254 F.R.D. 168 | S.D.N.Y. | 2008
memorandum and order
Plaintiff Harvey Lapin brings this securities class action against defendants Goldman Sachs & Co., and Goldman Sachs Group, Inc. (collectively “GS”) pursuant to § 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b) (the “Exchange Act”), and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder. Specifically, Plaintiff alleges that GS defrauded class members by making materially false misstatements and omissions in public statements relating to improper conflicts of interest that existed between GS’s research and investment banking departments. (See Second Am. Compl. (“SAC”) f 112-3.) Plaintiff brings this action on behalf of public investors who purchased the common stock of Goldman Sachs Group, Inc., during the period from July 1, 1999 through May 7, 2002 (the “Class Period”). (See SAC 111.)
Before the Court is Plaintiffs motion to certify the class pursuant to Rule 23 of the Federal Rules of Civil Procedure. GS opposes the certification motion on three grounds. First, GS argues that the adequacy element is not satisfied because Plaintiff is not an appropriate class representative. (See GS Opp’n at 26-30.) Second, GS contends that Rule 23(b) is not satisfied because individual issues of knowledge of the alleged fraud will predominate over common issues. (See id. at 8-16.) Finally, GS asserts that Rule 23(b) is likewise not satisfied because Plaintiff has failed to prove loss causation at this stage. (See id. at 16-26.)
For the reasons that follow, Plaintiffs motion to certify the class is granted.
I. Background
This action arises out of Plaintiffs claim that GS “misrepresent[ed] its business practices and [made] misleading statements in the course of its business, which artificially inflated the price of Goldman’s stock during the Class Period.” (Pl.’s Mem. at 2.) Specifically, Plaintiff contends that, while GS repre
This case was transferred into this District from the District of Nevada on March 19, 2004. On February 23, 2004, prior to the transfer, Plaintiff was appointed Lead Plaintiff, and the law firms of Kirby, Mclnerney & Squire, LLP and Glancy Binkow & Goldberg LLP were appointed as co-lead counsel.
Plaintiff filed the First Amended Complaint (“FAC”) on June 30, 2004. On February 23, 2005, the Honorable Kenneth M. Karas, District Judge, to whom this ease was previously assigned, granted the defendants’ motion to dismiss the FAC without prejudice to the filing of a second amended complaint. The SAC was filed on February 25, 2005, and again GS moved to dismiss. On September 29, 2006, Judge Karas denied Defendants’ motion to dismiss the SAC, except that the motion to dismiss original defendant Henry M. Paulson was granted. See Lapin, 506 F.Supp.2d at 249. GS answered the complaint on November 14, 2006.
The motion for class certification was fully submitted as of August 22, 2007. On September 4, 2007, this case was reassigned to the undersigned. The Court held oral argument on the motion on April 16, 2008.
II. Discussion
Courts in this district had previously held that, in reviewing a motion for class certification, “the district court must accept all of the allegations in the pleadings as true ... and avoid conducting a preliminary inquiry into the merits.” Dunnigan v. Met. Life Ins. Co., 214 F.R.D. 125, 133 (S.D.N.Y. 2003) (citing In re Indep. Energy Holdings PLC Sec. Litig., 210 F.R.D. 476, 477 n. 5 (S.D.N.Y.2002)). Accordingly, under the old standard, a proposed lead plaintiff needed only to make “some showing” that the Rule 23 requirements were met. Caridad v. Metro-North Commuter R.R., 191 F.3d 283, 292 (2d Cir.1999). However, in the recent ease of In re Initial Public Offering Securities Litigation, 471 F.3d 24, 41 (2d Cir.2006) (hereinafter “In re IPO”), the Second Circuit held that “a district judge may certify a class only after making determinations that each of the Rule 23 requirements has been met” and that “such determinations can be made only if the judge resolves factual disputes relevant to each Rule 23 requirement and finds that whatever underlying facts are relevant to a particular Rule 23 requirement have been established____” Thus, while Plaintiff bears the burden of establishing that the requirements of Rule 23 have been met based on the facts contained in the SAC, under In re IPO, the Court should not accept those facts as true if they are contested. See id. at 41-42. Rather, the Court must resolve disputed issues of fact that go to the merits of the claim to the extent they are relevant to the Rule 23 determination. See id.
A. Plaintiff Has Met the Requirements of Rule 23(a)
Class certification is governed by Rule 23 of the Federal Rules of Civil Procedure. See In re IPO, 471 F.3d at 27 (“[A] district judge may not certify a class without making a ruling that each Rule 23 requirement is met .... ”). Rule 23(a) provides that a class may be certified only if
(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; see also Cordes & Co. Fin. Serv., Inc. v. A.G. Edwards & Sons, Inc., 502 F.3d 91, 99 (2d Cir.2007).
1. Numerosity
“The numerosity requirement in Rule 23(a)(1) does not mandate that joinder of all parties be impossible-—only that the
The Court finds that Plaintiff has satisfied the numerosity requirement. Plaintiff has alleged, and GS does not contest, that at the time of the alleged fraud, GS had approximately 440 million shares of common stock outstanding, which traded on the New York Stock Exchange at an average daily trading volume of 1.2 million to 2.9 million shares. (See Hakala Decl. HH 7-8 & Ex. C.) These facts demonstrate that the proposed class is sufficiently large so as to satisfy the numerosity requirement. See In re Deutsche Telekom, 229 F.Supp.2d at 281 (finding numerosity element satisfied where 200 million shares issued pursuant to defendant’s prospectus); Wagner, 251 F.R.D. 112, 116 (finding class sufficiently numerous where defendant had 543 million outstanding shares with an average daily trading volume of 3.9 million shares). In addition, Plaintiff has shown that there were hundreds and even thousands of record holders of GS stock in or around 2000 through 2002, clearly surpassing the 40 possible plaintiffs necessary for the presumption. (See Press Decl. Ex. A.) Accordingly, the Court finds that Plaintiff has satisfied the numerosity requirement.
2. Commonality and Typicality
“The commonality requirement is met if plaintiffs’ grievances share a common question of law or of fact.” Marisol A. v. Giuliani, 126 F.3d 372, 376 (2d Cir.1997); see also Central States, 504 F.3d at 245 (quoting Marisol). This requirement is generally applied “ ‘permissively’ ” in securities fraud litigation. See In re Vivendi, 242 F.R.D. at 84 (quoting In re Nortel Networks Corp. Sec. Litig., No. 01 Civ. 1855(RMB), 2003 WL 22077464, at *3 (S.D.N.Y. Sept. 8, 2003)). Plaintiff need not show that all arguments are identical, “ ‘only that common issues of fact or law affect all class members.’ ” In re Deutsche Telekom, 229 F.Supp.2d at 281 (quoting Trief v. Dun & Bradstreet Corp., 144 F.R.D. 193, 198 (S.D.N.Y.1992)).
“Typicality ‘requires that the claims of the class representatives be typical of those of the class, and is satisfied when each class member’s claim arises from the same course of events, and each class member makes similar legal arguments to prove the defendant’s liability.’ ” Central States, 504 F.3d at 245 (citing Robinson v. Metro-N. Commuter R.R. Co., 267 F.3d 147, 155 (2d Cir.2001)). “Typicality does not require that the situations of the named representatives and the class members be identical.” In re Oxford Health Plans, Inc., 191 F.R.D. 369, 375 (S.D.N.Y.2000) (citing Trief, 144 F.R.D. at 200). However, “ ‘plaintiffs claim and the class claims [must be] so interrelated that the interests of the class members will be fairly and adequately protected in their absence.’ ” Marisol, 126 F.3d at 376 (quoting General Tel. Co. of the Sw. v. Falcon, 457 U.S. 147, 157 n. 13, 102 S.Ct. 2364, 72 L.Ed.2d 740 (1982)).
Courts have recognized that the commonality and typicality requirements of Rule 23 “tend to merge into one another, so that similar considerations animate analysis
Other than asserting that Plaintiff is subject to a unique defense (discussed infra at Section III.A.4), GS does not otherwise contest Plaintiffs assex-tions that the commonality and typicality requirements of Rule 23(a) are met. {See GS Opp’n at 26-28.) In light of this, and after considering the facts before the Court, the Court finds that, apart from considerations of unique defenses, Plaintiff has otherwise satisfied these requirements. Plaintiff has demonstrated that the claims of the potential class members, including his own, share common issues of law and fact sufficient to satisfy the commonality and typicality requirements. Plaintiff has set forth several issues of fact or law that will be common to the class, including, inter alia, whether GS misrepresented or omitted material facts concerning the alleged conflict, whether those omissions or misrepresentations were false or misleading, and whether the price of GS stock was artificially inflated as a result of the omissions or misrepresentations. {See PL’s Mem. at 8-11.) The Court finds that the claims of the proposed plaintiff class arise out of the same alleged facts and are based on common legal theories. Accordingly, the commonality and typicality requirements are met.
3. Adequacy
Finally, under Rule 23(a)(4), Plaintiff must demonstrate that he is an adequate lead plaintiff. For the reasons that follow, the Court finds that Plaintiff meets the adequacy x’equirement.
Rule 23(a)(4) requires that “the representative parties will fairly and adequately protect the interests of the class.” A “[djetermination of adequacy typically ‘entails inquiry as to whether: 1) plaintiffs interests are antagonistic to the interest of other members of the class and 2) plaintiffs attorneys are qualified, experienced and able to conduct the litigation.’ ” Cordes & Co. Fin. Servs., 502 F.3d at 99 (quoting Baffa v. Donaldson, Lufkin & Jenrette Sec. Corp., 222 F.3d 52, 60 (2d Cir.2000)). The inquiry is designed “to uncover conflicts of interest between named parties and the class they seek to represent.” Amchem Prod., Inc. v. Windsor, 521 U.S. 591, 625, 117 S.Ct. 2231, 138 L.Ed.2d 689 (1997). In addition, “[cjourts also consider ‘whether a putative representative is familiar with the action, whether he has abdicated control of the litigation to class counsel, and whether he is of sufficient moral character to represent a class.’” Niemiec v. Ann Bendick Realty, No. 04 Civ. 897(ENV), 2007 WL 5157027, at *12 (E.D.N.Y. Apr. 23, 2007) (quoting Noble v. 93 Univ. Place Corp., 224 F.R.D. 330, 339 (S.D.N.Y.2004)); see also Savino v. Computer Credit, Inc., 164 F.3d 81, 87 (2d Cir.1998) (“To judge the adequacy of representation, courts may consider the honesty and trustworthiness of the named plaintiff’); In re NYSE Specialists Sec. Litig., 240 F.R.D. 128, 144 (S.D.N.Y.2007) (“The Second Circuit has allowed for the consideration of charactei’istics such as honesty, trustwoi'thiness, and credibility in judging the adequacy of a class representative pursuant to Rule 23(a).”) (collecting cases). A lead plaintiff must also possess “a minimum threshold of knowledge about the case which, considering the nature of the claim, is sufficient to make reasonable decisions at critical stages of the litigation.” In re Lloyd’s Am. Trust Fund Litig., No. 96 Civ. 1262(RWS), 1998 WL 50211, at *11 (S.D.N.Y. Feb. 6, 1998). Thus, “class certification may properly be denied ‘where the class representatives ha[ve] so little knowledge of and involvement in the class action that they would be unable or unwilling to protect the interests of the class against the possibly competing interests of the attorneys.’ ” Maywalt v. Parker & Parsley Petroleum Co., 67 F.3d 1072, 1077-78 (2d Cir.
GS first contends that Plaintiff is an inadequate lead plaintiff because “he has no understanding of his obligations as class representative, is not in the habit of supervising his counsel, and has never participated in any decisions related to the litigation.” (GS Opp’n at 28-29 (citing record).) GS also contends that Plaintiffs provision of incorrect testimony renders him an inadequate lead plaintiff. (GS Opp’n at 29-30.) The Court rejects GS’s arguments. Plaintiff has demonstrated that he is familiar with the facts and legal theories underlying the case, is in regular contact with his lawyers, has met with them, has reviewed the complaint and other case documents, and understands that he is responsible for making decisions that impact the class and representing the class’s best interests. (See Revised Wheeler Decl. 114 at Ex. “Lapin Tr.” (“Lapin Dep. Tr.”) at 12-13, 55-56, 59-62, 64-65.)
Given this showing, the Court concludes that Plaintiff is an adequate class representative who will fairly represent the interests of the class. GS’s assertions— namely that Plaintiff has “ceded” control of his case over to his attorneys and “did not even remember filing a class action lawsuit” in another unrelated case (see GS Opp’n at 29)—do not show that Plaintiff is “unable or unwilling to protect the interests of the class.” In re Vivendi, 242 F.R.D. at 88 (quoting In re WorldCom, Inc. Sec. Litig., 219 F.R.D. 267, 286 (S.D.N.Y.2003)). Plaintiffs knowledge or recollection of a litigation wholly unrelated to this case is, standing alone, insufficient to render him an inadequate plaintiff in the litigation before this Court. Moreover, “ ‘in complex securities litigation, named plaintiffs are not expected to possess expert knowledge of the details of the case and must be expected to rely on expert counsel.’” In re Omnicom Group, Inc. Sec. Litig, No. 02 Civ. 4483(RCC), 2007 WL 1280640, at *6 (S.D.N.Y. Apr. 30, 2007) (quoting Baffa, 222 F.3d at 61); Fogarazzo v. Lehman Bros., Inc., 232 F.R.D. 176, 181 (S.D.N.Y.2005) (“[A] great deal of reliance upon the expertise of counsel is to be expected.”).
GS also argues that Plaintiffs provision of incorrect testimony renders him an inadequate lead plaintiff. (See GS Opp’n at 29-30.) Specifically, GS asserts that Plaintiffs statement that he “bought 75 shares of Goldman Sachs stock” in his certification (see "Wheeler Decl. Ex. A H4) was incorrect, as Plaintiff conceded at his deposition that his “financial advisor” made the decision to purchase the stock (see Lapin Dep. Tr. at 29, 51-52).
There is some authority for the proposition that inaccurate testimony that “subjects [the proposed lead plaintiffs] credibility to serious question” is grounds for denial of a class certification motion. Kline v. Wolf, 702 F.2d 400, 402-03 (2d Cir.1983); see also Savino, 164 F.3d at 87 (“To judge the adequacy of representation, courts may consider the honesty and trustworthiness of the named plaintiff’) (citing Kline, 702 F.2d at 402-03); Attenborough v. Constr. and Gen. Bldg. Laborers’ Local 79, 238 F.R.D. 82, 100-01 (S.D.N.Y.2006). However, as one district court in this Circuit has put it, “[o]nly when attacks on the credibility of the representative party are so sharp as to jeopardize the interests of absent class members should such attacks render a putative class representative inadequate.” In re Colonial P’ship Litig., No. H-90-829 (JAC), 1993 WL 306526, at *5 (D.Conn. Feb. 10,1993).
Here, the minor discrepancy (if it can even be called that) between Plaintiffs original statement that he purchased GS stock and his later statement that his investment advis- or actually purchased the stock on Plaintiffs behalf for the account of a profit-sharing plan for employees of Plaintiffs dental practice, does not impugn Plaintiffs credibility in any meaningful way. The discrepancy is simply not so material that it renders Plaintiff inadequate to represent the proposed class, nor does it jeopardize the interests of the class in
Accordingly, the Court finds that Plaintiff has satisfied the adequacy prong of Rule 23(a).
4. Plaintiff is not Subject to any Unique Defenses that Preclude Certification under Rule 23(a)
In addition to the objections discussed above, GS also contends that Plaintiffs motion for class certification must fail because Plaintiff is subject to a unique defense—lack of standing—in that he delegated “substantial investment authority” to an investment advisor, thereby negating his standing to sue under Section 10(b). {See GS Opp’n at 27.) In support, GS cites several eases for the proposition that a plaintiff must “have some level of involvement in [an] investment decision to invoke the protection of Section 10(b), as that provision seeks to shield investors from fraudulent information in the course of securities investment decisions.” (GS Opp’n at 27.) GS also asserts that Plaintiff conceded that he delegated complete decision-making authority to his investment advisor, and that his advisor had “complete discretion” to trade on behalf of Plaintiff and was not required to seek Plaintiffs approval before executing trades. (GS Opp’n at 27.) Plaintiff responds that the unique defense raised by GS is not meritorious and, in any event, does not preclude certification. For the reasons that follow, the Court finds that GS has not shown that Plaintiff is subject to a potentially meritorious unique defense that prevents Plaintiff from satisfying the typicality, commonality, or adequacy requirements of Rule 23(a).
“‘While it is settled that the mere existence of individualized factual questions with respect to the class representative’s claim will not bar class certification, class certification is inappropriate where a putative class representative is subject to unique defenses which threaten to become the focus of the litigation.’ ” Baffa, 222 F.3d at 59-60 (quoting Gary Plastic Packaging, 903 F.2d at 180). “The defendant need not show at the certification stage that the unique defense will prevail, only that it is meritorious enough to require the plaintiff to ‘devote considerable time to rebut the unique defense.’ ” Hallet v. Li & Fung Ltd., No. 95 Civ. 8917(JSM), 1997 WL 621111, at *3 (S.D.N.Y. Oct. 6, 1997) (quoting Landry v. Price Waterhouse, 123 F.R.D. 474, 476 (S.D.N.Y.1989)). “However, the court should not disqualify a named plaintiff based upon any groundless, far-fetched defense that the defendant manages to articulate.” Hallet, 1997 WL 621111, at *3 (citing In re Frontier Ins. Group Sec. Litig., 172 F.R.D. 31, 41 (E.D.N.Y.1997)). Additionally, “[t]he rule barring certification of plaintiffs subject to unique defenses is not ‘rigidly applied in this Circuit;’ in fact, ‘a representative may satisfy the typicality requirement even though that party may later be barred from recovery by a defense particular to him [or her] that would not impact other class members.’” In re Frontier, 172 F.R.D. at 41 (quoting Langner v. Brown, No. 95 Civ.1981(LBS), 1996 WL 709757, at *3 (S.D.N.Y. Dec. 10, 1996)); see also Darquea v. Jarden Corp., No. 06 Civ. 722(CLB), 2008 WL 622811, at *3 (S.D.N.Y. Mar. 6, 2008) (“The typicality requirement can be satisfied even where a putative class representative is subject to unique defenses.”); Trief, 144 F.R.D. at 200-01 (“[I]t is beyond reasonable dispute that a representative may satisfy the typicality requirement even though that party may later be barred from recovery by a defense particular to him that would not impact other class members.”) (citing Werner v. Satterlee, Stephens, Burke & Burke, 797 F.Supp. 1196, 1213-14 (S.D.N.Y.1992) and Mersay v. First Republic Corp., 43 F.R.D. 465, 469-70 (S.D.N.Y.1968)).
First, the Court finds that GS has not shown that Plaintiff is subject to a potentially meritorious unique defense that preclude certification under Rule 23(a). None of the cases cited by GS involved a situation in which the court declined to certify a class because of the presence of a unique defense. Indeed, the cases cited by GS support the proposition that, at least at the motion to dismiss or summary judgment stage, some involvement by a plaintiff in the investment decision may render plaintiff a “purchaser” for purposes of a Section 10(b) action. See Seippel v. Sidley, Austin, Brown & Wood, LLP, 399 F.Supp.2d 283, 296-97 (S.D.N.Y.
Second, even if GS had shown the presence of a meritorious unique defense as to Plaintiff, the Court finds that the litigation of this potential defense will not “threaten to become the focus of the litigation,” Baffa, 222 F.3d at 59-60, because it does not go to the heart of Plaintiffs case and will not require considerable time and effort to rebut. In re Ashanti Goldfields Sec. Litig., No. 00 Civ. 0717(DGT), 2004 WL 626810, at *13 (E.D.N.Y. Mar. 30, 2004) (“[E]ven in cases where a unique defense might exist, a plaintiff subject to a unique defense is not an appropriate class representative only if that unique defense might draw the focus of the litigation away from common legal or factual issues.”) (citations and internal quotation marks omitted); see also In re Indep. Energy Holdings, 210 F.R.D. at 481 (“While the extent of non-reliance on [plaintiffs’] part will certainly be a fact question to be decided at trial, it is unlikely to significantly shift the focus of the litigation to the detriment of the absent class members.”).
Accordingly, the Court finds that Plaintiff is not subject to any unique defenses that preclude certification under the commonality, typicality, or adequacy prongs of Rule 23(a).
For the foregoing reasons, the Court finds that Plaintiff has satisfied the requirements of Rule 23(a). The Court now turns to the requirements of Rule 23(b).
B. Rule 23(b)
Provided the criteria of Rule 23(a) are met, a district court must then determine whether the class action fits within one of the three types of class actions listed in Rule 23(b). Plaintiff contends that this class action qualifies under Rule 23(b)(3). Under Rule 23(b)(3), a court may certify the class if “the court finds that the questions of law or fact common to class members predominates over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.” Fed. R.Civ.P. 23(b)(3); see also Central States, 504 F.3d at 245.
1. Predominance
The first requirement, predominance, will be met “if resolution of some of the legal or factual questions that qualify each class member’s case as a genuine controversy can be achieved through generalized proof, and if these particular issues are more substantial than the issues subject only to individualized proof.” Moore v. PaineWebber, Inc., 306 F.3d 1247, 1252 (2d Cir. 2002). In cases involving publicly traded securities and purchases or sales in public securities markets, the elements of a securities fraud claim for violation of Section 10(b) and Rule 10b-5 are: (1) a material misrepresentation (or omission); (2) scienter, i.e., a
GS argues that the predominance requirement of Rule 23(b)(3) cannot be met for two reasons. First, GS asserts that the class may not be certified because individual issues of knowledge pertaining to the alleged fraud predominate over questions common to the class, and thus Plaintiff is not entitled to the presumption of reliance as articulated in Basic Inc. v. Levinson, 485 U.S. 224, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988). (See GS Opp’n at 8-16.) Second, GS asserts that Plaintiff has failed to establish loss causation by a preponderance of the evidence at this stage. (See id. at 16-26.)
For the reasons that follow, the Court finds that Plaintiff has met the predominance requirement contained in Rule 23(b)(3) as to each element of Plaintiffs Section 10(b) claim.
a. Plaintiff Has Met the Predominance Requirement With Respect to Four of the Six Elements of a Section 10(b) Claim
With respect to the six elements under Dura Pharmaceuticals, GS only contests Plaintiffs showing in relation to the reliance and, arguably, loss causation elements. The Court agrees that Plaintiff has met its burden with respect to the four uncontested elements, as each will be subject to generalized proof, and general issues will predominate over individual questions with respect to each element. First, Plaintiff has shown that proof of GS’s alleged misrepresentations and/or omissions are susceptible to generalized proof. Plaintiff asserts that such proof will be based on evidence of “Goldman’s own public statements regarding Goldman’s stock rating system and criteria, the impartiality and objectivity of Goldman’s research department, and Goldman’s purported compliance with applicable regulations.” (Pl.’s Reply at 13. ) Second, Plaintiff has shown that scien-ter will be proven based on evidence common to all class members, as Plaintiff asserts that he will establish that “Goldman management and personnel knew or disregarded the conflicts-of-interest alleged” by Plaintiff. {Id. at 14. ) Third, there is no dispute that the case involved the purchase or sale of securities, and Plaintiff has shown that, in any event, this element is subject to generalized proof. Finally, Plaintiff has shown that economic loss—to the extent loss causation can be shown, see infra—will be shown via class-wide proof. Although the damages, if any, owed to each individual class plaintiff who succeeds on his or her claims will vary, that fact does not defeat certification if the method of calculating damages is common to the class. See In re Oxford Health Plans, Inc., 191 F.R.D. 369, 377 (S.D.N.Y.2000) (“While damages may vary among class members, all share common questions of liability. Damage amounts can be calculated for each individual class member after a determination of liability.”).
Having found that Plaintiff has satisfied Rule 23(b)(3) with respect to four of the six elements of a Section 10(b) claim, the Court now turns to the remaining contested elements.
b. The Basic Presumption Applies Here, and is not Rebutted by Issues of Knowledge
GS first contends that Plaintiff cannot meet the predominance requirement with respect to the element of reliance because there is evidence in the record that certain members of the putative class had knowledge of the alleged fraud. Such knowledge, according to GS, rebuts the presumption of reliance articulated in Basic, and, under In re IPO, precludes certification under Rule 23(b) (3). For the reasons that follow, the Court finds that the proposed class plaintiffs did not have knowledge of the fraud, and thus the presumption of reliance is not rebutted.
“There is no dispute that a section 10(b) claimant ‘must allege and prove’ that
The Basic or “fraud-on-the-market” theory “creates a rebuttable presumption that (1) misrepresentations by an issuer affect the price of securities traded in the open market, and (2) investors rely on the market price of securities as an accurate measure of their intrinsic value.” Hevesi, 366 F.3d at 77. As such, the Basic theory allows a plaintiff alleging securities fraud to establish reliance “simply by virtue of the defendant’s public dissemination of misleading information.” Id.; see also DeMarco v. Lehman Bros., Inc., 309 F.Supp.2d 631, 635 (S.D.N.Y. 2004) (finding that, under the Basic presumption, “where there has been a misrepresentation to the securities marketplace, a rebuttable presumption arises that investors who purchased or sold securities in an efficient market relied upon the misrepresentation”) (citing Basic, 485 U.S. at 248-49, 108 S.Ct. 978).
“Any showing that severs the link between the alleged misrepresentation and either the price received (or paid) by the plaintiff, or his decision to trade at a fair market price, will be sufficient to rebut the presumption of reliance.” Basic, 485 U.S. at 248, 108 S.Ct. 978; In re Salomon Analyst Metromedia, 236 F.R.D. 208, 223 (S.D.N.Y. 2006). The Supreme Court in Basic hypothesized that the link would be severed and the presumption rebutted “if, despite [defendant’s] allegedly fraudulent attempt to manipulate market price, [the truth] credibly entered the market and dissipated the effects of the misstatements.” Basic, 485 U.S. at 248-49, 108 S.Ct. 978. In that event, “those who traded ... shares after the corrective statements would have no direct or indirect connection with the fraud.” Id.; see also Kalnit v. Eichler, 85 F.Supp.2d 232, 241 (S.D.N.Y.1999).
Here, there can be no dispute that the market for GS stock is an efficient market, and that investors rely on the market as an accurate measure of the stock’s value. See Basic, 485 U.S. at 249 n. 29, 108 S.Ct. 978 (finding the New York Stock Exchange to be a classic efficient market). Accordingly, the Court finds that, as a preliminary matter, Plaintiff is entitled to the Basic presumption in order to show that reliance can be proven on a class-wide basis.
Nevertheless, GS argues that knowledge of the alleged fraud in this case was widespread among investors in GS stock, and thus the Basic presumption is rebutted. In support, GS relies on public statements by institutional investors, academic papers, and a complaint filed against GS during the class period (the “Stefansky Complaint”), all of which publicized the existence of conflicts of interest like those alleged in this case. (See GS Opp’n at 10-15.) GS also cites to In re IPO and McLaughlin as support for the proposition that the Basic presumption is rebutted where there is widespread knowledge among investors of the facts allegedly misstated or concealed. (See id.; Transcript of April 16, 2008 Oral Argument at 4-20.) Without the presumption, GS contends, Plaintiff cannot show reliance on a class-wide basis, and thus certification should be denied. However, the cases relied on by GS are readily distinguishable and do not support denial of class certification here.
In re IPO specifically involved allegations that six different “focus” issuers of shares engaged in a scheme to defraud the investing public in violation of securities laws. The district court certified each of the six classes, and defendants appealed, arguing, inter alia, that Rule 23(b)(3) was not satisfied where the Basic presumption was rebutted for lack of an efficient market, and individual issues of reliance predominated. The Second Circuit
In McLaughlin, the Second Circuit likewise reversed the district court’s certification of the class, finding that numerous issues were not susceptible to generalized proof. The plaintiffs in McLaughlin consisted of a group of smokers who alleged that they were deceived by the defendant cigarette companies’ marketing into believing that “light” cigarettes were healthier than “full-flavored” cigarettes. McLaughlin, 522 F.3d. at 220. Plaintiffs sued the defendants not under the securities laws but under the Racketeer Influenced and Corrupt Organizations Act (“RICO”), under which the plaintiffs had to prove reliance, among other things. Id. at 219-20. The plaintiffs invoked the Basic presumption to make the necessary showing at the class action certification stage that common issues of fact would predominate as to the reliance element. Id. at 224, 108 S.Ct. 978. The court found, as it had in In re IPO, that the plaintiffs were not entitled to the Basic presumption because, unlike the New York Stock Exchange (the applicable market in Basic), the market for consumer goods— here, cigarettes—was not an efficient market. Id. at 224, 108 S.Ct. 978. The court concluded that, without the Basic presumption, the “too individualized” questions of reliance in that particular ease would predominate, and thus class certification was not appropriate. Id. at 224-25, 108 S.Ct. 978.
The Court finds that neither In re IPO nor McLaughlin compel a finding that the Basic presumption is rebutted in the instant case. In both In re IPO and McLaughlin, the Second Circuit found that the market at issue was not an efficient market, and that this alone made the Basic presumption inapplicable. See In re IPO, 471 F.3d at 43 (finding that the market in an initial public offering is not efficient); McLaughlin, 522 F.3d at 224 (finding that the market for cigarettes was “anything but efficient”). No such argument is made here, as no argument could be made that the New York Stock Exchange is not an efficient market. See Basic, 485 U.S. at 249 n. 29, 108 S.Ct. 978 (finding the New York Stock Exchange to be a classic efficient market). Moreover, in both In re IPO and McLaughlin, the Second Circuit found that the plaintiffs could not show actual reliance absent the Basic presumption. Here, GS instead submits that the fact of individualized questions of knowledge about the fraud itself rebuts the presumption because it severs the reliance “link.” See Basic, 485 U.S. at 248-49, 108 S.Ct. 978 (“[I]f, despite [defendants’] allegedly fraudulent attempt to manipulate market price, [the truth] credibly entered the market and dissipated the effects of the misstatements, those who traded ... shares after the corrective statements would have no direct or indirect connection with the fraud.”).
Putting aside Plaintiffs arguments that GS’s evidence is inadmissible hearsay (see Pl.’s Reply at 3-4), the evidence put forth by GS simply does not show that the reliance link was “severed.” GS has, at best, proffered evidence that industry members and academics were generally aware that conflicts involving research and investment banking divisions within the same firm were prevalent in the industry. (See GS Opp’n at 10-14.) This is very different from the situation in In re IPO, where it was undisputed that a substantial number of the proposed class members had actual notice of—and indeed, involvement in—the fraudulent scheme that was alleged to have artificially inflated share prices. See In re IPO, 471 F.3d at 43.
This distinction was not lost on Judge Kar-as, who, in the context of a statute of limitations argument, previously addressed GS’s claims that news articles and a complaint filed against GS put potential plaintiffs on notice of the alleged fraud. Indeed, Judge Karas found that generalized statements of the existence of analyst/banker conflicts was not sufficient to put potential plaintiffs on notice of the fraud, noting that:
[t]he news articles generally stated that analyst reports were influenced by investment banking considerations. Such media reports did not go beyond the type of general warnings about analysts that have been found insufficiently detailed to alert a reasonable investor to the fraud alleged. Reports indicating tension created by analysts’ placement within firms that receive a large proportion of revenue from investment banking business do not suggest widespread fraud to create a duty of inquiry: “[a]t most, those reports should have instilled in plaintiffs a healthy skepticism towards research reports; they did not reveal a ‘probability’ of fraud.” Fogarazzo v. Lehman Bros., 341 F.Supp.2d 274, 300 (S.D.N.Y.2004)____Similarly, the [Stefan-sky Complaint] merely alleges general grounds for potential conflicts of interest at Goldman due to the closer relationship between investment bankers and analysts ---- Such general allegations do not rise to the level discussed in [Shah v. Meeker, 435 F.3d 244 (2d Cir.2006) ] for a plaintiff to perceive the general fraudulent scheme alleged.
Lapin, 506 F.Supp.2d at 235. Additionally, Judge Karas noted that throughout the same time period, “investors were also being fed reassuring statements by Goldman, implying that the criticisms discussed in the articles and the complaint did not apply to Goldman” and defending the “independence and quality” of GS research. Id. at 235-36.
Unlike in IPO, neither the SAC nor any evidence put forth by GS demonstrates that any potential class plaintiff—including investment banks (see GS Opp’n at 13 n. 4)—had actual knowledge of, or participated in, any alleged fraud that resulted from conflicts of interest at GS. Because the Court finds that GS has failed to show that the truth about the alleged conflicts at GS (and the result, if any, that those conflicts had on stock price) “credibly entered the market,” Basic, 485 U.S. at 248-49,108 S.Ct. 978, the Court finds that the reliance link is not severed, and the Basic presumption is not rebutted on these grounds. Were it otherwise, GS could, in theory, rebut the Basic presumption and defeat class certification merely by citing comments by certain industry participants that note the potential for a type of fraud in the industry. This type of generalized notice of the potential for fraud is not the type of market recognition of credible information about the fraud contemplated in Basic or In re IPO. See Basic, 485 U.S. at 248-49, 108 S.Ct. 978.
c. Loss Causation Need Not Be Proven in Order to Invoke the Basic Presumption
Finally, GS argues that Plaintiff has not met the requirements of Rule 23(b)(3) because Plaintiff cannot establish loss causation by class-wide proof at this point. (See GS Opp’n at 16-26.) GS urges the Court to follow the Fifth Circuit’s decision in Oscar Private Equity Investments v. Allegiance Telecom, Inc., 487 F.3d 261 (5th Cir.2007), in which the court held that proof of loss causation is a prerequisite for the invocation of the Basic presumption and must be demonstrated at the class certification stage by a preponderance of the evidence. GS asserts that Plaintiff has failed to demonstrate loss causation because Plaintiffs expert, Dr. Scott Hakala, “has not offered any methodology to demonstrate that the alleged misstatements in the Complaint artificially inflated Goldman Sachs[’] stock price, let alone that any inflationary effect lasted throughout the almost three-year putative class period.” (GS Opp’n at 2.) Plaintiff responds that neither In re
There is no dispute that loss causation, which is defined as a “causal connection between the material misrepresentation and the loss,” is an element of a Section 10(b) claim and must be proven by a plaintiff in order to succeed on that claim on the merits. Dura Pharms., 544 U.S. at 342, 125 S.Ct. 1627 (citation omitted). The parties’ dispute instead centers around whether a plaintiff must prove loss causation at the class certification stage in order to invoke the Basic presumption and satisfy the predominance requirement. In support of its argument that loss causation must be proven at this stage of the litigation, GS relies heavily on the Fifth Circuit’s 2007 decision in Oscar. In Oscar, the Fifth Circuit stated that “Basic allows each of the circuits room to develop its own fraud-on-the-market rules” and that the Fifth Circuit “has used this room ... to tighten the requirements for plaintiffs seeking a presumption of reliance.” Oscar, 487 F.3d at 264-65 (citations omitted). Accordingly, the court held that, in the Fifth Circuit, the law “require[s] plaintiffs to establish loss causation in order to trigger the fraud-on-the-market presumption.” Id. at 265 (citations omitted). The court found that “the trial court erred in ruling that the class certification stage is not the proper time for defendants to rebut lead Plaintiffs’ fraud-on-the-market presumption.” Id. at 270.
At oral argument, GS also cited In re Credit Suisse First Boston Corp. (Lantronix, Inc.) Analyst Sec. Litig., 250 F.R.D. 137 (S.D.N.Y.2008) for the principle that a district court should evaluate the market impact of the alleged fraud in determining whether the fraud on the market presumption should apply. In a footnote in that case, the Honorable Loretta A. Preska, District Judge, found that the Basic presumption was inapplicable and/or rebutted where defendants were able to show that “the misrepresentation did not in fact lead to a distortion of the stock price.” Id. at 250 F.R.D. at 143 n. 11. Judge Preska went on to note that “[h]ere, Plaintiff has proffered evidence which, if credited, would constitute a modest showing of market impact. This showing, when weighed against Defendants’ opposing evidence, is insufficient to persuade the Court that the Basic presumption is applicable to this case.” Id. However, Judge Preska did not explicitly adopt Oscar or make a finding that a determination on loss causation was required in all cases in which a plaintiff relied upon the Basic presumption.
Several courts in this District have expressly addressed the Fifth Circuit’s decision in Oscar, and all have rejected the notion that a showing of loss causation is a requirement at the class certification stage. For example, in Darquea v. Jarden Corp., No. 06 Civ. 722(CLB), 2008 WL 622811, at *4 (S.D.N.Y. Mar. 6, 2008), the court held that the standard set forth in Oscar was “limited to the Fifth Circuit,” and that “a [pjlaintiff in the Second Circuit may benefit from the fraud-on-the-market presumption of reliance at the certification stage based solely on a showing that they made purchases or sales in an efficient market, and need not show that they specifically relied on the allegedly fraudulent conduct, as reliance—an element of a 10(b) [claim]—is presumed.” Likewise, in Wagner v. Barrick Gold Corp., 251 F.R.D. 112, 118-19 (S.D.N.Y.2008), the court found that proof of loss causation is not a prerequisite for certification of a class, and specifically cited Oscar as a “drastic” departure from the principles articulated in Basic. Finally, in the recent case of In re Alstom SA Sec. Litig., 253 F.R.D. 266, 280-81 (S.D.N.Y. 2008), the defendants argued that the plaintiffs could not establish reliance by way of the Basic presumption because the plaintiffs could not prove loss causation. The Court rejected this argument, finding that loss causation “relates to the merits of Plaintiffs’ case and Defendants have not sufficiently
The Court agrees with the reasoning employed by the majority of courts in this District that have considered the issue, and finds that Oscar should be rejected as a misreading of Basic. See In re Alstom, 2008 WL 4053361, at *10; Darquea, 2008 WL 622811, at *4; Wagner, 251 F.R.D. 112, 118-19. But see In re Credit Suisse, at 143 n. 11. Nothing in Basic or any Second Circuit precedent requires that Plaintiff prove loss causation by a preponderance of the evidence in order to invoke the Basic presumption and satisfy the requirements of Rule 23.
To the extent that GS relies on In re IPO for the principle that the Court is required, at the class certification stage, to make a finding as to whether a plaintiff has established loss causation, that reliance is misplaced. In re IPO requires only that district courts resolve any underlying factual disputes to the extent necessary to make a finding on the satisfaction of the Rule 23 requirements. See In re IPO, 471 F.3d at 41. Conversely, “a district judge should not assess any aspect of the merits unrelated to a Rule 23 requirement----” Indeed, “[b]y asking the Court to decide which expert report is more credible, defendants are requesting that the Court look beyond the Rule 23 requirements and decide the issue on the merits, a practice In re IPO specifically cautions against.” Hnot v. Willis Group Holdings Ltd., 241 F.R.D. 204, 210 (S.D.N.Y.2007). Accordingly, the Court finds that Plaintiff need not prove loss causation in order to invoke the Basic presumption.
Plaintiff has shown that, if the class plaintiffs are ultimately able to prove loss causation, that proof will be in the form of an event study provided by Plaintiffs expert, Dr. Scott Hakala. {See Pl.’s Mem. at 20.) According to Plaintiff, Dr. Hakala’s methodology will show that the loss incurred by the proposed class plaintiffs was attributable to GS’s misrepresentations and omissions, which artificially inflated the stock. {See id. at 20.) Additionally, Plaintiff asserts that Dr. Hakala’s methodology will show that “a consistent and correct model of inflation per share can be developed to cover the Class Period and can be used to compute class-wide damages.” {Id. at 20-21.) Despite GS’s protests that Dr. Hakala’s methodology is flawed, a “battle of the experts” is not appropriate at the class certification stage, as the relevant question is only whether Plaintiffs expert’s methodology will apply to the entire class. See Hnot, 241 F.R.D. at 210 (“[Plaintiffs disagree on whose statistical findings and observations are more credible, but this disagreement is relevant only to the merits of plaintiffs’ claim ... and not to whether plaintiffs have asserted common questions of law or fact.”) (emphasis in original). GS has not shown that Dr. Hakala’s methodology is incapable of proving loss causation on a class-wide basis. Accordingly, the Court finds that Plaintiff has satisfied the requirements of Rule 23(b)(3) with respect to the loss causation element of a Section 10(b) claim.
In sum, the Court finds that the predominance requirement of Rule 23(b)(3) is met with respect to the reliance and loss causation elements because Plaintiff has demonstrated that “resolution of some of the legal or factual questions that qualify each class member’s case as a genuine controversy can be achieved through generalized proof____” Moore, 306 F.3d at 1252.
2. Superiority
Finally, the other requirement under Rule 23(b), superiority, will be met if, “in terms of fairness and efficiency,” the Court finds that the advantages of a class action are greater than those of “alternative available methods of adjudication.” In re Vivendi, 242 F.R.D. at 91. In addressing the issue of
As one court in this District recently observed:
In general, securities suits ... easily satisfy the superiority requirement of Rule 23. Most violations of the federal securities laws ... inflict economic injury on large numbers of geographically dispersed persons such that the cost of pursuing individual litigation to seek recovery is often not feasible. Multiple lawsuits would be costly and inefficient, and the exclusion of class members who cannot afford separate representation would neither be “fair” nor an adjudication of their claims. Moreover, although a large number of individuals may have been injured, no one person may have been damaged to a degree which would induce him to institute litigation solely on his own behalf.
In re Merrill Lynch Tyco Research Sec. Litig., 249 F.R.D. 124, 132 (S.D.N.Y.2008) (quoting In re Blech Sec. Litig., 187 F.R.D. 97, 107 (S.D.N.Y.1999)); see also Darquea, 2008 WL 622811, at *5 (“Securities suits easily satisfy the superiority requirement.”).
The Court finds that the factors articulated in Rule 23(b)(3) weigh in favor of a finding of superiority in this matter. This is a lawsuit arising under the securities laws, and as is the case in most securities suits, multiple lawsuits would be inefficient and costly. Here, the number of potential plaintiffs is high, but the amount of potential recovery per plaintiff is not so high as to ensure that each plaintiff could or would bring an action individually. See, e.g., Darquea, 2008 WL 622811, at *5. Additionally, GS does not specifically challenge Plaintiffs assertion that a class action lawsuit is the superior method of resolving this ease. Accordingly, the Court finds that Plaintiff has met the superiority requirement of Rule 23(b).
III. Conclusion
For the foregoing reasons, Plaintiffs motion to certify the class pursuant to Rule 23 is GRANTED. The Clerk of the Court is respectfully directed to terminate the motion located at document number 40.
SO ORDERED.