In an opinion Friday, Judge Rakoff denied class certification in an class action accusing various defendants connected to a hedge fund of trading on insider information to the detriment of investors who traded around the same time. Judge Rakoff disqualified one of two proposed class representatives because he had an undisclosed arrangement for an attorney related by marriage to receive a 5 percent referral fee, and because his “difficulties with recollection and lack of familiarity with the litigation indicate[d] that he [was] wholly dependent on counsel to make crucial decisions affecting the interests of absent class members.” Judge Rakoff disqualified the other because he was “subject to the potentially meritorious defense that he suffered no economic loss attributable to defendants’ alleged wrongdoing,” on the theory that his winning trades could “net” against his losing ones.  This was disqualifying, Judge Rakoff concluded, because:

For most class members, the netting question is of only secondary importance, as the more pressing issue for those who are net losers is establishing liability. For [the plaintiff], by contrast, the netting issue is paramount, since for him it means the difference between a substantial recovery and no recovery at all. He is therefore highly likely to focus on this issue to the detriment of the class.

This is an issue the SDNY Blog flagged in this case almost three years ago in a post stating: “being the victim of securities fraud seems to have worked out all right in this case.”