Opinion
C.A. No. 99C-06-157 MMJ.
Submitted: August 16, 2004.
Decided: November 30, 2004.
Upon Plaintiffs' Renewed Motion for Class Certification Granted in Part Denied in Part.
Jeffrey S. Goddess, Esquire, Rosenthal, Monhait, Gross Goddess, P.A., Attorneys for Plaintiffs and the Class.
Allen M. Terrell, Jr., Esquire, Peter B. Ladig, Esquire, Richards, Layton Finger, Attorneys for Defendants.
MEMORANDUM OPINION
PROCEDURAL CONTEXT
Wit Capital Corporation, a wholly owned subsidiary of Wit Capital Group, Inc. (collectively "Wit Capital"), is an internet brokerage firm. Plaintiffs Arthur E. Benning, Sr., Barbara-Lee Benning, Arthur E. Benning, Jr. and Janessa Dabler were customers of Wit Capital. Plaintiffs filed their complaint on June 16, 1999, seeking declaratory relief and damages in connection with certain brokerage transactions.
Plaintiff Dabler was not a party to the Initial Complaint. Rather, Dabler was permitted to intervene as a named Plaintiff in April 2000.
On August 13, 1999, Wit Capital filed a Motion to Dismiss or Stay the Initial Complaint on the basis that the account agreements mandated a separate arbitration for each customer. At the November 9, 1999 hearing, the Court denied the motion and directed Plaintiffs to move for class certification following receipt of Wit Capital's responses to class certification discovery.
Plaintiffs filed a Motion for Class Certification on December 16, 1999. The Court denied class certification. The Delaware Supreme Court reversed the denial and remanded the action to this Court:
Benning v. Wit Capital Group, Inc., Del. Super., C.A. No. 99C-06-157, Alford, J. (Jan. 10, 2001).
Once the parties complete appropriate discovery, the Superior Court should then weigh the relevant factors to determine if Plaintiffs have met the requirements of Rule 23(b)(3) for purposes of class certification. The trial judge should take care to consider not only whether questions of law or fact common to the class predominate over the questions affecting individual members, but to also give equal weight to the question of whether or not a class action remains the superior method for the fair and efficient adjudication of this litigation.
Benning v. Wit Capital Group, Inc., Del. Supr., No. 116, 2001 (Order) (Nov. 1, 2001).
The parties subsequently conducted additional discovery on the issues of numerosity, typicality and predominance. Plaintiffs have requested that the Court certify a class consisting of all persons who entered into brokerage account agreements with Wit Capital on or before May 20, 1999. Plaintiffs allege that there are at least 41,000 potential class members. This is the Court's consideration of Plaintiffs' Renewed Motion for Class Certification.
Super. Ct. Civ. R. 23(a)(1) (whether the class is so numerous that joinder of all members is impracticable).
Super. Ct. Civ. R. 23(a)(3) (whether the claims or defenses of the representative parties are typical of the claims or defenses of the class).
Super. Ct. Civ. R. 23(b)(3) (whether questions of law or fact common to the members of the class predominate over any questions affecting only individual members).
FACTS
Wit Capital served a niche market by offering initial public offering ("IPO") stock to small investors, who otherwise were excluded from the IPO market by brokerage firms that reserved IPO shares for their largest and most sophisticated customers. In general, when stocks are offered for the first time to the public, the demand exceeds the available shares. IPO stock is allocated to brokerage firms on a limited basis. IPO shares are a desirable investment because they offer investors the opportunity to reap exponential returns within a relatively short period of time.
The service offered by Wit Capital was distribution of its limited allocation of IPO shares. Each customer executed an account agreement with Wit Capital ("Account Agreement"). The Account Agreement required customers desiring to participate in an IPO to maintain a certain minimum account balance. The account was required to have available funds equal to or greater than the purchase price of the securities. The Account Agreement defined "Available Funds" as "the sum of money market funds and credit interest balances, plus funds receivable from settled sales, minus funds needed to pay for recent purchases and minus funds needed to pay for any open orders and any uncleared deposits." Wit Capital was required to execute IPO stock purchase orders on a first-come, first-served basis. Priority was given to customers who refrained from "flipping" their shares from previous IPOs for at least 60 days following an IPO. Another exception to the first-come, first-served approach was to give an absolute preference to members of "affinity groups," without regard to their "flipper" status.
On its home page, Wit Capital defined "non-flippers" as "Members who have track records for buying public offering shares and holding them for at least 60 days."
Wit Capital defined "affinity groups" as "individual investors with some preexisting relationship or affinity to the issuer, such as customers, employees or suppliers."
PLAINTIFFS' ALLEGATIONS
Plaintiffs allege that Wit Capital did not allocate IPO shares to them and other purported class members on a first-come, first-served basis, for at least four different reasons:
(1) Incorrect Date for Account Balance Calculation
Plaintiffs allege that Wit Capital computed allocations for IPO orders on the wrong dates. Wit Capital allocated shares on the effective date, or trade date. Plaintiffs contend that the correct date was the settlement date, three days after the trade date. Because Wit Capital determined account balances on or before the effective date, rather than the settlement date, Wit Capital improperly rejected orders from customers whose accounts may not have been adequately funded as of the effective date for each IPO, but who subsequently could have funded or did fund their accounts for the order in question.
(2) Improper Calculation of Minimum Account Balance
The Account Agreement provided that minimum account balances may consist of cash and stock. Plaintiffs allege that Wit Capital improperly calculated the minimum account balances as though each customer had to have an all cash balance. Therefore, according to Plaintiffs, Wit Capital improperly denied IPO stock to customers who had sufficient cash and stock in their accounts.
(3) Violation of Share Limitation Policy
Wit Capital had a written policy limiting individual customers to the purchase of no more than 100 or 200 shares of any particular IPO stock if Wit Capital received fewer than the number of shares ordered by customers. Plaintiffs claim that some customers were allocated more that the proper number of shares, while other qualified customers received no IPO shares whatsoever.
(4) Disregard of Anti-Flipping Policy
Wit Capital's written policy was to give preference to customers who did not sell prior IPO shares within 60 days after the initial purchase, i.e., "non-flippers." Plaintiffs contend that Wit Capital disregarded this policy by denying IPO stock to customers who had been identified as "non-flippers." In the same IPO, customers identified as "flippers" were given IPO shares.
REQUISITES TO CLASS ACTION
Delaware Superior Court Civil Rule 23 provides in pertinent part:
(a) Requisites to class action. One or more members of a class may sue or be sued as representative parties on behalf of all only if (1) the class is so numerous that joinder of all members is impracticable, (2) there are questions of law or fact common to the class, (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class, and (4) the representative parties will fairly and adequately protect the interests of the class.
(b) Class actions maintainable. An action may be maintained as a class action if the prerequisites of paragraph (a) are satisfied, and in addition:
(1) The prosecution of separate actions by or against individual members of the class would create a risk of:
(A) Inconsistent or varying adjudications with respect to individual members of the class which would establish incompatible standards of conduct for the party opposing the class, or
(B) Adjudications with respect to individual members of the class which would as a practical matter be dispositive of the interests of the other members not parties to the adjudications or substantially impair or impede their ability to protect their interests; or
(2) The party opposing the class has acted or refused to act on grounds generally applicable to the class, thereby making appropriate final injunctive relief or corresponding declaratory relief with respect to the class as a whole; or
(3) The Court finds that the questions of law or fact common to the members of the class predominate over any questions affecting only individual members, and that a class action is superior to other available methods for the fair and efficient adjudication of the controversy. . . .
The four issues central to Plaintiffs' Motion for Class Certification are:
(1) Whether the class is so numerous that joinder of all members is impracticable;
(2) Whether the claims of the representative parties are typical of the claims of the class;
(3) Whether questions of law or fact common to the class predominate over the questions affecting individual members; and
(4) Whether or not a class action is the superior method for the fair and efficient adjudication of this litigation.
ANALYSIS
During oral argument on Plaintiffs' renewed motion, the Court requested additional written submissions on three issues. First, is there a cognizable cause of action for damages to those customers who were induced to hold their prior IPO stock because of Wit Capital's policy of favoring "non-flippers?" Second, should the Court certify a class limited to customers who were wrongly denied the opportunity to participate in an IPO? Third, should the Court certify subclasses within a class, identified by the type of conduct on the part of Wit Capital that proximately caused damage; and, would each subclass need a class representative and be required to meet numerosity and typicality requirements.
I. Customers Induced To Hold By Wit Capital's "Anti-Flipping" Policy
Plaintiffs allege that Wit Capital had a stated policy giving priority to customers who received IPO allocations and held the shares for at least 60 days. These customers were to be identified as "non-flippers." Plaintiffs assert claims for damages sustained as a result of Wit Capital's purported failure to adhere to its anti-flipping policy.
In Manzo v. Rite Aid Corporation, the Court of Chancery considered whether, under Delaware law, shareholders could advance claims for investment opportunity losses — so called "holder claims." The Rite Aid plaintiff alleged that she would not have held her shares had Rite Aid disclosed accurate information concerning the company's financial performance. If she had not been induced to hold stock, she would have invested elsewhere. Plaintiff sought money damages to compensate for the return she alleged would have been earned from other investments.
2002 WL 31926606 (Del.Ch.), aff'd, 825 A.2d 239 (Del. 2003).
The Rite Aid Court found:
Under this theory, the Court is asked to presume that plaintiff's investment in Rite Aid stock would have been deployed in other more successful investments. . . . [A]warding money damages to compensate plaintiff for the return she could have earned had she invested elsewhere — as she was free to do, but didn't do — amounts to speculation founded upon uncertainty. As plaintiff has failed to direct this Court to any precedent or policy to support such an award, plaintiff's assertion of "investment opportunity losses" does not, in my opinion, state a cognizable injury.
Id.
In this case, Plaintiffs have cited Duncan v. Theratx, Inc., asserting that Delaware law permits recovery of "benefit of the bargain" damages. Plaintiffs' reliance on Duncan is misplaced. In that case, the Delaware Supreme Court considered a question certified to the Court by the United States Court of Appeals for the Eleventh Circuit. The question was: "What is the proper measure of damages when a defendant's contractual obligation to cause a shelf registration, under which plaintiff is entitled to trade a restricted stock, to remain in effect for a specified period of time is breached by defendant's temporary suspension of plaintiffs' ability to trade the restricted stock?"
775 A.2d 1019 (Del. 2001).
Id. at 1020.
The Eleventh Circuit already had found that the company had breached the merger agreement. Therefore, the issue of liability had been resolved. The only determination before the Delaware Supreme Court was the measure of damages, not whether the cause of action was valid under Delaware law. Unlike the instant case, the Duncan shareholders were not simply induced to hold. Instead, the shareholders were prohibited from trading their shares by the temporary suspension of shelf registration. Under the narrow circumstances presented, the Delaware Supreme Court held that the shareholders were not required to show that they actually would have sold the shares during the restricted period. The Court reasoned that the company's breach amounted to a temporary conversion of the shares.
Id. at 1021.
Id. at 1022-24 (The measure of damages was calculated as "the difference between (1) the highest intermediate price of the shares during a reasonable time at the beginning of the restricted period, which functions as an estimate of the price that the stockholders would have received if they had been able to sell their shares, and (2) the average market price of the shares during a reasonable period after the restrictions were lifted.")
In contrast, Wit Capital customers were free to trade their IPO shares. As in Rite Aid, this Court finds that Plaintiffs' inducement to hold theory does not state a cause of action. There may be many reasons why potential class members chose not to sell IPO shares for 60 days. Any award of money damages would be too speculative and not based upon a cognizable injury.
Additionally, under Delaware law, no claim of fraud can be pursued as a class action. Individual issues of justifiable reliance predominate over questions common to members of a potential class. The Delaware Supreme Court has ruled that there is no presumption of reliance based on a "fraud on the market" theory. Therefore, Count III of the Complaint in its entirety cannot be pursued as part of a class action. To the extent other allegations assert reliance as an element of any cause of action, those claims are not appropriate in a class action.
Rite Aid, 2002 WL 31926606.
See Malone v. Brincat, 722 A.2d 5, 12-13 (Del. 1998).
II. Numerosity
Rule 23(a)(1) requires that a class be so numerous that joinder of all members is impracticable. There is no rigid minimum number of members requisite to class certification. Classes with as few as 40 members have been found to satisfy the numerosity requirement. The moving party need not show the exact size of the proposed class. The Court may make common sense assumptions.
Smith v. Hercules, Inc., 2003 WL 1580603, at *4 (Del.Super.); Mentis v. Delaware American Life Ins. Co., 2000 WL 973299, at *3 (Del.Super.); Paine Webber R D Partners v. Centocor, Inc., 1997 WL 719096, at *4 (Del.Super.); Marhart, Inc. v. CalMat Co., 1992 WL 82365, 82338 (Del.Ch.).
Smith v. Hercules, Inc., 2003 WL 1580603, at *4 (Del.Super.).
German v. Federal Home Loan Mortgage Corp., 885 F. Supp. 537, 552 (S.D.N.Y. 1995).
Wit Capital has argued that a class defined as "all Wit Capital customers who entered into a brokerage Account Agreement with Wit Capital before May 21, 1999" cannot be certified. However, Wit Capital's expert opined: "For each of these putative class members to have been affected by the alleged failure of Wit Capital to follow its allocation policies, it must be true that each of them: i) applied for IPO allocations, ii) were denied allocations, and iii) were denied allocations due to alleged violations of Wit Capital's policies."
Affidavit of Allan W. Kleidon at ¶ 18 (Mar. 16, 2004).
Plaintiffs' expert examined data from fourteen sample IPO allocations. Plaintiffs either sought or received allocations of IPO stock through their brokerage accounts with Wit Capital in each of these fourteen IPOs. The number of customers requesting stock in a single allocation ranged from 2,039 to 18,226 depending upon the particular IPO. The number of customers who received stock ranged from 100 to 9,340. The customers who requested, but did not receive stock ranged from 1,539 to 16,136.
Declaration of Keith Altman (Dec. 17, 2003).
The question is how many of the customers denied stock were deprived of the right to participate in IPOs as a result of Wit Capital's alleged wrongful conduct. A definitive determination of such numbers necessarily is inextricably intertwined with a determination of the merits of Plaintiffs' claims. Under these circumstances, the Court must examine the evidence presently available and make common sense assumptions.
Because the burden is on the party seeking class certification, the Court reviews the facts presented in the light most favorable to the non-moving party. Wit Capital provided data for only fourteen IPOs. It is not disputed that Wit Capital offered customers the opportunity to participate in a far greater number of IPOs. For purposes of this analysis, however, the Court will only consider the fourteen sample IPOs. In 93,522 instances, customers requested but did not receive stock. Assuming that only 1% of these requests gives rise to a cognizable claim of improper denial of participation in an allocation, the proposed class would have 935 members. If these class members were to be divided into four sub-classes, with each sub-class having approximately 233 members, the numerosity requirement in Rule 23(a)(1) clearly has been met.
Dieter v. Prime Computer, Inc., 681 A.2d 1068, 1071 (Del.Ch. 1996).
Wit Capital has not attempted to show that the policy violations only could have affected the named Plaintiffs. Rather, Wit Capital pointed out that a large number of customers have not yet complained. Plaintiffs responded that they only became aware of the alleged wrongful conduct because three of the Plaintiffs happened to be family members and compared their Wit Capital transactions. When potential class members would not have a realistic opportunity to be aware of a cause of action as individuals, class certification is particularly warranted.
III. Sub-Classes and Predominance
As noted above, Plaintiffs have asserted four theories of recovery for customers wrongfully denied allocations. (1) Wit Capital determined account balances on or before the effective date, rather than the settlement date, thus improperly rejecting orders from customers whose accounts may not have been adequately funded as of the effective date for each IPO, but who subsequently could have or did fund their accounts for the order in question. (2) Wit Capital improperly calculated the minimum account balances as though the customer had to have an all cash balance, thereby denying IPO stock to customers who had sufficient cash and stock in their accounts. (3) Contrary to its policy, Wit Capital allocated more that the proper number of shares to some customers, while other qualified customers received no IPO shares. (4) Wit Capital disregarded its preference policy by denying IPO stock to customers who had not been identified as "flippers" and, as part of the same IPO, allocating stock to customers identified as "flippers."
A single class comprised of all customers allegedly harmed as a result of all four Wit Capital practices would be problematic. Rule 23(a)(2) mandates that there must be "questions of law or fact common to the class." Rule 23(b)(3) requires that the common questions of law or fact must predominate over any questions affecting only individual members. Each of Plaintiffs' four theories of recovery involves a separate factual and legal analysis. The first issue is whether Wit Capital had the alleged duty to customers. The second issue is whether Wit Capital breached that duty. The creation of four sub-classes, according to the type of alleged wrongful conduct, ensures that the questions of law and fact common to each sub-class predominate over individual questions.
IV. Typicality
Rule 23(a)(3) states that the claims of the representative parties must be typical of the claims of the class. The typicality requirement must be met for each sub-class. Plaintiffs have alleged that one or all of the Plaintiffs were wrongfully denied IPO allocations as a result of each of the four separate theories of recovery. Therefore, Plaintiffs' claims are typical of the sub-classes. As representative parties, Plaintiffs have the ability to fairly and adequately protect the interests of the class.
Super. Ct. Civ. R. 23(c)(4).
Rule 23(a)(4).
V. Practicality and Superiority
The final issue is whether a class action is the superior method for the fair and efficient adjudication of this litigation. Rule 23(b)(1) requires that the Court determine whether individual members' actions could result in inconsistent or incompatible results. The answer to this is clear. Litigation of this case will likely be protracted and complicated. Different factfinders inevitably will not reach identical results. Should individual actions be brought in different jurisdictions, it is likely that legal issues will be resolved with some degree of inconsistency.
Wit Capital has argued that arbitration is available and required pursuant to the Account Agreement. During oral argument, the Court asked whether, as a practical matter, it would be possible for Wit Capital, an allegedly under-resourced entity, to engage in hundreds or even thousands of separate arbitration proceedings. During the hearing and as part of post-hearing written submissions, Wit Capital's response was that there was "no evidence that there could be a thousand claimants and that Plaintiffs had failed to demonstrate that there were more than a handful of potential claimants." This Court's finding of numerosity addresses Wit Capital's assertion that there are very few potential claimants.
By way of additional response, Wit Capital stated: "Wit Capital (and the customers) contractually agreed to arbitrate individual claims. Wit Capital will honor that obligation, regardless of how many individual claims may be brought." Regardless of Wit Capital's good faith intent to abide by its obligation to arbitrate, the Court finds this argument unpersuasive. The specter of numerous arbitrations, engaged in by a company in financial difficulty, is unrealistic. A class action is superior to either individual arbitrations or separate trials. Further, if the Court were to deny class certification, it appears that the pursuit of individual claims is economically impractical for the individual plaintiffs.
Wit Capital has asserted that this action must fail in part because "at least in regards to the allegedly improperly allocated IPO shares, there is no allegation here that Wit Capital benefitted from its alleged mistakes. . . . There is no unjust enrichment to Wit Capital. Moreover, any customer who did not receive an IPO allocation also did not pay for one. Indeed, one could conclude that customers who did not receive an allocation — and who also therefore did not pay for one — were not harmed at all." If the Court were to accept this argument, the result would be a wrong without a remedy. There could never be a case in which a customer, wrongfully denied the opportunity to participate in an IPO, could recover. If Wit Capital has in fact breached contractual or other duties to customers and there were to be no class action, Wit Capital would not be held accountable.
CONCLUSION
THEREFORE, the Court makes the following findings. Count III of the Amended Complaint ("holder" claims for damages sustained as a result of Wit Capital's purported failure to adhere to its anti-flipping policy) cannot be pursued as part of a class action. Any award of money damages would be too speculative and not based upon a cognizable injury. To the extent other allegations assert reliance as an element of any cause of action (such as fraud), those claims are not appropriate in a class action. Individual issues of justifiable reliance predominate over questions common to members of a potential class.
However, with respect to the Plaintiffs' remaining claims, the numerosity requirement in Rule 23(a)(1) has been met. The Court hereby certifies a class comprised of Wit Capital customers who applied for IPO allocations and were denied allocations because of alleged violations of Wit Capital's policies. Four sub-classes are hereby certified: (1) qualified customers whose accounts may not have been adequately funded as of the effective date for each IPO, but who subsequently could have or did fund their accounts for the order in question, and were denied IPO allocations because Wit Capital determined account balances on or before the effective date, rather than the settlement date; (2) qualified customers who had sufficient cash and stock in their accounts, but were denied IPO allocations because Wit Capital improperly calculated the minimum account balances as though the customer had to have an all cash balance; (3) qualified customers who received no IPO shares because Wit Capital allocated more than the proper number of shares to other customers; and (4) qualified customers who had not been identified as "flippers," but were denied IPO allocations because Wit Capital disregarded its preference policy and, as part of the same IPO, allocated stock to customers identified as "flippers."
The creation of four sub-classes, according to the type of wrongful conduct, ensures that the questions of law and fact common to each sub-class predominate over individual questions. Plaintiffs' claims are typical of those of members of the sub-classes. As representative parties, Plaintiffs have the ability to fairly and adequately protect the interests of the class. A class action is superior to either individual arbitrations or separate trials for the fair and efficient adjudication of this case.
Counsel are requested to contact the Court to arrange for a prompt scheduling conference to address how best to bring the remainder of this case to an orderly conclusion.