Richard Hershey v. Pacific Investment Management

Citation: Not availableDocket: 08-1075

Court: Court of Appeals for the Seventh Circuit; July 7, 2009; Federal Appellate Court

Original Court Document: View Document

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In the case before the Seventh Circuit, plaintiffs Josef A. Kohen and others have filed a class action suit against Pacific Investment Management Company LLC (PIMCO) and PIMCO Funds, challenging the district court's certification of a plaintiff class. The plaintiffs allege violations of the Commodity Exchange Act, specifically claiming that PIMCO engaged in market manipulation by cornering a futures market for 10-year U.S. Treasury notes between May 9 and June 30, 2005. The class consists of individuals who purchased futures contracts during this period after having short-sold the notes, with the intention of delivering the specified quantity to a commodity clearinghouse on June 30. The concept of "cornering" the market refers to a trader's attempt to gain significant control over market supply to influence futures prices. The excerpt further illustrates how futures contracts typically do not result in the actual delivery of commodities but are often settled through offsetting contracts, allowing speculators to avoid delivery obligations. The document emphasizes that price fluctuations in the underlying commodity affect the value of futures contracts, benefiting either the long or short position depending on market movements.

A buyer can manipulate market prices by “cornering” the market, which involves purchasing a significant number of contracts—such as June contracts for 10-year Treasury notes—thereby limiting sellers' options to fulfill their obligations only through that buyer. This control allows the buyer to demand delivery, potentially causing the price to surge due to supply constraints, particularly near the contract's expiration. Financial futures contracts typically settle in cash, eliminating deliverable supply concerns; however, certain contracts, like those for 10-year U.S. Treasury notes, require actual delivery. PIMCO allegedly increased its ownership of a specific Treasury note from 12% to 42% within two weeks, leading to claims of a monopoly price that forced other market participants to incur losses exceeding $600 million by having to enter offsetting contracts instead of purchasing competitively priced ones.

The class certified by the district court includes individuals who bought June contracts to close short positions between May 9 and June 30, 2005. PIMCO challenges this class definition, arguing that some members may lack standing as they did not incur losses; some may have hedged their positions and profited more from long positions than they lost from shorts due to PIMCO's actions. The plaintiffs concede this but argue that such issues should be resolved during the damages phase. Ultimately, if PIMCO is found liable for cornering the market, class members will need to submit claims for their respective damages, with those who suffered no injury likely not filing claims and others potentially being denied claims for failing to prove damages.

PIMCO contends that class certification requires the district judge to ascertain which class members have suffered damages, but this approach would undermine the efficiency of class action procedures, effectively placing the trial before certification. While injury is necessary for standing, as long as one member of the certified class has a plausible claim for damages, the standing requirement is met. The named plaintiff must have standing before class certification, but if they lose standing, they can be replaced by another class member who does have standing. A named plaintiff who lacks a stake may not be a suitable representative, but this does not affect jurisdiction. If a named plaintiff fails to prove injury at trial, the case is dismissed on its merits rather than for lack of jurisdiction. PIMCO's argument regarding "statutory standing" was clarified to suggest that if a class member is found to lack damages, they would not be bound by a judgment, allowing them to pursue an independent suit. This interpretation, however, is deemed impractical. The term "statutory standing" is noted as potentially misleading, typically referring to a situation where a plaintiff has standing in the Article III sense but is not within the class protected by the relevant statute, which does not apply in this case.

Class actions may include individuals who have not suffered injury from the defendant's actions, which can be inevitable due to unknown class members or the specifics of their claims. This does not prevent class certification, as established in Carnegie v. Household Int’l. However, class definitions must not be overly broad, encompassing individuals who could not have been injured. Courts have indicated that if a class clearly contains many uninjured individuals, certification should not occur, as seen in various cases including Oshana v. Coca-Cola Co.

The potential liability from a class action can pressure defendants to settle, even with low probabilities of liability, due to the significant financial risk involved. In this context, while the defendant, PIMCO, is a large firm with substantial assets, it still faces the burden of extensive litigation and potential multi-hundred-million-dollar claims, which could necessitate numerous individual hearings for claim valuation.

Concerns regarding class overbreadth have not yet been substantiated. Although some class members may have benefited financially from alleged manipulations, it is premature to assume that many did. Short sellers, for instance, may experience losses due to price increases caused by unlawful actions, but they typically do not hedge all their risks, maintaining the potential for speculative gains while facing the risk of losses if prices exceed their selling point.

Some class members may have engaged in speculative trading on the June Contract and made short sales as a hedge, potentially profiting due to PIMCO’s alleged market manipulation. The extent of these "long" speculators is unclear, but if there were many, it would contradict PIMCO’s significant purchases aimed at increasing the contract's price for short sellers. The plaintiffs have not established that PIMCO attempted to corner the market, but it is assumed they may prove this claim. PIMCO’s argument that the class definition is overly broad lacks justification, particularly in its use of the term "wildly." Citing Dura Pharmaceuticals, PIMCO argues that the plaintiffs cannot claim injury from inflated prices if they sold before the price drop; however, the plaintiffs, having sold short, may have indeed been harmed by inflated cover prices before the delivery deadline. PIMCO's counsel indicated they could identify class members, which would allow for assessing how many gained from PIMCO's alleged manipulation, potentially leading to a reevaluation of class certification if many were found to be net gainers. PIMCO also contends that class certification should be denied due to potential conflicts of interest among class members, which could hinder impartial representation by class counsel.

Class members who purchased the June Contract during the seven-week complaint period aimed to limit their losses. Those who covered early may argue that the peak impact of PIMCO’s alleged misconduct occurred at that time. The price trajectory of the June Contract included a decline at one point, leading class members who covered during this dip to assert that PIMCO's influence on prices concluded prior to the rise that followed, attributing subsequent price increases to market dynamics instead. For example, if prices rose from $100 to $130 at the dip's lowest point and then to $150 by delivery, short sellers who covered during the dip would contend that PIMCO was responsible for the initial increase, while market factors contributed to the later rise. Conversely, those who covered at the end of the period would argue that all price increases were due to PIMCO’s unlawful actions. Currently, these conflicts remain hypothetical; should they materialize, the district court may certify subclasses for separate representation, ensuring manageability in compliance with procedural rules. Denying class certification based on potential conflicts at this stage would be premature, making PIMCO's attempts to dismiss the suit unfounded. Consequently, the district court's class certification is affirmed.