Download associated file: Enron 5th Cir Decision.pdf 

The attached decision of the Fifth Circuit in Enron (Regents of the Univ. of Calif. v. Credit Suisse First Boston (USA), Inc., 2007 U.S. App. LEXIS 6396 (5th Cir. March 19, 2007)) largely exculpates financial institutions from fraud liability under the federal securities laws. That is the substantive outcome, but the procedural point is no less important.

Procedurally, the Regents v. Credit Suisse was a Rule 23(f) appeal from a class certification decision. Yet, the reversal was on substantive grounds. The Fifth Circuit’s reasoning has broad implications for all Rule 23(f) appeals. The Fifth Circuit determined that it was necessary to reach the merits to determine whether the predominance requirement of Rule 23(a) were satisfied.

‛The district court's definition of "deceptive act" is integral to its conclusion that the requirements for class certification are met.... Once the rule 23(a) requirements are satisfied, a class may be certified if ‘[1] the court finds that the questions of law or fact common to the members of the class predominate over any questions affecting only individual member’ [the predominance test].... The district court's theory of liability implicates primarily the predominance requirement.... Without its broad conception of liability for ‘deceptive acts,’ the district court could not have found that the entire class was entitled to rely on Basic's fraud-on-the-market theory, because the market may not be presumed to rely on an omission or misrepresentation in a disclosure to which it was not legally entitled.“

This analysis permits the merits to be reached in any securities, and perhaps virtually any, 23(f) appeal. This approach (1) reflects the continuing trend of merging analysis of the merits into class certification determinations, and (2) effectively renders appealable the denial of 12(b)(6) motions in the class action context.