Villanova Law Review


This Essay considers the potential implications for securities class actions of Standard Fire Insurance Co. v. Knowles, which is presently before the Supreme Court. Although the ultimate question in Knowles is whether the plaintiff class may be gerrymandered so as to avoid removal to federal court, a closely related question may arise in securities fraud class actions (which are filed in federal court in the first place). In an action under SEC Rule 10b-5, the plaintiff typically seeks to recover for losses suffered as a result of buying a stock at a price inflated by management misrepresentations. In such a case, the measure of damages is the difference between the price paid and the price at which the stock settles after corrective disclosure. Although this remedy is well-established, it is fundamentally flawed in that it includes losses suffered by the corporation itself that impact all stock holders should be the subject of a derivative action. Courts should decline to certify most Rule 10b-5 actions as class actions because the plaintiff class invariably includes diversified portfolio investors—buyer-holders, who will lose more on the shares they hold because of the class action itself than they will gain on the shares they bought during the fraud period. Knowles is an ideal opportunity for the Court to make it clear that a class action is a matter of judicial grace, and that as such, the courts have the power and the duty to assure that the device is used efficiently and equitably.