In Bell v. Brockett, the Fourth Circuit affirmed the certification of a class of defendants, a rare procedural maneuver that the court referred to as a “unicorn.”
- The lawsuit arose from an alleged Ponzi scheme operated by Rex Venture Group, LLC, a company that owns and operates online auction websites. The scheme involved investors in one of the company’s websites. Though some investors profited, many suffered significant losses.
- After the SEC brought an enforcement action, a receiver was appointed for the company. The receiver then moved to certify a defendant class of investors who profited from the scheme, arguing that their ill-gotten gains were improper and should be returned to the receiver for redistribution to losing investors.
- The district court agreed, certifying the defendant class. After entering summary judgment in the receiver’s favor and determining that the profiting investors were liable, the district court created a claims process to enable the losing investors to recoup their losses. Thereafter, a group of defendant class members appealed the judgments against them, arguing that they were not represented by adequate class counsel.
- On appeal, the Fourth Circuit noted that Rule 23 adequacy requirements are especially critical in defendant class actions, where due process risks are magnified because “an unnamed class member can be brought into a case, required to engage in discovery and even be subjected to a judgment compelling the payment of money or other relief without ever being individually served with a lawsuit.”
- The Fourth Circuit then held that the district court erred in two significant respects: (i) it failed to appoint class counsel until seven months after it certified the class; and (ii) it failed to consider the Rule 23(g) factors concerning class counsel’s adequacy when it finally named class counsel. Nonetheless, the panel agreed that the district court’s certification was proper under the unique circumstances of the case.
- First, the Fourth Circuit concluded that the class members waived their adequacy objections by failing to properly raise them in the district court.
- Second, the court stated that it was reluctant to unwind the claims process initiated by the district court, reasoning that “the toothpaste cannot be put back into the tube” given that over 2,500 class members had already resolved the claims against them.
