Between 2007 and 2008, the American economy experienced its worst contraction since the Great Depression. News soon spread that a financial instrument called a “mortgage-backed security” was a prime cause of this disaster, compounding a host of extant problems in the housing market, including low interest rates, relaxed lending standards, and misplaced assumptions that prices would continue to rise indefinitely. Yet the damage done by mortgage-backed securities spilled beyond housing— institutional investors bet big on these products, only to realize too late that many of these securities were backed by loans issued haphazardly at best, fraudulently at worst. Shockwaves from the meltdown spread throughout not just the nation, but the global economy, casting corporate titans and individuals alike into ruin. Six years later, the world is still struggling to shake off the fallout.
In the wake of this crisis, class action litigation alleging securities fraud has become commonplace. Investors in devalued financial products like mortgage-backed securities generally claim that they were misled by misstatements or omissions in offering documents, for which they have recourse under federal law. Because of the way that financial institutions promulgate these documents, one type of offering document—called a “shelf registration statement”—may be shared across many different securities offerings. These offerings also involve unique documents called “supplemental prospectuses,” which describe the characteristics particular to each security. Thus, while an allegedly misleading shelf registration statement lends itself to class action litigation regarding all offerings that it covers, supplemental prospectuses differentiate between those offerings, diminishing their apparent similarity and hence their susceptibility to class adjudication. This tension has spawned uncertainty over class action standing, which essentially requires that the class representative, acting on behalf of the class members, demonstrate a personal stake in the outcome of the litigation. Many courts have held that lead plaintiffs must have personally purchased from each securities offering that they seek to prove is fraudulent. However, some courts have allowed named plaintiffs in such class actions to bring closely related claims without having purchased the same securities as other class members. These conflicting decisions have given rise to the following question: Does a named plaintiff have standing to litigate claims concerning mortgage-backed securities that he or she did not actually purchase?