Opinion
07 Civ. 6950 (LAP).
December 23, 2009
Opinion and Order
Plaintiffs bring this suit against Milberg LLP, four of its former partners (the "Individual Defendants"), and Coughlin Stoia Geller Rudman Robbins LLP ("Coughlin LLP"). The Individual Defendants and the predecessor to both Milberg LLP and Coughlin LLP previously represented Plaintiffs in two class actions and/or plaintiffs in other class actions. Plaintiffs' claims — for violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO") and breach of fiduciary duties — center on a scheme Defendants implemented while working on these cases in which they paid individuals to serve as lead plaintiffs. Milberg LLP and Individual Defendant Weiss jointly move to dismiss the case pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6), arguing that Plaintiffs lack standing and that their claims are barred by the applicable statutes of limitations, respectively. The other Individual Defendants and Coughlin LLP join this motion, and Individual Defendant Lerach additionally moves to dismiss the claims against him pursuant to Federal Rule of Civil Procedure 12(b)(2) for want of personal jurisdiction. For the reasons stated below, Defendants' motions are GRANTED in part and DENIED in part.
I. The Parties
At the beginning of the relevant period, the Individual Defendants were all partners of Milberg Weiss Bershad Hynes Lerach LLP. (Second Am. Class Action Compl. ("Compl.") ¶¶ 17-18, 23-27.) In May 2004, this firm split into two firms: Milberg Weiss Bershad Schulman LLP, which is now Milberg LLP, and Lerach Coughlin Stoia Geller Rudman Robbins LLP, which is now Coughlin LLP. (Id. ¶¶ 19, 29.) At all relevant times, these firms specialized in serving as lead counsel in class action lawsuits. (Id. ¶¶ 3, 132.)
For ease of reference, the Court hereinafter refers to all iterations of the Milberg firm as "Milberg LLP."
Plaintiffs were absent class members in two securities class actions in which Defendants served as lead counsel: In re Schein Pharm., Inc. Sec. Litig., No. 98 Civ. 4311, United States District Court for the District of New Jersey ("In re Schein"); and Stanley v. Safeskin, No. 99 Civ. 434, United States District Court for the Southern District of California ("Safeskin"). (Id. ¶¶ 11, 14.) In both cases the parties settled, and Defendants received attorneys' fees. (Id. ¶¶ 41, 43, 167).
The parties agree that in In re Schein, final judgment was entered and attorneys' fees were awarded in December 2000; in Safeskin, final judgment was entered in March 2003 and attorneys' fees were awarded in April 2003. (See Zaiger Decl. Supp. Mot. Defs. Milberg LLP and Weiss Dismiss Second Am. Class Action Compl. ("Zaiger Decl.") 7-8.)
II. Background
Plaintiffs allege that beginning as early as 1979 and continuing through 2005, Defendants secured appointment as lead counsel in numerous class action lawsuits by virtue of a scheme in which they (1) illegally paid lead plaintiffs; (2) misrepresented to various courts that these plaintiffs were not illegally compensated; (3) misrepresented the magnitude of these plaintiffs' injuries; and (4) made illegal payments to an expert witness. (Id. ¶ 3.) Defendants also filed litigation documents containing false or misleading statements and omissions; sent documents to absent class members containing such statements and omissions; and caused their clients to make false and misleading statements in depositions and in court documents. (Id. ¶¶ 4-5.)
In January 2002, a wave of news articles reported a grand jury investigation of Milberg LLP in Los Angeles. An indictment was handed down on May 18, 2006 against Milberg LLP and Individual Defendants Bershad and Shulman, United States v. Lazar, No. 05 Cr. 587, United States District Court for the Central District of California. (Id. ¶¶ 53-55.) A superseding indictment named Individual Defendant Weiss. (Id. ¶¶ 58-59.) On September 20, 2007, a Criminal Information was filed in the same court against Individual Defendant Lerach, United States v. Lerach, No. 07 Cr. 964. (Id. ¶ 56.) All of the Individual Defendants eventually entered into plea agreements, which are attached to Defendants' declaration. (Zaiger Decl. Exs. 1-5.) Plaintiffs incorporate the plea agreements into the Second Amended Complaint. (Compl. ¶¶ 60, 64, 70, 75.) A Case Disposition Agreement entered into by Milberg LLP is also attached to Defendants' Declaration and lists 165 actions in which Milberg LLP paid individuals to serve as plaintiffs. (Zaiger Decl. Ex. 5 at 15-25.) The two cases in which Plaintiffs were absent class members do not appear on the list.
In the Zaiger Declaration, Defendants Milberg LLP and Weiss provide several news articles concerning the grand jury. (Zaiger Decl. Exs. 9-12.) As discussed infra, the Court may take notice of these articles in its analysis of the statute of limitations without converting Defendants' motion to dismiss into a motion for summary judgment.
The Court may take notice of the plea agreements and Case Disposition Agreement without converting Defendants' motion to dismiss into a motion for summary judgment because the Second Amended Complaint itself relies on these documents. See Global Network Commc'ns, Inc. v. City of New York, 458 F.3d 150, 156-57 (2d Cir. 2006). Plaintiffs expressly incorporate the plea agreements into the Second Amended Complaint (Compl. ¶¶ 60, 65, 70, 74), and extensively quote Milberg LLP's admissions in the Case Disposition Agreement in order to describe Defendants' scheme, (id. ¶¶ 79-84).
III. The Lawsuit
Plaintiffs seek to certify a class "on their own behalf and . . . on behalf of all persons and entities who were members of the certified plaintiffs classes in the lawsuits in which Defendants . . . made illegal payments to their clients to appear as [p]laintiffs . . . and/or misrepresented their clients' losses and shareholdings . . . and were harmed by Defendants actions." (Compl. ¶ 45.) Plaintiffs allege that both Milberg LLP and Coughlin LLP continue to share and split fees earned from cases commenced before the predecessor to Milberg LLP split (id. ¶ 22; Pls.' Mem. Opp'n Defs.' Mots. Dismiss Second Am. Compl. ("Pls.' Mem.") 2-3, 29-31), and this is presumably the reason why Coughlin LLP is a named Defendant, (Pls.' Mem. 2-3). Plaintiffs mostly do not, however, indicate which particular attorneys committed specific wrongful acts and instead discuss all Defendants as a group.
IV. Standard of Review
The standards of review for a motion to dismiss under Rule 12(b)(1) for lack of subject matter jurisdiction and under Rule 12(b)(6) for failure to state a claim are "substantively identical." Lerner v. Fleet Bank, N.A., 318 F.3d 113, 128 (2d Cir. 2003). On a motion to dismiss under 12(b)(1), however, the party invoking the court's jurisdiction bears the burden of proof to show that subject matter jurisdiction exists, while the movant bears the burden of proof on a motion to dismiss under Rule 12(b)(6). Id. In deciding both motions, the Court "must accept all factual allegations in the complaint as true and draw inferences from those allegations in the light most favorable to the plaintiff." In re AIG Advisor Group Sec. Litig., 309 F. App'x 495, 497 (2d Cir. 2009). Plaintiffs bear the burden of proving that the Court has personal jurisdiction over Defendants. M M Packaging, Inc. v. Kole, 183 F. App'x 112, 114 (2d Cir. 2006). When a motion to dismiss pursuant to Federal Rule of Procedure 12(b)(2) is made before any discovery has been conducted, as in this case, a plaintiff need only make a prima facie showing of personal jurisdiction. Id. On this motion, the Court must construe all pleadings in the light most favorable to the plaintiff. DiStefano v. Carozzi N. Am., Inc., 286 F.3d 81, 84 (2d Cir. 2001).
To survive a motion to dismiss, a complaint must "plead enough facts to state a claim that is plausible on its face." Ruotolo v. City of New York, 514 F.3d 184, 188 (2d Cir. 2008) (internal quotation marks omitted) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, ___ U.S. ___, 129 S.Ct. 1937, 1949 (2009).
V. Discussion
a. The Statute of Limitations
1. Plaintiffs' RICO Claim
The statute of limitations for a private civil RICO claim is four years from when a plaintiff discovers or reasonably should discover an alleged injury. World Wrestling Entm't, Inc. v. Jakks Pac., Inc., 328 F. App'x 695, 697 (2d Cir. 2009). A plaintiff should discover an injury if there are sufficient "storm warnings" of the wrongful conduct forming the basis of the plaintiff's claims. Id. (citing Staehr v. Hartford Fin. Servs. Group, Inc., 547 F.3d 406, 427 (2d Cir. 2008)). Whether a plaintiff has such "inquiry notice" or "constructive notice" is judged under an objective standard and requires an evaluation of the totality of the circumstances. Staehr, 547 F.3d at 427.
Inquiry notice means that sufficient facts exist to suggest to a plaintiff of normal intelligence that wrongdoing is "probable, not merely possible." Shah v. Meeker, 435 F.3d 244, 249 (2d Cir. 2006) (internal citation and quotation marks omitted). A plaintiff need not have notice of all of the relevant details or know about "the entire fraud being perpetrated to be on inquiry notice," Staehr, 547 F.3d at 427 (internal citation and quotation marks omitted), but instead merely must be aware of the "general fraudulent scheme," In re Integrated Res. Real Estate Ltd. P'ships Sec., 815 F. Supp. 620, 637 (S.D.N.Y. 1993) (quotingRobertson v. Seidman Seidman, 609 F.2d 583, 587 (2d Cir. 1979)).
Knowledge of an injury is imputed on the basis of inquiry notice in two ways: (1) if the plaintiff "makes no inquiry once the duty arises, knowledge will be imputed as of the date the duty arose;" but (2) if "some inquiry is made [after the duty arises], we will impute knowledge of what [a plaintiff] in the exercise of reasonable diligence [] should have discovered concerning the [injury], and in such cases the limitations period begins to run from the date such inquiry should have revealed the [injury]." Lentell v. Merrill Lynch Co., Inc., 396 F.3d 161, 167-68 (2d Cir. 2005) (third alteration in the original) (internal citation and quotation marks omitted).
Courts may determine as a matter of law whether inquiry notice existed in a particular case, but a complaint may be dismissed on this basis only "when uncontroverted evidence clearly" supports such a finding. Staehr, 547 F.3d at 427. While making this determination is frequently inappropriate on a motion to dismiss, LC Capital Partners, LP v. Frontier Ins. Group, Inc., 318 F.3d 148, 156 (2d Cir. 2003), it is proper to do so when the complaint and documents which the court may take notice of clearly show that the claims are barred as a matter of law, Staehr, 547 F.3d at 425. In this analysis, a court also may take judicial notice of news coverage and prior lawsuits without converting a motion to dismiss into a motion for summary judgment. Id. at 425. The court simply notes the existence of the information without considering it for the truth of the matters asserted therein. Id.
Even a single news article can place a plaintiff on inquiry notice.See In re MBIA Inc., No. 05 Civ. 3514, 2007 WL 473708, at *6-7 (S.D.N.Y. Feb. 14, 2007) (collecting cases). Although generic news articles describing the opportunity for wrongful conduct do not create a duty of inquiry, articles that present evidence of actual wrongful conduct are sufficient. Lentell, 396 F.3d at 170. Consequently, a news article that describes an allegation of wrongful conduct with a sufficient degree of specificity will impose a duty of inquiry. See Shah, 435 F.3d at 251 (dismissing an action as time barred where a single news article described with sufficient detail the allegations "at the heart of" plaintiff's complaint, including defendants' alleged conflict of interest and a specific example of how this affected one defendant's conduct); In re Global Crossing, Ltd. Sec. Litig., 313 F. Supp. 2d 189, 200-01 (S.D.N.Y. 2003) (finding that one magazine article constituted a "storm warning" because it explained in detail "the transactions at the heart of plaintiff's allegations of accounting fraud," even though it did not provide information regarding all the claims eventually asserted in plaintiffs' complaint); In re Sterling Foster Co., Inc., Sec. Litig., 222 F. Supp. 2d 216, 251-52 (E.D.N.Y. 2002) (finding that two news articles that reported a complaint filed by the National Association of Securities Dealers regarding illegal profits gained by an underwriter from various initial public offerings put plaintiffs on inquiry notice as to securities fraud); In re Ultrafem Inc. Secs. Litig., 91 F. Supp. 2d 678, 692-93 (S.D.N.Y. 2000) (finding that one article put plaintiffs on inquiry notice where it discussed the same issues that formed the basis for some of their claims).
Defendants argue that Plaintiffs had inquiry notice of the facts forming the basis of their RICO claim by January 25, 2002, when numerous news articles first appeared concerning the grand jury probe of Milberg LLP. (Mem. Supp. Mot. Defs. Milberg LLP and Weiss Dismiss Second Am. Class Action Compl. ("Defs.' Mem.") 16.) Plaintiffs contend that the news articles did not provide sufficient information to put them on inquiry notice (Pls.' Mem. 22-23) and that inquiry notice did not exist until sometime in 2005, (id. 25). Although Plaintiffs do not expressly indicate when or how they believe inquiry notice arose in 2005, they allege that at least one of the Plaintiffs in this case, "Plaintiff Korsinsky[,] did not discover, and could not reasonably have discovered" Defendants' conduct until July 16, 2005, when Seymour Lazar was indicted for receiving illegal payments from Milberg LLP in connection with the "Lazar Lawsuits," including In re Schein. (Compl. ¶¶ 169-171.) Regardless of the date of inquiry notice, Plaintiffs fail to indicate when they began investigating Defendants' conduct and when they believe a reasonably diligent inquiry conducted after this date would have revealed Defendants' conduct. Thus knowledge of Defendants' conduct will be imputed to Plaintiffs as of the date inquiry notice arose. Accordingly, the Court must determine whether inquiry notice existed more than four years prior to the commencement of this action.
Individual Defendant Lerach was not made a party to this action until Plaintiffs filed their First Amended Class Action Complaint on April 7, 2008. (Dkt. No. 45.)
The existence of the grand jury and some specific aspects of it received an enormous amount of media attention. Defendants provide twenty-eight news articles from January 25, 2002 to March 4, 2002 alone that mention the grand jury. (Zaiger Decl. Exs. 9-12.) Several of these articles appeared just on January 25-26, 2002, and therefore indicate a deluge of news coverage once the story emerged. Most of the articles provided by Defendants appeared in widely-read publications, including The New York Times, The Wall Street Journal, The Los Angeles Times, The Associated Press, The Chicago Tribune, and The National Law Journal, and some appeared in these publications more than once. Similar articles also were published in newspapers with more local or limited distributions — thus showing the significant amount of interest generated by this story, including The San Diego Union-Tribune, The Recorder (San Francisco), The Kansas City Star, and The New York Post. The articles clearly represent only a sampling of the news coverage for this widely-followed story.
The titles of some of these articles demonstrate the significant amount of public attention the grand jury received. For example, an article from The Recorder (San Francisco) on January 28, 2002 titled "Probe of Milberg has Bar Buzzing" indicates that the existence of the grand jury spurred significant amounts of discussion within the legal community. (Zaiger Decl. Ex. 12(5).) An article in the Kansas City Star on February 12, 2002 titled "Law Firm that Challenged Sprint Faces Grand Jury Scrutiny" shows that the interest generated by this story was reinforced by Milberg LLP's work on previous cases and was not limited to the allegations at issue in the grand jury. (Id. Ex. 12(16).)
Many articles concerning the grand jury also reported about other news involving Milberg LLP, thus adding to the attention garnered solely by the grand jury. For instance, on February 4, 2002 The National Law Journal reported that "[s]hortly after making its pitch to be lead counsel in the burgeoning securities fraud class-action litigation against Enron Corp., with perhaps a nine-figure fee at stake, it was revealed that New York-based Milberg is the target of a federal grand jury investigation in Los Angeles. . . . 'Of course' the leak is connected to Enron, said one securities lawyer. 'Lerach had a good week. He was on all the talk shows.'" (Zaiger Decl. Ex. 12(10).)
Many of the articles discussed allegations presented to the grand jury and substantially mirror Plaintiffs' allegations in this suit. While several articles named particular parties identified in the grand jury, the articles also suggested a pattern of conduct by Defendants that did not seem limited to those named parties. An article in The Los Angeles Times on January 25, 2002, for instance, noted the existence of the grand jury, that it was investigating Milberg LLP's "financial arrangement with plaintiffs in a number of cases, in particular . . . Steven G. Cooperman.," and that Milberg LLP had received a subpoena for its records concerning Cooperman. (Id. Ex. 9 (emphasis added).) An article the next day in The Los Angeles Times reported that Milberg LLP had confirmed it was the subject of the grand jury probe, that "a wave of grand jury subpoenas [was] issued to shareholders who had repeatedly appeared in the lawsuits," and that the investigation was "believed to have started or gained momentum from the cooperation of Cooperman . . . a plaintiff in more than three dozen shareholder suits." (Id. Ex. 11 (emphasis added).)The New York Times published a similar article the same day from The Associated Press, noting that subpoenas had been issued to Milberg LLP and to various stockbrokers and that prosecutors requested that the latter testify about providing investors' names to Milberg LLP. (Id. Ex. 10.)
These three articles alone thus revealed the basic allegations presented to the grand jury; that Milberg LLP may have engaged in a pattern of illegal behavior; that numerous cases in which Milberg LLP served as counsel were at issue; and that subpoenas had been sent to Cooperman, shareholders who appeared as plaintiffs in multiple lawsuits, and stockbrokers who may have provided names of investors to Milberg LLP. Several of the news articles mentioned Defendants' enormous market share for class action suits, and it would have been unreasonable for Plaintiffs to assume, without inquiring, that their cases were not part of a common scheme of behavior.
An article in The Associated Press on January 25, 2002 titled "NY Law Firm Under Investigation by Grand Jury" stated that Milberg LLP "was responsible for 85 percent of all securities class actions in California last year." (Id. Ex. 12(3).) An article in The Wall Street Journal on February 6, 2002 titled "Lerach's Enron Gambit" noted that "[t]he Milberg firm accounts for the lion's share of all federal shareholders' suits, and in California Mr. Lerach is approaching Bill Gates['] levels of market share." (Id. Ex. 12(11).)
As discussed infra, Plaintiffs argue that in order to be on inquiry notice they had to know, inter alia, the identity of the paid plaintiffs and the lawyers involved. (Pls.' Mem. 23-24.) They argue that mention of Cooperman in the news articles was insufficient because he was not a plaintiff in In re Schein or Safeskin. (Id. at 23.) First, however, Plaintiffs did not have to know the identity of the paid plaintiffs in order to have been on inquiry notice because this comprised a mere detail of Defendants' scheme. Second, because Plaintiffs seek to represent absent class members in cases other than In re Schein and Safeskin, the identity of Cooperman is relevant to some of these other cases. Third, although some of the articles did name an individual attorney who was involved — Lerach — it would have been unreasonable to assume that he was the only attorney at Milberg LLP who was involved with the scheme.
While Plaintiffs argue that they did not have inquiry notice until July 2005, the Second Amended Complaint does not allege any facts about the general nature of Defendants' scheme that became available to them as of this date but did not appear in several of the earlier articles provided by Defendants. See Shah, 435 F.3d at 250 (finding that inquiry notice existed where a single news article discussed all of the improper business practices alleged in plaintiff's complaint). In fact, Plaintiffs point to only two new details revealed by the July 2005 indictment: that Defendants "paid Ms. Lazar $188,000 for serving as Lead Plaintiff in theSchein litigation" and that Defendants "paid Lazar for acting as lead counsel in more than fifty securities class actions since 1980." (Compl. ¶¶ 170-72.)
None of Plaintiffs' other allegations in support of its RICO claim materially deviate from the information in the news articles, and thus this information was not necessary in order to impose a duty of inquiry.Cf. Rothman v. Herzog, 220 F.3d 81, 96-98 (2d Cir. 2000) (remanding to the district court for a determination of when a reasonably diligent inquiry would have revealed information alleged by plaintiffs regarding a defendant added more than one year after the original complaint was filed). First, Plaintiffs allege that Defendants committed commercial bribery by filing and prosecuting hundreds of class actions on behalf of Cooperman, Lazar, and others and giving those lead plaintiffs millions of dollars in illegal payments in return. (Compl. ¶¶ 143-54.) These plaintiffs in turn made false statements and submitted falsified documents to various courts. (Id. ¶ 152.) Second, Plaintiffs allege that Defendants committed mail and wire fraud in connection with In re Schein. They note that the lead plaintiff in that case filed a certificate with the court and that Defendants filed a complaint and mailed a settlement agreement to all class members. (Id. ¶¶ 155-73.) Third, Plaintiffs list several cases in which Defendants misrepresented their clients' losses in order to be appointed lead counsel and describe the nature of these and similar misrepresentations. (Id. ¶¶ 174-205.) Plaintiffs also mention a financial expert who Defendants routinely used and to whom they made illegal payments. (Id. ¶¶ 39-40). Lastly, Plaintiffs provide details about the specific allegations against Defendants as revealed in their indictments and plea agreements. (Id. ¶¶ 53-84.) All of these allegations constitute mere details of Defendants' scheme and do not excuse Plaintiffs' failure to conduct an inquiry.
Because this information relates to indictments issued after July 2005, however, these allegations do not support Plaintiff's argument that inquiry notice arose in July 2005.
Plaintiffs also argue that in order to be on inquiry notice, they had to know "the names of the attorneys and paid plaintiffs involved, as well as how far back the scheme started, and the name of the company involved in the litigation." (Pls.' Mem. 23-24.) Otherwise, Plaintiffs argue, an inquiry would not have revealed anything, and Plaintiffs would not "have been even close to the pleading requirements of Rule 9(b)." (Id.)
Plaintiffs are correct that the statute of limitations does not mandate the filing of "groundless or premature suits by requiring plaintiffs to file suit before they can discover with the exercise of reasonable diligence the necessary facts to support their claims." Lentell, 396 F.3d at 168 (internal citation and quotation marks omitted); cf. Shah v. Stanley, No. 03 Civ. 8761, 2004 WL 2346716, at *11-13 (S.D.N.Y. Oct. 19, 2004) (explaining that this policy does not change the Second Circuit's rule regarding the duty of inquiry imposed by storm warnings). However, "storm warnings" do impose a duty to make a reasonably diligent inquiry, Staehr, 547 F.3d at 411, and "well-settled law in this Circuit penalizes a plaintiff who fails to make some inquiry after the storm warnings have given rise to constructive notice," id. at 427 (internal quotation marks omitted). The information described by Plaintiffs was unnecessary to create a duty of inquiry, ever assuming arguendo these details were necessary to file a pleading with the requisite specificity.
Consicering the widely publicized nature of the grand jury investigation of Milberg LLP, the Court concludes that Plaintiffs were on inquiry notice of Defendants' conduct no later than March 4, 2002, the date of the most recent news article provided by Defendants to the Court. These news articles constitute uncontroverted evidence that clearly shows that Plaintiffs were on inquiry notice of Defendants' conduct more than four years before they filed suit in August 2007. (Dkt. No. 1.) Accordingly, Plaintiffs' RICO claim is untimely and is dismissed.
2. Plaintiffs' Claim for the Breach of Fiduciary Duties a. Standing Relating to all Cases Except In re Schein and Safeskin
Plaintiffs do no assert their breach of fiduciary duties claim against Coughlin LLP. (Pls.' Mem. ¶¶ 207-09.)
The Court need not determine at this point whether to exercise supplemental jurisdiction over this state law claim because it concludes that Plaintiffs lack standing to assert this claim as it relates to all cases other than In re Schein and Safeskin. See Motorola Credit Corp. v. Uzan, 388 F.3d 39, 55 (2d Cir 2004). Plaintiffs' breach of fiduciary duties claim relating to these two cases is discussed infra.
Defendants argue that Plaintiffs lack standing to sue for injuries to plaintiffs in cases which they themselves were not parties, i.e., all cases other than In re Schein and Safeskin. Plaintiffs contend that this issue pertains not to standing but to class certification — whether Plaintiffs are proper representatives of plaintiffs in these other cases. They argue that they are proper representatives of these other parties because their injuries arise from the same scheme, depend on the same legal theories for recovery, and seek the same recovery. Defendants counter that Plaintiffs must have standing before a class may be certified, and the Court agrees.
In order to have standing, a plaintiff must have "suffered an injury in fact that is distinct and palpable; the injury must be fairly traceable to the challenged action; and the injury must be likely redressable by a favorable decision." Denney v. Deutsche Bank AG, 443 F.3d 253, 263 (2d Cir. 2006) (citing Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992) (internal quotation marks omitted). Traditionally, district courts have examined standing before addressing class certification. In re AllianceBernstein Mut. Fund Excessive Fee Litig., No. 04 Civ. 4885, 2005 WL 2677753, at *9-10 (S.D.N.Y. Oct. 19, 2005). Indeed, "[t]hat a suit may be a class action . . . adds nothing to the question of standing, for even named plaintiffs who represent a class must allege and show that they personally have been injured, not that injury has been suffered by other, unidentified members of the class to which they belong and which they purport to represent." Lewis v. Casey, 518 U.S. 343, 357 (1996) (internal citations and quotation marks omitted). "Because individual standing requirements constitute a threshold inquiry, the proper procedure when the class plaintiff lacks individual standing is to dismiss the complaint, not to deny the class for inadequate representation." 1 Newberg on Class Actions § 2:9 (4th ed. 2009). The Court of Appeals has acknowledged this "general rule that the class action device cannot be used to enlarge the jurisdiction of the federal courts." In re Literary Works in Elec. Databases Copyright Litig., 509 F.3d 116, 127 n. 7 (2007) (citing Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 613 (1997).
In rare circumstances the Supreme Court has analyzed class certification before standing, for instance in cases involving mass tort class actions brought solely for the purposes of a pre-negotiated settlement. See, e.g., Ortiz v. Fibreboard Corp., 527 U.S. 815, 821, 824, 831 (1999); Amchem, 521 U.S. at 597, 612-23. However, as the Supreme Court noted in Ortiz regarding petitioners' argument that some of the purported class members lacked standing: "[o]rdinarily, of course, this or any other Article III court must be sure of its own jurisdiction before getting to the merits. But the class certification issues are, as they were in Amchem, logically antecedent to Article III concerns, and themselves pertain to statutory standing." Ortiz, 527 U.S. at 831 (internal citations and quotation marks omitted); see also Amchem, 521 U.S. at 612-13 (stating "We agree that the [t]he class certification issues are dispositive; because their resolution here is logically antecedent to the existence of any Article III issues, it is appropriate to reach them first . . . mindful that Rule 23's requirements must be interpreted in keeping with Article III constraints . . . [and not] extend . . . the [subject-matter] jurisdiction of the United States district courts") (first and third alterations in the original).
A minority of cases in this Court also examined class certification before standing, even outside the context of settlement-only class actions. These cases have certified lead plaintiffs on the basis of the typicality requirement of Federal Rule of Civil Procedure 23, even though the lead plaintiffs in those cases did not suffer the injuries of all of the class members. See, e.g., In re Dreyfus, 2000 WL 1357509, at *2-3. However, "better reasoned decisions favor the traditional test, so that Article III standing is determined first, before proceeding to the issue of detemining the class." In re Salomon Smith Barney Mut. Fund Fees Litig., 441 F. Supp. 2d 579, 606 (S.D.N.Y. 2006) (finding that plaintiffs did not have standing to assert claims regarding mutual funds in which they had not invested); see also Hoffman v. UBS-AG, 591 F. Supp. 2d 522, 530-32 (S.D.N.Y. 2008) (same); In re Merrill Lynch Inv. Mgmt. Funds Sec. Litig., 434 F. Supp. 2d 233, 236 n. 8 (S.D.N.Y. 2006) (same, and stating that although a minority of courts have analyzed class certification before standing, "there is more recent countervailing authority in this district"). Plaintiffs themselves were not injured by Defendants' conduct in the cases in which Plaintiffs were not parties. Accordingly, Plaintiffs do not have standing to assert claims regarding these injuries, and this claim is dismissed as it relates to all cases other than In re Schein and Safeskin.
See, e.g., Maywalt v. Parker Parsley Petrol. Co., 147 F.R.D. 51, 56-57 (S.D.N.Y. 1993). Plaintiffs' argument rests on two other cases from this Court, Hicks v. Morgan Stanley Co., No. 01 Civ. 10071, 2003 WL 21672085, at *5 (S.D.N.Y. July 16, 2003); and In re Dreyfus Aggressive Growth Mut. Fund Litig., No. 98 Civ. 4318, 2000 WL 1357509, at *2-3 (S.D.N.Y. Sept. 20, 2000).
b. The Statute of Limitations
Defendants also argue that Plaintiffs' fiduciary duties claim is time barred. The statute of limitations for a breach of fiduciary duties claim varies according to what remedy is sought: three years if a party seeks monetary damages and six years if a party seeks an equitable remedy.Cooper v. Parsky, 140 F.3d 433, 440-41 (2d Cir. 1998); Kaufman v. Cohen, 307 A.D.2d 113, 118, 760 N.Y.S.2d 157 (1st Dep't 2003). A six-year statute of limitations governs Plaintiffs' claim in this case because the disgorgement of attorneys' fees is an equitable remedy. See Design Strategy, Inc. v. Davis, 469 F.3d 284, 299-300 (2d Cir. 2006) (explaining that disgorgement is an equitable remedy, contrasted with compensatory damages).
Plaintiffs argue that this claim is based in fraud and therefore is subject to a six-year statute of limitations, although they also note that a breach of fiduciary duties claim asserted by a party seeking an equitable remedy is subject to a six-year statute of limitations. (Pls.' Mem. 25.) Defendants dispute that Plaintiffs' claim is based in fraud and argue that even if it is, it is time barred. (Reply Mem. Supp. Mot. Defs. Milberg LLP and Weiss Dismiss Second Am. Class Action Compl. ("Defs.' Reply Mem.") 8-9.) They note that under N.Y.C.P.L.R. § 213(8), the statute of limitations governing fraud-based claims is six years from when a claim acrrues or two years from when a plaintiff discovers or should have discovered a fraud. (Defs.' Reply Mem. 9.) Defendants also erroneously argue that Plaintiffs' claim is for money damages and therefore is subject to a three-year statute of limitations. (Defs.' Mem. 16-17.) The Court finds that Plaintiffs' claim more properly sounds in breach of fiduciary duties than in fraud and that therefore N.Y.C.P.L.R. § 213(8) does not apply. "[W]here an allegation of fraud is not essential to the cause of action pleaded except as an answer to an anticipated defense of Statute of Limitations, courts look for the reality, and the essence of the action and not its mere name." Powers Mercantile Corp. v. Feinberg, 109 A.D.2d 117, 120, 490 N.Y.S.2d 190 (1st Dep't 1985) (internal citation and quotation marks omitted).
The statute of limitations normally does not begin running on a breach of fiduciary duties claim "until the fiduciary has openly repudiated his or her obligation or the relationship has been otherwise terminated."Golden Pac. Bancorp v. F.D.I.C., 273 F.3d 509, 518-19 (2d Cir. 2001) (internal citations and quotation marks omitted). This continuous representation doctrine results from the tolling of the statute of limitations during the time between the breach of the duty and the end of the fiduciary relationship, so that the beneficiary of the relationship may continue to rely on the "fiduciary's skill without the necessity of interrupting a continuous relationship of trust and confidence by instituting suit." Id. at 519 (citing Greene v. Greene, 56 N.Y.2d 86, 92, 94-95, 451 N.Y.S.2d 46 (N.Y. 1982)). However, this doctrine tolls the statute of limitations only regarding the attorney's continuing representation on the particular matter at issue and does not toll the time during an attorney's general representation of a client. Bastys v. Rothschild, 154 F. App'x 260, 262 (2d Cir. 2005) (citing Shumsky v. Eisenstein, 96 N.Y.2d 164, 168, 726 N.Y.S.2d 365, 368-69 (N.Y. 2001)).
Viewing the Second Amended Complaint in the light most favorable to Plaintiffs, their fiduciary duties claim is untimely as it relates to In re Schein, because in that case final judgment was entered and attorneys' fees were awarded to Milberg LLP in December 2000. (Zaiger Decl. Ex. 8.) Plaintiffs have not shown that Defendants continued to represent them in this case in a meaningful manner after this date. Therefore this claim is dismissed. However, Plaintiffs' claim is timely as it relates toSafeskin, because in that case final judgment was entered in March 2003 and attorneys' fees were awarded in April 2003. (Zaiger Decl. Ex. 7.) Plaintiffs' fiduciary relationship with Defendants in this case clearly continued up until the time of final judgment in March 2003, which is less than six years before Plaintiffs commenced this action.
c. Safeskin
i. Supplemental Jurisdiction
Although all of the federal claims in this case have been dismissed, the Court may retain jurisdiction over this state law claim pursuant to 28 U.S.C. § 1367(c)(3). See, e.g., Motorola Credit Corp, 388 F.3d at 55-56. The Court concludes that it is in the interest of judicial economy to do so. See id. No additional discovery or proceedings are required at this point, and no difficult issues of state law are before the Court. See id. at 59.
ii. Personal Jurisdiction over Lerach
Plaintiffs appear to argue that the Court has personal jurisdiction over Individual Defendant Lerach because as a licensed lawyer in New York he regularly transacted business here and because he caused injuries here. (Pls.' Mem. 32.) New York's long-arm statute provides in part that "a court may exercise personal jurisdiction over any non-domiciliary . . . [who] transacts any business within the state." N.Y.C.P.L.R. § 302(a)(1). To satisfy this provision, a person must transact business within New York and the cause of action must arise from such a business transaction. Best Van Lines, Inc. v. Walker, 490 F.3d 239, 246 (2d Cir. 2007). Transacting business within this context requires activity in which a "defendant purposefully avails itself of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its laws." Id. (internal citations and quotation marks omitted). This element of New York's long-arm statute can be met even by a single transaction in New York. See id. at 248 (collecting cases). Lerach meets this requirement.
For personal jurisdiction to arise from a transaction, there must be "a substantial relationship between the transaction and the claim asserted . . . a connection that is merely coincidental is insufficient." Sole Resort, S.A. de C.V. v. Allure Resorts Mgmt., LLC, 450 F.3d 100, 103 (2d Cir. 2006) (internal citations and quotation marks omitted). This is necessarily a fact-specific analysis in which determining "when the connection . . . crosses the line from 'substantially related' to 'mere coincidence' is not always self-evident." Id. (internal citation and quotation mark omitted). Courts have found personal jurisdiction wanting in cases where the connection between New York and the events causing the alleged injury were "at best . . . tangential." Id. at 104.
Given this standard, Plaintiffs have successfully made a prima facie showing under this provision of New York's long-arm statute. Plaintiffs allege that at all relevant times Lerach practiced law in New York and that he concocted Defendants' scheme with Cooperman. (Compl. ¶ 27.) While Plaintiffs focus mainly on Lerach's work on suits filed in New York (Pls.' Mem. 32) and they do not argue that Cooperman participated inSafeskin (Pls.' Mem. 23), they also argue that Lerach was "a knowing and willing participant in the illegal scheme to pay named plaintiffs," (id. 32). Accordingly, the Court cannot conclude that Plaintiffs' claim in relation to Safeskin did not have a sufficient connection to Lerach's conduct in New York. Therefore the Court finds that it has personal jurisdiction over Lerach due to his transaction of business in New York and it need not consider whether Lerach may have caused an injury in New York.
iii. The Merits
Defendants argue that in making this claim, Plaintiffs have not adequately alleged a breach of fiduciary duty: they state that "there is no allegation that Safeskin involved a paid plaintiff" and they note that the case does not appear on the Milberg LLP Case Disposition Agreement as one of the 165 cases in which there were paid plaintiffs. (Defs.' Mem. 2.) Plaintiffs do in fact allege wrongdoing associated with Safeskin, although they do not do so with any particularity. Instead they merely allege that Defendants breached their fiduciary duties in accordance with the general scheme described in the Second Amended Complaint. (Compl. ¶¶ 206-08.) Viewing the Second Amended Complaint in the light most favorable to Plaintiffs, however, this element of the claim is sufficient to survive Defendants' motions to dismiss.
Plaintiffs also allege that a few of Milberg LLP's clients inSafeskin, inter alia, failed to disclose to the court their trades of the securities at issue during the proposed class period. (Compl. ¶¶ 180-81.) It is unclear if these allegations relate to Plaintiffs' breach of fiduciary duties claim.
Further, a breach of fiduciary duties claim seeking restitution for a defendant's ill-gotten gain only needs to show that the breach was a "substantial factor" in the gain. LNC Invs., Inc. v. First Fid. Bank, N.A. New Jersey, 173 F.3d 454, 465 (2d Cir. 1999). Plaintiffs have also satisfied this element of the claim.
VI. Conclusion
For the foregoing reasons, Defendants' motions to dismiss (Dkt. Nos. 58, 61, 64, 67, 68) are GRANTED as to Plaintiffs' RICO claim and GRANTED as to Plaintiffs' breach of fiduciary duties claim as it relates to In re Schein and all cases in which Plaintiffs were not absent class members. Defendants' motion to dismiss Plaintiffs' breach of fiduciary duties claim as to Safeskin is DENIED.
SO ORDERED.