Second Circuit Reaffirms That Knowledge Defenses Can Defeat Class Certification

Previously published on May 3, 2012.

Keywords: knowledge defences, class certification, securities fraud, misstatement

The recent summary order from the US Court of Appeals for the Second Circuit in New Jersey Carpenters Health Fund v. RALI Series 2006-QO1 Trust, No. 11-1683-cv (2d Cir. Apr. 30, 2011), reaffirms the important principle of securities law that knowledge defenses can create individual factual questions sufficient to defeat class certification.

A central tenet of securities law is that a defendant in a securities fraud or misstatement case is not liable to anyone who knew about the alleged fraud or misstatements when the relevant purchase or sale took place. In a path-breaking 2006 decision—In re Initial Public Offerings Securities Litigation—the Second Circuit reversed class certification in a securities fraud and misstatement case in part because the proposed class included many purchasers who knew about the defendants' allegedly wrongful