MEMORANDUM OPINION AND ORDER
Plaintiff, as trustee of a trust, filed this action on October 1, 1985. Various pendent claims arising under state law have been eliminated, and the case now involves only a single claim for relief under section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C.A. § 78j(b) (West 1981), and rule 10b-5 promulgated thereunder. Plaintiff contends that defendants, as officers and/or directors of Denelcor, Inc., a now-bankrupt Colorado corporation, engaged in a scheme to artificially inflate the market price of Denelcor’s common stock by disseminating false and misleading information concerning, among other things, (1) the development and marketing of certain large, high-performance computer systems manufactured by Denelcor and (2) the availability of the software necessary to run them. The misrepresentations of which plaintiff complains were purportedly contained in Denelcor’s press releases, annual reports, and other publicly-distributed materials.
Four motions are before me for a ruling, but only two of them command detailed attention. First, defendants have moved to decertify the class which was “conditionally certified” on January 29, 1988. Second, they have moved for partial summary judgment based on their statute of limitations defense. A ruling on the motion to decertify the class requires a review of the litigation’s procedural history.
MOTION TO DECERTIFY CLASS
The case’s initial year of life was consumed by procedural wrangling and rule 12 motions practice. During this period plaintiff filed one amended complaint, and defendants filed motions to dismiss, first, the original complaint and then the amended complaint. Plaintiff also filed a motion to certify the class described in the amended complaint. On June 23, 1986, Judge Carrigan dismissed all claims arising under state law, leaving only the claim for violation of rule 10b-5. On December 3, 1986, he denied the motion to certify the class on the ground that, premised as it was on an amended complaint which he had partially dismissed, the motion was moot. He also ordered plaintiff to file (1) a second amended complaint re-articulating the remaining claim under rule 10b-5 and (2) a motion for class certification, if plaintiff still wished to pursue a claim on behalf of a class.
It took plaintiff over three months to do anything in response to Judge Carrigan’s order of December 3, 1986. On March 19, 1987, he filed his Second Amended Class
Judge Carrigan conditionally certified a Fed.R.Civ.P. 23(b)(3) class action on January 29, 1988. With limited exceptions, the conditional class included open-market purchasers of Denelcor stock from May 19, 1981, through July 27, 1985. Inexplicably, the deposition of the named plaintiff had not been taken by January 29, 1988, so Judge Carrigan was forced to decide the matter on conflicting arguments of counsel concerning (1) whether the named plaintiffs claims were typical of the class claims and (2) whether the named plaintiff could adequately represent the class. Indicating that he was “troubled somewhat by the conflict of the arguments of counsel," Transcript of Proceedings, January 29, 1988 at 43, he stressed the conditional and tentative nature of his ruling in the following language:
Therefore, I conditionally certify the class[,] ... but on the condition that this case be vigorously handled, henceforward; that it be moved as quickly as possible toward trial, and prepared for trial or settlement; and that there be no further delays.
If it should appear, through discovery or otherwise, that typicality is not as represented, and the adequacy of representation is not as represented, and it does not meet the conditions I’ve laid down, I would expect that defendants would file a motion to decertify the class; and I will grant it if it’s so demonstrated.
Id. at 45.
Despite Judge Carrigan’s admonition, the case proceeded no more expeditiously after his ruling than it had before. The named plaintiff’s deposition was not concluded until August of 1988. The case was set for a 15-day trial to a jury to commence on October 2, 1989. Seventeen days before trial (September 15, 1989), defendants moved to decertify the class. Five days before trial (September 27, 1989), plaintiff responded to the motion by filing his own motion to bifurcate the trial in order to have the liability issues tried separately from the defenses of the statute of limitations and reliance, which plaintiff conceded might be applicable to his claims. He still had filed no motion to give any notice to the class.
On September 27, 1989, because of a conflicting criminal trial, Judge Carrigan vacated the trial date. Not until October 20, 1989, eighteen days after trial had originally been scheduled to commence, did plaintiff file a motion seeking court approval of the notice he proposed to send to class members, alerting them to the pendency of a class action. On November 8, 1989, Judge Carrigan entered an order approving the proposed notice. Plaintiff then proceeded to give notice to the class members, despite the pendency of defendants’ motion to decertify the class.
It is against this background that I must consider defendants’ arguments (1) that plaintiff’s claims are not typical of the class claims and (2) that plaintiff and his counsel cannot fairly and adequately represent the class. See Fed.R.Civ.P. 23(a)(3), 23(a)(4). Defendants question plaintiff’s “adequacy” as a representative on two grounds. First, they assert that plaintiff himself is simply not credible, that his friendship with one of Denelcor’s directors has improperly limited the cast of defendants from whom the class is seeking recovery, and that he is motivated primarily by spite or ill-will toward the defendants. Second, they argue that plaintiff’s counsel is not adequately protecting the interests of the class. Both plaintiff and his counsel have fiduciary obligations to the class. Wagner v. Lehman Bros. Kuhn Loeb Inc.,
A plaintiffs lack of credibility and the impurity of his motives can render him an “inadequate” class representative. See, e.g., id. (credibility); Kline v. Wolf,
Viewed in this light, some of defendants’ arguments are insignificant. Defendants point to the fact that Dale Tower, a personal friend of plaintiff, was not re-elected to Denelcor’s board of directors. A second friend, Marjorie Katz, was fired by Denelcor in 1984. Even if these facts prove that plaintiff is motivated by animus toward the company, defendants have not shown how they impair the interests of the class. True, such animus may affect settlement negotiations, but that problem could be addressed by adequate class counsel and/or by the United States Magistrates, to whom I regularly refer cases for the purpose of facilitating settlement negotiations.
There are, however, other problems which are so serious as to preclude a finding that plaintiff is an adequate representative. Some relate to plaintiff’s credibility. It is undisputed that on three separate occasions plaintiff requested employment with Denelcor and was refused. Also, according to documentation before me, plaintiff believed that Denelcor officials had threatened his life and suspected that Denelcor’s financial problems may have been the result of a conspiracy headed by a competitor or a foreign power bent on stopping Denelcor’s research on its high-performance computer systems. If these assertions had any basis in fact, one would expect plaintiff to tell me what it is; on the record before me, I can only conclude that the assertions are the product of a wild imagination. At the very least, it must be acknowledged that plaintiff’s credibility is subject to extraordinary attack and that this problem may well divert the fact finders’ attention from the merits and thus infect the claims of the class as a whole. Indeed, the potential attack on plaintiff’s credibility creates another unique defense making plaintiff’s claim atypical. Kline v. Wolf,
Plaintiff’s personal relationship with former director Dale Tower casts a further cloud upon plaintiff’s suitability to fulfill his fiduciary role. Tower was a director for thirteen months during the class period, yet he has not been named as a defendant. Defendants have argued—and will surely continue to do so at trial—that plaintiff has played favorites by suing only the directors he does not like. The omission to sue a potential defendant cannot but prejudice the class. Plaintiff’s explanation for the omission—that Tower was a director “for a
Adequacy of representation also requires that counsel for the class fulfill a fiduciary obligation to the class, and this notion forms the second aspect of defendants’ argument that plaintiff is not an adequate representative. Counsel for plaintiff allude to “extensive and successful participation in securities fraud class actions” and list all such actions in which counsel has been involved. This experience is undoubtedly important, but the court is surely entitled to consider what has been done in the case before it in order to evaluate whether counsel has adequately represented the class. This case’s unusual procedural history affords a full opportunity to do so.
I am not satisfied that counsel for plaintiff have fulfilled their responsibilities. For example, in addition to the insufficiently-explained absence of Tower, plaintiff has failed to name two other Denelcor directors as defendants, one of whom, R.C. Mecure, was a director during 45 months of the 50-month class period. This raises serious questions concerning the conduct of the litigation. See Biben v. Card, [1985-1986 Transfer Binder] Fed.Sec.L.Rep. (CCH) If 92,462, at 92,829,
More serious is plaintiff’s delay in providing notice to the class members and in pursuing the class issues throughout the litigation. Rule 23(c)(2) requires that the best notice practicable be given to class members. Class members need to be alerted to their rights to opt out, to intervene and meaningfully participate in the pending class action, or to object to the adequacy of representation. Fed.R.Civ.P. 23(d)(2) advisory committee’s note. This notice should go out as promptly as circumstances permit. 2 H. Newberg, Newberg on Class Actions § 8.09, at 112 (2d ed. 1985) (quoting Frankel, Some Preliminary Observations Concerning Civil Rule 23,
Plaintiff and counsel have not complied with the requirement to pursue their action with dispatch and to request notice to the class as promptly as circumstances permitted. Although plaintiff initially proceeded properly (by requesting class certification on February 6, 1986, the complaint having been filed October 1, 1985), interest seems to have waned after Judge Carrigan, having dismissed large parts of the amended complaint, ordered plaintiff to file a new complaint and motion to certify the class, if a class action was still desired. It took six months, and an intervening order threatening dismissal for failure to prosecute, for plaintiff to file the new complaint and motion. More critically, the court conditionally certified the class on January 29, 1988. It was not until October 20, 1989, 21 months after certification, 18 days after the original trial had been scheduled, and four years after the case had been filed, that plaintiff moved for court approval to send notice to the class.
Plaintiff seeks to explain the extraordinary delay in moving for notice to the class by portraying it as part of a considered, deliberate strategy to avoid needless expense in the circumstances presented here. The argument is that, since Judge Carrigan had only conditionally certified the class, it would have been imprudent of plaintiff to
I am not persuaded by plaintiffs explanation, in light of the sequence of events here. Plaintiff could have moved for notice at any time, and, if he truly wished to avoid needless expense, he could have asked Judge Carrigan in this motion to review discovery and other events subsequent to the order of conditional certification and to confirm that the case could proceed as a class action. He did not do so. Instead, he waited until defendants had filed motions for decertification based partly on his failure to give notice. He responded in two ways. First, he moved to bifurcate the trial, so that it could proceed without notice to the class. Second, while the motion to decertify was pending, he not only moved for notice to the class, but also proceeded to assume the expense of giving notice, never once bringing to Judge Carrigan’s attention his concern that he would incur needless expense if the court withdrew its conditional certification—a concern which should have been heightened by the filing of the motion for decertification. I therefore infer that plaintiff’s delay in moving for notice to the class was hardly the result of a deliberate, sound strategy to avoid the potentially-needless expense of giving notice; the timing of the motion for notice can only be viewed as part of an ill-conceived, scrambling and belated attempt to blunt one of the better arguments made in the motions to decertify the class. It fully supports the finding that plaintiff and his counsel are not adequate class representatives.
Rule 23(a)(3): Typicality
Defendants argue that plaintiff’s claims are not “typical” of the class claims because there are defenses to plaintiff’s claim that may not be applicable to claims of the remainder of the class. The rationale behind the requirement that the class representative’s claims be typical of the class claims is recognition that a plaintiff with claims typical of the class will, in pursuing and defending his own self interest in the litigation, be concomitantly advancing or defending the interests of the class. 1 H. Newberg, Newberg on Class Actions § 3.22, at 199 (2d ed. 1985).
Plaintiff argues that his claims are typical of the class claims because he intends to rely solely on a fraud on the market theory in this case. This theory eliminates the need for an individual plaintiff to prove reliance. Underlying the theory is the presumption that a company’s value will accurately be reflected in its open-market price. When fraud prevents accurate information from reaching the public, the price of stock on the open market may be distorted. If an investor can prove that the fraud was material, this theory creates a rebuttable presumption of reliance. Basic Inc. v. Levinson,
Defendants intend to rebut this presumption with evidence that plaintiff traded not in reliance on market information, but on information obtained through his personal contacts with the company. Nonreliance on the integrity of the market is an affirmative defense to a fraud on the market theory. Peil v. Speiser,
Given the frequency with which plaintiff contacted Denelcor, as well as the proximity of those contacts to his stock transactions, a fact-finder could infer that he may have relied upon information obtained from those contacts as the basis for his investment decisions. Obviously, this undermines plaintiff’s fraud on the market theory, see Peil v. Speiser,
“It is enough to deny class treatment when a defense peculiar to the class representative is even arguably present.” Wagner v. Lehman Bros. Kuhn Loeb Inc.,
Plaintiffs most compelling argument against decertification is that it might be prejudicial to absent class members “at this late stage in the proceedings” because it might be difficult for other defrauded shareholders to institute new litigation on behalf of the class. I have considered the possibility of prejudice to the class in arriving at this decision. To some extent, the potential for this sort of prejudice is inherent in rule 23. Rule 23(c) expressly contemplates the conditional certification that has occurred in this case. The rule also recognizes the possibility that an order certifying a class may be altered or amended before a decision on the merits. It is my duty under rule 23(c)(1) to ensure that, after conditional certification, the class representative continues to adequately represent the best interests of the class. See, e.g., In re General Motors Corp. Engine Interchange Litigation,
DEFENDANTS’ MOTION FOR PARTIAL SUMMARY JUDGMENT
All parties concede that Colo.Rev. Stat. § 13-80-101(l)(c) (1987 Repl.Vol.) (formerly Colo. Rev. Stat. § 13-80-109 [1973]) supplies the three-year limitations period applicable to plaintiff’s claim. See Ernst & Ernst v. Hochfelder,
Plaintiff contends that he was unaware of the alleged fraud until after October 1, 1982, in part because defendants attempted to conceal it. Plaintiff also convincingly contends that, even by exercising reason
Defendants do not dispute plaintiff’s factual contention that he could not have discovered the fraud before October 1, 1982. They argue, rather, that all of the allegations relating to misrepresentations occurring before October 1, 1982, should be stricken, based on the rule set forth in In re Data Access Systems Securities Litigation,
Defendants apparently urge the court to adopt Data Access piecemeal. They concede that Colorado’s three-year limitations period is applicable, but argue that the court should disregard the Tenth Circuit’s tolling precedents and adopt Data Access’s strict three-year limitation, which eliminates any tolling whatsoever. Neither Data Access, nor the construction of it urged by defendants, is the law in this circuit. As one district court has recognized in Marchese v. Nelson,
REMAINING MOTIONS
My decision to decertify the class makes plaintiff’s motion to bifurcate the trial and defendant Fisher’s motion to amend the order approving the manner and form of notice to the class moot. Accordingly, it is hereby
ORDERED as follows:
1. defendants’ motion for partial summary judgment on the statute of limitations is denied;
2. defendants’ motion to decertify the class is granted;
3. plaintiff’s motion to bifurcate the trial is denied as moot;
4. defendant Fisher’s motion to amend the manner and form of providing notice to the class is denied as moot; and
5. plaintiff shall prepare and provide notice of decertification at the earliest possible time to all members of the class to whom notice has previously been sent. The notice shall be submitted to the court for approval before sent.