Opinion
Master File No. 02 Civ. 3288 (DLC).
March 3, 2005
Max W. Berger, John P. Coffey, Steven B. Singer, Chad Johnson, Beata Gocyk-Farber, John C. Browne, David R. Hassel, Bernstein Litowitz Berger Grossman LLP, New York, New York, Leonard Barrack, Gerald J. Rodos, Jeffrey W. Golan, Mark R. Rosen, Jeffrey A. Barrack, Pearlette V. Toussant, Regina M. Calcaterra, Chad A. Carder, Barrack, Rodos Bacine, Philadelphia, Pennsylvania, For Lead Plaintiff.
Geoffrey S. Harper, Beth Jaynes, Kelly R. Vickers, Autumn J.S. Hwang, Fish Richardson P.C., Citigroup Building, New York, New York, For Defendant Francesco Galesi.
George E. Ridge, Cooper Ridge Lantinberg, P.A., Jacksonville, FL, For Defendant Bert C. Roberts, Jr.
Pamela Rogers Chepiga, Allen Overy LLP, New York, New York, Liaison Counsel for Director Defendants.
Eliot Lauer, Michael Moscato, Jonathan Walsh, Curtis, Mallet-Prevost, Colt Mosle LLP, New York, NY, For Defendant Arthur Andersen LLP.
Jay B. Kasner, Thomas J. Nolan, Jay S. Berke, Susan L. Saltzstein, Jason D. Russell, Cyrus Amir-Mokri, Steven J. Kolleeny, Skadden, Arps, Slate, Meagher Flom LLP, New York, New York, For Underwriter Defendants.
OPINION AND ORDER
This Opinion, which resolves a motion in limine filed in the securities class action stemming from the collapse of WorldCom, Inc. ("WorldCom"), addresses the circumstances in which a jury may render an award of aggregate damages for violations of the Securities Act of 1933 ("Securities Act"). Familiarity with the Opinions addressing other in limine motions in this action is assumed.
See In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288 (DLC), 2005 WL 408137 (S.D.N.Y. Feb. 22, 2005) (barring evidence concerning named plaintiffs); In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288 (DLC), 2005 WL 375315 (S.D.N.Y. Feb. 17, 2005) (addressing the Underwriter Defendants' motion to phase the trial and the motions in limine filed by the Lead Plaintiff); In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288 (DLC), 2005 WL 375314 (S.D.N.Y. Feb. 17, 2005) (addressing motions in limine filed by the Underwriter Defendants); In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288 (DLC), 2005 WL 375313 (S.D.N.Y. Feb. 17, 2005) (addressing motions in limine filed by Arthur Andersen LLP). The parties were permitted to provide supplemental briefing to address the analysis contained in WorldCom, 2005 WL 375313, at *4. This Opinion reflects the pertinent arguments made by the parties in those supplemental submissions.
Andersen and the Underwriter Defendants have moved to preclude Lead Plaintiff's expert from testifying to aggregate class-wide damages sustained by purchasers of WorldCom bonds. Alternatively, in order to attack that expert's aggregate damages calculation, they request access to claims data received from the settlement reached between the Lead Plaintiff and the Citigroup Defendants.See In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288 (DLC), 2004 WL 2591402 (S.D.N.Y. Nov. 12, 2004). For the following reasons, the motion to preclude and the request for access to claims data are denied.
Background
On June 25, 2002, WorldCom announced a massive restatement of its financials. The Lead Plaintiff in this class action sued the underwriters of two massive WorldCom bond offerings, a May 2000 offering and a May 2001 offering (the "Offerings"), contending that the registration statements for the Offerings contained false information and omitted material information. The Lead Plaintiff's expert has calculated damages for the bonds sold through the Offerings as of June 27, 2002. The parties do not dispute that June 27, 2002 is the appropriate "date of suit" for any calculation of damages under Section 11(e)(1) of the Securities Act.
Section 11(e) provides that Section 11 plaintiffs can recover:
such damages as shall represent the difference between the amount paid for the security . . . and (1) the value thereof as of the time such suit was brought, or (2) the price at which such security shall have been disposed of in the market before suit, or (3) the price at which such security shall have been disposed of after suit but before judgment if such damages shall be less than the damages representing the difference between the amount paid for the security (not exceeding the price at which the security was offered to the public) and the value thereof as of the time such suit was brought. . . .15 U.S.C. § 77k(e).
Under the first prong of Section 11(e), damages are calculated as of the date of suit, in this case, June 27, 2002. At that time, WorldCom bonds were trading at approximately 15% of par, or $150 for a $1000 face value bond. The Lead Plaintiff's aggregate damage calculation using this date is approximately $13 billion.
As explained recently, when a bond is disposed of following suit, and when the price of a bond at the time of sale is greater than it was at the time of suit, in calculating damages a plaintiff must use the higher figure and is thus entitled to a lesser amount of damages. WorldCom, 2005 WL 375313, at *3. Approximately four months after the date of suit, or on October 22, 2002, the bonds began to trade generally at prices greater than they did on June 27. Over the course of the next eighteen months, the bond prices generally continued to increase. Those who disposed of their 2000 and 2001 Offering bonds through the WorldCom bankruptcy proceeding in 2004 received consideration valued at 35.7% of par.
The Underwriter Defendants calculate that if all of the bonds purchased through the Offerings by class members were disposed of through the bankruptcy proceeding, then the damage calculations would be approximately $3 billion less than presently calculated by the Lead Plaintiff based on the June 27, 2002 date.
Actual trading data for the bonds is not publicly available. The Underwriter Defendants represent that "presently there is no way to determine with a reasonable degree of certainty the average disposition price for the bonds." As Andersen explains, the daily volume of trading in an individual bond is not publicly reported. Thus, while stock trading models can use trading volume information to estimate the portion of class members who sold their shares on particular days, comparable models based on public information cannot be used to estimate bond sales. The defendants have submitted some evidence, however, that substantial sales of WorldCom bonds took place in the immediate aftermath of the June 25 disclosure. A June 27, 2002 letter to investors from a financial management company reflects that WorldCom debt was migrating at that time from high grade/high yield holders to investors in distressed debt instruments and that trading prices were depressed by that transition.
The Underwriter Defendants who are proceeding to trial are seventeen investment banks. Citigroup, Inc. ("Citigroup") and its affiliate Salomon Smith Barney, ("Salomon") have already settled the Lead Plaintiff's claims against them. See WorldCom, 2004 WL 2591402. The Underwriter Defendants, together with Citigroup and Salomon, were the principal market-makers for the bonds. Indeed, as far as the bonds purchased through the 2000 Offering are concerned, just four of these banks had over 50% of the trading data for sales as of June 25, 2002. The defendants, therefore, have direct access to extensive information about the trading history of the WorldCom bonds.
The Lead Plaintiff also has access to information about the bond sales by members of the class. In 2004, the Citigroup Defendants paid $2.575 billion to settle claims brought under both the Securities Act and the Securities Exchange Act of 1934 ("Exchange Act") by the Lead Plaintiff. Most members of the class have until March 4, 2005 to submit their claim forms to receive a share in that recovery. As of February 25, approximately 300,000 claim forms had been filed with the claims administrator. Claims administrators do not typically begin to process claims until a detailed plan of allocation has been developed and approved by the Court, because it will significantly increase the costs of administration to do so. No detailed plan of allocation has been developed as of this time, and the processing of the claims forms has not yet begun. If there is a judgment in the Lead Plaintiff's favor, the Lead Plaintiff will seek to send another notice to the class, to attempt through other means to identify members of the class who have not yet submitted claims, and to allow further claims to be submitted.
That date is being extended for certain members of the class.
Discussion
The Lead Plaintiff will be permitted to present an aggregate damages figure to the jury for the losses suffered by bondholders. An Opinion of February 17 rejected the argument by the Underwriter Defendants that an aggregate damages figure should not be presented, see WorldCom, 2005 WL 375314, at *7, and nothing in the present submissions requires a change in that ruling. It has long been established that absent class members in securities cases "have been awarded a common fund of damages computed by the trier of the fact, based usually on expert testimony." In re Oxford Health Plans, Inc. Sec. Litig., 244 F. Supp. 2d 247, 251 (S.D.N.Y. 2003) (collecting cases). The trial of Securities Act claims, with their special formulae for calculating damages embodied in Section 11(e), alongside Exchange Act claims should not change that practice.
At the class action trial, the jury will be asked to determine, among other things, whether there were material misrepresentations and omissions in the registration statements for the Offerings, whether the defendants have shown that any decline in the price of WorldCom bonds was due to factors other than the misstatements and omissions ("negative causation"), and the amount of damages suffered by the class from the alleged wrongdoing. To assist them in making these determinations, the parties will be educating the jury principally about the events that occurred between 1999 and June 25, 2002. No party is advocating that the events following June 25, 2002, and the effect of those events on the market price for WorldCom bonds, should be presented to the jury in order for it to determine the materiality of the alleged misstatements and omissions, whether negative causation has been established, or to compute the damages that flow from a finding of liability. From this perspective, it is undisputed that June 27 is the appropriate date to use in fixing liability for damages and for calculating the damages.
A date near June 25, 2002 will also be the appropriate trigger date for the calculation of the Exchange Act damages, although part of that calculation will include the application of the ninety-day look back provision. See 15 U.S.C. § 78u-4;Oxford Health, 244 F. Supp. 2d at 249.
The issue of whether there is a cap on an individual class member's right to recover is a separate matter. Section 11(e) provides the three exclusive formulae that will govern the computation of a recovery by an individual class member. If the individual class member sold her WorldCom bonds after June 27, 2002, and sold them at a higher price than the price in effect on June 27, then her recovery will be limited by Section 11(e) (3). This part of the process, which is subject to a simple arithmetic calculation, will be addressed in the bifurcated proceedings or claims process that will follow the plenary trial.
The Underwriter Defendants themselves suggested that individualized issues for class members, including damages, follow a plenary trial. See WorldCom, 2005 WL 375315, at *1.
The Underwriter Defendants speculate that an aggregate damages award might overcompensate a class member since the common fund created by the judgment could be allocated proportionately among all claims submitted. They are wrong. As already explained in prior Opinions, the formulae in Section 11(e) will govern the right of any bondholder to recover for her Section 11 losses.See WorldCom, 2005 WL 375313, at *3. No bondholder will receive more for her Section 11 claim than she is entitled to recover under Section 11(e).
To the extent that the fund established through any jury award is greater than the claims process shows should be distributed to class members, then that money will not be distributed to class members and the defendants may be entitled to recover undistributed funds. See In re Blech Sec. Litig., No. 94 Civ. 7696 (RWS), 2003 WL 1610775, at *26 (S.D.N.Y. Mar. 26, 2003). InThe Boeing Co. v. Van Gemert, 444 U.S. 472 (1980), the Court approved an award of attorney's fees from the entirety of a common fund created by a judgment entered in a securities class action even though, as of the time of its decision, only about 47% of the class had submitted claims. Id. at 476 n. 4, 478. The Court observed that such an award was entirely consistent with the common-fund doctrine, id. at 481, and that "[a]ny right that Boeing may establish to the return of money eventually unclaimed is contingent on the failure of absentee class members to exercise their present rights of possession," id. at 482. A similar process may be employed here.
The benefits of an aggregate damages award are many. If the defendants are found liable by a jury, then it is appropriate that the jury make all of the determinations that can appropriately be made at the plenary trial to fix the amount that the class was damaged by their wrongdoing. Entry of an award will also permit entry of a final judgment so that there can be prompt appellate review, and will create a common fund to pay the litigation expenses of the class representatives and the administration costs associated with the claims process. See Oxford Health, 244 F. Supp. 2d at 251.
The authorities on which the Underwriter Defendants rely do not compel a different result. In Allapattah Services, Inc. v. Exxon Corp., 333 F.3d 1248 (11th Cir. 2003), cert. granted in part, Exxon Corp. v. Allapattah Servs., Inc., 125 S. Ct. 317 (2004), the Eleventh Circuit declined to find that the district court erred in refusing to enter an aggregate judgment. Id. at 1257. In Exxon, approximately 10,000 Exxon dealers obtained a verdict that Exxon Corporation had breached its dealer agreements by overcharging them for fuel purchases and had fraudulently concealed that fact. The district court entered a final judgment for the class representatives but denied the dealers' post-trial motion for entry of a class-wide judgment, "concluding that it had no authority to enter an aggregate judgment because the jury had not awarded aggregate damages." Id. at 1252. The district court then certified several questions for interlocutory appeal, including whether an aggregate compensatory and prejudgment interest award could be entered for the class before the claims administration process. Assuming for purposes of its discussion that the district court had the power to enter an aggregate judgment when the jury had not awarded such damages, id. at 1256-57, the Eleventh Circuit concluded that this was not the ideal case in which to do so because of several significant obstacles to the entry of an aggregate damages award. Id. at 1257. The court listed those obstacles as including the existence of dealers who either had opted out or not submitted claims, accounting for dealers whose claims were time-barred, the different rates for prejudgment interest in each of the states from which the dealers haled, and the remaining need to litigate the set-off claims asserted by Exxon. Id. at 1257.
Exxon provides little guidance for a securities class action lawsuit, given the multiple problems that are uniquely associated with the litigation of a nation-wide class action asserting common law and breach of contract claims. In particular, its reference to the existence of opt-outs and the failure of class members to submit claims should not be given too much weight since these were only two of several obstacles identified by the court to an aggregate damage award. For the reasons described above, it is premature to determine how many of those entitled to an award will ultimately fail to submit claims. In any event, "[w]hether or not class members ultimately submit a claim form, as long as they have not opted out, they remain members of the class and are bound by the judgment." Blech, 2003 WL 1610775, at *26. It is unnecessary, therefore, to reduce a damages award by the number of those who may not file claims, id., and the existence of the claims process should not prevent a calculation and award of aggregate damages, id. While the number of opt outs can be determined at this time with more certainty, the existence of opt outs does not by itself prevent an award of aggregate damages for the class.
In Kaufman v. Motorola, Inc., No. 95 C 1069, 2000 WL 1506892 (N.D. Ill. Sept. 21, 2000), the court rejected the expert's proportional trading model under the principles enunciated inDaubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993). With the rejection, an award of aggregate damages became impossible, and the court observed that an adequate remedy could be fashioned by having the jury determine a per share damage loss. This hurdle to proof of aggregate damages does not exist here.
Finally, in Jaroslawicz v. Engelhard Corp., 724 F. Supp. 294 (D.N.J. 1989), a securities class action brought under federal and state law, the court ruled before trial that damages would be determined at the plenary trial "solely on a per share basis" and that the jury would not award a lump sum amount. Id. at 302. It reasoned that the need to give the defendants an opportunity to rebut the presumption of reliance as to each class member and to address plaintiff-specific issues of direct reliance under New Jersey law prevented an aggregate damages award. Id. n. 11. The Jaroslawicz court warned, however, that all class-wide issues of reliance would be litigated at the plenary trial. Id. at 302.
Because the Lead Plaintiff has not brought state law claims, and because the likelihood of any effective rebuttal to the presumption of reliance is, in this case, speculative and remote, the concerns in Jaroslawicz do not apply here. Indeed, theJaroslawicz court acknowledged that there was no hard-and-fast rule regarding an award of aggregate damages, that the determination of whether an aggregate award was appropriate should be governed by considerations of economy and fairness, and that the equitable considerations on this issue favored the plaintiffs. Id. at 299.
Turning to the remaining issue, there is no need for the claims administrator to process the claims that are being made as a result of the Citigroup Defendants' settlement with the Lead Plaintiff, or for those claims forms to be produced to the Underwriter Defendants. The Underwriter Defendants have in their own possession sufficient data to discern any pattern of purchases and sales, to the extent that they believe that it is relevant or helpful to them.
The fact that there was a partial settlement in this action prior to trial and that the (first) period for submitting claims is nearing conclusion on the eve of trial are fortuitous events that should not affect the evidence to be presented at trial, or the merits of the legal arguments made at trial. Again, as described above, the claims submitted as of March 4 may not reflect the universe of claims made in this class action. In any event, injecting the claims process into the trial will create a myriad of problems. For example, the Underwriter Defendants and Andersen moved to preclude any mention of the Citigroup settlement at trial. WorldCom, 2005 WL 375314, at *1. Finally, the Underwriter Defendants have in their own possession a more complete set of data from which to determine the timing of sales by those who purchased bonds through the Offerings.
Conclusion
The motion in limine by the Underwriter Defendants and Andersen to preclude the Lead Plaintiff's expert from opining on the amount of an aggregate damages award is denied. The request by the Underwriter Defendants and Andersen for access to the claims data in order to present data on sales by class members following June 27, 2002 in connection with the calculation of Section 11 damages is denied.
SO ORDERED.