Opinion
02 Civ. 3288 (DLC).
July 5, 2007
For Petitioner UBS Financial Services, Inc.: Jay Shapiro, Christian T. Kemnitz, Katten Muchin Rosenman LLP, Chicago, IL.
For Respondents Howard Gimbel and Marvin Davis: Harold C. Hirshman, Sonnenschein Nath Rosenthal LLP, Chicago, IL.
OPINION and ORDER
Howard Gimbel ("Gimbel") and Marvin Davis ("Davis"), and trusts and profit sharing plans which they control, have commenced an arbitration before the Chicago Board Options Exchange to recover losses in WorldCom, Inc. ("WorldCom") common stock and options from UBS Financial Services Inc. ("UBSFS"). Both are class members in the WorldCom securities class action, which was settled in tranches in 2004 and 2005. Neither opted out of the class nor objected to the terms of the settlements or the scope of the Injunction and bar order entered in 2005, and indeed Davis submitted a claim to recover from the WorldCom settlement fund. UBSFS moved to bar the arbitration of the Gimbel and Davis claims to the extent that they rest on transactions in WorldCom securities. Its motion was granted on June 22, 2007 at a conference with the parties. This Opinion provides the reasons for the issuance of that injunction.
BACKGROUND
The WorldCom Securities Litigation ("Securities Litigation") has been described in many previous Opinions issued by this Court, and the Court assumes familiarity with those Opinions. Only those facts essential to the resolution of the issues presented by this motion are described here. The terms used in this Opinion are as defined in the Securities Litigation.
See, e.g., In re WorldCom, Inc. Sec. Litig., 02 Civ. 3288 (DLC), 2004 WL 2591402 (S.D.N.Y. Nov. 12, 2004) (approval of consolidated class action settlement with Citigroup Defendants);In re WorldCom, Inc. Sec. Litig., 346 F. Supp. 2d 628 (S.D.N.Y. 2004) (addressing Underwriter Defendants' motion for summary judgment); In re WorldCom, Inc. Sec. Litig., 294 F. Supp. 2d 392 (S.D.N.Y. 2003) (deciding a number of defendants' motions to dismiss class action, including the motion of Citigroup, Inc., Salomon Smith Barney and Jack Grubman).
Beginning in January 2002, there were a series of public announcements that provided notice that WorldCom's financial statements and reporting may not have been entirely accurate. In April 2002, counsel for Gimbel and Davis notified UBSFS that they were "pursuing a claim they had against PaineWebber relating to the management of their accounts" through the year 2000. Counsel negotiated a tolling and standstill agreement with "UBS PaineWebber" dated October 24, 2002. The agreement, which ran for 90 days, stated that during the period of forbearance covered by the agreement "all Time-Related Defenses will be tolled." A Time-Related Defense was defined as "all defenses, whether by statute, common law, or equity, based or partially based on the passage of time and includes all statute of limitations and statutes of repose as well as all time-related equitable defenses, such as laches."
In April 2002, the first class action lawsuits alleging securities fraud claims concerning WorldCom were filed in this district. On June 25, 2002, WorldCom announced a massive restatement of its financials. Litigation concerning WorldCom intensified, and the class actions filed in this district were consolidated. The consolidated securities class action complaint defined the WorldCom class to include "all persons and entities who purchased or otherwise acquired publicly traded securities of WorldCom, Inc. during the period beginning April 29, 1999 through and including June 25, 2002, and who were injured thereby." Gimbel and Davis are both members of the class.
A. December 2003 Notice of Opt Out Date
Class members, including Gimbel and Davis, were provided with a December 11, 2003 notice of the class action in early 2004. The notice set an opt out date of February 20, 2004. Neither Gimbel nor Davis opted out by that date. The opt out period was later extended to September 1, 2004, and neither Gimbel nor Davis opted out by that date either.
The December 2003 notice began with the following prominent statement: "IF YOU DO NOT REQUEST TO BE EXCLUDED FROM THE CLASS BY FEBRUARY 20, 2004 AS DESCRIBED BELOW, YOU WILL BE BOUND BY THE DECISIONS AND OUTCOME OF THIS LAWSUIT." (In capital letters and bolded in original.) It advised class members that
In the event any settlement is reached or a Judgment is obtained against any defendant, only persons who do not exclude themselves from the Class at this time will be eligible to participate in a distribution of the settlement of Judgment proceeds. If you exclude yourself from the Class, you will not be eligible to participate in any settlement reached on behalf of the Class. . . .
It warned that class members could not elect to remain in the class for purposes of asserting claims and also elect to be excluded to pursue claims "in an individual capacity." It advised class members that if they remained in the class, "you will be bound" by any judgment entered in the case and "will not be allowed to sue for your individual claims." The December 2003 notice also made clear that if a class member wanted "to attempt to pursue a claim on your own outside of the Class Action, and that claim arises from the facts alleged in the Complaint or the Amended Complaint, then you must complete and submit a written request for exclusion from the Class . . ." (emphasis in original). Plaintiffs who had already filed individual actions were specifically advised in the notice that they would have to "file a request for exclusion from the Class . . . [or] be precluded from pursuing" their individual actions.
B. Citigroup Defendants' Settlement
In May 2004, the Citigroup Defendants settled with the class for $2.65 billion, and an August 2, 2004 notice of the settlement and fairness hearing to address the settlement was sent to class members. The August notice also advised class members of the September 1 opt out deadline and a plan of allocation for the Citigroup Defendants' settlement fund. It enclosed a claim form, which it advised class members had to be submitted by March 4, 2005.
On February 23, 2005, Davis submitted three proof of claim and release forms to the Claims Administrator in the Securities Litigation. The forms reflected purchases of WorldCom stock between September 19, 1997 and January 14, 2001, and sales of shares from February 2001 to December 2002.
C. Underwriters' Settlement
In early 2005, the underwriters in two WorldCom bond offerings entered an historic settlement with the class for over $3.5 billion. UBS Warburg LLC was one of those underwriters. A third notice dated July 1, 2005 was sent to the class that summer providing details of the settlement terms with the underwriters and other remaining defendants. It notified class members of a September 9, 2005 fairness hearing ("Fairness Hearing") and how they could object to the settlement. This notice provided release language, which read
UBS Warburg LLC changed its name to UBS Securities LLC on June 9, 2003.
[A]ll claims and causes of actions of every nature and description, known and unknown, whether under federal, state, common or foreign law, whether brought directly or derivatively, based upon, arising out of, or relating in any way to investments (including, but not limited to, purchases, sales, exercises, and decisions to hold) in securities issued by WorldCom, including without limitation all claims arising out of or relating to any disclosures, public filings, registration statements or other statements by WorldCom, as well as all claims asserted by or that could have been asserted by Plaintiffs or any member of the Class in the Action against the Settling Defendant Releasees.
The "Releasees" were defined to include affiliates of UBS Warburg LLC. Specifically, they were defined to include UBS Warburg LLC and its "parents, subsidiaries, divisions and affiliates, the present and former employees, officers and directors of each of them. . . ."
UBS Warburg LLC was a wholly owned subsidiary of UBS AG and UBS Americas Inc., which was also a wholly owned subsidiary of UBS AG. UBSFS is a wholly owned subsidiary of UBS Americas Inc., which again, is a wholly-owned subsidiary of UBS AG. On November 3, 2000, UBS Americas Inc. acquired PaineWebber Group, and PaineWebber, Inc. later changed its name to UBSFS.
The settlement with the underwriters and others was approved in September 2005, and judgment was entered in favor of the class. The September 21, 2005 Judgment ("Judgment") releases UBS Warburg LLC and its
present and former parents, subsidiaries, divisions and affiliates, [its] present and former employees, officers and directors . . ., [its] predecessors, heirs, successors and assigns . . ., and any person or entity in which [it] has or had a controlling interest or which is or was related to or affiliated with [it].
The released underwriter claims are defined as
all claims of every nature and description, known and unknown, asserted by or that could have been asserted by Plaintiffs in the Complaint, including, but not limited to, all claims arising out of or relating to investments (including, but not limited to, purchases, sales, exercises, and decisions to hold) in securities issued by WorldCom, as well as options or derivatives based on the value of securities issued by WorldCom, or arising out of or relating to any disclosures, registration statements or other statements by WorldCom, including without limitation claims asserted by or that could have been asserted by Plaintiffs in the Complaint based on or related to the Securities Act of 1933, the Securities Exchange Act of 1934, or any federal, state or foreign statute or common law, or in equity, including without limitation any claims based on allegedly intentional, reckless, or negligent conduct, whether arising under state, federal or foreign statute or common law, or in equity, as claims . . . in this Court, in any federal or state court, or in any other court, arbitration proceeding, [etc.]. . . ."
D. Gimbel and Davis Claim
On May 11, 2006, Gimbel and Davis ("Claimants") notified UBSFS that they were terminating the tolling agreement. On June 22, their attorney made a claim for violation of the NASD conduct rules and Illinois securities law against UBSFS, formerly known as UBS PaineWebber, Inc., and Charles Nicky Bank ("Bank"), based on trading in accounts at UBS PaineWebber's Northbrook, Illinois office. The Statement of Claim ("Claim") reports that UBSFS is a division of UBS AG. It explains that UBS PaineWebber, Inc. was formed in November 2000 when UBS AG merged with PaineWebber, Inc.
The Claimants' broker at PaineWebber from mid-1996 to January 2004, with one brief interruption, was Howard Jacobson, Davis's son-in-law ("Jacobson"). Jacobson had served as their broker since 1984. Bank was Jacobson's supervisor at PaineWebber.
The Claim asserts that Jacobson made inappropriate and unsuitable recommendations which damaged the Claimants in an amount exceeding $60 million. It emphasizes the recommendation that they sell naked put options, and Jacobson's failure to advise Gimbel and Davis that they should diversify their holdings or at least hedge their significant concentrations in technology stocks if they could not sell due to potential tax ramifications. It asserts that they were "ideal candidates" for hedging strategies since they had large concentrated positions in WorldCom and another security, Qualcomm, both of which positions had a low cost basis and had appreciated dramatically in value.
It also complains that PaineWebber's computer system miscalculated equity margin requirements, including those for stocks such as WorldCom. While PaineWebber fixed the problem, it never informed Gimbel or Davis that they had been extended more credit for margin trading than regulatory rules allowed.
Through its amended answer of September 1, 2006, UBSFS raised as an affirmative defense the Claimants' failure to opt out of the class action. The answer explains that the naked puts that the Claimants sold were puts on WorldCom stock. It also explains that Gimbel and Davis held a substantial stake in Chicago Fiber Optic, which was acquired by MFS Communications in 1990, which was in turn acquired by WorldCom in late 1996, largely in exchange for WorldCom stock. The WorldCom stock amounted to as much as 40% and 80% of the value of Davis's and Gimbel's accounts, respectively, and was used as collateral to buy other telecom company shares on margin.
A sale of puts is generally an expression of confidence in the issuer, reflecting an expectation that the price of the issuer's stock will rise, or at least not fall.
According to the UBSFS answer in the arbitration, Gimbel was once a director of MFS Communications.
On May 11, 2007, UBSFS requested that this Court enjoin the arbitration, which is scheduled to begin in August, to the extent it is barred by the Judgment. An Order of May 17 set a briefing schedule and a hearing date of June 22. The Claimants submitted an opposition on June 1, and a sur-reply on June 19. On June 21, UBSFS provided the Form 8-K filed by UBS Americas Inc. on November 3, 2000 to address the corporate affiliation of UBS Warburg LLC and UBSFS, f/k/a PaineWebber. After hearing oral argument at the June 22 hearing, the Court issued an oral injunction against the arbitration of claims based on WorldCom securities. It provided the parties with a further opportunity, however, to present evidence solely with respect to the corporate affiliation of UBS Warburg LLC and UBSFS.
The sur-reply was not authorized. Among other things, it chided UBSFS for not producing "evidence" that UBS Warburg LLC and UBSFS are affiliates. It also argued for the first time that the Claimants suffered from significant health problems during at lease "some part" of the time when class notices were sent out.
The document explained that UBS and PaineWebber completed their merger on November 3, 2000, and that it was their expectation that "PaineWebber will be an integral part of the UBS Warburg business group."
In a June 28, 2007 submission, the Claimants insert several additional attacks on the breadth of the Injunction. These new issues are beyond the scope of the supplemental post-hearing submissions which the Court allowed the parties to make. As a consequence, they will not be considered.
DISCUSSION
Gimbel and Davis have presented a range of arguments to avoid the Injunction's bar and the ramifications of their decision not to opt out of the WorldCom securities class action. None of the arguments is successful.
A. Class Members
Gimbel and Davis appear to claim that they are not members of the WorldCom class since they are not asserting any claims as to the May 2000 WorldCom bond offering, the offering in which UBS Warburg LLC participated as an underwriter. They contend that, as a result, they would not have been eligible to receive any of the proceeds from that settlement. Specifically, Davis declares that he "did not purchase any WorldCom bonds, including in the May, 2000 bond offering." Gimbel similarly asserts that he "did not purchase any WorldCom bonds, including in the May, 2000 bond offering." Gimbel's assertion turned out to be misleading if not intentionally false. Gimbel in fact purchased on May 9, 2002, 100,000 WorldCom notes issued in the May 2000 offering.
Gimbel tries to avoid the clear implications of his statement by pointing out that notes are not bonds, and that he purchased notes in that offering. This does not address his attorney's representation in this motion practice that Gimbel did not purchase WorldCom debt, or the clear implications of his affirmation that he had not made any purchase of any securities issued in the WorldCom May 2000 offering.
This purchase was at a time that the notes were rated BB/BA2, and after WorldCom securities had substantially declined in value due to an industry decline and adverse disclosures concerning WorldCom itself. The notes were purchased through Gimbel's account at Mesirow Financial, not UBSFS, and were not disclosed by the Claimant to UBSFS or to this Court.
Whether or not Gimbel or Davis purchased notes in the underwriting in which UBS Warburg LLC served as one of several underwriters, both claimants are class members and are covered by the release of claims entered through the Judgment. Gimbel and Davis do not dispute that they purchased or otherwise acquired WorldCom securities during the class period. Davis even filed a claim to obtain a portion of the class action settlement. As class members, the Claimants are barred from asserting claims against any of the released parties, including UBSFS, to the extent that those claims are covered by the Judgment bar.
B. Adequacy of Notice
Gimbel and Davis assert that the December 2003 class notice mentioned only UBS Warburg LLC, and did not put them on notice that their failure to exclude themselves from the class action would compromise their arbitration claims against PaineWebber. They also assert that the August 2004 notice did nothing to rectify the problem. They assert that only the July 2005 notice, which was sent after the close of the opt out period, alerted them that the settlement with UBS Warburg LLC would benefit its affiliates. Even then, Gimbel and Davis assert that they would not have had reason to believe that the Securities Litigation and the settlement with the defendants had anything to do with their arbitration claims since "they had not purchased any debt securities."
This argument may be swiftly rejected. From at least June 1, 2001, each of the monthly statements sent to both claimants read "UBS PaineWebber Investment Account." As their Notice of Claim reflects, they knew that UBS merged with PaineWebber in November 2000. Their 2002 tolling agreement was executed with UBS PaineWebber.
The Judgment releases all affiliates of UBS Warburg LLC, and it is clear that UBSFS, the successor to PaineWebber, is such an affiliate. To the extent that either Claimant had objections to the scope of the release, they were required to make those objections at the Fall 2005 Fairness Hearing. And, of course, as already explained, Gimbel did in fact purchase WorldCom "debt securities" and Davis chose to take advantage of the class action settlements by submitting claim forms. Finally, there is no legal requirement that a notice of the pendency of a class action include a description of a release that may someday be negotiated to resolve claims brought in the class action. The Second Circuit has explicitly rejected the contention that class members must be given a second opportunity to opt out after the terms of a settlement are announced. Wal-Mart Stores, Inc. v. Visa U.S.A., Inc., 396 F.3d 96, 114 (2d Cir. 2005).
C. Receipt of Class Notices
Gimbel and Davis do not deny that they received each of the class notices, but contend that UBSFS has failed to establish which class notices were sent to them. This contention is frivolous. UBSFS has shown that both men received all notices sent to the class.
D. Identical Factual Predicate
Gimbel and Davis assert that their Claim does not overlap with those issues addressed in the class action since it contains no allegations that WorldCom stock was overpriced. They point to the release language in the Judgment, arguing that none of the claims they bring in the arbitration "were asserted or could have been asserted" in the class action. In a related argument, they contend that the named plaintiffs in the class action could not have asserted claims against UBSFS or PaineWebber relating to its brokerage operations since none of the named plaintiffs held a brokerage account with PaineWebber.
As the Second Circuit noted in Wal-Mart, 396 F.3d 96, "[p]ractically speaking, class action settlements simply will not occur if the parties cannot set definitive limits on defendants' liability." Id. at 106 (citation omitted). The scope of a settlement release, however, is limited by the "identical factual predicate" and "adequacy of representation" doctrines. Id. "The law is well established in this Circuit and others that class action releases may include claims not presented and even those which could not have been presented as long as the released conduct arises out of the `identical factual predicate' as the settled conduct." Id. at 107 (citation omitted).
Insofar as Gimbel and Davis are seeking to recover for losses sustained through their investments in WorldCom securities, their claims are rooted in the same factual predicate upon which the class action was based. For example, to the extent that they are complaining of a strategy of selling WorldCom puts, they protest a strategy that allows the seller to make money from the sale of puts on the assumption that the puts will not be exercised. Puts are purchased to cover the risk of a fall in securities prices. Therefore, a sale of WorldCom puts generally reflects a belief that the prices of the underlying securities will rise or remain stable. This belief would be based on the same publicly disclosed information about WorldCom on which the class action proceeded.
Similarly, to the extent that Gimbel and Davis complain that they were not told either to sell or hedge against their WorldCom holdings, presumably by purchasing puts on WorldCom stock, among other strategies, this complaint is just another expression of their belief that they should have been warned that the publicly disclosed information about WorldCom was unreliable and that their WorldCom holdings were a riskier investment than they understood at the time. The class action proceeded on the theory that WorldCom, its officers, directors, auditor and underwriters misled the market and failed to disclose information which would have profoundly altered the perception of WorldCom as a suitable investment. Properly understood, the claims that Gimbel and Davis bring are claims based on recommendations to invest in WorldCom securities, and they seek losses arising from those investment decisions.
There is of course no requirement that the class action complaint have pleaded the very claims that Gimbel and Davis assert in their demand for arbitration. Id. Thus, the fact that the Claimants have formulated their Claim for losses resulting from their WorldCom investment strategies as suitability claims does not prevent the Injunction from barring the Claim. See Rich v. Salomon Smith Barney, Inc., No. 02 Civ. 3288 (DLC), 2006 WL 709101 (S.D.N.Y. Mar. 21, 2006).
For essentially the same reasons, the Claimants' contention that claims may only be released against a broker when a named plaintiff in a class action has a brokerage relationship with the broker is wrong. None of the named plaintiffs were alleged to have brokerage accounts with Citigroup, or with each of the Underwriter Defendants. Nonetheless, it was entirely appropriate to bar each of them and each class member from asserting further claims against these defendants arising from investments in WorldCom securities in return for the contributions which these defendants made to settle the class action. If the Claimants' reasoning were accepted, all brokerage customers of each of the seventeen Underwriter Defendants could sue those banks for their stock losses. The defendants collectively paid an enormous sum for peace. They obtained protection from suits brought not just from bondholders, but from all holders of WorldCom securities, whether or not an investor had a brokerage account with them or was able to show direct reliance on any statement or omission by them.
Nothing in the class notices or the Judgment and its release provides any basis for Claimants to assert, as they do here, that the investment banks who served as underwriters on the bond offerings were only protected by the Judgment bar from suits by bondholders. Of course, as counsel for Gimbel volunteered at the June 22 conference, Gimbel's claim must certainly fail since he did indeed hold WorldCom debt (although he had denied that fact in his affirmation and motion papers and it was only uncovered through an independent investigation by UBSFS). Similarly, Davis knew that he was entitled to participate in the fund created for the WorldCom class members; he put in claims and received a distribution from the class action settlement fund. Finally, to the extent that class members had objections to the scope of the bar order, they were given an opportunity to be heard during the Fairness Hearing. Gimbel and Davis, who were ably represented by counsel, did not object.
E. Adequacy of Representation
Gimbel and Davis also assert that they were not adequately represented by the named plaintiffs in the class action. Adequate representation for a claim "is determined by the alignment of interests of class members, not proof of vigorous pursuit of that claim." Wal-Mart, 396 F.3d at 113. This argument also fails. The interests of named plaintiffs and class members were aligned insofar as the interest was recovery from losses from investments in WorldCom securities.
Gimbel and Davis essentially contend that it is unfair to enforce the Judgment bar against them because the named plaintiffs did not get enough money from UBS Warburg LLC. The named plaintiffs accepted a contribution to the Underwriter Defendants' settlement of just $12.5 million from UBS Warburg LLC, which Gimbel and Davis assert is inadequate to compensate them for "losses relating to options on WorldCom stock" of tens of millions of dollars. This argument apparently concerns their strategy of selling WorldCom puts.
It is noteworthy that neither Gimbel nor Davis made any objection to either of the massive settlements in the class action. To the extent that any class member had any objection to the amount UBS Warburg LLC contributed to the settlement, they had an opportunity to be heard at the Fairness Hearing.
In any event, the Claimants have not provided any legal authority to judge the adequacy of the representation provided by the named plaintiffs to the class based on the amount paid by a single Underwriter Defendant or any one defendant. No class member is restricted in receiving compensation from the class action settlements by the amount its brokerage firm contributed or did not contribute to the settlement. Class members can recover even if they held brokerage accounts at firms who were not named as defendants in the WorldCom class action and who contributed not one penny to the settlement.
The Claimants are essentially arguing that they should not be bound by the Judgment since the named plaintiffs did not recover monies from the Underwriter Defendants to compensate investors who lost money in trading WorldCom stock and options and did not bring claims based on the suitability of investment advice given by Underwriter Defendants to their own brokerage customers. This argument draws too fine a line. If the Claimants wished to bring their own separate claims against their broker for losses in their WorldCom trading, they could have opted out of the class action. If the Claimants wish today to bring a claim against their broker for unsuitable investment advice concerning investments other than WorldCom, they may do so. What they may not do is remain in the class action and try to pursue their own separate litigation over investment losses in the same securities. And of course, Davis has literally tried to have it both ways, putting in claims for recovery from the class action settlements and also filing his arbitration Claim.
F. Excusable Neglect
Gimbel and Davis ask that they be permitted to opt out of the class action in the event that their other arguments are rejected. Davis offers to return the distribution he has already received from the class action settlement. They frame this argument as one based on the doctrine of excusable neglect. The law of excusable neglect was described in In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288 (DLC), 2005 WL 1048073, at *6 (S.D.N.Y. May 5, 2005), and that discussion is incorporated by reference here.
Gimbel and Davis first assert that UBSFS cannot bar their arbitration claim since they entered into a tolling agreement with UBSFS in 2002, an agreement that was extended on several occasions. This contention can be swiftly rejected. The tolling agreement cannot be fairly read to constitute a waiver of the bar imposed through the Judgment.
Davis next asserts that his current UBS broker helped him "fill out the claim forms" that Davis submitted to participate in the class action settlement. In fact, what happened is quite different. The broker's assistant provided Davis with copies of his account statements. It was a Morgan Stanley employee who assisted Davis in completing the claim form. Nothing from this sequence constitutes a forfeiture of UBSFS's right to enjoin the arbitration.
In a sur-reply, the Claimants make an undeveloped argument based on Davis' deposition testimony that they are entitled to equitable tolling of the opt out period due to ill health. It appears that Davis was hospitalized from November 2004 through January 2005, and had medical treatments for months afterwards, and that at some unspecified time Gimbel had "a couple of strokes." This argument is untimely and in any event does not excuse a failure to opt out during the extensive period permitted before September 1, 2004, or the failure to ask at any time before June 2007 for an extension of the opt out period. Indeed, Davis described his health problems in the context of explaining why it took him so long to file his claims for a portion of the class action settlement. Nothing in his testimony reflects that at that time, in early 2005, he realized that he preferred to opt out rather than participate in the settlement recovery.
CONCLUSION
UBSFS shall submit a proposed injunction upon notice to the Claimants no later than July 13, 2007.
SO ORDERED: