Second Circuit Rejects Class Action Against Underwriter Defendants in IPO Laddering Cases

According to reports in a December 6, 2006 article in the New York Times entitled "Court Rejects Class Action Against Banks" (here, registration required) and a December 6, 2006 Wall Street Journal article entitled "Wall Street Wins Ruling Blocking IPO Class Action" (here, subscription required) on December 5, 2006, the United States Court of Appeals for the Second Circuit ruled in the IPO laddering cases that the district court had improvidently ruled that IPO investors' class action could proceed as a class action in against the 55 offering underwriter defendants. Specifically, the Second Circuit ruled that said the federal judge overseeing the lawsuit had erred in granting class-action status to six “focus cases” out of 310 consolidated class actions. This of course does not eliminate the possibility that investors could pursue individual actions against the underwriters. But even though individual actions can still go forward, the ruling has a certain disaggregating impact.

The Second Circuit's opinion may be found here. (Hat tip to the WSJ.com Law Blog, here, for the link to the opinion.)

The ruling also has an uncertain but curious potential impact on the pending settlement that the issuer defendants had entered into with investors. The issuers had agreed to pay the investors $1 billion dollars, with the issuers' obligation to be reduced to the extent of investors' recoveries from the underwriter defendants. (A brief summary of this settlement may be found here.) From the issuers' perspective, this settlement was looking very good when J.P. Morgan in April 2006 agreed to contribute $425 million to the settlement. But now that the Second Circuit has ruled that the investors' case cannot proceed against the underwriter defendants as a class action, it would appear that the issuers' settlement could unravel --the issuers' settlement with investors was merely proposed; it had not yet been approved by the court.

The question now on the table is whether the this unexpected but dramatic procedural undoes the issuers' $1 billion settlement and J.P. Morgan's $425 settlement. According to a December 6, 2006 Law.com article entitled "Huge IPO Case Hits Snag at 2nd Circuit" (here), "the issuers may try to get out of the settlement, say lawyers involved in the case" and the district court judge could "nix it based on Tuesday's ruling."

As the New York Times put it, in a statement that while strong is not an overstatement, "the ruling was a devastating blow to the embattled securities class-action powerhouse Milberg Weiss Bershad & Schulman, which is a co-leader for the plaintiffs."

A Bloomberg.com article discussing the Second Circuit's decision may be found here.