On October 27, 2021, Judge Richard Seeborg of the United States District Court for the Northern District of California denied plaintiffs’ motion for class certification in a putative class action against a major financial services company (the “Company”) alleging violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Crago v. Charles Schwab & Co., Inc.
, No. 16-CV-03938-RS (N.D. Cal. Oct. 27, 2021). Plaintiffs alleged that the Company stated that it adhered to the duty of “best execution” without disclosing key information about an agreement (the “Agreement”) to route most of its customers' retail trade orders to a particular vendor (the “Vendor”) without verifying that the Vendor was providing best execution. The Court previously dismissed an earlier complaint in this action, in a decision that was covered here
. After declining to dismiss an amended complaint, the Court denied plaintiffs’ motion for class certification, finding that plaintiffs were not entitled to a presumption of reliance and that individualized proof of reliance was therefore required. This defeated the commonality requirements of Rule 23(a).
Plaintiffs—customers who placed trades with the Company—alleged that the Company’s stated commitment to securing best execution for its clients was false and misleading in light of the Company’s bulk order routing through the Vendor. Plaintiffs moved to certify as a class all clients who placed one or more non-directed equity orders during the class period that were routed to the Vendor pursuant to the Agreement. In opposing class certification, the Company argued that (1) the presumption of reliance under the Supreme Court’s decision in Affiliated Ute Citizens of Utah v. United States
was not applicable because plaintiffs were not primarily alleging omissions, and (2) plaintiffs failed to satisfy the commonality requirement because each plaintiff would need to provide individualized proof of reliance.
The Court agreed with the Company that the Affiliated Ute
presumption should not apply, citing recent Ninth Circuit precedent In re Volkswagen “Clean Diesel” Mktg., Sales Practices, & Prod. Liab. Litig
. The Court explained that the Supreme Court had established the presumption of reliance in Affiliated Ute
because “reliance is impossible or impractical to prove when no positive statements were made.” As in Volkswagen—
a case that involved affirmative representations about environmental compliance and omissions concerning the use of defeat devices—the Court noted that plaintiffs alleged that the Company made “both affirmative misrepresentations and a key omission” relating to the existence of the Agreement. As in Volkswagen
, the Court held that the plaintiffs were not entitled to a presumption of reliance. The Court explained that “[t]he existence of these affirmative statements is key, because they mean [plaintiffs] can prove reliance through ordinary means by demonstrating a connection between the alleged misstatements and [their] injury.”
Next, in assessing whether the commonality requirement of Rule 23(a) could be satisfied in the absence of a presumption of reliance, the Court analyzed whether reliance could be proven on a class-wide basis. Although the question of reliance was a common one, the “diverse motivations” plaintiffs had for using the Company for their respective trades underscored the difficulty of establishing “commonality as to reliance.” In addition to citing “affirmations that it provided best execution, [plaintiffs] gave other reasons for using [the Company], including the quality of its platform, lower commissions as compared to other brokers, and recommendations from family.” Accordingly, the Court held that, “[g]iven the millions of trades at issue in this proposed class, the need to analyze individualized proof of reliance as to each proposed class member ‘gives no cause to believe that all the [plaintiffs’] claims can productively be litigated at once.’”
Finally, the Court held that class certification was improper under Rule 23(b)(3) for lack of predominance. In light of the Court’s holding that the plaintiffs could not invoke the Affiliated Ute
presumption, and instead must “present individualized proof of reliance,” the Court held that certification would be improper because “individual issues . . . would . . . overwhelm the common ones.”