MEMORANDUM OPINION AND ORDER
In these consolidated actions alleging various violations of the federal securities laws, Scott Stackman, Jack Perry, Kevin Gillis, Florence and Howard Schubert, L. Neil Le-Roy, and Howard Green (collectively “plaintiffs”)
BACKGROUND
Plaintiffs allege that starting as early as July 20, 1995, Bear, Stearns engaged in a scheme to defraud investors of certain publicly-traded securities when it began acting as a clearing broker for A.R. Baron & Company (“A.R. Baron” or “Baron”) and continued until June 28, 1996, when A.R. Baron ceased doing business. See Amended and Consolidated Class Action Complaint dated April 1, 1998 (“Am.Compl.”) at 111. As part of the scheme, plaintiffs contend that Harriton and A.R. Baron utilized various and sundry methods to artificially inflate and manipulate the price of the securities
Plaintiffs assert that throughout the class period Harriton and others at Bear, Stearns shed their role as a mere clearing broker for A.R. Baron, and with actual knowledge, directly participated in the heretofore described scheme. See Am. Compl. at H 3. Moreover, plaintiffs allege that after Baron was sanctioned by the National Association of Securities Dealers (“NASD”) defendants asserted control over Baron’s trading operations by, inter alia, placing Bear, Stearns’ employees at Baron’s offices to observe Baron’s trading activities, approving or declining to execute certain trades, imposing restrictions on Baron’s inventory, and loaning funds to Baron.
Plaintiffs’ proposed class would encompass all persons who purchased the aforemen
DISCUSSION
In order to certify a class, the Court must find that plaintiffs have satisfied the prerequisites to class certification found in Rule 23. See General Tel. Co. v. Falcon,
1. Predominance of Common Questions of Law or Fact — Rule 23(a)(2) and Rule 23(b)(3)
Rule 23(a)(2) demands that the prospective class members share common questions of law or fact but does not require that every question of law or fact be common to every class member. See 7A Wright et al., Federal Practice and Procedure: Civil 2d. § 1763, at 196 (1986). Rule 23(b)(3) requires that common questions predominate and is satisfied where “plaintiffs allege ... a single common thread to which all the fraudulent activity is related.” Tedesco v. Mishkin,
Defendants expend a substantial part of their efforts arguing that plaintiffs have failed to allege that Bear, Stearns activities were part of a scheme with common questions of law and fact and that common questions predominate over individual ones. Defendants argue that plaintiffs assert three distinct types of wrongful conduct which do not allege a common scheme with respect to the various securities supposedly manipulated by defendants in this action. See Def. Opp. at 11-12. However, the allegations in plaintiffs’ complaint, which must be accepted as true at this stage of the proceedings, see In re Blech Sec. Litig.,
Defendants’ concern that members of the proposed class will present widely different damage issues because some of them both purchased and sold securities during the class period and because there are ten different securities involved is not dispositive at this stage of the proceeding. When considering whether common questions of law predominate, the Court appropriately focuses on the liability issue “and if the liability issue is common to the class, common questions are held to predominate.” Dura-Bilt Corp. v. Chase Manhattan Corp.,
Typicality and Adequacy of Class Representatives 2.
Unique Defenses a.
Defendants raise an exhaustive series of arguments regarding the typicality of the proposed lead plaintiffs who, defendants assert, suffer from various defenses that render them unfit. The Court agrees with defendant that four of the proposed class representatives suffer from unique defenses that would prejudice absent class members should this action proceed to trial and that, as a matter of law, prevent each of them from serving as a class representative. See Gary Plastic Packaging Corp.,
As this Court has previously noted, a person that increases his holdings in a security after revelation of an alleged fraud involving that security is subject to a unique defense that precludes him from serving as a class representative. See Kovaleff v. Piano, 142 F.R.D. 406, 408 (S.D.N.Y.1992); see also In re Avon Sec. Litig., No. 91 Civ. 2287,
Defendants also contend that the remaining proposed class representatives, each of whom was involved in the Paperclip IPO in some fashion,
The Court does not agree with defendants’ conclusions regarding the consequences of these revelations.
b. Unrepresented Securities
Defendants further attack the typicality of the proposed class representatives on the ground that various promoted stocks were never purchased by any of the class representatives. Hence, defendants assert, plaintiffs have no incentive to show that the markets for these securities were manipulated and that plaintiffs suffered damage as a result of such manipulation. On the con
To meet the typicality requirement, the proposed class representatives need not have invested in all of the securities listed as part of an alleged fraud. See Tedesco,
CONCLUSION
The Court grants plaintiffs’ motion for certification of this action as a class action for the purposes of determining liability of defendants. The class shall encompass all customers of A.R. Baron who purchased the stock of the promoted companies from July 20, 1995 until and including June 28, 1996.
Counsel for plaintiffs shall serve on defendants and submit, pursuant to Fed.R.Civ.P. 23(c)(2), a proposed form of notice to the class on or before September 29, 2000. Defendants shall file any objections to the proposed notice on or before October 31, 2000.
It is SO ORDERED.
Notes
. On September 24, 1999 the Court entered a Stipulation and Order dropping Messrs. Berwecky, Frystock, and Burgess as proposed class representatives.
. The plaintiffs allege that defendants manipulated the market price of the stock of the following so-called “promoted companies.” The "promoted companies” include: Health Professionals, Inc., Cyromedical Sciences, Inc., Cypros Pharmaceuticals Corporation, Innovir Laboratories, Inc., Voxel, Advanced Mammography Systems, Inc., Symbollon, Inc., Aqua Care Systems, Inc., Laser Video Network, Inc., and Paperclip Imaging Software.
. Plaintiffs contend that further evidence of defendants’ knowledge of A.R. Baron's fraud is demonstrated by cash payments received in “brown bags” by A.R. Baron brokers in exchange for making unauthorized purchases of large blocks of stocks on behalf of A.R. Baron's customers, of which defendants were allegedly aware. The companies whose stocks plaintiffs denominate as the “brown bag” stocks included Jockey Club, Inc., Comprehensive Environmental Systems, Icis Management Group and U.S. Bridge. See Am. Compl. at HH 67-68. At various points in their briefs both parties list purchasers of the brown bag stocks as proposed members of the class. See e.g. Defendants' Memorandum of Law in Opposition to Plaintiffs’ Motion for Class Certification dated Februaiy 19, 1999 (“Def. Opp.”) at 2; Plaintiffs’ Memorandum of Law in Support of their Motion for Class Certification dated January 11, 1999 ("Pltf.Mem.”) at 2, 10. However, since plaintiffs' complaint states that the proposed class members include only purchasers of the promoted securities and because none of the ten class representatives initially proposed by plaintiff ever purchased brown bag stocks, the Court will not certify any of these individuals as representatives of any class other than the purchasers of the promoted securities. See Amend. Compl. at 1H 1, 27; Def. Opp. at 16.
. Defendants' only dispute regarding numerosity is that, should the Court certify a subclass for each promoted security, certain of these individual subclasses would not independently meet the numerosity requirement. See Def. Opp. at 22. Since the Court has found certification of subclasses unnecessary, defendants' argument is irrelevant and there is no dispute regarding numerosity. Accordingly, the Court will not further discuss this requirement.
. Defendants argue that the Paperclip IPO cannot be considered as a part of the plaintiffs' claim. With respect to plaintiffs’ market manipulation allegations, the Court agrees that it is inappropriate to allow plaintiffs to include the Paperclip IPO stock in its list of "promoted"
Moreover, Paperclip stock acquired through Baron on the open market may be appropriately classified as one of the “promoted” securities since such securities are afforded the above-described causation presumption. Accordingly, individuals that purchased Paperclip stock on the open market, in contrast to those whose participation in the IPO constituted their only involvement with Baron, are proper members of the proposed class.
. Specifically, plaintiffs Perry and Stackman participated in the IPO, plaintiff Gillis received and reviewed the prospectus for the IPO, and plaintiff Leroy spoke with a Baron broker about, and arranged to have his wife participate in, the IPO. See Block Affidavit at Exh. A-D.
. The Court does, however, find that plaintiff Stackman is subject to a unique defense and may not act as a class representative because his participation in the Paperclip IPO was his only involvement with Baron. See Block Affidavit at Exh. 2; Amend. Comp, at Exh. 10. Since Mr. Stackman did not either buy Paperclip stock on the open market or execute trades in any of the other promoted securities, Mr. Stackman cannot, as noted above, benefit from the reliance presumption afforded plaintiffs in fraud on the market cases. See supra note 5. Mr. Stackman is the only one of the proposed class representatives in this position and hence he may not represent the class.
. Defendants argue that various putative class action plaintiffs could not have relied on the integrity of the market because they were speculative traders that relied on the advice of their brokers. See Defendants’ Supplemental Memorandum of Law in Opposition to Plaintiffs Motion for Class Certification dated September 1, 1999 at 6, 10-12. Individual questions of reliance such as those alleged by defendants are generally not sufficient to defeat class certification. See In re AM Int'l Sec. Litig.,
. Defendants’ also overstate their case when they argue that plaintiffs who have submitted claims to the SIPC Trustee for the Baron estate similarly lack the incentive to properly litigate this case and should be eliminated as class representatives. See Def. Opp. at 20. The record reveals that the Trustee has currently only paid claimants half of their total amount of losses and it is uncertain whether full remittance is possible or will ever occur. See Notice of Allowance or Denial of General Creditor and Restitution Fund Claims, In re A.R. Baron & Co., Debtor, No. 96-8831A dated May 12, 2000. The fact that a class member has received or will be receiving compensation from the SIPC Trustee, while it may result in an offset in damages, does not detract from the incentive to prove the common scheme.
. Defendants’ objections regarding the date of Bear, Steams involvement in the alleged scheme raise questions of fact relevant to defendants’ liability. At this point in the proceeding, the Court must construe plaintiffs' factual allegations as trae and may not inquire into the merits of their claim. See Eisen v. Carlisle,