The Second Circuit affirmed the district court’s denial of class certification of a class of investors based on the appellants’ failure to satisfy the numerosity and commonality requirements of Rule 23(a).  Following the collapse of the Cheyne SIV in 2007, a structured investment vehicle structured by Morgan Stanley, the appellants sought to certify a class of sophisticated institutional investors that purchased notes from the SIV between 2004 and 2007.  The class action complaint alleged that Morgan Stanley and the defendant ratings agencies committed common law fraud because the agencies gave the SIV unreliable ratings that Morgan Stanley allegedly demanded and used in its selling documents despite knowing of their unreliability.

Although the appellants provided evidence of more than 100 potential class members, the Second Circuit affirmed that the appellants failed to establish numerosity.  According to the appellate court, the district court did not abuse its discretion in holding that a class was not superior to joinder based on the “size, sophistication, and individual stakes of the parties.”  Specifically, joinder was possible because the class was made up of sophisticated institutional investors that each had millions of dollars at stake and the ability to pursue their claims individually.   The Second Circuit also added that, due to the differences in the notes purchased by the individual investors, the efficiencies offered by class certification were minimal.

The Second Circuit further affirmed the district court’s denial of certification based on the appellant’s failure to establish commonality.  The appellate court held that the appellants’ “fraud-created-the-market” theory does not apply to state law causes of action and agreed with the district court that the appellants failed to establish class-wide reliance as a common issue.

Pennsylvania Public School Employees’ Retirement System v. Morgan Stanley & Co., Inc., No. 13-2095  (2d Cir. Oct. 31, 2014).