In 2008, investors in the Parkcentral hedge fund lost as much as $3 billion dollars when Parkcentral’s investment in commercial mortgage-backed securities (“CMBS”) was devalued. The investors, limited partners of Parkcentral, sued employees of Parkcentral’s general partner alleging that they breached fiduciary duties by making material misrepresentations and omissions regarding the nature of Parkcentral’s investments and hedging strategy.  In particular, the investors claim that the defendants had falsely represented to the investors that the long position in AAA-rated CMBS would be hedged when in fact it was not.

The court first dismissed nearly all of the claims, leaving only breach of fiduciary duty remaining.  Then, the court denied class certification for the investors on two separate (and each independently sufficient) grounds: lack of numerosity under Rule 23(a) and failure to meet any of the requirements of Rule 23(b).  The court found that numerosity was not satisfied even though there are 112-130 potential class members.  The number of class members alone is not determinative.  Instead, the court found that joinder is practical because the potential class members are substantial, sophisticated parties, many of whom were represented by common advisors and all of whose names and contact information can be easily ascertained.  Also, most of the class members are Texas citizens and are sophisticated investors of substantial means who could presumably act through lawyers in a Dallas lawsuit.

Further, the court found that even if numerosity had been met, which it was not, none of the Rule 23(b) requirements were met.  Specifically, plaintiffs argued that either (1) adjudications with respect to individual class members, as a practical matter, would be dispositive of the interests of the other members or would substantially impair the ability of non-parties to protect their interests, or (2) common issues predominate and a class action would be superior to other available methods for adjudicating the controversy.  In rejecting both arguments, the court found, among other things, that plaintiffs did not show that defendants’ assets would be insufficient to satisfy plaintiffs’ claims and that the case raises pervasive individual questions about the content of information received, reliance on such information, and damages.  Because plaintiffs did not establish predominance of common issues, the court did not make a determination as to whether the class action would be superior to other available methods for adjudicating the controversy.

In re Parkcentral Global Litigation, No. 3:09-cv-765-M (N.D. Tex. Aug. 25, 2014)