## Facts

- Thousands of investors brought coordinated securities actions arising from numerous late-1990s technology and internet IPOs.
- The litigation was centralized and consolidated in federal court, and the district court selected six “focus cases” to address common questions.
- Plaintiffs alleged underwriters orchestrated IPO-related schemes, including tie-in agreements (“laddering”), undisclosed compensation tied to IPO allocations, and biased analyst research supporting inflated prices.
- The primary claims in the focus cases included alleged violations of Exchange Act § 10(b) and SEC Rule 10b-5.
- The district court certified broad classes, using a “some showing” approach and deferring a more exacting Rule 23 analysis.
- Underwriter defendants sought interlocutory review, arguing the district court applied an incorrect Rule 23 standard and that individualized issues defeated Rule 23(b)(3) predominance.

## Issues

1. Whether a district court may certify a class based on a relaxed “some showing” of Rule 23 compliance, or must make definitive findings that each Rule 23 requirement is satisfied.
2. Whether, and to what extent, a court may consider evidence overlapping with merits issues when deciding class certification.
3. Whether the asserted securities-fraud theories presented predominating common issues, or instead required individualized inquiries that defeat Rule 23(b)(3).

## Decision

- The Second Circuit vacated the class certification orders and remanded.
- The court held the district court erred by applying an overly lenient “some showing” standard instead of making definitive Rule 23 determinations.
- The court ruled that class certification requires evaluation of relevant evidence and resolution of factual disputes necessary to decide Rule 23 elements, even if that analysis overlaps with merits matters.
- Applying the correct approach on the existing record, the court concluded Rule 23(b)(3) predominance was not satisfied because individualized issues embedded in plaintiffs’ theories would overwhelm common questions.
- The court left open the possibility that narrower classes, subclasses, or differently grouped claims might satisfy Rule 23 on remand.

## Legal Principles

- A court must make a definitive assessment that each Rule 23 requirement is met; a provisional or “some showing” standard is improper.
- Rule 23 requires a rigorous analysis that may include weighing competing evidence and resolving factual disputes relevant to certification.
- Plaintiffs’ allegations are not presumed true for class certification; courts may test them against the evidentiary record for Rule 23 purposes.
- When a Rule 23 requirement overlaps with a merits issue, the court must decide the Rule 23 question to the extent necessary, without adjudicating issues that are purely merits determinations.
- Rule 23(b)(3) predominance is not satisfied where plaintiffs’ own theories and proof indicate that individualized questions (including reliance, knowledge, and transaction-specific circumstances) would control the litigation.

## Conclusion

The Second Circuit set aside the IPO class certifications because the district court did not make required, evidence-based Rule 23 findings and because the plaintiffs’ theories, as presented, entailed individualized reliance and transaction questions that defeated predominance under Rule 23(b)(3), requiring reconsideration on remand under the clarified standard.


In re Initial Public Offering Securities Litigation, 471 F.3d 24 (2d Cir. 2006)