                                                                                                                           Opinions of the United
2001 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


8-6-2001

Newton v. Merrill Lynch
Precedential or Non-Precedential:

Docket 00-1586




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Filed August 6, 2001

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 00-1586

KENNETH E. NEWTON; MLPF&S CUST. FPO,
BRUCE ZAKHEIM IRA FBO BRUCE ZAKHEIM

v.

MERRILL LYNCH, PIERCE, FENNER & SMITH, INC.;
PAINEWEBBER, INC.

(D.C. No. 94-cv-5343)

JEFFREY PHILLIP KRAVITZ

v.

DEAN WITTER REYNOLDS, INC.

(D.C. No. 95-cv-213)

       MLPF&S Cust. FPO, Bruce Zakheim IRA
       FBO Bruce Zakheim, Jeffrey Phillip Kravitz,
       Gloria Binder,

       Appellants

On Appeal from the United States District Court
for the District of New Jersey
D.C. Civil Action Nos. 94-cv-05343 & 95-cv-00213
(Honorable Dickinson R. Debevoise)

Argued: December 14, 2000

Before: SCIRICA, FUENTES and GARTH, Circuit Ju dges

(Filed: August 6, 2001)
KAREN L. MORRIS, ESQUIRE
 (ARGUED)
Morris & Morris
1105 North Market Street,
 Suite 1600
Wilmington, Delaware 19801

 Attorney for Appellants

STEPHEN M. SHAPIRO, ESQUIRE
 (ARGUED)
Mayer, Brown & Platt
190 South LaSalle Street
Chicago, Illinois 60603

 Attorney for Appellees,
Merrill Lynch, Pierce, Fenner &
Smith, Inc., PaineWebber, Inc.,
and Dean Witter Reynolds, Inc.

DAVID A. BROWNLEE, ESQUIRE
Kirkpatrick & Lockhart
Henry W. Oliver Building
535 Smithfield Street
Pittsburgh, Pennsylvania 15222

 Attorney for Appellee,
Merrill Lynch, Pierce, Fenner &
Smith, Inc.

PAUL J. FISHMAN, ESQUIRE
Friedman, Kaplan & Seiler
One Gateway Center, 25th Floor
Newark, New Jersey 07102

ROBERT B. McCAW, ESQUIRE
Wilmer, Cutler & Pickering
520 Madison Avenue
New York, New York 10022

 Attorneys for Appellee,
PaineWebber, Inc.

                           2
       WILLIAM H. PRATT, ESQUIRE
       Kirkland & Ellis
       Citigroup Center
       153 East 53rd Street
       New York, New York 10022

        Attorney for Appellee,
       Dean Witter Reynolds, Inc.

       KARL A. GROSKAUFMANIS,
        ESQUIRE
       Fried, Frank, Harris, Shriver &
        Jacobson
       1001 Pennsylvania Avenue, N.W.,
        Suite 800
       Washington, D.C. 20004

        Attorney for Amicus Curiae-
       Appellees, Securities Industry
       Association

OPINION OF THE COURT

SCIRICA, Circuit Judge.

In this putative class action under S 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5,
thousands of investors sued their broker-dealers, who
traded on the National Association of Securities Dealers
Automated Quotation System (NASDAQ), for breaching
their duty of best execution. Despite the broker-dealers'
duty to execute trades under the most "favorable terms
reasonably available," the investors charge the defendants
executed orders at the price offered on the central National
Best Bid and Offer system (NBBO), failing to investigate
other feasible alternatives that potentially offered better
prices. With hundreds of thousands of investors in the
putative class, this alleged practice affected hundreds of
millions of transactions.

The crux of this interlocutory appeal under Fed. R. Civ.
P. 23(f) is whether plaintiffs' securities fraud claims satisfy
the requirements for class certification under Fed. R. Civ. P.

                               3
23. The District Court denied plaintiffs' petition for class
certification. We will affirm.

I.

The District Court had jurisdiction over the federal claims
arising under the Securities Exchange Act of 1934, 15
U.S.C. S 78j(b), and 28 U.S.C. S 1331, as well as
supplemental jurisdiction over the state law claims under
28 U.S.C. S 1367. Plaintiffs filed a petition for permission to
appeal the denial of class certification under Fed. R. Civ. P.
23(f) which we granted. As an interlocutory appeal, we have
jurisdiction under 28 U.S.C. S 1292(e).

II.

In 1998, the Supreme Court responded to the risk of
improvident and largely unreviewable class certification
decisions by amending Fed. R. Civ. P. 23 to provide for
interlocutory appeal by permission of the court of appeals.1
Recognizing that denying or granting class certification is
often the defining moment in class actions (for it may
sound the "death knell" of the litigation on the part of
plaintiffs, or create unwarranted pressure to settle
nonmeritorious claims on the part of defendants), the Rule
acknowledges the extraordinary nature of class actions and
permits the appellate courts to develop a coherent body of
jurisprudence in this area.2
_________________________________________________________________

1. The permissive interlocutory appeal provision was adopted under the
power conferred by 28 U.S.C. S 1292(e).

2. Before Rule 23(f) was promulgated, the Supreme Court rejected the
"death knell" doctrine as a justification for circumventing the federal-
appellate-jurisdiction precondition that a district court decision " `end[
]
the litigation on the merits and leave[ ] nothing for the court to do but
execute the judgment.' " Coopers & Lybrand v. Livesay, 437 U.S. 463,
467 (1978) (quoting Catlin v. United States, 324 U.S. 229, 233 (1945)). In
these instances, appellate jurisdiction was limited by 28 U.S.C. S 1291,
which provided that the "courts of appeals shall have jurisdiction of
appeals from all decisions of the district courts of the United States . .
.
except where a direct review may be had in the Supreme Court." 28
U.S.C. S 1291 (1978). Because plaintiffs had the opportunity to pursue

                               4
The new Rule provides that "[a] court of appeals may in
its discretion permit an appeal from an order of a district
court granting or denying class action certification under
this rule if application is made to it within ten days after
entry of the order." Fed. R. Civ. P. 23(f). Before its adoption,
courts were hesitant to invoke an alternative grant of
appellate jurisdictional authority under 28 U.S.C.S 2072(c),
which enabled the Supreme Court by rule to "define when
a ruling of a district court is final for the purposes of appeal
under section 1291." 28 U.S.C. S 2072(c); see also Blair v.
Equifax Checking Servs., Inc., 181 F.3d 832, 833 (7th Cir.
1999) (noting this authority "had gone unused, in part
because it invites the question whether a particular rule
truly `defines' or instead expands appellate jurisdiction");
7B Charles Alan Wright, Arthur R. Miller & Mary Kay Kane,
Federal Practice and Procedure S 1802, pp. 105-06 (West
Supp. 2000) (hereinafter Wright, Miller & Kane) ("[Rule
23(f)] is modelled on Section 1292(b), but differs in
significant respects from that device in that it requires only
appellate court approval of the appeal and it does not
require that the district court's decision involve`a
controlling question of law' about which the courts are
divided."). On occasion, courts granted writs of mandamus
to review certification decisions but with an uneasiness that
their actions stretched the writ's traditionally restrictive
parameters. See 5 James Wm. Moore et al., Moore's Federal
Practice S 23.61[9][c] (discussing standard and cases); see
also, e.g., In re Rhone-Poulenc Rorer Inc. , 51 F.3d 1293 (7th
Cir. 1995) (granting order of mandamus to rescind class
_________________________________________________________________

litigation individually if class certification was denied, a district
court
decision decertifying a putative class did not constitute a final decision
under 28 U.S.C. S 1291. Livesay, 437 U.S. at 467. At the time, there
existed no special rules on appealing class certification decisions.
Reasoning that a "death knell" exception would have to apply with equal
force to all forms of litigation, the Court rejected this proposition.
While
the Court recognized several policy arguments in favor of permitting
appeals of certification decisions which effectively put an end to
litigation, without legislative guidance or authority, it ultimately found
the arguments against such a rule more persuasive. Id. at 470-77. The
new Rule 23(f) provides the authority as well as the guidance for these
appeals which was previously wanting.

                               5
certification). Although we have issued rulings on Rule 23(f)
motions, we have yet to articulate standards for granting or
denying permission to appeal.3

The Committee Note is always a good starting point. It
emphasizes that "[t]he court of appeals is given unfettered
discretion whether to permit the [interlocutory] appeal, akin
to the discretion exercised by the Supreme Court in acting
on a petition for certiorari." Comm. Note, Fed. R. Civ. P.
23(f). The Note also sketches a rough outline of the types of
cases courts of appeals should review: "Permission is most
likely to be granted when the certification decision turns on
a novel or unsettled question of law, or when, as a practical
matter, the decision of certification is likely dispositive of
the litigation."4 Id.; see also 5 Moore's Federal Practice
S 23.61[9][b]. To provide further guidance on how to
separate the wheat from the chaff, the Note instructs that

       several concerns justify expansion of present
       opportunities to appeal. An order denying certification
       may confront the plaintiff with a situation in which the
       only sure path to appellate review is by proceeding to
       final judgment on the merits of an individual claim
       that, standing alone, is far smaller than the costs of
       litigation. An order granting certification, on the other
       hand, may force a defendant to settle rather than incur
       the costs of defending a class action and run the risk
       of potentially ruinous liability.

Comm. Note, Fed. R. Civ. P. 23(f). We can glean from the
Note, therefore, at least three principles to guide the
appellate courts in their exercise of discretionary
jurisdiction: (1) when denial of certification effectively
_________________________________________________________________

3. Fortunately, four of our sister circuits have written thoughtful
opinions on the new rule. Lienhart v. Dryvit Sys., Inc., No. 00-908, 2001
WL 715773, at *2-5 (4th Cir. June 26, 2001); Prado-Steiman v. Bush,
221 F.3d 1266, 1271-77 (11th Cir. 2000); Waste Mgmt. Holdings, Inc. v.
Mowbray, 208 F.3d 288, 292-95 (1st Cir. 2000); Blair v. Equifax
Checking Servs., Inc., 181 F.3d 832, 833-36 (7th Cir. 1999).

4. In effect, the Rule authorizes appellate courts to "restore equilibrium
when a doubtful class certification ruling would virtually compel a party
to abandon a potentially meritorious claim or defense before trial."
Mowbray, 208 F.3d at 293.

                               6
terminates the litigation because the value of each
plaintiff 's claim is outweighed by the costs of stand-alone
litigation; (2) when class certification places inordinate or
hydraulic pressure on defendants to settle, avoiding the
risk, however small, of potentially ruinous liability; and (3)
when an appeal implicates novel or unsettled questions of
law; in this situation, early resolution through interlocutory
appeal may facilitate the orderly development of the law.5

But interlocutory review is not cabined by these
circumstances. The Note signals that the new Rule gives
_________________________________________________________________

5. Other courts of appeals have adopted a taxonomy based on these
principles. In the first case examining the standards for interlocutory
appeal, Blair v. Equifax Checking Servs., Inc. , 181 F.3d 832, 833-36 (7th
Cir. 1999), the Court of Appeals for the Seventh Circuit provided an in-
depth description of the three examples mentioned above that would
merit exercise of interlocutory review. Taking its cue from the Committee
Note, the court held that cases where certification tolled the "death
knell"
of litigation for plaintiffs or placed irresistible pressure to settle on
defendants presented circumstances ripe for review. The court also held
that appeals which would help develop the law similarly invited the
exercise of this review. In Waste Mgmt. Holdings, Inc. v. Mowbray, 208
F.3d 288, 292-95 (1st Cir. 2000), the Court of Appeals for the First
Circuit largely adopted the Seventh Circuit's methodology with one
restriction. To prevent fecund legal minds from framing every legal issue
as an important question of fundamental law, the court narrowed this
review to cases in which "an appeal will permit the resolution of an
unsettled legal issue that is important to the particular litigation as
well
as important in itself and likely to escape effective review if left
hanging
until the end of the case." Id. at 294. Thereafter, the Court of Appeals
for
the Eleventh Circuit discussed the standards for reviewing petitions in
Prado-Steiman v. Bush, 221 F.3d 1266, 1271-77 (11th Cir. 2000). Adding
other factors, the court elaborated on the principles set forth previously
by the Court of Appeals for the Seventh Circuit. In addition to those
already mentioned, the court looked to (1) whether the certification
decision is likely dispositive of the litigation; (2) whether the decision
involved a novel or unsettled legal question; (3) the strength of the
district court's reasoning; (4) the status of the case before the district
court; and (5) the "likelihood that future events may make immediate
appellate review more or less appropriate." Id. at 1276. Recently, the
Court of Appeals for the Fourth Circuit reviewed the standards for
granting a motion under Fed. R. Civ. P. 23(f) and adopted the analysis
enunciated in Prado-Steiman. Lienhart v. Dryvit Sys., Inc., No. 00-908,
2001 WL 715773, at *2-5 (4th Cir. June 26, 2001).

                               7
appellate courts broad discretion. For example, an error in
the class certification decision that does not implicate novel
or unsettled legal questions may still merit interlocutory
review given the consequences likely to ensue. To put it
another way, if the appellant demonstrates that the ruling
on class certification is likely erroneous, " `taking into
account the discretion the district judge possesses in
implementing Rule 23, and the correspondingly deferential
standard of appellate review,' " Mowbray , 208 F.3d at 293
(quoting Blair, 181 F.3d at 835), interlocutory review may
be proper.

Furthermore, as explained in the Note, interlocutory
review is not constrained by the potentially limiting
requirement of 28 U.S.C. S 1292(b) that the district court
order "involve[ ] a controlling question of law as to which
there is a substantial ground for difference of opinion and
that an immediate appeal from the order may materially
advance the ultimate termination of the litigation." Yet if
allowing the litigation to follow its natural course would
provide the moving party with an adequate remedy,
interlocutory review will generally prove unnecessary. In the
end, however, the courts of appeals are afforded wide
latitude as "[p]ermission to appeal may be granted or
denied on the basis of any consideration that the courts of
appeals finds persuasive." Comm. Note, Fed. R. Civ. P.
23(f).

We believe these principles provide a useful template for
courts to work from when evaluating petitions under Rule
23(f). It is, of course, difficult to foresee all the
permutations to which this rule will apply, and courts will
have the task of exercising their best judgment in making
these decisions. See Lienhart, 2001 WL 715773, at *4
(rejecting "stringent standards" for review of Rule 23(f)
petitions); Blair, 181 F.3d at 834 ("[I]t would be a mistake
for us to draw up a list that determines how the power
under Rule 23(f) [should] be exercised. Neither a bright-line
approach nor a catalog of factors would serve well--
especially at the outset, when courts necessarily must
experiment with the new class of appeal."); see also Comm.
Note, Fed. R. Civ. P. 23(f) ("The courts of appeals will
develop standards for granting review that reflect the

                               8
changing areas of uncertainty in class litigation."). Further,
as the Committee Note mentions, class certification
decisions often involve "familiar and almost routine issues"
that do not necessitate interlocutory appeal. If granting the
appeal, however, would permit us to address (1) the
possible case-ending effect of an imprudent class
certification decision (the decision is likely dispositive of the
litigation); (2) an erroneous ruling; or (3) facilitate
development of the law on class certification, then granting
the motion would be appropriate. But these instances
should not circumscribe our discretion; there may also be
other valid reasons for the exercise of interlocutory review.
Again, we emphasize that the courts of appeals have been
afforded the authority to grant or deny these petitions "on
the basis of any consideration that the court of appeals
finds persuasive."6 Comm. Note, Fed. R. Civ. P. 23(f).

The claims here touch on several reasons justifying
interlocutory appeal. On the one hand, some of the
securities claims pressed by the putative class members
may be too small to survive as individual claims. On the
other, certifying the class may place unwarranted or
hydraulic pressure to settle on defendants. Either way, an
adverse certification decision will likely have a dispositive
impact on the course and outcome of the litigation.
Moreover, this case raises fundamental questions about
what type of private securities claims merit class
certification. For these reasons, the motion was properly
granted.

III.

We review a decision granting or denying class
certification for abuse of discretion. In re LifeUSA Holding
Inc., 242 F.3d 136, 143 (3d Cir. 2001); Holmes v. Pension
Plan of Bethlehem Steel Corp., 213 F.3d 124, 136 (3d Cir.
2000). The district court abused its discretion if its decision
_________________________________________________________________

6. As set forth in the Note, the district courts"having walked through the
certification decision, can provide cogent advice on the factors"
animating their decisions. Comm. Note, Fed. R. Civ. P. 23(f).
Furthermore, because permission to appeal does not stay trial court
proceedings, any stay should be sought first from the trial court. Id.

                               9
" `rests upon a clearly erroneous finding of fact, an errant
conclusion of law or an improper application of law to fact.' "7
In re General Motors Corp. Pick-Up Truck Fuel Tank Prods.
Liab. Litig., 55 F.3d 768, 783 (3d Cir. 1995) (hereinafter
"G.M. Trucks") (quoting Int'l Union, UAW v. Mack Trucks,
Inc., 820 F.2d 91, 95 (3d Cir. 1987)). A class certification
decision requires a thorough examination of the factual and
legal allegations. Barnes v. Am. Tobacco Co., 161 F.3d 127,
140 (3d Cir. 1998), cert. denied, 526 U.S. 1114 (1999). For
this purpose, "it may be necessary for the court to probe
behind the pleadings before coming to rest on the
certification question." General Tel. Co. of Southwest v.
Falcon, 457 U.S. 147, 160 (1982); see also Amchem Prods.,
Inc. v. Windsor, 521 U.S. 591, 634-35 (1997) (Breyer, J.,
concurring in part and dissenting in part); 7B Wright,
Miller & Kane, S 1785, p. 16 (West Supp. 2000). "Before
deciding whether to allow a case to proceed as a class
_________________________________________________________________

7. In its amicus brief, the Securities Industry Association contends we
should be wary of extending class certification to cases where the court
will in effect set market standards (such as "best execution") and, by
doing so, affect the certainty of capital markets. Generally, it is
desirable
for these types of changes to occur through rule making by the
appropriate agency. But courts should not hesitate to provide remedies
for litigants injured by unlawful conduct that may not clearly violate
regulatory standards. Newton v. Merrill Lynch, Pierce, Fenner & Smith,
Inc., 135 F.3d 266, 274 (3d Cir. 1998) (en banc) ("[T]here is no statute,
rule, regulation, or interpretation, by the SEC or by a court, that
authoritatively establishes that, for all trades, the NBBO exhausted the
category of `reasonably available prices' during the class period. This
absence of precedent did not, however, absolve the district court of the
duty to resolve the plaintiffs' securities fraud claim once it was
presented
in this suit."); see also Deposit Guaranty Nat'l Bank v. Roper, 445 U.S.
326, 339 (1980) ("The aggregation of individual claims in the context of
a classwide suit is an evolutionary response to the existence of injuries
unremedied by the regulatory action of government.").

Even the Securities and Exchange Commission has argued that "the
mere fact that the [Securities and Exchange] Commission was
considering (and has now adopted) rules that prospectively affect . . .
broker-dealers' order handling obligations would not make it appropriate
for the court to abstain from deciding whether the defendants committed
fraud with respect to [their duty of best execution] as it existed during
the period at issue in this case." Br. of Amicus Curiae the Securities and
Exchange Commission, at 12 n.14, in Newton, 135 F.3d 266.

                               10
action, . . . [courts] should make whatever factual and legal
inquiries are necessary under Rule 23." Szabo v. Bridgeport
Machs. Inc., 249 F.3d 672, 676 (7th Cir. 2001); see also 5
Moore's Federal Practice S 23.46[4] ("[B]ecause the
determination of a certification request invariably involves
some examination of factual and legal issues underlying the
plaintiffs' cause of action, a court may consider the
substantive elements of the plaintiffs' case in order to
envision the form that a trial on those issues would take.")
(footnotes omitted).

Over twenty-five years ago in Eisen v. Carlisle &
Jacquelin, the Supreme Court cautioned against going
beyond the pleadings in class certification decisions. 417
U.S. 156, 177 (1974) ("[N]othing in either the language or
history of Rule 23 . . . gives a court any authority to
conduct a preliminary inquiry into the merits of a suit in
order to determine whether it may be maintained as a class
action."). But this admonition must be examined in context.
At the time, it was ancillary to the principal issue of
whether Fed. R. Civ. P. 23 required a class representative
in a securities class action to provide notice to all class
members. With a claim that amounted to no more than
seventy dollars, the plaintiff in Eisen sought to shift his
notice burden to the defendant because providing notice to
the 2.25 million potential class members was
extraordinarily costly (roughly $225,000). The district court
held that the defendant should bear 90% of the cost,
because the plaintiff was "more than likely" to "prevail on
his claims." Holding this burden could not be shifted, the
Supreme Court affirmed the reversal by the court of
appeals.

Not long after Eisen, the Court stepped away from this
bright-line declaration in Coopers & Lybrand v. Livesay,
when it held that

       [e]valuation of many of the questions entering into
       determination of class action questions is intimately
       involved with the merits of the claims. The typicality of
       the representative's claims or defenses, the adequacy of
       the representative, and the presence of common
       questions of law or fact are obvious examples. The
       more complex determinations required in Rule 23(b)(3)

                               11
       class actions entail even greater entanglement with the
       merits . . . .

437 U.S. 463, 469 n.12 (1978) (quotation and citation
omitted). Subsequently, in General Tel. Co. of Southwest v.
Falcon, the Court appeared to move even further away from
Eisen, recognizing that

       [s]ometimes the issues are plain enough from the
       pleadings to determine whether the interests of the
       absent parties are fairly encompassed within the
       named plaintiff 's claim, and sometimes it may be
       necessary for the court to probe behind the pleadings
       before coming to rest on the certification question . . . .
       [A]ctual, not presumed conformance with Rule 23(a)
       remains . . . indispensable.

Falcon, 457 U.S. at 160. This reasoning applies with equal
force to certification questions surrounding Fed. R. Civ. P.
23(b)(3). Szabo, 249 F.3d at 677. As the Court concluded in
Livesay, class certification may require courts to answer
questions that are often " `enmeshed in the factual and legal
issues comprising the plaintiff 's cause of action.' " 437 U.S.
at 469 (quoting Mercantile Nat'l Bank v. Langdeau, 371 U.S.
555, 558 (1963)). To address these questions, courts may
"delve beyond the pleadings to determine whether the
requirements for class certification are satisfied." 5 Moore's
Federal Practice S 23.61[5]; Szabo, 249 F.3d at 677 (holding
courts may "look[ ] beneath the surface of a complaint" to
"make a preliminary inquiry into the merits"); see also
Amchem, 521 U.S. at 615 (Fed. R. Civ. P. 23(b)(3) invites a
"close look" before determining class certification); 7B
Wright, Miller & Kane, S 1785, p.16 (West Supp. 2000)
(courts not precluded from "necessary inquiry into the
underlying elements of the case in order to evaluate
whether Rule 23 has been met"); Moore's Federal Practice,
Manual For Complex Litigation (Third) S 30.1 ("The decision
on whether or not to certify a class, therefore, can be as
important as decisions on the merits of the action and
should be made only after consideration of all relevant
evidence and arguments presented by the parties.").

Since Eisen was decided, the nature of class actions and
how they are litigated have undergone a sea change.

                               12
Irrespective of the merits, certification decisions may have
a decisive effect on litigation. As mentioned, if individual
claims are small, then plaintiffs may not have the incentive
or resources to pursue their claims if certification is denied
--sounding the "death knell" to the litigation.8 On the other
hand, granting certification may generate unwarranted
pressure to settle nonmeritorious or marginal claims.
Rhone-Poulenc, 51 F.3d at 1299-1300 (granting order of
_________________________________________________________________

8. Trial of plaintiffs' claims here touches on concerns raised by the
Court
of Appeals for the Seventh Circuit in In re Rhone-Poulenc Rorer Inc., 51
F.3d 1293 (7th Cir. 1995). In Rhone-Poulenc, the court granted a writ of
mandamus to reverse the certification of a class of hemophiliacs who
received blood contaminated with HIV. The class involved only a few
hundred parties, but each individual had claims possibly worth millions
of dollars. The court reasoned that the enormous size of the potential
liability would impose an "intense pressure to settle," id. at 1298,
because "[t]he risk of facing an all-or-nothing verdict presents too high
a risk, even when the probability of an adverse judgment is low."
Castano v. Am. Tobacco Co., 84 F.3d 734, 746 (5th Cir. 1996) (citing
Rhone-Poulenc, 51 F.3d at 1298). It considered settlements forcibly
induced by the small probability of an immense judgment "blackmail
settlements." Rhone-Poulenc, 51 F.3d at 1298; see also Castano, 84 F.3d
at 746; G.M. Trucks, 55 F.3d at 784-85. Although finding the hydraulic
pressure to settle should not dispositively affect a certification
decision,
the court suggested that it should be balanced against the benefits of a
class action. Rhone-Poulenc, 51 F.3d at 1299 ("We do not want to be
misunderstood as saying that class actions are bad because they place
pressure on defendants to settle. That pressure is a reality, but it must
be balanced against the undoubted benefits of the class action that have
made it an authorized procedure for employment by federal courts."); see
also Kline v. Coldwell, Banker & Co. 508 F.2d 226, 238 (9th Cir. 1974)
("I doubt that plaintiffs' counsel expect the immense and unmanageable
case that they seek to create to be tried. What they seek to create will
become (whether they intend this result or not) an overwhelmingly costly
and potent engine for the compulsion of settlements, whether just or
unjust.") (Duniway, J., concurring). The Supreme Court has also
recognized the dynamic pressure certification sets in motion. The Court
has observed that "[c]ertification of a large class may so increase the
defendant's potential damages liability and litigation costs that he may
find it economically prudent to settle and to abandon a meritorious
defense." Livesay, 437 U.S. at 476. Certifying this class raises a similar
concern because the size of the class and number of claims may place
acute and unwarranted pressure on defendants to settle. It is a factor we
weigh in our certification calculus.

                               13
mandamus to rescind certification based in part on the "the
demonstrated great likelihood that the plaintiffs' claims,
despite their human appeal, lack legal merit"); see also G.M.
Trucks, 55 F.3d at 784-85 (vacating class certification for
settlement and remanding for further development on the
record). In a similar vein, the Court of Appeals for the Fifth
Circuit has concluded that "[g]oing beyond the pleadings is
necessary, as a court must understand the claims,
defenses, relevant facts, and applicable substantive law in
order to make a meaningful determination of the
certification issues." Castano, 84 F.3d at 744 (decertifying
class that sued tobacco manufacturers for nicotine
addiction). In Castano, the court held that

       a mass tort cannot be properly certified without a prior
       track record of trials from which the district court can
       draw the information necessary to make the
       predominance and superiority analysis required by rule
       23. This is because certification of an immature tort
       results in a higher than normal risk that the class
       action may not be superior to individual adjudication.

Id. at 747. Other courts have followed similar approaches.
Szabo, 249 F.3d at 675-78; see also Rutstein v. Avis Rent-A-
Car Sys., Inc., 211 F.3d 1228, 1234 (11th Cir. 2000); Hanon
v. Dataproducts Corp., 976 F.2d 497, 508-09 (9th Cir.
1992).

In reviewing a motion for class certification, a preliminary
inquiry into the merits is sometimes necessary to determine
whether the alleged claims can be properly resolved as a
class action.9 This is such an instance. We must probe
beyond the surface of plaintiffs' allegations in performing
our review to assess whether plaintiffs' securities claims
satisfy Fed. R. Civ. P. 23's requirements.)
_________________________________________________________________

9. See Geoffrey C. Hazard, Jr., Class Certification Based on Merits of the
Claims, 69 Tenn. L. Rev. (forthcoming Fall 2001).

                               14
IV.

A.

This case is before us for the second time. We have
already provided a succinct description of the facts,
including the operation of the NASDAQ market and
defendants' role.10 Newton v. Merrill Lynch, Pierce, Fenner &
Smith, Inc., 135 F.3d 266 (3d Cir. 1998) (en banc)
(hereinafter "Newton").

       Plaintiff-Appellants are investors who purchased and
       sold securities on the NASDAQ market, the major
       electronic market for "over-the-counter" securities,
       during the . . . period from November 4, 1992 to
       [August 28, 1996] ("the class period"). The defendants
       are NASDAQ market makers. NASDAQ is a self-
       regulating market owned by the National Association of
       Securities Dealers ("NASD"), subject to oversight by the
       Securities and Exchange Commission ("SEC").

       An "over-the-counter" market like NASDAQ differs in
       important respects from the more familiar auction
       markets, like the New York and American Stock
       Exchanges. The NYSE and AMEX markets are
       distinguished by a physical exchange floor where buy
       and sell orders actually "meet," with prices set by the
       interaction of those orders under the supervision of a
       market "specialist." In a dealer market like NASDAQ,
       the market exists electronically, in the form of a
       communications system which constantly receives and
       reports the prices at which geographically dispersed
       market makers are willing to buy and sell different
       securities. These market makers compete with one
       another to buy and sell the same securities using the
_________________________________________________________________

10. The defendants who executed the plaintiffs' orders are Merrill Lynch,
Pierce, Fenner & Smith, Inc.; Dean Witter Reynolds, Inc.; and
PaineWebber, Inc. Each defendant is an "integrated broker/dealer"
brokerage company that executed trades both as an agent and a
principal. For certification, plaintiffs are divided into three
subclasses.
Each subclass consists of all the class members that placed market
orders with a particular defendant.

                               15
electronic system; NASDAQ is, then, an electronic
inter-dealer quotation system.

In a dealer market, market makers create liquidity by
being continuously willing to buy and sell the security
in which they are making a market. In this way, an
individual who wishes to buy or sell a security does not
have to wait until someone is found who wishes to take
the opposite side in the desired transaction. To account
for the effort and risk required to maintain liquidity,
market makers are allowed to set the prices at which
they are prepared to buy and sell a particular security;
the difference between the listed "ask" and"bid" prices
is the "spread" that market makers capture as
compensation.

The electronic quotation system ties together the
numerous market makers for all over-the-counter
securities available on NASDAQ. All NASDAQ market
makers are required to input their bid and offer prices
to the NASD computer, which collects the information
and transmits, for each security, the highest bid price
and lowest ask price currently available. These prices
are called the "National Best Bid and Offer," or NBBO.
The NASD computer, publicly available to all NASDAQ
market makers, brokers and dealers, displays and
continuously updates the NBBO for each offered
security.

Plaintiffs allege that technological advances made it
feasible during the class period for the defendant
market makers to execute orders at prices quoted on
private on-line services like SelectNet and Instinet and
that those prices were frequently more favorable to
their investor clients than the NBBO price. According
to plaintiffs, the defendants regularly used these
services and knew that prices better than NBBO were
often available through them. Even though they knew
that their investor clients expected them to secure the
best reasonably available price, plaintiffs say, the
defendants executed plaintiffs' orders at the NBBO
price when they knew that price was inferior and when
they, at the same time, were trading at the more
favorable price for their own accounts. In this way,

                        16
       they were able to inflate their own profit margins at the
       expense of their investor clients. This practice is
       alleged to violate section 10 of the Securities
       [Exchange] Act of 1934, 15 U.S.C. S 78j, and Rule 10b-
       5 promulgated thereunder, 17 C.F.R. S 240.10b-5.

       The plaintiffs also charge defendants with two other
       violations of section 10 and Rule 10b-5. Market makers
       who simultaneously hold a market order for both sides
       of a transaction may obtain more favorable prices than
       the NBBO by "crossing" these in-house orders.
       Transactions handled in this way are executed within
       the spread, giving both the purchaser and the seller a
       better price. Similarly, a customer order can be
       matched by a market maker with an in-house limit
       order on the other side of the transaction. Since a limit
       order specifies a particular price at which to execute a
       transaction, matching another customer order at that
       price may beat the currently displayed NBBO quote for
       that security. Plaintiffs allege that the failure of the
       defendants to execute orders of their clients in these
       ways when feasible constitutes a fraudulent practice
       because, by executing at the NBBO rather than
       matching customer orders, the defendants capture the
       full market "spread" as a fee for their services without
       incurring any actual risk in the transaction.11

Newton, 135 F.3d at 268-69.12

Since the initiation of this action, the Securities and
Exchange Commission has promulgated new rules that
effectively end the alleged improper practice by the
defendants. See Order Execution Obligations, Exchange Act.
Rel. No. 34-37619A, 61 Fed. Reg. 48290, 48306-16, 48322-
23 (Sept. 12, 1996) ("While in the past quote-based
_________________________________________________________________

11. For a more detailed description of the alternative avenues for
executing trades on the NASDAQ (e.g., Instinet, SelectNet) see the
district court opinion granting defendants summary judgment, In re
Merrill Lynch, et al. Sec. Litig., 911 F. Supp. 745, 759-60 (E.D. Pa.
1995),
rev'd, Newton, 135 F.3d 266.

12. Defendants' duty to provide best execution remained consistent
whether they were acting as agents of the trade or principals. Newton,
135 F.3d at 270 n.1.

                                17
executions in OTC [over the counter] securities were
generally recognized as satisfying best execution
obligations, the development of efficient new facilities has
altered what broker dealers must consider in seeking
execution of customer orders."); see also Newton, 135 F.3d
at 271. The new regulations require the NBBO to
incorporate prices displayed on Instinet and SelectNet as
well as other sources of liquidity. See 17 C.F.R.
SS 240.11Ac1-1 to -4 (2000).

B.

Defendants initially moved to dismiss this action under
Fed. R. Civ. P. 12(b)(6) for failure to state a claim upon
which relief could be granted. At the request of the District
Court, defendants converted their motion into one for
summary judgment which was subsequently granted. The
District Court held that plaintiffs' claims failed to satisfy
two requirements necessary to maintain a Rule 10b-5
securities violation--misrepresentation or omission of a
material fact, and scienter--because defendants'"duty of
best execution" remained ill-defined during the class period.
In re Merrill Lynch, et al. Sec. Litig., 911 F. Supp. at 769-71.
Without a clear standard to apply against defendants'
employment of an industry-wide practice, the court found
the nondisclosure of their trading execution practice, along
with their implied representation to obtain best execution,
did not constitute a misrepresentation or omission of
material fact. Id. Even if the practice constituted a material
misrepresentation, the district court held defendants had
not formed the requisite scienter, or intent to deceive,
because they were not aware their practice actually violated
the securities laws. Id. at 771-72.

On appeal, a divided panel of this court affirmed. We
granted rehearing en banc. The en banc court unanimously
reversed the district court and remanded, holding the
execution of trades at the NBBO, albeit the industry
standard, could still be considered fraudulent behavior
violating the standards of Rule 10b-5. Newton , 135 F.3d at
274. Noting this practice could constitute a material
misrepresentation with scienter when better prices were
reasonably available, we expressed no opinion on

                               18
defendants' liability, only whether defendants' practice
could be actionable under Rule 10b-5. Id. at 272-74. On
remand, plaintiffs amended their complaint, extending the
class period to the time new securities regulations took
effect outlawing the defendants' alleged tortious practice.
Plaintiffs then moved for class certification which the
District Court denied. An interlocutory appeal under Fed.
R. Civ. P. 23(f) was then granted.

C.

Plaintiffs contend defendants' behavior in this case was
unvarying, alleging it was their established practice to
execute trades at prices displayed solely on the NBBO
without investigating other sources. They claim this
"common scheme" provides a uniform course of unlawful
conduct well-suited for adjudication as a class action.
Plaintiffs also argue that during the class period defendants
capitalized on their access to alternative trading sources to
find better prices when trading on their own accounts. As
noted in Newton, an SEC study reported that a "two-tiered
market" existed during the class period where market
makers exploited these services to garner better prices for
themselves while simultaneously denying them to their
customers.13 Id. at 273. For their part, defendants argue
_________________________________________________________________

13. As noted in Newton, a three month study of prices within the class
period indicated that "85% of the bids and offers displayed by market
makers on Instinet and 90% of the bids and offers displayed on
SelectNet were at better prices than those posted publicly on NASDAQ."
135 F.3d at 272 (citing Order Execution Obligations, Exchange Act. Rel.
No. 34-37619A, 61 Fed. Reg. 48290, 48307-08 (Sept. 12, 1996)). These
apparently incriminating percentages may be mitigated, however, by the
fact that during a full year of the class period (1993), for example, the
electronic communication networks (including services like SelectNet and
Instinet) "accounted for only 13% of share volume in Nasdaq securities
and only 1.4% of listed share volume." Securities and Exchange
Commission, Div. of Market Regulation, Electronic Communication
Networks and After-Hours Trading 6 (June 2000) (citing Market
2000 Report: Study II, Structure of the U.S. Equity Markets, 1994
SEC Lexis 133, at *43-44 (Jan. 1994)), available at
http://www.sec.gov.news/studies/ecnafter.htm. Based on these figures,
defendants contend plaintiffs' trades could have been executed at
superior prices from alternative sources only about 30% of the time
during the class period. See Br. of Appellees at 8 n.7.

                               19
that without examining each transaction, their past ability
to obtain a better price for a particular trade is purely
speculative. On appeal, the availability of better prices
remains hotly contested.

In this interlocutory appeal, we do not decide whether
defendants' alleged practice constitutes a Rule 10b-5
securities violation with respect to each individual member
of the putative class. Our inquiry only addresses whether
the federal securities claims alleged by the investors satisfy
the requirements demanded by Fed. R. Civ. P. 23.

V.

To determine whether the claims alleged by the putative
class meet the requirements for class certification, we must
first examine the underlying cause of action--in this case,
a Rule 10b-5 private securities fraud claim. See Barnes,
161 F.3d at 138; McCarthy v. Kleindienst, 741 F.2d 1406,
1412 (D.C. Cir. 1984). This analysis is critical because
class certification under Fed. R. Civ. P. 23(b)(3) is
permissible only when "questions of law or fact common to
the members of the class predominate over any questions
affecting only individual members." Fed. R. Civ. P. 23(b)(3).
For the elements of the Rule 10b-5 claim which remain in
dispute, "[r]equiring proof of individualized reliance [and
injury] from each member of the proposed plaintiff class
effectively would . . . prevent[ ] [plaintiffs] from proceeding
with a class action, since individual issues then would . . .
overwhelm[ ] the common ones." Basic Inc. v. Levinson, 485
U.S. 224, 242 (1988). On the other hand, presuming these
elements would resolve "the problem of balancing the
substantive requirement of proof of reliance [and injury] in
securities cases against the procedural requisites of
[Federal Rule of Civil Procedure] 23." Id. (quotation and
citation omitted); see also Peil v. Speiser, 806 F.2d 1154 (3d
Cir. 1986) (upholding presumption of reliance in Rule 10b-
5 claims based on fraud-on-the-market theory); Hoxworth v.
Blinder, Robinson & Co., 980 F.2d 912 (3d Cir. 1992)
(affirming class certification where reliance presumed)
(hereinafter "Hoxworth II"); William Rubenstein, A
Transnational Model of Adjudication, 89 Geo. L.J. 371, 391-
92 (2001) (discussing effect of presuming reliance in

                               20
securities class actions). If proof of the essential elements of
the cause of action requires individual treatment, then
class certification is unsuitable. See Binder v. Gillespie, 184
F.3d 1059, 1063-66 (9th Cir. 1999) (upholding class
decertification where presumption of reliance and loss
unavailable), cert. denied, 528 U.S. 1154 (2000).

Under Rule 10b-5 causation is two-pronged. Huddleston
v. Herman & MacLean, 640 F.2d 534, 549 n.24 (5th Cir.
1981), aff 'd in part, rev'd in part on other grounds, 459 U.S.
375 (1983); see also James D. Cox, Robert W. Hillman &
Donald C. Langevoort, Securities Regulation: Cases and
Materials 769-71 (3d ed. 2001); 5 A. Jacobs, The Impact of
Rule 10b-5 S 64.01[a], at 3-221 to 3-222 (Supp. 1980).
Reliance, or transaction causation, establishes that but for
the fraudulent misrepresentation, the investor would not
have purchased or sold the security. Suez Equity Investors,
L.P. and SEI Assocs. v. Toronto-Dominion Bank, 250 F.3d
87, 95-96 (2d Cir. 2001); Weiner v. Quaker Oats Co., 129
F.3d 310, 315 (3d Cir. 1997); Robbins v. Koger Props., Inc.,
116 F.3d 1441, 1447 (11th Cir. 1997). Loss causation
demonstrates that the fraudulent misrepresentation
actually caused the loss suffered. Suez Equity Investors,
250 F.3d at 95-96; EP MedSystems, Inc. v. EchoCath, Inc.,
235 F.3d 865, 883-84 (3d Cir. 2000). We must first address
whether plaintiffs' claims are entitled to class-wide
presumptions of reliance and economic loss before turning
to the requirements for certification under Fed. R. Civ. P.
23(b)(3).

A.

Section 10(b) of the Securities Exchange Act of 1934
makes it unlawful "[t]o use or employ, in connection with
the purchase or sale of any security registered on a
national securities exchange . . . any manipulative or
deceptive device or contrivance in contravention of such
rules and regulations as the [Securities and Exchange]
Commission may prescribe." 15 U.S.C. S 78j(b). Under this
statute, the Securities and Exchange Commission
promulgated Rule 10b-5 which provides:

       It shall be unlawful for any person, directly or
       indirectly, by the use of any means or instrumentality

                               21
       of interstate commerce, or of the mails or of any facility
       of any national securities exchange,

       (a) to employ any device, scheme, or artifice to defraud,

       (b) to make any untrue statement of a material fact or
       to omit to state a material fact necessary in order to
       make the statements made, in the light of the
       circumstances under which they were made, not
       misleading, or

       (c) To engage in any act, practice, or course of business
       which operates or would operate as a fraud or deceit
       upon any person, in connection with the purchase or
       sale of any security.

17 C.F.R. S 240.10b-5. In Newton, we set forth the
necessary elements of a Rule 10b-5 violation:

       To state a claim for securities fraud under S 10 of the
       Securities [Exchange] Act of 1934 and Rule 10b-5,
       plaintiffs must demonstrate: (1) a misrepresentation or
       omission of a material fact in connection with the
       purchase or sale of a security; (2) scienter on the part
       of the defendant; (3) reliance on the misrepresentation;
       and (4) damage resulting from the misrepresentation.

Newton, 135 F.3d at 269; see also Semerenko v. Cendant
Corp., 223 F.3d 165, 174 (3d Cir. 2000).

It is important to recognize that the facts of this case do
not resonate with those typical of securities violations
under Rule 10b-5. Customarily those claims involve a
fraudulent material misrepresentation or omission that
affects a security's value. See EchoCath, 235 F.3d at 884
(citing typical cases: Semerenko, 223 F.3d at 171 (financial
statement); Weiner, 129 F.3d at 311-12 (corporation's
financial condition); In re Burlington Coat Factory Sec. Litig.,
114 F.3d 1410, 1415-17 (3d Cir. 1997) (projected future
earnings); In re Westinghouse Sec. Litig., 90 F.3d 696, 700-
01 (3d Cir. 1996) (fraudulent representation of company's
state of affairs)).

The alleged material nondisclosure here consisted of a
broker-dealer accepting an investor's order under the
implied representation of the duty of best execution. This

                                22
duty requires a broker-dealer to "use reasonable efforts to
maximize the economic benefit to the client in each
transaction." Newton, 135 F.3d at 270. A broker-dealer who
"accepts such an order while intending to breach that duty
makes a misrepresentation that is material to the purchase
or sale [of a security]." Id. at 269. If the order was executed
in a manner inconsistent with this duty, it was also
performed with scienter. Id. at 273-74. Despite defendants'
claim that execution at the NBBO price represented an
acceptable industry-wide practice, we held in Newton that
plaintiffs had alleged a claim that at least satisfied Rule
10b-5's material misrepresentation and scienter
requirements. Id. at 274-75. We did not examine the other
elements of a Rule 10b-5 claim--specifically, reliance and
loss causation--because these elements were not relevant
to the duty of best execution. On remand, the District
Court picked up where we left off. Although the court found
no issues affecting misrepresentation and scienter that
would preclude class certification, it held that individual
questions on reliance and economic loss presented
formidable obstacles to class certification.

The parties disagree whether evidence of reliance and
economic loss are consistent with each trade or would
require individual treatment at trial. Defendants argue that
reliance and economic loss cannot be presumed across the
class for the hundreds of millions of trades at issue.
Because only class members who detrimentally relied on a
defendants' execution practice would have a cause of
action, they maintain the individual inquiry necessary to
establish reliance and economic loss renders plaintiffs'
claims unfit for class certification. Whether proof of reliance
and economic loss are unique to each investor,
necessitating a trade-by-trade examination, remains
contested.

B. Reliance

In Rule 10b-5 securities class actions, a plaintiff must
prove reliance on a fraudulent material misrepresentation
or omission. Kline v. First W. Gov't Sec., Inc. , 24 F.3d 480,
487 88 (3d Cir. 1994); Peil, 806 F.2d at 1160 (discussing
reliance). "It is axiomatic that a private action for securities

                               23
fraud must be dismissed when a plaintiff fails to plead that
he or she reasonably and justifiably relied on an alleged
misrepresentation." Semerenko, 223 F.3d at 178 (citing
Weiner, 129 F.3d at 315; In re Burlington Coat Factory, 114
F.3d at 1417). This burden requires a plaintiff to
demonstrate that defendants' conduct caused him" `to
engage in the transaction in question.' " Robbins, 116 F.3d
at 1447 (quoting Currie v. Cayman Res. Corp., 835 F.2d
780, 785 (11th Cir. 1988)); see also Peil, 806 F.2d at 1160.
"Recognizing that the requirement of showing direct
reliance presents an unreasonable evidentiary burden in a
securities market where face-to-face transactions are rare
and where lawsuits are brought by classes of investors . . .
this court has adopted a rule that creates a presumption of
reliance in certain cases." Semerenko, 223 F.3d at 178.
"The reason for shifting the burden on the reliance issue
has been an assumption that the plaintiff is generally
incapable of proving that he relied on a material
[nondisclosure]." Sharp v. Coopers & Lybrand, 649 F.2d
175, 188 (3d Cir. 1981), overruled in part on other grounds,
In re Data Access Sys. Sec. Litig., 843 F.2d 1537 (3d
Cir.1988) (en banc).

The seminal opinion on the presumption of reliance in
securities fraud cases is Affiliated Ute Citizens of Utah v.
United States, 406 U.S. 128, 153-54 (1970). Affiliated Ute
involved an effort by some members of the Ute tribe to
distribute its assets among its members. For this purpose,
the tribe placed its assets in a corporation and issued each
member ten shares of stock that were subsequently
deposited in a local bank. As fiduciary, the bank assumed
responsibility for enforcing the stocks' restrictions. For its
own benefit and unknown to the Utes, the bank facilitated
sales of the stock to outside investors at costs below its fair
market value. When the Utes discovered the bank's
practice, they sued under Rule 10b-5. In defense, the bank
claimed the Utes failed to establish reliance on a
misrepresentation of material fact. But the Supreme Court
held the plaintiffs were entitled to a presumption of
reliance, holding that in cases "involving primarily a failure
to disclose [material facts], positive proof of reliance is not
a prerequisite to recovery." Id. at 153. Applying this
precept, we have held that "the proper approach to the

                               24
problem of reliance is to analyze the plaintiff 's allegations,
in light of the likely proof at trial, and determine the most
reasonable placement of the burden of proof of reliance."
Sharp, 649 F.2d at 188; see also Joseph v. Wiles, 223 F.3d
1155, 1162 (10th Cir. 2000) (recognizing that " Affiliated Ute
presumption of reliance exists in the first place to aid
plaintiffs when reliance on a negative would be practically
impossible"); Blackie v. Barrack, 524 F.2d 891, 907 (9th
Cir. 1975) (same).

We extended the Affiliated Ute presumption of reliance to
investors when securities dealers failed to disclose a pricing
policy that overcharged investors in the purchase and sale
of "penny stocks."14 In Hoxworth II, investors alleged they
were systematically defrauded by a securities dealer's
failure to disclose its pricing policy of excessive markups or
markdowns on different securities. 980 F.2d 912. Because
of this uniform, material nondisclosure, we concluded that
the "plaintiffs [were] entitled to the presumption of reliance
set forth in Affiliated Ute." Id. at 924; cf. Eisenberg v.
Gagnon, 766 F.2d 770, 786-87 (3d Cir. 1985) (holding
individual questions of reliance in securities class action
involving investment in tax shelters did not preclude
certification). In analogous cases, reliance has not been a
hurdle to class certification. See Grandon v. Merrill Lynch &
Co., Inc., 147 F.3d 184, 190 (2d Cir. 1998) ("A broker-dealer
commits fraud (in violation of S 10(b) and Rule 10b-5) by
charging customers excessive markups without proper
disclosure."); Bank of Lexington & Trust Co. v. Vining-Sparks
Sec., Inc., 959 F.2d 606, 613 (6th Cir. 1992) ("[T]he failure
to disclose exorbitant mark-ups violates section 78j(b) and
Rule 10b-5."); Angelastro v. Prudential-Bache Sec., Inc., 764
F.2d 939, 942-46 (3d Cir. 1985) (reliance does not bar
private securities fraud action involving nondisclosure of
fraudulent credit terms on margin accounts); Ettinger v.
Merrill Lynch, Pierce, Fenner & Smith, Inc., 122 F.R.D. 177,
180, 182 (E.D. Pa. 1988) (reliance not an issue in securities
class action alleging securities dealer failed to disclose
improper markups on bonds).
_________________________________________________________________

14. "Penny stocks are low-priced, high-risk equity securities for which
there is frequently no well-developed market." Hoxworth II, 980 F.2d at
914 n.1.

                               25
Investors may also be entitled to a rebuttable
presumption of reliance under the "fraud-on-the-market
theory." This is because "in an efficient market the
misinformation directly affects the stock prices at which the
investor trades and thus, through the inflated or deflated
price, causes injury even in the absence of direct reliance."
In re Burlington Coat Factory, 114 F.3d at 1419 n.8 (citing
Basic Inc., 485 U.S. at 241-42). Reliance may be presumed
when a fraudulent misrepresentation or omission impairs
the value of a security traded in an efficient market. Basic
Inc., 485 U.S. at 241-42; Semerenko, 223 F.3d at 178; In re
Burlington Coat Factory, 114 F.3d at 1419 n.8. Here
plaintiffs' claims do not involve an omission or
misrepresentation that affected the value of a security in an
efficient market. Therefore, a presumption of reliance based
on this theory would be inappropriate.

The District Court did not explicitly rule on whether
reliance could be presumed. Instead the court observed
that the investors' trades "involved multiple circumstances
which bear decisively upon the existence of reliance." In re
Merrill Lynch, et al. Sec. Litig., 191 F.R.D. 391, 395 (D.N.J.
1999) (hereinafter "Merrill Lynch"). On this point, the court
found that some plaintiffs may have known about the
defendants' practice, belying their argument. Id. ("The
degree of sophistication of the putative class members
varies widely. Some, no doubt, were new to the world of
NASDAQ trading; some were institutional investors.").

Plaintiffs contend that defendants' uniform practice of
executing trades at the NBBO price, even if better prices
were reasonably available from alternative sources, and
their failure to disclose the practice to their customers
warrant a presumption of reliance. Defendants respond
that at least some plaintiffs knew of the execution practice
which nullifies their reliance. In support, they cite several
news articles describing the practice15 as well as an SEC
_________________________________________________________________

15. See, e.g., Floyd Norris, The S.E.C. Tries to Insure that Investors Get
Better Stock Prices, N.Y. Times, Sept. 28, 1995, at D8; Daniel Kadlec,
Young Traders Can Be Gamble for Street, USA Today, Sept. 27, 1995, at
3B; Warren Getler, Reuter's Instinet is Biting Off Chunks of Nasdaq's
Territory, Wall St. J., Oct. 4, 1994, at C1; Gretchen Morgenson, Fun and
Games on Nasdaq, Forbes, Aug. 16, 1993, at 74; Craig Torres, How
Street Turns Your Stock Trades to Gold, Wall St. J., Feb. 16, 1993, at C1.

                               26
report noting that institutional investors (who fall within
the putative class's broad definition)16 used alternative
electronic trading sources to obtain better prices for their
trades. Br. of Appellees at 56-57. Because some plaintiffs
knew or should have known of their practice, defendants
assert that reasonable reliance on the alleged nondisclosure
did not occur class-wide. For this reason, a presumption of
reliance is arguably unavailable. See Straub v. Vaisman &
Co., Inc., 540 F.2d 591, 595-98 (3d Cir. 1976).

While it seems apparent that some class members likely
knew of defendants' practice, this knowledge does not
necessarily invalidate the presumption. When defendants
fail to disclose material information about a uniform
practice involving the purchase or sale of securities,
plaintiffs may be entitled to a presumption of reliance
which defendants may rebut. See, e.g., Affiliated Ute, 406
U.S. at 153-54; Hoxworth II, 980 F.2d at 924; Blackie, 524
F.2d at 905-06; see also In re Prudential Ins. Co. of Am.
Sales Practice Litig., 148 F.3d 283, 314 (3d Cir. 1998)
(approvingly noting conclusion that "because plaintiffs'
fraud-based claims stem largely from misleading omissions,
reliance can be presumed") (quotation and citation omitted)
(hereinafter "Prudential"). Presuming reliance class-wide is
proper when the material nondisclosure is part of a
common course of conduct.17 Hoxworth II, 980 F.2d at 924
(holding class entitled to presumption of reliance against
securities dealer for failure to disclose exorbitant pricing
_________________________________________________________________

16. Plaintiffs define the class as consisting"of all persons who placed
market orders with Merrill Lynch or PaineWebber or Dean Witter to
purchase or sell shares of OTC stock between November 4, 1992 and
August 28, 1996."

17. Further explaining the justification for presuming reliance from
material nondisclosures, we noted in Sharp that " `[s]ince nothing is
affirmatively represented in a nondisclosure case, demanding proof of
reliance would require the plaintiff to demonstrate that he had in mind
the converse of the omitted facts, which would be virtually impossible to
demonstrate in most cases.' " 649 F.2d at 188 n.18 (quoting Note, The
Reliance Requirement in Private Actions Under SEC Rule 10b-5, 88 Harv.
L. Rev. 584, 590 (1975) (footnote omitted)). The justifications for
creating
presumptions in general are explored in greater depth in 2 J. Strong,
McCormick on Evidence S 343, p. 437-43 (5th ed. 1999).

                               27
policy for securities); see also Prudential, 148 F.3d at 314;
Ettinger, 122 F.R.D. at 180.

To reiterate, the investors have alleged that the broker-
dealers failed to disclose their policy of executing NASDAQ
trades at the NBBO price. Like a securities dealer's failure
to disclose its policy of overcharging investors, defendants'
execution of investors' trades at the NBBO price, when
better prices may have been available from alternative
services, constitutes a potentially fraudulent common
course of conduct from which reliance can be presumed.
See Hoxworth II, 980 F.2d at 924 (holding plaintiffs entitled
to presumption of reliance because of defendants'
nondisclosure of pricing policy);18 see also Prudential, 148
F.3d at 314. We will not require each plaintiff to prove he
relied on a practice which defendants did not affirmatively
disclose. See Sharp, 649 F.2d at 188-89; Ettinger, 122
F.R.D. at 180. Because their allegations of a uniform
nondisclosure would make it impractical for investors to
affirmatively prove their lack of knowledge of defendants'
practice, the burden of rebutting a presumption of reliance
is properly placed on defendants here. Therefore, under this
set of facts, we hold presuming reliance would be
appropriate because defendants allegedly failed to disclose
their trade execution practice.

C. Economic Loss

1.

Under Rule 10b-5, a plaintiff must also establish that he
suffered an economic loss that was caused by defendant's
fraudulent conduct. Semerenko, 223 F.3d at 185;
Huddleston, 640 F.2d at 549. If economic loss is evident,
then plaintiff must prove a "sufficient causal nexus between
the loss and the alleged [nondisclosure]." Semerenko, 223
_________________________________________________________________

18. This was based on an earlier decision by our circuit that the "burden
shifting rationale of Affiliated Ute was fully applicable" to the
nondisclosure of an exorbitant markup pricing policy. Hoxworth v.
Blinder, Robinson & Co., Inc., 903 F.2d 186, 202 (3d Cir. 1990)
(hereinafter "Hoxworth I").

                               28
F.3d at 184. Loss causation derives its function from the
"standard rule of tort law that the plaintiff must allege and
prove that, but for the defendant's wrongdoing, the plaintiff
would not have incurred the harm of which he complains."
Bastian v. Petren Res. Corp., 892 F.2d 680, 685 (7th Cir.
1990).

Initially, loss causation was a requirement established by
the courts. In re Phillips Petroleum Sec. Litig. , 881 F.2d
1236, 1244 (3d Cir. 1989) (citing Huddleston, 640 F.2d at
549); Angelastro, 764 F.2d at 942-43; see also Bastian, 892
F.2d at 685. But under the Private Securities Litigation
Reform Act of 1995, it became a statutory element of
private securities fraud claims under Rule 10b-5. The Act
provides that "[i]n any private action arising under this
chapter, the plaintiff shall have the burden of proving that
the act or omission of the defendant alleged to violate this
chapter caused the loss for which the plaintiff seeks to
recover damages." 15 U.S.C. S 78u-4(b)(4).

In any event, it is necessary here to separate the concept
of economic loss from the issue of loss causation. Of
particular importance is whether plaintiffs have, in fact,
suffered an economic loss. "[F]ailure to show actual
damages is a fatal defect in a Rule 10b-5 cause of action."
Feldman v. Pioneer Petroleum, Inc., 813 F.2d 296, 302 (10th
Cir. 1987); see also 2 T. Hazen, Law of Securities Regulation
S 13.7, p. 553 (3d ed. 1995) ("Failure to allege or prove
actual damages will result in dismissal of any 10b-5
damage claim."). For this reason, "[i]nvestors cannot
complain about a fraud that did not cause them any harm."
Latigo Ventures v. Laventhol & Horwath, 876 F.2d 1322,
1325 (7th Cir. 1989); Huddleston, 640 F.2d at 555. The
economic loss that plaintiffs claim would be the difference
between the price at which their trades were executed and
the "better" price allegedly available from an alternative
trading source.19 Therefore, to show economic loss,
_________________________________________________________________

19. The Court of Appeals for the Tenth Circuit has explained how the
measure of damages should be calculated under Rule 10b-5:

       Although neither Section 10(b) of the [Securities Exchange] Act nor
       Rule 10b-5 contains explicit provisions for determining damages,

                               29
plaintiffs must establish that a "better" price was
obtainable for each executed trade. If a "better" price was
unavailable for a particular trade, then a class member
could not have suffered injury and cannot maintain a Rule
10b-5 claim.

2.

The District Court held that economic loss could neither
be established nor presumed class-wide. Merrill Lynch, 191
F.R.D. at 397. Finding that defendants' practice did not
detrimentally affect the value of plaintiffs' securities across
the entire market nor did it necessarily result in
overcharging, the District Court found no resemblance to
cases where economic injury naturally flowed from
defendant's alleged conduct. Id. at 396. Irrespective of
reliance, the District Court found that, after reviewing the
record, many investors received the best available price
when defendants executed their trades at the NBBO listed
price. Id. ("The record as it is presently constituted requires
the conclusion that in a large number of transactions there
were no better prices from other sources."). Drawing on the
summary judgment record where it determined from a
sample analysis of twelve trades executed by defendants
that only one resulted in actual economic injury to a class
representative, the District Court concluded that an
undefined number of class members sustained no economic
loss whatsoever, necessitating the conclusion that damages
were not susceptible to class-wide proof.20 Id. at 396; see
_________________________________________________________________

       courts have applied the "actual damages" standard of Section 28 of
       the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78bb(a), to
Rule
       10b-5 claims. Under Section 28 of the Act, the "correct measure of
       damages . . . is the difference between the fair value of all that
the
       (plaintiff) received and the fair value of what he would have
received
       had there been no fraudulent conduct." Randall v. Loftsgaarden,
       478 U.S. 647, 661-62 (1986).

Feldman, 813 F.2d at 301-02 (footnotes omitted).

20. In defendants' motion for summary judgment, the District Court
examined twelve of the class representatives' trades with the defendants
during the initial class period (November 4, 1992 to November 4, 1994).

                               30
also In re Merrill Lynch et al., Sec. Litig., 911 F. Supp. at
766. Based on this reasoning, the District Court found the
question of economic loss remained unique to each
investor. Plaintiffs argue against extrapolating the
improbability of class-wide damages from twelve trades and
contend the District Court erred in finding that"many"
_________________________________________________________________

Although the court's opinion mentions thirteen trades, only twelve were
evaluated. While the court was provided pricing information from
SelectNet to compare the prices at which the trades were executed, "[n]o
information on either Instinet prices, SOES limit order file prices or
payment for order flow arrangements was supplied for any of the
transactions." In re Merrill Lynch, et al. Sec. Litig., 911 F. Supp. at
766
(footnote omitted).

In the only trade where the District Court found a plaintiff had clearly
sustained economic injury, plaintiff Binder purchased 1000 shares of
Optical Radiation through PaineWebber on April 21, 1994. Six minutes
after receiving the order, PaineWebber executed it at a price of
$20/share. However, earlier that morning an offer was sent over
SelectNet that remained open for the entire day to sell 2000 shares of
Optical Radiation in blocks of 1000 at $19 3/4. Had PaineWebber
executed the trade at the price offered on SelectNet, the plaintiff would
have saved $25.

In two other trades, the court also found inferential and speculative
evidence that better prices may have been available. On the same day
that plaintiff Binder placed an order to buy 7000 shares of Hydron
Technologies at 2 9/16, which PaineWebber executed through a market-
maker in the security, an offer restricted to Lehman Bros. to sell up to
3000 shares of Hydron Technologies at 2 1/2 was broadcast on
SelectNet. Based on this restricted offer, plaintiffs contend the lower
price indicated a better price for the stock would have been available
from other sources, potentially Instinet. Additionally, plaintiffs assert
Merrill Lynch's execution of plaintiff Zakheim's purchase order for 120
shares of U.S. Healthcare at 42 3/4 was, on average, $0.16/share more
than the price at which Merrill Lynch executed trades in the stock
throughout the day. For this reason, plaintiffs reasoned a better price
was more than likely available on Instinet that day.

The District Court found SelectNet would not have provided superior
prices in six other transactions. Id. While no information from an
alternative source was provided for the remaining three transactions, the
court noted it was still possible that superior prices may have been
available for them. Id.

                               31
class members were uninjured. But we agree with the
District Court's finding that plaintiffs' claims would require
individual treatment to determine actual injury.

In fraud-on-the-market or overcharging cases that
warrant a presumption of reliance, plaintiffs satisfy their
initial burden because they sustain economic loss by
reason of the alleged conduct.21 In fraud-on-the-market
cases, the price at which a stock is traded is presumably
affected by the fraudulent information, thus injuring every
investor who trades in the security. In re Burlington Coat
Factory, 114 F.3d at 1419 n.8 (citing Basic Inc., 485 U.S. at
241-42). Nor was economic loss a question in those
securities claims where defendants failed to disclose a
fraudulent pricing policy that overcharged investors.
Accordingly, presuming economic loss was the ineluctable
_________________________________________________________________

21. It bears noting that class actions alleging antitrust injury often
raise
similar concerns. In antitrust class actions, injury may be presumed
when it is clear the violation results in harm to the entire class.
Bogosian
v. Gulf Oil Corp., 561 F.2d 434, 454 (3d Cir. 1977); In re Nasdaq Market-
Makers Antitrust Litig., 169 F.R.D. 493, 526 (S.D.N.Y. 1996). In Bogosian,
a class of service station dealers sued their lessors, major oil
companies,
for forcing them to purchase gasoline at controlled prices in violation of
the antitrust laws. 561 F.2d 434. We recognized that

       when an antitrust violation impacts upon a class of persons . . . ,
       there is no reason why proof of the impact cannot be made on a
       common basis so long as the common proof adequately
       demonstrates some damage to each individual. Whether or not fact
       of damage can be proven on a common basis therefore depends
       upon the circumstances of each case.

Id. at 454. Likewise, in In re Nasdaq Market-Makers, a class was certified
to pursue allegations that market makers of NASDAQ traded securities
conspired to charge supra-competitive prices on the securities they
traded for investors. 169 F.R.D. 493. The court noted that plaintiffs'
claim of antitrust injury was "susceptible [to] . . . common classwide
proof [because] . . . an illegal price-fixing scheme presumptively damages
all purchasers of a price-fixed product in an affected market." Id. at
526.
Nevertheless, antitrust cases still require proof of injury to each
individual for common questions to predominate in a class action.
Windham v. Am. Brands, Inc., 565 F.2d 59, 65-66 (4th Cir. 1977) (en
banc); see also Broussard v. Meineke Disc. Muffler Shops, Inc., 155 F.3d
331, 342-43 (4th Cir. 1998) (citing Windham, 565 F.2d at 66); Kline v.
Coldwell, Banker & Co., 508 F.2d 226, 233 (9th Cir. 1974).
32
by-product of the alleged fraud. The same does not hold
true here. The execution of plaintiffs' trades at the NBBO
listed price did not necessarily injure each class member.
Plaintiffs may be entitled to a presumption of economic loss
only when it is clear each class member has in fact
sustained economic injury. See Semerenko, 223 F.3d at
185. In a securities class action, a putative class may
presumptively establish economic loss on a common basis
only if the evidence adequately demonstrates some loss to
each individual plaintiff.

Because securities claims may take on several forms,
proving economic loss on a common basis is a fact-specific
inquiry. See EchoCath, 235 F.3d at 884; Grandon, 147 F.3d
at 190; see also Bogosian, 561 F.2d at 454 (evaluating loss
in antitrust class actions). We find no support in the case
law for presuming economic injury for purposes of class
certification in Rule 10b-5 claims22 absent indication that
each plaintiff has suffered an economic loss. See
Semerenko, 223 F.3d at 184-85 ("[W]here the claimed loss
involves the purchase of a security at a price that is inflated
due to an alleged misrepresentation, there is a sufficient
causal nexus between the loss and the alleged
misrepresentation to satisfy the loss causation
requirement."); see also Robbins, 116 F.3d at 1448 ("Our
decisions explicitly require proof of a causal connection
between the misrepresentation and the investment's
subsequent decline in value."); Hayes v. Gross, 982 F.2d
104, 107 (3d Cir. 1992) (injury assumed when security
purchased at price inflated by fraudulent
misrepresentation); Scattergood v. Perelman, 945 F.2d 618,
624 (3d Cir. 1991) (same).

In assessing the question of economic loss, it is
important to bear in mind how the facts here differ from
those in a typical securities action. Unlike a "fraud-on-the-
market" claim, this case does not involve a
_________________________________________________________________

22. The cases on which we rely generally discuss loss causation in the
context of applying the requirements of a Rule 10b-5 claim, not class
certification. Many of these cases arise as class actions, but they
typically involve motions to dismiss for failure to state a claim or
motions
for summary judgment rather than class certification.

                               33
misrepresentation or omission that decreased the value of
a security. Furthermore, unlike excessive over-pricing
policy claims, this case does not involve a practice that
necessarily harmed investors across the class.23 See
generally Grandon, 147 F.3d 184; Hoxworth II , 980 F.2d
912; Vining-Sparks, 959 F.2d 606; Angelastro, 764 F.2d
939; Ettinger, 122 F.R.D. 177. In this case, defendants
allegedly executed trades solely at the NBBO price.
Depending on the facts of each trade, the NBBO listed price
may or may not have provided a class member with the
best price. Therefore, economic loss to the plaintiffs cannot
be presumed by the purchase or sale of a security at the
NBBO price, and we will not presume it across the class.

In sum, we conclude that the putative class would be
entitled to a rebuttable presumption of reliance but not of
economic loss. Therefore, their claims do not warrant a
rebuttable presumption of class-wide injury.24
_________________________________________________________________

23. Plaintiffs also contend that the claims in this case are similar to
those in Prudential, where we certified a settlement class alleging fraud.
148 F.3d 283. The claims here are easily distinguished from the
securities fraud claims in Prudential. In Prudential, the federal
securities
claims involved the sale of vanishing premium life insurance policies
which the insurance company fraudulently claimed would become self-
funding. 148 F.3d at 300 (citing In re Prudential Ins. Co. of Am. Sales
Practices Litig., 962 F. Supp. at 500). By purchasing the policies,
plaintiffs risked economic injury because the instruments were
structurally incapable of meeting the financial expectations Prudential
had promised. Whether or not class members actually suffered economic
injury was immaterial to the viability of the class's claims because the
insurance company did not contest liability. See Prudential, 148 F.3d at
296-97.

24. Citing AUSA Life Ins. Co. v. Ernst and Young, 206 F.3d 202 (2d Cir.
2000), plaintiffs contend that defendants' trading practice established
loss causation throughout the class because it was foreseeable the
practice would cause economic harm to class members. See 206 F.3d at
217-20 (remanding dismissal of securities action for reconsideration of
loss causation in terms of foreseeability that defendant's conduct would
have caused alleged economic harm). By focusing on whether or not the
loss was simply foreseeable, plaintiffs have put an improper gloss on the
court's opinion. The Court of Appeals for the Second Circuit has
explained that "loss causation . . . examines how directly . . . [the
fraudulent conduct] caused the loss, and whether the resulting loss was

                               34
VI.

Turning to the test for class certification, we must
examine the elements of a Rule 10b-5 claim through the
prism of Fed. R. Civ. P. 23 to determine whether the
District Court abused its discretion in failing to certify the
class. A putative class must satisfy the four conjunctive
criteria of Fed. R. Civ. P. 23(a): numerosity, commonality,
typicality, and adequacy of representation.25 A class seeking
_________________________________________________________________

a foreseeable outcome of the fraudulent [conduct]." Suez Equity
Investors, 250 F.3d at 96 (summarizing the Court of Appeals for the
Second Circuit's definition of loss causation). Whether or not the loss is
foreseeable becomes a factor only if direct causation has been
demonstrated. Id.

Our test for loss causation is framed somewhat differently. As noted,
a viable Rule 10b-5 securities claim must show a"sufficient causal
nexus between the loss and the alleged [nondisclosure]." Semerenko, 223
F.3d at 184; see also In re Phillips Petroleum , 881 F.2d at 1244 (holding
fraudulent misrepresentation "must touch upon the reasons for the
investment's decline in value") (citing Huddleston, 640 F.2d at 549). In
other words, to establish loss causation, a claim must demonstrate that
the fraudulent conduct proximately caused or substantially contributed
to causing plaintiff 's economic loss. See EchoCath, 235 F.3d at 883-84;
Semerenko, 223 F.3d at 186. Whether there are differences between
these standards for loss causation, it is far from certain in this case
that
each plaintiff has sustained a loss, unlike the insurance companies in
AUSA.

In the end, we need not address here whether their claims establish
loss causation because we find that plaintiffs' claims do not warrant a
class-wide presumption of economic loss. For those investors who did
not receive the best available price and suffered a loss as a result,
establishing loss causation would not be an issue. See Hoxworth I, 903
F.2d at 203 n.24 (rejecting defendants' argument that excessive markups
or markdowns may not have been the cause of plaintiffs' injuries).

25. Fed. R. Civ. P. 23(a) provides:

       Prerequisites to a Class Action. One or more members of a class
       may sue or be sued as representative parties on behalf of all only
if
       (1) the class is so numerous that joinder of all members is
       impracticable, (2) there are questions of law or fact common to the
       class, (3) the claims or defenses of the representative parties are
       typical of the claims or defenses of the class, and (4) the
       representative parties will fairly and adequately protect the
interests
       of the class.
35
money damages must also satisfy the (b)(3) requirements of
predominance and superiority--namely, whether common
questions of law or fact predominate and whether the class
action represents the superior method for adjudicating the
case.26

Denying class certification, the District Court found that
plaintiffs' claims were atypical and the class representatives
inadequate to represent the class. On related grounds, the
court also held that common issues did not predominate
and the class action device was neither superior nor
manageable. Merrill Lynch, 191 F.R.D. at 397-98. As noted,
we review the District Court's decision denying class
certification for abuse of discretion. See supra p. 10.

A. Federal Rule of Civil Procedure 23(a)

The certification requirements of Fed. R. Civ. P. 23(a)
embrace two rudimentary principles: 1) the necessity and
efficiency of adjudicating the claims as a class and 2) the
assurance of protecting the interests of absentee members.27
_________________________________________________________________

26. Fed. R. Civ. P. 23(b) provides:

         Class Actions Maintainable. An action may be maintained as a
         class action if the prerequisites of subdivision (a) are satisfied,
and
         in addition:

         * * *

         (3) the court finds that the questions of law or fact common to the
         members of the class predominate over any questions affecting only
         individual members, and that a class action is superior to other
         available methods for the fair and efficient adjudication of the
         controversy. The matters pertinent to the findings include: (A) the
         interest of members of the class in individually controlling the
         prosecution or defense of separate actions; (B) the extent and
nature
       of any litigation concerning the controversy already commenced by
       or against members of the class; (C) the desirability or
undesirability
       of concentrating litigation of the claims in the particular forum;
(D)
       the difficulties likely to be encountered in the management of a
       class action.

27. We have explained in greater detail that

         [t]he drafters designed the procedural requirements of Rule 23,
         especially the requisites of subsection (a), so that the court can
36
Baby Neal v. Casey, 43 F.3d 48, 55 (3d Cir. 1994); G.M.
Trucks, 55 F.3d at 785. If the class does not satisfy each of
the 23(a) criteria, the suit cannot be maintained as a class
action. For this reason, we will address each criterion in
turn.

1. Numerosity

Numerosity requires a finding that the putative class is
"so numerous that joinder of all members is impracticable."
Fed. R. Civ. P. 23(a)(1). It is clear the size of putative class
satisfies this criterion. There are hundreds of thousands of
class members and joinder would be impracticable. Id.;
Merrill Lynch, 191 F.R.D. at 394.

2. Commonality & Typicality

" `The concepts of commonality and typicality are broadly
defined and tend to merge,' " because they focus on similar
aspects of the alleged claims. Barnes, 161 F.3d at 141
(quoting Baby Neal, 43 F.3d at 56). Commonality requires
the presence of "questions of law or fact common to the
class," Fed. R. Civ. P. 23(a)(2), and typicality demands that
"the claims or defenses of the representative parties are
typical of the claims or defenses of the class." Fed. R. Civ.
P. 23(a)(3). The significance of commonality is self-evident:
it provides the necessary glue among class members to
_________________________________________________________________

       assure, to the greatest extent possible, that the actions are
       prosecuted on behalf of the actual class members in a way that
       makes it fair to bind their interests. The rule thus represents a
       measured response to the issues of how the due process rights of
       absentee interests can be protected and how absentees' represented
       status can be reconciled with a litigation system premised on
       traditional bipolar litigation.

       ***

       The Rule 23(a) class inquiries (numerosity, commonality,
typicality,
       and adequacy of representation) constitute a multipart attempt to
       safeguard the due process rights of absentees. Thus, the ultimate
       focus falls on the appropriateness of the class device to assert
and
       vindicate class interests.

G.M. Trucks, 55 F.3d at 785, 796.

                               37
make adjudicating the case as a class worthwhile. 1
Herbert B. Newberg & Alba Conte, Newberg on Class
Actions S 3.01, p. 3-4 (3d ed. 1992). Typicality ensures the
interests of the class and the class representatives are
aligned "so that the latter will work to benefit the entire
class through the pursuit of their own goals." Barnes, 161
F.3d at 141. "The typicality criterion is intended to preclude
certification of those cases where the legal theories of the
named plaintiffs potentially conflict with those of the
absentees by requiring that the common claims are
comparably central to the claims of the named plaintiffs as
to the claims of the absentees." Baby Neal , 43 F.3d at 57
(citing Weiss v. York Hosp., 745 F.2d 786, 810 (3d Cir.
1984)).

We have set a low threshold for satisfying both
requirements. See Barnes, 162 F.3d at 141 (noting claims
based on common course of conduct satisfy typicality); In re
Sch. Asbestos Litig., 789 F.2d 996, 1010 (3d Cir. 1986)
(highlighting that the " `threshold of commonality is not
high' ") (quoting Jenkins v. Raymark Indus., Inc., 782 F.2d
468, 472 (5th Cir. 1986)). That is, "Rule 23(a) does not
require that class members share every factual and legal
predicate to meet the commonality and typicality
standards." G.M. Trucks, 55 F.3d at 817." `[N]either of these
requirements mandates that all putative class members
share identical claims.' " Prudential, 148 F.3d at 311
(quoting Baby Neal, 43 F.3d at 56). Nevertheless, we
require courts to examine them separately because the
criteria remain distinct. Baby Neal, 43 F.3d at 56.

a. Commonality

As noted, commonality does not require an identity of
claims or facts among class members. Prudential , 148 F.3d
at 310 (citing Baby Neal, 43 F.3d at 56)." `The commonality
requirement will be satisfied if the named plaintiffs share at
least one question of fact or law with the grievances of the
prospective class.' " Id. (quoting Baby Neal, 43 F.3d at 56);
Georgine v. Amchem Prods., Inc., 83 F.3d 610, 627 (3d Cir.
1996), aff 'd sub nom., Amchem Prods., Inc. v. Windsor, 521
U.S. 591 (1997).

                               38
The District Court found, and it is not seriously contested
on appeal, that common questions of law and fact are
present. Merrill Lynch, 191 F.R.D. at 394. Whether the
defendants' execution of their customers' trades at prices
quoted on the NBBO violates Rule 10b-5 constitutes a
factual and legal claim that is common to the entire class.
In fact, plaintiffs' claims raise several common issues
including: 1) did defendants intentionally execute the
plaintiffs' orders at the NBBO price without examining
other alternatives; 2) did defendants fail to disclose their
practice in violation of their duty to their customers; 3)
were defendants technologically capable of providing
superior prices to those offered on the NBBO; and 4) did
defendants' conduct violate S 10(b) of the Securities
Exchange Act of 1934. See Br. of Appellants at 31. The
District Court properly held the putative class satisfied this
requirement.

b. Typicality

The typicality inquiry here centers on whether " `the
named plaintiff[s'] individual circumstances are markedly
different or . . . the legal theory upon which the claims are
based differs from that upon which the claims of other
class members will perforce be based.' " Eisenberg, 766
F.2d at 786 (quoting Weiss, 745 F.2d at 809 n.36). The
criterion acts as a bar to class certification only when "the
legal theories of the named representatives potentially
conflict with those of the absentees." Georgine, 83 F.3d at
631. If the claims of the named plaintiffs and putative class
members involve the same conduct by the defendant,
typicality is established regardless of factual differences.28
_________________________________________________________________

28. One treatise describes this standard as met"[w]hen it is alleged that
the same unlawful conduct was directed at or affected both the named
plaintiffs and the class sought to be represented." 1 Newberg on Class
Actions S 3.13, p. 3-77; see also Prudential, 148 F.3d at 311
(" `Commentators have noted that cases challenging the same unlawful
conduct which affects both the named plaintiffs and the putative class
usually satisfy the typicality requirement irrespective of the varying
fact
patterns underlying the individual claims.' ") (quoting Baby Neal, 43 F.3d
at 58); In re NASDAQ Market-Makers, 169 F.R.D. at 510-11 ("[The
typicality requirement is satisfied] where the claims are based on the
same legal theory and where the class members have allegedly been
injured by the same course of conduct as that which allegedly injured
the proposed representatives.").

                               39
Barnes, 161 F.3d at 141; see also 1 Newberg on Class
Actions S 3.15, p. 3-78 ("Factual differences will not render
a claim atypical if the claim arises from the same event or
practice or course of conduct that gives rise to the claims
of the class members, and if it is based on the same legal
theory."). Our jurisprudence "assures that a claim framed
as a violative practice can support a class action embracing
a variety of injuries so long as those injuries can all be
linked to the practice." Baby Neal, 43 F.3d at 63
(discussing Falcon, 457 U.S. 147). As a result, we have
concluded that the requirement "does not mandate that all
putative class members share identical claims," Barnes,
161 F.3d at 141, because " `even relatively pronounced
factual differences will generally not preclude a finding of
typicality where there is a strong similarity of legal theories'
or where the claim arises from the same practice or course
of conduct." Prudential, 148 F.3d at 311 (quoting Baby
Neal, 43 F.3d at 58); Hoxworth II, 980 F.2d at 923.

The District Court found that the different circumstances
surrounding each trade over the class period rendered the
claims of the named representatives "[a]typical of those
members of the huge class." Merrill Lynch, 191 F.R.D. at
397. It reasoned that "[i]f proof of the representatives'
claims would not necessarily prove all the proposed class
members['] claims, the representatives['] claims are not
typical of the proposed members' claims." Id. The District
Court also believed that individual questions on reliance
and injury buttressed its finding. Id. But typicality does not
require similarity of individual questions concerning
reliance or damages on the part of the class representatives
and class members in a securities fraud action. Blackie,
524 F.2d at 905-06. In fact, whether the class
representatives' claims prove the claims of the entire class
highlights important issues of individual reliance and
damages that are more properly considered and relevant
under the predominance and superiority analysis.

In Hoxworth II, we found a putative class of securities
investors, who had purchased or sold excessively marked-
up securities, satisfied the typicality requirement. 980 F.2d
at 923. Although the class members may have purchased
or sold different securities at varying prices, all their claims

                               40
stemmed from defendant's "course of conduct in failing to
advise purchasers of its excessive markup policy." Id.; see
also Ettinger, 122 F.R.D. at 180-81 (holding typicality
satisfied where "[p]laintiff 's claims and those of the class
arise from the same conduct of defendant and are based on
the same legal theory"). Similarly, in Eisenberg v. Gagnon,
we held that securities claims involving fraudulent
inducement to invest in worthless tax shelters satisfied
typicality. 766 F.2d 770 (3d Cir. 1985). Although the named
plaintiffs invested in different tax shelters, their
investments were "prepared by the same defendants, and
contain[ed] the same alleged omissions and
misrepresentations." Id. at 786. The typicality in their legal
claims was sufficient to meet this criterion.

The named plaintiffs here, like the members of the
putative class, are purchasers and sellers of securities on
the NASDAQ. They allege that defendants violated their
duty of best execution by automatically executing each
investor's trade at prices listed on the NBBO without
consulting alternative sources that may have provided
better value. Plaintiffs' claims rest solely on a single legal
theory--a Rule 10b-5 violation-- and allege a uniform
course of conduct--automatic execution of their trades at
the NBBO listed price. Any differences then among class
members are factual--which security, at what price, under
what circumstances, etc. The alleged cause of their injuries,
however, remains typical throughout the class. Because
each class member "would need to demonstrate the
existence of this scheme, their interests are sufficiently
aligned that the class representatives can be expected to
adequately pursue the interests of the absentee class
members." Prudential, 148 F.3d. at 312. The inability of a
class representative to prove every other class members'
claim does not necessarily result in failure of the typicality
requirement. The District Court erred in finding potential
factual differences rendered plaintiffs' claims atypical.

3. Adequacy of Representation

Class representatives must "fairly and adequately protect
the interests of the class." Fed. R. Civ. P. 23(a)(4). This
requires a determination of (1) whether the representatives'

                                41
interests conflict with those of the class and (2) whether the
class attorney is capable of representing the class. Falcon,
457 U.S. at 157 & n.13; Barnes, 161 F.3d at 141. The
Supreme Court has counseled that this element "serves to
uncover conflicts of interest between named parties and the
class they seek to represent." Amchem, 521 U.S. at 625. It
also functions as a catch-all requirement that "tend[s] to
merge with the commonality and typicality criteria of Rule
23(a)." Id. at 626 n.20.29

After determining economic loss could not be presumed
class-wide,30 the District Court found the class's
employment of a statistical formula to calculate and
allocate damages would create conflicts between plaintiffs
who were actually injured and uninjured plaintiffs in
search of a windfall. Merrill Lynch, 191 F.R.D. at 398.
Questioning plaintiffs' ability to resolve this conflict, the
court refrained from deciding whether the class satisfied
the adequacy of representation requirement.31

Following the Supreme Court's observation that adequacy
of representation is an admixture of commonality and
typicality, the District Court's reservation appears to be
_________________________________________________________________

29. Although in a different context, both the Supreme Court and our
Court found the potential harm to absentee members of the class
particularly significant in denying certification in the Amchem
litigation.
Amchem, 521 U.S. at 626-28 ("As the Third Circuit pointed out, named
parties with diverse medical conditions sought to act on behalf of a
single giant class rather than on behalf of discrete subclasses. In
significant respects, the interests of those within the single class are
not
aligned. Most saliently, for the currently injured, the critical goal is
generous immediate payments. That goal tugs against the interest of
exposure-only plaintiffs in ensuring an ample, inflation-protected fund
for the future."). This concern is not implicated in the case before us.

30. "Turning to the other elements of a Rule 10b-5 claim, reliance and
damages, it is evident that common questions of fact do not prevail."
Merrill Lynch, 191 F.R.D. at 395.

31. Defendants assert that plaintiffs did not properly preserve this issue
on appeal because it is only mentioned in a footnote in their brief. While
plaintiffs do not discuss adequacy of representation, they do contest the
underlying factors motivating the District Court's conclusion. Because
the issue was present in their opening brief and is implicit in their
claims, it was sufficiently raised on appeal.

                               42
based on its earlier conclusion that the class did not satisfy
the typicality requirement. As noted, the District Court's
typicality concerns reflect inquiries better addressed under
our review of predominance and superiority. See supra p.
41. While the commonality and typicality criteria tend to
merge into an analysis of adequacy of representation under
Fed. R. Civ. P. 23(a), the standards for measuring the
predominance of common issues under Fed. R. Civ. P.
23(b)(3) should not be imputed to adequacy of
representation.32 That is to say, the reasons for denying
certification under the predominance standard may not
necessarily compel denying certification under 23(a)(4),
because the predominance requirement is more stringent
than commonality and typicality. See supra note 32. On
these facts, we hold that counsel would suitably represent
the class and that there are no foreseeable conflicts
between the named representatives and the class they seek
to represent that would bar certification. Therefore, the
putative class would satisfy the adequacy of representation
requirement.

B. Fed. R. Civ. P. 23(b)(3)

Class certification under Fed. R. Civ. P. 23(b)(3) must
also satisfy the twin requirements of predominance and
superiority. The predominance inquiry demands "that
questions of law or fact common to the members of the
class predominate over any questions affecting only
individual members." Fed. R. Civ. P. 23(b)(3). Superiority
calls for a determination that a class action is the best
method of achieving a "fair and efficient adjudication of the
controversy." Id. The Supreme Court has explained that
these elements were adopted
_________________________________________________________________

32. We have interpreted the "predominance requirement [as]
incorporat[ing] the commonality requirement." Georgine, 83 F.3d at 626.
The Supreme Court has also noted that "the predominance requirement
of Rule 23(b)(3) is similar to the requirement of Rule 23(a)(3) that
`claims
or defenses' of the named representatives must be`typical of the claims
or defenses of the class.' " Amchem, 521 U.S. at 623 n.18.
Notwithstanding, the Court has counseled that "the predominance
requirement is far more demanding [than commonality]." Id. at 623-24.

                               43
       to cover cases in which a class action would achieve
       economies of time, effort, and expense, and promote
       . . . uniformity of decision as to persons similarly
       situated, without sacrificing procedural fairness or
       bringing about other undesirable results . . . [which]
       . . . invite[ ] a close look at the case before it is
       accepted as a class action . . . .

Amchem, 521 U.S. at 615 (internal quotations and citations
omitted). To assist in this "close look," Fed. R. Civ. P.
23(b)(3) includes a nonexclusive list of relevant factors:

       (A) the interest of members of the class in individually
       controlling the prosecution or defense of separate
       actions; (B) the extent and nature of any litigation
       concerning the controversy already commenced by or
       against members of the class; (C) the desirability or
       undesirability of concentrating the litigation of the
       claims in the particular forum; (D) the difficulties likely
       to be encountered in the management of a class action.

Fed. R. Civ. P. 23(b)(3). Simply, "[i]ssues common to the
class must predominate over individual issues, and the
class action device must be superior to other means of
handling the litigation." Prudential, 148 F.3d at 313-14.

1. Predominance

Predominance measures whether the class is sufficiently
cohesive to warrant certification. Amchem, 521 U.S. at 623.
Unlike commonality, predominance is significantly more
demanding, requiring more than a common claim. Id. at
623-24. After holding the class was not entitled to a
presumption of class-wide loss, the District Court found
that individual questions of whether each class member
sustained economic injury presented insurmountable
obstacles to certification. Merrill Lynch, 191 F.R.D. at 396-
97 ("[A]bsent proof of classwide pecuniary loss resulting
from that reliance, there can be no classwide claim for
securities fraud."). Examining millions of trades to ascertain
whether or not there was injury, said the court, meant that
individual issues overwhelmed common questions among
the class. Id. at 397-98. We agree.

                                44
Because the automated execution of orders at the NBBO
listed price did not necessarily injure each class member,
the District Court found that "whether a class member
suffered damages would have to be determined on a trade
by trade basis," because "some class members would have
suffered damages; while some would not." Id. at 396. This
individual inquiry is complicated by several factors.
Assessing economic injury to a class member would first
require examining whether a particular trade provided an
investor with "the best reasonably available price." Newton,
135 F.3d at 270. The comparison between the price at
which a particular trade was executed on the NBBO with
the prices and trades available at the same time on
alternative electronic sources would only begin to answer
this question. As the Newton court recognized:

       [A]scertaining what prices are reasonably available in
       any particular situation may require a factual inquiry
       into all of the surrounding circumstances . . . .

       * * *

       Other terms in addition to price are also relevant to
       best execution. In determining how to execute a client's
       order, a broker-dealer must take into account order
       size, trading characteristics of the security, speed of
       execution, clearing costs, and the cost and difficulty of
       executing an order in a particular market. When the
       plaintiffs state that better "prices" were reasonably
       available from sources other than the NBBO, we
       understand that to mean that, given an evaluation of
       price as well as all of the other relevant terms, the
       trade would be better executed through a source of
       liquidity other than the NBBO (e.g. SelectNet, Instinet,
       in-house limit orders or market orders held by the
       defendants, or limit orders place by the public in the
       Small Order Execution System).

Id. at 270 & n.2 (internal citations omitted). These factors
would appear to vary from class member to class member
and, for each class member, from trade to trade. Whether
a class member suffered economic loss from a given
securities transaction would require proof of the
circumstances surrounding each trade, the available

                               45
alternative prices, and the state of mind of each investor at
the time the trade was requested. This Herculean task,
involving hundreds of millions of transactions, counsels
against finding predominance.

In an effort to gloss over this requirement, plaintiffs
suggest their expert could calculate the amount of damages
each class member sustained thereby removing proof of
injury as an obstacle to certification. In a sworn
declaration, plaintiffs' expert provided no model formula,
but instead projected that he could devise a formula that
would measure damages among the class and serve as a
plan for allocation.33 We are not convinced. But even if
plaintiffs could present a viable formula for calculating
damages (which they have not), defendants could still
require individualized proof of economic loss. See, e.g.,
Kline, 508 F.2d at 236 & n.9.

The District Court rejected plaintiffs' arguments. Drawing
guidance from antitrust jurisprudence, the court concluded
that "[p]roof of damage . . . must be distinguished from the
mere calculation of damages." Merrill Lynch , 191 F.R.D. at
396. As the Court of Appeals for the Eighth Circuit
recognized after reviewing Supreme Court jurisprudence,
" `an antitrust plaintiff must prove that his damages were
caused by the unlawful acts of the defendant. . . [before]
the amount of damages may be determined.' " Amerinet v.
_________________________________________________________________

33. On this point, the testimony by plaintiffs' expert was limited to the
averment that

       based on my work and my familiarity with statistical relationships
       which can be powerfully applied to relevant market data, it is my
       opinion a reliable measure of damages can be developed in this case
       based on the application of well-established statistical
techniques.
       Based upon an analysis of the types of data set forth in
Plaintiffs'
       Damage Submission, I can devise a formula which measures class-
       wide damages and from which a plan of allocation can be
       constructed. I will develop the formula using explanatory variables
       that have been widely-used in published studies analyzing
       transaction costs and the bid-asked spread. I will test the formula
       against actual transaction data to make any necessary adjustments.
       The methodology described herein will, in my opinion, yield a
       reliable measure of damages suffered as a result of the practices
       challenged in this lawsuit.

                               46
Xerox Corp., 972 F.2d 1483, 1494 (8th Cir. 1992) (quoting
MCI Communications Corp. v. Am. Tel. & Tel. Co., 708 F.2d
1081, 1161 (7th Cir. 1983)). On this basis, the District
Court reasoned that

       [c]lass treatment of damages issues, however,
       presumes the ability to prove the fact of damage
       without becoming enmeshed in individual questions of
       actual damage . . . [.] Where proof of fact of damage
       requires evidence concerning individual class members,
       the common questions of fact become subordinate to
       the individual issues, thereby rendering class
       certification problematic.

Merrill Lynch, 191 F.R.D. at 396 (quotation and citation
omitted). Proof of injury (whether or not an injury occurred
at all) must be distinguished from calculation of damages
(which determines the actual value of the injury). Even
assuming plaintiffs' ability to calculate damages, the
District Could held this did not exempt them from proving
each class member suffered economic injury. Therefore, the
court found that determining actual economic loss on the
part of each investor would involve individual questions
that predominate over common ones.

The District Court's analogy to antitrust class actions is
well-taken. In a Rule 10b-5 securities claim that"impacts
upon a class of persons . . . there is no reason . .. why
proof of the impact cannot be made on a common basis so
long as the common proof adequately demonstrates some
damage to each individual." Bogosian, 561 F.2d at 454
(discussing injury in antitrust cases). The ability to
calculate the aggregate amount of damages does not
absolve plaintiffs from the duty to prove each investor was
harmed by the defendants' practice. In class actions based
on a "fraud-on-the-market," an excessive pricing policy for
securities, or an antitrust violation, the alleged conduct
itself causes economic injury. But only those class
members whose trades could have been executed at better
prices sustained economic injury here. Determining which
class members were economically harmed would require an
individual analysis into each trade and its alternatives. The
individual questions, therefore, are overpowering. As we
held in Georgine:

                               47
       Even if we were to assume that some issues common
       to the class beyond the essentially settled question of
       the harmfulness of asbestos exposure remain, the huge
       number of important individualized issues overwhelm
       any common questions. Given the multiplicity of
       individualized factual and legal issues, . . . we can by
       no means conclude that the questions of law or fact
       common to the members of the class predominate over
       any questions affecting only individual members.

83 F.3d at 630 (internal quotes omitted); Barnes , 161 F.3d
at 146 ("Because nicotine addiction must be determined on
an individual basis and remains an essential part of
plaintiffs' . . . claim . . . class treatment is inappropriate.").
While obstacles to calculating damages may not preclude
class certification, the putative class must first demonstrate
economic loss on a common basis. As noted, the issue is
not the calculation of damages but whether or not class
members have any claims at all.

The District Court was also guided by our decision in
Georgine. Merrill Lynch, 191 F.R.D. at 396 ("Although in
Georgine, as in the present case, there were several
common questions, the Court held that class treatment was
inappropriate because `each individual plaintiff 's claim
raises radically different factual and legal issues from those
of other plaintiffs . . . [.] In such circumstances, the
predominance requirement of Rule 23(b)(3) cannot be
met.' ") (quoting Georgine, 83 F.3d at 618). In Amchem, the
Supreme Court affirmed our determination that a
settlement class of individuals exposed to asbestos
products failed the predominance prong because of
significant individual issues surrounding each claim. The
plaintiffs had been exposed to "different asbestos containing
products, for different amounts of time, in different ways,
and over different periods." Georgine, 83 F.3d at 626. There
were also different classes of plaintiffs--some who were
presently injured and some who had been exposed but
whose future injury remained speculative. Id. The
individualized differences as to amount of asbestos
exposure and future injury were significant because they
would "lead to disparate applications of legal rules,
including matters of causation, comparative fault, and the

                               48
types of damages available to each plaintiff." Id. at 627. For
these reasons, the constellation of individual issues
eclipsed common questions.

Citing the Supreme Court's guidance that
"[p]redominance is a test readily met in certain cases
alleging consumer or securities fraud or violations of the
antitrust laws," Amchem, 521 U.S. at 625 (citing Comm.
Note, Fed. R. Civ. P. 23), plaintiffs contend Amchem, a mass
tort action, may be distinguished, and argue that individual
economic injury need not be factored into the
predominance calculus. See Hoxworth II, 980 F.2d at 924
(holding that "uniform scheme to defraud investors in the
class securities . . . would support class action treatment");
Ettinger, 122 F.R.D. at 182 (common question of exorbitant
markups on securities predominates over individual
damage calculations).

Although the securities claims are unlike the mass tort
claims in Amchem, the obstacles to satisfying the
predominance requirement are comparable. In Amchem, the
Court found that individual questions on the varying
degrees and effects of asbestos exposure overpowered
common ones. The breadth of the claims here may be
different from Amchem, but the sheer number of claims
raising individual questions of injury is strikingly similar.
In Georgine, we recognized "individualized issues can
become overwhelming in actions involving long-term mass
torts (i.e., those which do not rise out of a single accident)."
161 F.3d at 628. The alleged injuries in Newton arise out of
the execution of hundreds of millions of trades, not a single
act of fraudulent conduct. The distinct facts among the
hundreds of thousands of plaintiffs involving hundreds of
millions of trades will determine whether securities
violations occurred. Because plaintiffs' claims will require
an economic injury determination for each trade, we hold
the putative class fails to satisfy the predominance
requirement.

Moreover, as we have noted in securities cases involving
fraud-on-the-market or excessive markups, injury
necessarily flowed from defendant's conduct and reliance
and injury could be presumed. In those cases, if
defendant's conduct was held fraudulent, a claim of loss

                               49
naturally followed. Here it remains contested whether
defendants' conduct in each trade was fraudulent as well as
whether the investors suffered a loss as a result. Because
it is clear that at least some of the plaintiffs have not
suffered economic injury, individual questions remain that
would have to be adjudicated separately. For these reasons,
we hold this case does not fall within the scope of those
"certain cases alleging . . . securities fraud," Amchem, 521
U.S. at 625 (emphasis supplied), in which predominance
may be readily established.34

Because economic loss cannot be presumed, ascertaining
which class members have sustained injury means
individual issues predominate over common ones.
Therefore, the District Court exercised its sound discretion
_________________________________________________________________

34. In the alternative, the putative class argues that under Prudential,
148 F.3d 283, the predominance inquiry will not be undermined if each
class member has not suffered economic injury. Br. of Appellants at 47-
49. But plaintiffs' reliance on Prudential is misplaced. First, the lion's
share of the fraud claims in Prudential were largely unrelated to federal
securities law. Prudential, 148 F.3d at 314. In describing the claims, the
district court observed:

       [M]ost of the plaintiffs' claims [did] not even involve a reliance
       element. Plaintiffs' claims for breach of contract, breach of
implied
       obligation of good faith and fair dealing, negligence, negligent
       training and supervision, and unjust enrichment do not involve
       reliance. An individual issue with respect to one element of a
small
       portion of plaintiffs' claims does not outweigh the multitude of
       issues common to the remaining elements and claims.

In re Prudential Ins. Co. of Am. Sales Practice Litig., 962 F. Supp. at
516.
The claims in this appeal fall squarely under Rule 10b-5. Second,
plaintiffs note that the class in Prudential contained "both injured and
uninjured policyholders" without barring certification. 148 F.3d at 306.
Based on this, plaintiffs contend that even if some class members did
not suffer economic loss, class certification should not be prohibited in
this case either. We disagree. In Prudential, the presence of injured and
uninjured class members was evaluated in the context of standing, not
class certification. Id. at 306-07. But satisfaction of constitutional
standing does not answer the predominance inquiry. Furthermore, there
was no dispute over the individual question of economic loss in
Prudential because the defendant insurance company did not contest
liability and waived all defenses. See Prudential, 148 F.3d at 296-97.

                               50
in finding the putative class did not satisfy the
predominance requirement.

2. Superiority

Even if reliance and damages could be presumed or
determined in separate proceedings after certification, this
action fails to satisfy Fed. R. Civ. P. 23(b)(3)'s superiority
requirement.

A class action must represent the best "available
method[ ] for the fair and efficient adjudication of the
controversy." Fed. R. Civ. P. 23(b)(3). Here we must address
"the difficulties likely to be encountered in the management
of a class action." Fed. R. Civ. P. 23(b)(3)(D). According to
the District Court, the need for individualized inquiry into
actual injury transformed the "[e]xploration of each and
every customer's NASDAQ transactions with defendants
during the period from November 4, 1992 to August 28,
1996 [into] a mind-boggling undertaking." Merrill Lynch,
191 F.R.D. at 398. We agree. With hundreds of millions of
trades, it is difficult to imagine how this case can be tried.35

Contending each individual claim is so small that only a
class action will provide a remedy, plaintiffs maintain that
_________________________________________________________________

35. Defendants contend that plaintiffs have not preserved this issue on
appeal because they did not address superiority in their initial brief.
See
Br. of Appellees at 69. The plaintiffs' waiver of a dispositive issue,
they
argue, provides sufficient grounds for affirming the District Court. See
Nagle v. Alspach, 8 F.3d 141, 143-44 (3d Cir. 1993) (holding issues to be
appealed must appear in briefing to be preserved). Although the plaintiffs
do not address superiority directly in their brief, they raise the issue
specifically in their reply brief, and the facts and arguments on
superiority are present throughout their brief. We have concluded that
" `[a]n issue is waived unless a party raises it in its opening brief.' "
Reform Party of Allegheny County v. Allegheny County Dept. of Elections,
174 F.3d 305, 316 n.11 (3d Cir. 1999) (quoting Laborers' Int'l Union of
N. Am. v. Foster Wheeler Corp., 26 F.3d 375, 398 (3d Cir. 1994)). We also
reasoned that "absent extraordinary circumstances, briefs must contain
statements of all issues presented for appeal, together with supporting
arguments and citations." Simmons v. City of Philadelphia, 947 F.2d
1042, 1065 (3d Cir. 1991). But we believe the issue of superiority was
implicit in the plaintiffs' opening brief and was adequately raised on
appeal.

                               51
denying certification will absolve defendants from
wrongdoing. The District Court rejected this rationale as a
"basis for excusing plaintiffs from proving the essential
elements of their cause of action." Merrill Lynch, 191 F.R.D.
at 398. We agree. Recently we held this factor "by itself is
insufficient to overcome the hurdles of predominance and
superiority and efficient and fair management of a trial,
which Rule 23(b) requires." In re LifeUSA Holding Inc., 242
F.3d at 148 n.13. We also recognize that some class
members, such as large institutional investors who fall
within the class definition, arguably would have a
significant financial stake to raise stand-alone claims.

Turning to manageability, the District Court's evaluation
must be "granted a wide range of discretion." Link v.
Mercedes Benz of N. Am., Inc., 550 F.2d 860, 864 (3d Cir.
1977). "Manageability is a practical problem, one with
which a district court generally has a greater degree of
expertise and familiarity than does the appellate court." In
re Sch. Asbestos Litig., 789 F.2d at 1011. It encompasses
"the whole range of practical problems that may render the
class action format inappropriate for a particular suit."
Eisen, 417 U.S. at 164.

Here there are hundreds of millions of transactions
executed over several years. Plaintiffs maintain their expert
can devise a formula for calculating injury and damages
that will allay manageability concerns. Yet we are hesitant
to rely on a formulaic nostrum given the consequences if it
fails to meet expectations. See Windham, 565 F.2d at 70
("But where the court finds, on the basis of substantial
evidence as here, that there are serious problems now
appearing, it should not certify the class merely on the
assurance of counsel that some solution will be found."). As
noted, actual injury cannot be presumed, and defendants
have the right to raise individual defenses against each
class member. See In re Sch. Asbestos Litig., 789 F.2d at
1011 ("The potential for individual defenses . . . clearly
poses significant case management concerns."). We hold
that establishing proof of the plaintiffs' injuries and
litigating the defenses available to the defendants would
present insurmountable manageability problems for the
District Court.

                               52
The superiority requirement also casts serious doubt on
the efficiency and manageability of certifying this class for
trial. "In terms of efficiency, a class of this magnitude and
complexity could not be tried. There are simply too many
uncommon issues, and the number of class members is
surely too large. Considered as a litigation class, then, the
difficulties likely to be encountered in the management of
this action are insurmountable." Georgine, 83 F.3d at 632-
33.36 Although plaintiffs attempt to fit this case under
Prudential, that case raised different issues because the
class was certified for the purpose of settlement. This is
significant because "the settlement approval inquiry is far
different from the certification inquiry. In settlement
situations, the superiority requirement arguably translates
into the question whether the settlement is a more
desirable outcome for the class than individualized
litigation, and may assure that the settlement has not
grossly undervalued plaintiffs' interests." G.M. Trucks, 55
F.3d at 796. Significantly, in Prudential we did not have to
"inquire whether the case, if tried, would present
intractable management problems . . . for the proposal
[was] that there be no trial." Amchem , 521 U.S. at 620.
Additionally we have recognized that adjudicating Rule 10b-
5 securities claims as a class action satisfies superiority
only if the litigation results in fewer individual actions.
Because injury determinations must be made on an
individual basis in this case, adjudicating the claims as a
class will not reduce litigation or save scarce judicial
resources. Under these circumstances, plaintiffs fail to
satisfy the superiority standard. See G.M. Trucks, 55 F.3d
at 783 ("One of the paramount values in [class actions] is
efficiency. Class certification enables courts to treat
common claims together, obviating the need for repeated
adjudications on the same issue.").

We are also mindful that Amchem and Prudential involved
mature claims. The class settlements were the result of
verdicts on established liability and damages awards. This
case does not share a similar track record. Of course, many
_________________________________________________________________

36. Of course, one of the central concerns behind denying certification in
Georgine was the potential harm to absentee members. This is not a
factor here.

                               53
securities fraud claims do not generally implicate maturity
concerns because they do not raise complex issues of
causation and injury. Furthermore, the divergent outcomes
in Amchem and Prudential make it clear that maturity alone
is neither necessary nor sufficient for certification, but it
may help to ensure that class certification is "superior to
individual adjudication." Castano, 84 F.3d at 747.

The specter of adjudicating plaintiffs' claims at trial is, at
the very least, daunting. Individual questions of economic
loss present insurmountable manageability problems.
Moreover, class certification would place hydraulic pressure
on defendants to settle which weighs in the superiority
analysis. See supra note 8. At trial, determining actual
injury would require hundreds of millions of individual
assessments. For these reasons, the District Court was
clearly within its sound discretion to hold this case failed to
satisfy the superiority requirement.

VII.

In sum, although the putative class satisfies the
requirements of Fed. R. Civ. P. 23(a), it cannot meet the
requirements of Fed. R. Civ. P. 23(b)(3). In particular, the
investors' claims fail the predominance and superiority
requirements under Fed. R. Civ. P. 23(b)(3). For these
reasons, we will affirm the judgment of the District Court.

A True Copy:
Teste:

       Clerk of the United States Court of Appeals
       for the Third Circuit

                               54
