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finding class representatives adequate when the complaint alleged a common course of conduct and unitary legal theory for the entire class period.
Summary of this case from IBEW Local 90 Pension Fund v. Deutsche Bank AGOpinion
01 Civ. 10071 (HB).
July 17, 2003.
OPINION AND ORDER
Pursuant to Federal Rules of Civil Procedure 23(a) and 23(b), Lead Plaintiff Lawrence H. Nicholson ("Lead Plaintiff" or "Nicholson") seeks the following: 1) an order certifying a class consisting of all persons who purchased or otherwise acquired shares of Morgan Stanley Dean Witter Prime Income Trust ("the Trust"), a proprietary mutual fund, between November 1, 1998 and April 26, 2001 ("the class period"); 2) an order appointing Lead Plaintiff to serve as class representative; and 3) an order appointing as class counsel Goodkind Labaton Rudoff Sucharow LLP and Cauley Geller Bowman Coates Rudman, LLP. For the following reasons, Nicholson's motion is granted.
Excluded from the Class are the Defendants, members of the immediate family of each of the individual defendants, any entity in which any Defendant has a controlling interest, and the legal affiliates, representatives, heirs, controlling persons, successors, and predecessors-in-interest or assigns of any such excluded party.
I. Background
Evan Siegert, an intern in my Chambers during the summer of 2003 and a third-year law student at Brooklyn Law School, provided substantial assistance in the research and drafting of this opinion.
The Plaintiffs in this class action allege that the Defendants violated Section 11, 15 U.S.C. § 77k; Section 12(a)(2), id. § 77l(a)(2); and Section 15, id. § 77o, of the Securities Act of 1933. These allegations note that Defendants failed to follow SEC requirements for the valuation of securities and issued registration statements and prospectuses during the class period which contained false and misleading statements about the Trust's net asset value (NAV), which is the price at which shares in the Trust are bought and sold by members of the public. Specifically, Nicholson alleges the Defendants failed to use market quotations although readily available to determine NAV for the loans in the Trust. Second, Nicholson claims that even when market valuations were not readily available, the Defendants valued the loans at face value rather than fair value in order, Plaintiffs allege, to maintain the false impression that the stated objective of preservation of capital was being met, in violation of the SEC's rule that the valuation reflect what the owner "might reasonably expect to receive for [them] upon their current sale." Because the loans were not accurately valued, the Trust's NAV was inflated and shareholders overpaid for their shares. Nicholson claims that in early 2000, in response to pressure from the SEC, the Trust began to "mark to market" the loans and that, as a result, the NAV began a steady descent from $9.84 on December 20, 1999 to $8.88 at the end of the class period. The end date of the class period is when the Defendants finally valued all the loans based on independent pricing services.
Plaintiffs name as Defendants the following: Morgan Stanley Co, which is a diversified financial institution and administrator of the Trust; Morgan Stanley Dean Witter Advisers Inc., which is a wholly owned subsidiary of Morgan Stanley Co. and the Trust's investment advisor; the individual members of the Trust's Board of Trustees or executive officers (Charles A. Fiumefreddo, Mitchell M. Merin, Michael Bozic, Edwin J. Garn, Wayne E. Hedien, Manuel H. Johnson, and Michael E. Nugent); and the Trust's portfolio managers (Sheila A. Finnerty and Peter Gewirtz).
The NAV is determined by subtracting the Trust's liabilities from its assets and dividing this sum by the number of shares.
Defendants issued four prospectuses during the class period — on November 20, 1998; January 25, 1999; December 20, 1999; and December 27, 2000.
SEC Accounting Series Release ("ASR") 118.
II. Discussion
Nicholson seeks certification of this class and appointment as class representative for the Section 11 and Section 12 claims. Section 11(a) imposes civil liability on the signatories of a registration statement for materially false or omitted statements. Goldkrantz v. Merv Griffin et al., 1999 U.S. Dist LEXIS 4445, at *7 (S.D.N.Y. April 6, 1999) (citing 15 U.S.C. § 77k(a)), aff'd 201 F.3d 431 (2d Cir. 1999). Defendants concede that Nicholson is a proper class representative with respect to Section 11, but they argue that the class should be limited to the time after January 26, 2000, when Nicholson first invested, because he has no incentive to prove the claims of those who invested before that date. According to Defendants, Nicholson thus fails the typicality and adequacy-of-representation requirements for class certification pursuant to Rule 23(a) with respect to the Section 11 claim. Defendants also contend that Nicholson is not a proper class representative for the Section 12 claim because he did not suffer a cognizable injury under that section and thus his claim lacks standing and typicality.
The Section 15 claim is derivative of the Section 11 and 12 claims, and thus does not warrant separate consideration.
This rule imposes the following requirements before a class can be certified:
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.
Fed.R.Civ.P. 23(a).
A class was certified in a case involving the same type of investment vehicle and the same general allegations about improper valuations. See Abrams v. Van Kampen Funds Inc., 2002 U.S. Dist. LEXIS 16022 (N.D. Ill. Aug. 27, 2002). Moreover, class treatment is generally well-suited to securities-fraud cases. See In re Dreyfus, 2000 WL 1357509, at * 11. For example, it is beyond peradventure that numerosity is satisfied here — as of March 31, 2001, a date falling within the class period, nearly 300 million shares of the Trust were issued and outstanding and the class likely includes several thousand members. Moreover, as the Supreme Court observed, the predominance requirement of Rule 23(b)(3) is readily met in securities-fraud class actions. See Amchen Prods. Inc. v. Windsor, 521 U.S. 591, 625 (1997).
A. Typicality and adequacy of representation for Section 11 claim
Defendants contend that the Trust's portfolio was substantially different in 1998 and 1999 than in 2000 and 2001, and Nicholson lacks any incentive to undertake the "cumbersome" fact-intensive proof for each day during the class period before he made an investment, that might bear out the allegation that 1) reliable market quotations existed for most or all the loans and 2) that the Defendants' determinations of "fair value" were so unreasonable as to be in bad faith. Moreover, Defendants stress that even if Nicholson can prove his own claims of false statements, he could not prove the claims of those who invested prior to January 26, 2000. As such, he is neither typical nor does he have the incentive to adequately represent members of the class who invested prior to January 26, 2000. I disagree.
Specifically, of approximately 240 loans in the portfolio in 1998, only 117 remained in March 2000 when the proposed class representative invested and only 89 remained in March 2001.
"Typicality refers to the nature of the claim of the class representative, and not to the specific facts from which the claim for relief arose or relief is sought." Dura-Bilt v. Chase Manhattan Corp., 89 F.R.D. 87, 99 (S.D.N.Y. 1981). The typicality requirement is met when the class representative's claim "arises from the same event or course of conduct that gives rise to claims of other class members and the claims are based on the same legal theory." Dura-Bilt, 89 F.R.D. at 99; see also In re Dreyfus Aggressive Growth Mut. Fund Litig., 98 Civ. 4318 (HB), 2000 WL 1357509, at *3 (S.D.N.Y. Sept. 20,2000). In such a situation, the typicality requirement is usually met, despite "minor variations in the fact patterns underlying individual claims." Robidoux v. Celani, 987 F.2d 931, 936-37 (2d Cir. 1993); see also In re NASDAQ Market-Makers Antitrust Litig., 172 F.R.D. 119, 126 (S.D.N.Y. 1997) ("Typicality, however, does not require that the situations of the named representatives and the class members be identical." (citation and internal quotations omitted)). However, certification should be denied where class representatives are "subject to unique defenses which threaten to become the focus of the litigation." Gary Plastic Packaging Corp. v. Merrill Lynch, Pierce, Fenner Smith, Inc., 903 F.2d 176, 180 (2d Cir. 1990). Typicality requires that a "class representative `have the incentive to prove all the elements of the cause of action which would be presented by the individual members of the class were they initiating individualized actions.'" In re NASDAQ Market-Makers Antitrust Litig., 172 F.R.D. 119, 126 (S.D.N.Y. 1997) (quoting Daniels v. Amerco, 1983-1 Trade Cas. (CCH) 65,274 (S.D.N.Y. Mar. 10, 1983)).
The adequacy-of-representation requirement with respect to the class representative ensures that "the class members must not have interests that are antagonistic to one another." Drexel, 960 F.2d at 291 (citation and internal quotations omitted); see also In re Dreyfus, 2000 WL 1357509, at *10. Courts have repeatedly held that "[i]n alleging a common course of conduct, the plaintiffs will have a sufficient incentive to fully develop the facts which occurred after their own purchases of shares." In re Dreyfus, 2000 WL 1357509, at *10 (citing Dura-Bilt); see also Berwecky v. Bear, Stearns Co., 197 F.R.D. 65, 70-71 (S.D.N.Y. 2000) ("[T]he Court finds that the plaintiffs have sufficient incentive to demonstrate a common scheme with respect to all of the promoted securities."). Here, the typicality and adequacy-of-representation inquiries merge. See Dura-Bilt, 89 F.R.D. at 99 ("The typicality prerequisite overlaps with the common question requirement of Rule 23(a)(2) and the adequate representation requirement of Rule 23(a)(4).").
The second aspect of adequacy of representation under Rule 23(a), namely the adequacy of the class counsel to represent the class, is not at issue here.
As noted above, the essence of Defendants' opposition on typicality and adequacy-of-representation grounds to the appointment of Nicholson as class representative is that he lacks incentive to litigate fully on behalf of the members who purchased prior to January 2000. The Plaintiffs here allege a common course of conduct and a unitary legal theory for the entire class period — that is, Defendants issued prospectuses and registration statements that contained false statements about the Trust's NAV, because the loans were not properly valued and were not marked to market when they should have been. Although it is true some of the prospectuses and registration statements involved here were issued before Nicholson invested, the nature of Nicholson's claims are identical to the claims of the other class members. Although Nicholson concedes it will be necessary to undertake the substantial task of proving the misvaluation of loans before he invested, Nicholson's counsel represented at oral arguments that they were developing methodologies to prove these facts and that they had already requested and obtained electronic information about all the loans in the fund for the entire class period. In addition, at oral arguments, Nicholson's attorney argued that to the extent that class counsel, who are working on contingency, have a very strong incentive to prove the claims of all members of the class in order to maximize their award and Nicholson has a strong incentive to retain the ablest representation, he has an indirect incentive to encourage class counsel to prove the claims of all class members. See Dura-Bilt, 89 F.R.D. at 100 ("[S]ome courts have noted `that the glimmer o: increased attorneys fees for the victorious plaintiff who represents a larger class is another incentive for the plaintiff to develop a full record of those events which occurred subsequent [or prior] to his purchase.'" (quoting Elkind v. Liggett Meyers, Inc., 77 F.R.D. 708, 711 (S.D.N.Y 1977))); see also Baffa v. Donaldson, Lufkin Jenrette Sec. Corp., 222 F.3d 52, 62 (2d Cir. 2000) (finding that an individual who had knowledge of the subject matter of the litigation and was willing and able to work with counsel to litigate the action is an adequate class representative). Finally, a similar argument was raised and rejected in In re Dreyfus. There, the defendants contended that the named plaintiffs lacked "incentive to conduct an exhaustive analysis of the Funds' changing composition." In re Dreyfus, 2000 WL 1357509, at *10. At issue there was whether class representatives who invested in one fund could represent a class o people who invested in a second closely related one. While I noted that the class representatives would necessarily prove the claims of those who invested in the second fund if the class representatives proved their own case, I did not hold that typicality was appropriate only if the class representative necessarily proved all other members' claims.
The defendants' reliance on Gordon v. Hunt, 98 F.R.D. 573 (S.D.N.Y. 1983), for the proposition that class certification is inappropriate where the putative class representative lacks complete incentive to litigate on behalf of the entire class is also unavailing. In Gordon, the court limited the class to the three-week period that the proposed lead plaintiff sold silver futures contracts short rather than the eight-month period that defendants allegedly conspired to manipulate the silver market. See Gordon, 98 F.R.D. at 575. The court described the case as "exceptionally complex" given that it involved sixty contracts traded on three exchanges with 10,000 plaintiffs and the possibility that significant world events rather than defendants' alleged manipulation caused the fluctuations in the prices. See id. at 576, 579. Although the court found him inadequate as a class representative for the period after he stopped trading because he lacked the incentive to prove the intricate facts necessary to show a conspiracy, equally if not more important to the court's decision to truncate the class period was manageability. See id. at 575-76.
Based on the foregoing, I conclude that Nicholson meets the typicality and adequacy-of-representation requirements set forth in Rule 23(a) as to the Section 11 claim.
B. Section 12
Defendants contend that class certification should be denied for the Section 12 claim because Nicholson did not suffer a cognizable injury under Section 12, and thus lacks both typicality for Rule 23(a) and Article III standing. Plaintiffs counter that Nicholson has suffered a cognizable injury and that Defendants misread and misapply Section 12's damages formula.
Section 12(a)(2) provides that "a person who offers or sells securities by means of a prospectus or oral communication that misrepresents or omits material facts is liable to the person purchasing such security from him." In re Dreyfus, 2000 WL 1357509, at *7 (citing 15 U.S.C. § 771(a)(2)). Defrauded buyers can recover "subject to subsection (b) . . . the consideration paid for such security with interest thereon, less the amount of any income received thereon, upon the tender of such security, or for damages if he no longer owns the security." Goldkrantz v. Merv Griffin, et al., 1999 U.S. Dist. LEXIS 4445, at *15 (quoting 15 U.S.C. § 771(a)(2)). The statute thus enumerates different remedies depending on whether or not the plaintiff continues to hold the stock in question. See Wigand v. Flo-Tek, Inc., 609 F.2d 1028, 1035 (2d Cir. 1979). However, the Supreme Court has indicated that a rescissory measure of damages will be employed in the situation where the plaintiff no longer owns the security. See Randall v. Loftsgaarden, 478 U.S. 647, 655-56 (1986) ("[T]he plaintiff is entitled to a return of the consideration paid, reduced by the amount realized when he sold the security and by any `income received' on the security."). In 1995, Congress amended the statute to provide a defense of "loss causation" — that is, a plaintiff cannot recover for the depreciation in value that defendant proves was not caused by the material misrepresentation. See Act of Dec. 22, 1995, Pub.L. 10467, Tit. I, § 105(3), 109 Stat. 757 (codified at 15 U.S.C. § 771(b)).
This provision provides:
Loss causation. In an action described in subsection (a)(2), if the person who offered or sold such security proves that any portion or all of the amount recoverable under subsection (a)(2) represents other than the depreciation in value of the subject security resulting from such part of the prospectus or oral communication, with respect to which the liability of that person is asserted, not being true or omitting to state a material fact required to be stated therein or necessary to make the state not misleading, then such portion or amount, as the case may be, shall not be recoverable.
Nicholson invested $415,000 in the Trust on January 26, 2000 and sold on December 21, 2001 at $346,704.06, for a loss of $68,295.94. Nicholson received $56,318.02 in dividends during the nearly two years he held this investment. According to Nicholson, he suffered damages because the Fund lost more in value ($11,977.92) than he earned in dividends over the course of his investment. However, the value of his investment on the date that Defendants "marked to market" all the loans in the Trust — and thus the amount that Defendants contend was attributable to any alleged misrepresentations — was approximately $373,000, for a depreciation in value of $42,000, which is less than the amount he earned in dividends. Stated another way, the consideration Nicholson paid less the amount of dividends he received is approximately $14,000 more than the amount he sold the shares for, once the depreciation in value not attributable to Defendants is included.
Defendants note that Nicholson elsewhere in the litigation has alleged damages of approximately $42,000. The defendants refer to a memo on behalf of Nicholson and Nita Bradshaw which states: "During the Class Period, Nicholson purchased 42,131.98 shares of the Trust for which he paid approximately $415,000. His total losses, as limited by the PSLRA, are approximately $42,249.95."
Ordinarily, the issue of loss causation is a fact question inappropriate for resolution at this stage of the litigation. See Eisen v. Carlisle Jacquelin, 417 U.S. 156, 178 (1974) ("In determining the propriety of a class action, the question is not whether the plaintiff or plaintiffs have stated a cause of action or will prevail on the merits, but rather whether the requirements of Rule 23 are met." (quoting Miller v. Mackey International, 452 F.2d 424 (5th Cir. 1971))); In re Visa Check/MasterMoney Antitrust Litig. v. Visa, USA Inc., 280 F.3d 124, 133 (2d Cir. 2001). However, the Plaintiffs' pleadings here do not raise any fact question about whether any loss after April 26, 2001 was caused by Defendant's alleged misrepresentations. Indeed, the plaintiffs allege that the Trust's NAV was valued accurately from April 26, 2001 onward, which is when all the senior loans in the Trust's portfolio were marked to market. Thus, once the decline in the value of Nicholson's investment after April 26, 2001 is excluded, he has not suffered a cognizable harm under the rescissory damages of Section 12(a).
Defendants suggest that because Nicholson is unable to show a cognizable harm, he lacks standing and typicality and thus the Section 12 class cannot be certified. They cite Simon v. Eastern Ky. Welfare Rights Organization, 426 U.S. 26 (1976), for the proposition that "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.'" Simon, 426 U.S. at 40 n. 20 (quoting Warth v. Seldin, 422 U.S. 490, 502 (1975)). The issue, as I construe it, is whether Nicholson can be appointed to represent a class that includes a claim for which he has not suffered an actual injury (but others in the class have) but where he undeniably suffered an injury and thus has standing with respect to a closely related claim. Because Nicholson is rightly in federal court for his Section 11 claim and because the Section 11 and Section 12 claims arise out of the same conduct and involve the same legal theories, the proper inquiry is typicality rather than standing. This is not the situation where none of the class members have suffered an injury, see O'Shea v. Littleton, 414 U.S. 488, 494 (1974) ("[I]f none of the named plaintiffs purporting to represent a class establishes a requisite case or controversy with the defendant, none may seek relief on behalf of herself or himself or any other member of the class."); nor where Nicholson seeks both damages (for which he has standing) and an injunction but is unable to demonstrate a likelihood of future harm, see Los Angeles v. Lyons, 461 U.S. 95, 105 (1983) (holding that plaintiffs who had standing to sue city for damages lacked standing to sue for an injunction). Rather, it is analogous to the situation where the proposed class representatives have claims against some but not all of the defendants named in the class action. According to Newberg on Class Actions, the issue is properly analyzed under Rule 23(a)(4) rather than Article III. See 1 Alba Conte Herbert B. Newberg, Newberg on Class Actions § 2:9 (4th ed.) (discussing two illustrative cases). This was the approach taken in In re Dreyfus as well. There, the defendants similarly contended that plaintiffs lacked standing to represent a class that purchased a second fund where the only named plaintiff who invested in that fund actually realized a profit. See In re Dreyfus, 2000 WL 1357509, at *5. I noted that "Courts have not addressed this concern vis-à-vis the doctrine of standing, but rather have examined such concerns pursuant to Rule 23(a)(3)'s typicality requirement." Id. at *8.
This treatise also notes:
Care must be taken, when dealing with apparently standing-related concepts in a class action context, to analyze individual standing requirements separately and apart from Rule 23 class prerequisites. Though the concepts appear related, in that they both seek to measure whether the proper party is before the court to tender the issues for litigation, they are in fact independent criteria. . . . 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. . . . On the other hand, when a class plaintiff shows individual standing, the court should pass to Rule 23 criteria to determine whether, and to what extent, the plaintiff may serve in a representative capacity on behalf of the class.Id.
This result is supported by the Supreme Court's recent decision in Gratz v. Bollinger, ___ U.S. ___, 123 S.Ct. 2411 (2003). In Gratz, Chief Justice Rehnquist for the Court held that the class representative who sought damages for past injury and declaratory and injunctive relief against the university's admissions policy could represent class members who applied to the freshman class, as he did, and class members who applied as transfer students, which he did not (although he indicated an intent to do so). See Gratz, 123 S.Ct. at 2423-24. The majority rejected Justice Stevens' argument that there was a difference in the standards for admission as a freshman and as a transfer and that this difference was significant for Article III standing. See id. at 2423. Chief Justice Rehnquist wrote:
Justice Stevens' concern was with the class representative's ability to seek prospective relief on behalf of the transfer applicants, because his injury was "conjectural or hypothetical" and because the transfer policy was not before the Court and record was incomplete on important aspects of the policy. See id. at 2436-37 (Stevens, J., dissenting). It is not clear whether Justice Stevens objected to the class representative's ability to represent the transfer applicants for compensatory damages.
Justice Stevens . . . contends that the University's use of race in undergraduate transfer admissions differs from its use of race in undergraduate freshman admissions, and that therefore Hamacher lacks standing to represent absent class members challenging the latter. As an initial matter, there is a question whether the relevance of this variation, if any, is a matter of Article III standing at all or whether it goes to the propriety of class certification pursuant to Federal Rule of Civil Procedure 23(a). The parties have not briefed the question of standing versus adequacy, however, and we need not resolve the question today: Regardless of whether the requirement is deemed one of adequacy or standing, it is clearly satisfied in this case.Id. at 2423. Although the Court recognized the tension between this result and its prior decisions on standing, see id. at 2434 n. 15, significantly the Court found the class representative had standing to sue on behalf of a class that included both freshman applicants and transfer applicants. See id. at 2426.
I conclude that the typicality concern does not on these facts warrant the denial of certification for the class on the Section 12 claim. The differences between Section 11, which imposes civil liability on the signatories of a registration statement that contains false statements, and Section 12, which imposes liability for offering or selling a security by means of a prospectus or oral communication that contains a false statement and permits rescission, are not significant here. First, plaintiffs do not allege that Defendants made false oral statements. Second, shares in the Trust were not publicly traded, but rather were sold and repurchased by Defendants. Third, the statements that are alleged to be false appeared in both the registration statements and the prospectuses.
III. Conclusion
Nicholson's motion is granted in its entirety: First, a class is certified consisting of all persons who purchased or otherwise acquired shares of Morgan Stanley Dean Witter Prime Income Trust between November 1, 1998 and April 26, 2001, inclusive. Second, Lead Plaintiff Lawrence H. Nicholson is appointed class representative. Third, Goodkind Labaton Rudoff Sucharow LLP and Cauley Geller Bowman Coates Rudman, LLP are appointed class counsel.
Per the pre-trial scheduling order of January 16, 2003, the deadline for discovery is October 1, 2003, no party may make a dispositive motion returnable after December 31, 2003, and the matter, which is estimated to take three weeks to try, is on the Court's April 2004 trailing trial calendar.