Fort Worth Employees’ Retirement Fund v. J.P. Morgan Chase & Co.
In what appears to be an increasingly common practice since the Supreme Court decided Comcast Corp. v. Behrend, 133 S.Ct. 1426 (2013), the Southern District of New York recently certified a class as to liability, but rejected certification as to damages. Fort Worth Employees’ Retirement Fund v. J.P. Morgan Chase & Co., — F.R.D. —-, 2014 WL 4840752, 09-3701 (JPO) (S.D.N.Y. Sep. 30, 2014). Taking a cue from Comcast, the Court held that the predominance requirement for class certification—that “questions of law or fact common to class members predominate over any questions affecting only individual members,” see Fed. R. Civ. P. 23(b)(3)—requires plaintiffs to specify a damages methodology that can be utilized for the entire class. The plaintiffs, investors in certain mortgage-backed securities issued by JP Morgan Chase & Co. and related entities (collectively “JPM”), failed to adequately specify the methodology they planned to use to value the securities at issue. The Court therefore rejected certification as to damages and placed responsibility on each class member to prove damages on a member-by-member basis. The Court, however, found that the plaintiffs proved predominance as to liability and certified the class for that limited purpose.
Plaintiffs’ Claims: Misleading Statements in Mortgage-Backed Securities Offering Documents
Fort Worth is a putative securities class action against JPM stemming from alleged falsehoods made by JPM in its securities offerings. The securities, known as “pass-through certificates,” (“Certificates”) consisted of residential mortgage loans that JPM bought from lenders, packaged into trusts, and sold to investors on the market. According to the plaintiffs, the Certificates’ registration statements contained false or misleading statements that concealed the true value of the underlying loans and overstated the rigor of the underwriting standards that had been applied to the Certificates’ issuance. The plaintiffs sued JPM under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933.
In September of last year, the plaintiffs moved to certify a class consisting of all persons or entities who purchased or otherwise acquired any Certificates prior to March 23, 2009. To support their case for certification, the plaintiffs submitted a report from a mortgage-backed securities expert, who opined that the case was appropriate for class action treatment for various reasons. Specifically, the expert posited that the issues—i.e., the value of the Certificates and the effect of JPM’s alleged misstatements thereon—were common to all class members and that damages could be calculated on a class-wide basis.
Court Rejects JPM’s Admissibility Challenge
Initially, JPM challenged the report’s admissibility, arguing the expert “performed no analysis to support” his conclusions and was relying instead on “hypothetical speculation.” But the Court held the expert’s “general knowledge of economic principles and of the market for mortgage-backed securities” rendered his methods sufficiently reliable for admissibility purposes. Further, at the class certification (as opposed to liability) stage, there was no need to quantify the effects of the misstatements on the Certificates’ value; the expert need only show that the misstatements “would have affected the value of the Certificates in a common manner.” Thus, it was irrelevant that the expert had yet to analyze the degree of the plaintiffs’ harm; this went to damages—not to the expert’s reliability for certification purposes.
Plaintiffs Proved Predominance as to Liability, but not Damages
Then the Court proceeded to decide whether “questions of law or fact common to class members predominate over any questions affecting only individual class members,” as required by Federal Rule of Civil Procedure 23(b)(3). JPM argued that the Certificates—and the processes by which they were issued—were “just too complex” for class-wide analysis. But the Court held that mortgage-backed securities’ complexity does not defeat predominance. Because JPM issued the Certificates pursuant to the “same basic process,” and because alleged flaws in that process were subject to “common proof,” the Court concluded that “[t]he merits of Plaintiffs’ claims hinge on systemic conduct” and that JPM’s liability could properly be determined on a class-wide basis.
The Court rejected certification as to damages, however, holding that the plaintiffs’ expert failed to specify a damages methodology that could be applied to all class members. The Court noted that the United States Supreme Court in Comcast v. Behrend placed “emphasis on the importance of damages calculations to the analysis of predominance at the class certification stage[.]” Comcast was an antitrust case in which the Supreme Court reversed class certification because the plaintiffs’ damages methodology failed to reflect the one theory of antitrust impact that that had been accepted by the District Court. The Supreme Court held that to prove predominance of common issues, plaintiffs must show that a sufficient nexus exists between their theory of liability and their theory of damages—which the Comcast plaintiffs did not do. Further, Comcast seemed to place a premium on specifying the damages methodology, with the majority noting that—at least in antitrust cases—predominance requires plaintiffs to prove by a preponderance of the evidence that the case is susceptible to awarding damages on a class-wide basis.
Following Comcast’s lead, the Court in Fort Worth held that the plaintiffs’ expert failed to show that damages could be calculated in a manner common to the class. Although the expert’s proposed methodology appeared sufficiently linked to the plaintiffs’ liability case, the Court held that “a more precise specification of the damages calculation method is necessary to assure that the model is in fact linked with the theory of liability.” For example, the expert stated he was “confident” in his ability to apply a damages model “that’s applicable, systematically, for all members of the class.” That model would aim to value the Certificates—and the misstatements’ effects thereon—either using market prices for comparable instruments, modeling expected cash flow from the underlying loans, or by using third party pricing (using benchmarks for prices kept by third-party providers like the Interactive Data Corporation). But the Court held this was not enough because the expert had not in fact built the model. Although the expert’s methodology seemed plausible, his failure to proffer any concrete figures left the Court to wonder “how Plaintiffs plan to engage in the difficult process of valuing the complex asset-backed securities that underlie the Certificates.” Without building a specific model in concrete terms, the expert was essentially relying on his “say-so,” which fell short of Comcast’s heightened specificity requirement for showing predominance of common damages questions.
Here, the Court seemed to imply that if the expert had in fact built his contemplated model of damages, the plaintiffs would have shown that common damages questions predominated over individual issues. But this seems to contradict the Court’s statement, in the very next paragraph, that “no actual calculation needs to be performed at this stage.” It is, after all, hard to contemplate how the expert could have built a model for calculating damages without performing any calculations.
Bifurcating Class Certification: An Increasingly Common Practice
In any event, given Comcast’s emphasis on damages calculations in the predominance analysis at the class certification stage, courts seem more willing to resort to bifurcating class actions—certifying as to liability but leaving the damages determination to the individual class members. In fact, Judge Oetken—the Judge who decided Fort Worth—did the same thing in Jacob v. Duane Reade, Inc., 293 F.R.D. 578 (S.D.N.Y. 2013), an employment case where the Court decertified a class as to damages, but allowed it as to liability. As in Fort Worth, the Jacob Court relied on Federal Rule 23(c)(4)—which permits courts to certify a class “with respect to particular issues”—and held that Comcast did not foreclose courts’ ability to certify a class as to liability but not as to damages. Thus, although Rule 23(c)(4) “cannot cure every ill that troubles a putative class,” Jacob, 293 F.R.D. at 589, it seems Courts are relying on it more and more to salvage certain aspects of class actions in Comcast’s wake.