at 271. The new regulations require the NBBO to incorporate prices displayed on Instinet and SelectNet as well as other sources of liquidity. See 17 C.F.R. SS 240.11Ac1-1 to -4 (2000).

Defendants initially moved to dismiss this action under Fed. R. Civ. P. 12(b)(6) for failure to state a claim upon which relief could be granted. At the request of the District Court, defendants converted their motion into one for summary judgment which was subsequently granted. The District Court held that plaintiffs' claims failed to satisfy two requirements necessary to maintain a Rule 10b-5 securities violation--misrepresentation or omission of a material fact, and scienter--because defendants' "duty of best execution" remained ill-defined during the class period. In re Merrill Lynch, et al. Sec. Litig., 911 F. Supp. at 769-71. Without a clear standard to apply against defendants' employment of an industry-wide practice, the court found the nondisclosure of their trading execution practice, along with their implied representation to obtain best execution, did not constitute a misrepresentation or omission of material fact. Id. Even if the practice constituted a material misrepresentation, the district court held defendants had not formed the requisite scienter, or intent to deceive, because they were not aware their practice actually violated the securities laws. Id. at 771-72.

On appeal, a divided panel of this court affirmed. We granted rehearing en banc. The en banc court unanimously reversed the district court and remanded, holding the execution of trades at the NBBO, albeit the industry standard, could still be considered fraudulent behavior violating the standards of Rule 10b-5. Newton , 135 F.3d at 274. Noting this practice could constitute a material misrepresentation with scienter when better prices were reasonably available, we expressed no opinion on defendants' liability, only whether defendants' practice could be actionable under Rule 10b-5. Id. at 272-74. On remand, plaintiffs amended their complaint, extending the class period to the time new securities regulations took effect outlawing the defendants' alleged tortious practice. Plaintiffs then moved for class certification which the District Court denied. An interlocutory appeal under Fed. R. Civ. P. 23(f) was then granted.

Plaintiffs contend defendants' behavior in this case was unvarying, alleging it was their established practice to execute trades at prices displayed solely on the NBBO without investigating other sources. They claim this "common scheme" provides a uniform course of unlawful conduct well-suited for adjudication as a class action. Plaintiffs also argue that during the class period defendants capitalized on their access to alternative trading sources to find better prices when trading on their own accounts. As noted in Newton, an SEC study reported that a "two-tiered market" existed during the class period where market makers exploited these services to garner better prices for themselves while simultaneously denying them to their customers.13 Id. at 273. For their part, defendants argue that without examining each transaction, their past ability to obtain a better price for a particular trade is purely speculative. On appeal, the availability of better prices remains hotly contested.

In this interlocutory appeal, we do not decide whether defendants' alleged practice constitutes a Rule 10b-5 securities violation with respect to each individual member of the putative class. Our inquiry only addresses whether the federal securities claims alleged by the investors satisfy the requirements demanded by Fed. R. Civ. P. 23.

To determine whether the claims alleged by the putative class meet the requirements for class certification, we must first examine the underlying cause of action--in this case, a Rule 10b-5 private securities fraud claim. See Barnes, 161 F.3d at 138; McCarthy v. Kleindienst, 741 F.2d 1406, 1412 (D.C. Cir. 1984). This analysis is critical because class certification under Fed. R. Civ. P. 23(b)(3) is permissible only when "questions of law or fact common to the members of the class predominate over any questions affecting only individual members." Fed. R. Civ. P. 23(b)(3). For the elements of the Rule 10b-5 claim which remain in dispute, "[r]equiring proof of individualized reliance [and injury] from each member of the proposed plaintiff class effectively would . . . prevent[ ] [plaintiffs] from proceeding with a class action, since individual issues then would . . . overwhelm[ ] the common ones." Basic Inc. v. Levinson, 485 U.S. 224, 242 (1988). On the other hand, presuming these elements would resolve "the problem of balancing the substantive requirement of proof of reliance [and injury] in securities cases against the procedural requisites of [Federal Rule of Civil Procedure] 23." Id. (quotation and citation omitted); see also Peil v. Speiser, 806 F.2d 1154 (3d Cir. 1986) (upholding presumption of reliance in Rule 10b-5 claims based on fraud-on-the-market theory); Hoxworth v. Blinder, Robinson & Co., 980 F.2d 912 (3d Cir. 1992) (affirming class certification where reliance presumed) (hereinafter "Hoxworth II"); William Rubenstein, A Transnational Model of Adjudication, 89 Geo. L.J. 371, 391-92 (2001) (discussing effect of presuming reliance in securities class actions). If proof of the essential elements of the cause of action requires individual treatment, then class certification is unsuitable. See Binder v. Gillespie, 184 F.3d 1059, 1063-66 (9th Cir. 1999) (upholding class decertification where presumption of reliance and loss unavailable), cert. denied, 528 U.S. 1154 (2000).

Under Rule 10b-5 causation is two-pronged. Huddleston v. Herman & MacLean, 640 F.2d 534, 549 n.24 (5th Cir. 1981), aff'd in part, rev'd in part on other grounds, 459 U.S. 375 (1983); see also James D. Cox, Robert W. Hillman & Donald C. Langevoort, Securities Regulation: Cases and Materials 769-71 (3d ed. 2001); 5 A. Jacobs, The Impact of Rule 10b-5 S 64.01[a], at 3-221 to 3-222 (Supp. 1980). Reliance, or transaction causation, establishes that but for the fraudulent misrepresentation, the investor would not have purchased or sold the security. Suez Equity Investors, L.P. and SEI Assocs. v. Toronto-Dominion Bank, 250 F.3d 87, 95-96 (2d Cir. 2001); Weiner v. Quaker Oats Co., 129 F.3d 310, 315 (3d Cir. 1997); Robbins v. Koger Props., Inc., 116 F.3d 1441, 1447 (11th Cir. 1997). Loss causation demonstrates that the fraudulent misrepresentation actually caused the loss suffered. Suez Equity Investors, 250 F.3d at 95-96; EP MedSystems, Inc. v. EchoCath, Inc., 235 F.3d 865, 883-84 (3d Cir. 2000). We must first address whether plaintiffs' claims are entitled to class-wide presumptions of reliance and economic loss before turning to the requirements for certification under Fed. R. Civ. P. 23(b)(3).

Section 10(b) of the Securities Exchange Act of 1934 makes it unlawful "[t]o use or employ, in connection with the purchase or sale of any security registered on a national securities exchange . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [Securities and Exchange] Commission may prescribe." 15 U.S.C. S 78j(b). Under this statute, the Securities and Exchange Commission promulgated Rule 10b-5 which provides:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

(a) to employ any device, scheme, or artifice to defraud,

(b) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.

17 C.F.R. S 240.10b-5. In Newton, we set forth the necessary elements of a Rule 10b-5 violation:

To state a claim for securities fraud under S 10 of the Securities [Exchange] Act of 1934 and Rule 10b-5, plaintiffs must demonstrate: (1) a misrepresentation or omission of a material fact in connection with the purchase or sale of a security; (2) scienter on the part of the defendant; (3) reliance on the misrepresentation; and (4) damage resulting from the misrepresentation.

Newton, 135 F.3d at 269; see also Semerenko v. Cendant Corp., 223 F.3d 165, 174 (3d Cir. 2000).

It is important to recognize that th