Weisburgh v . NH Savings Bank Corp. CV-90-227-B 09/30/93 UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE
Jeffrey Weisburgh, on behalf of himself and all those similarly situated, Edward C . Taylor, and Maurice B . Emond
v. Civ. N o . 90-227-B
New Hampshire Savings Bank Corp., et al
O R D E R
Plaintiffs bring this securities fraud action on behalf of
themselves and all other persons who purchased New Hampshire
Savings Bank Corp. ("NHSBC") common stock between January 3 0 ,
1989 and April 3 , 1990. Plaintiffs allege that during this
period, defendant NHSBC and several of its officers and directors
artificially inflated the market price of NHSBC's common stock by engaging in a common course of conduct designed to publicly
misrepresent NHSBC's financial condition and future prospects.
Plaintiffs base their claims for relief on §§10(b) and 20 of the
Securities and Exchange Act of 1934, 15 U.S.C.A. §§ 77(b)-78(h),
and Rule 10b-5 promulgated thereunder, 17 C.F.R. §240.10b-5, as
well as on the common law of negligent misrepresentation. Presently before me is plaintiffs' motion for class certification
pursuant to Rule 23(a) and (b)(3) of the Federal Rules of Civil
Procedure.
I. BACKGROUND
At some point prior to January 3 0 , 1989, NHSBC's loan portfolio began to rapidly deteriorate. Failing commercial construction projects and the collapse of the New Hampshire real estate market had begun to take their toll. Plaintiffs allege that NHSBC should have immediately disclosed that its portfolio was deteriorating, established adequate loan and credit loss reserves, and written-off non-collectible loans. NHSBC, however, did not correct these problems. Instead, on January 3 0 , 1989, when the bank announced its earnings per share, it also announced a $6 million addition to its fourth quarter 1988 loan loss reserves that wrongly led prospective investors to believe that the bank had established adequate reserves to meet the challenges NHSBC was facing.
Plaintiffs allege that in the following sixteen months, defendants continued to misrepresent NHSBC's true condition in a series of Annual Reports, Quarterly Reports, filings with the SEC, press releases and public statements. While these
2 disclosures revealed additional problems at NHSBC, plaintiffs assert that each disclosure also led investors to mistakenly believe that past problems had been addressed and that NHSBC had now conservatively provided for the risk of future write-offs and loan losses. According to plaintiffs, such misstatements and omissions were material and misleading. In addition, the inadequate loss provisions NHSBC detailed also caused its income and assets to be materially misstated throughout the period. Plaintiffs contend that the fraud finally ended on April 3 , 1990, when NHSBC issued a press release announcing revised fourth quarter and year-end 1989 results. The revised 1989 results reflected a $68.8 million loss for the year. In this press release, NHSBC also revealed that its auditors would issue a "going concern" opinion and that the bank would be forced to enter into a Cease and Desist Order with federal regulators.1 Over the course of the period, defendants' announcements had a devastating effect on NHSBC's stock price. On January 3 0 , 1989, NHSBC stock traded at $11.00 per share. After the Company's
1 Plaintiffs also allege that during the period defendants failed to disclose that federal and state regulators had criticized NHSBC's loan practices and loan loss reserves. These regulators had also imposed restrictions on NHSBC that severely impaired its liquidity and operational flexibility.
3 April 3 , 1990 release, the stock traded at $1.12. On May 5 , 1990, plaintiffs filed a class action complaint stating their federal securities law and state law claims.2 On September 1 4 , 1990, plaintiffs moved for certification of the class pursuant to Rule 23 of the Federal Rules of Civil Procedure. Plaintiffs defined the proposed class as consisting of "[a]ll purchasers of New Hampshire Saving Bank common stock during the period January 3 0 , 1989 through April 3 , 1990
(inclusive)." Jeffrey Weisburgh, Edward Taylor and Maurice Emond were proposed as class representatives. Defendants opposed certification of plaintiffs' federal securities claims on the grounds that the named plaintiffs were atypical and inadequate representatives and lacked standing to assert the claims of certain members of the proposed class. Defendants also argued that plaintiffs' state law claims could not be certified because questions of individual reliance would predominate over questions common to the class. After almost three years of procedural disputes, a hearing was held on September 9, 1993. I now grant
2 Jeffrey Weisburgh was the only named class representative when the class action complaint was filed. Named plaintiffs Edward Taylor and Maurice Emond were added by amending the original complaint. For convenience, I refer to plaintiffs in the plural throughout this order.
4 plaintiffs' motion as to their federal securities law claims and
deny it as to their state law claims. Because Article III
standing "is the threshold question in every federal case", Warth
v . Seldin, 422 U.S. 4 9 0 , 498 (1975), I address this issue first.
II. STANDING
Defendants raise two objections to named plaintiffs' standing to assert the claims of absent class members. First, defendants argue that because misrepresentations or omissions are only actionable under § 10(b) if plaintiffs relied upon them in purchasing NHSBC stock, the named plaintiffs lack standing to challenge alleged misrepresentations made after their last purchases. Adair v . Sorenson, 134 F.R.D. 1 3 , 16 (D. Mass. 1991); see also Blue Chip Stamps v . Manor Drug Stores, 421 U.S. 723, 731, 737-38 (standing to bring a § 10(b) claim is limited to actual purchasers and sellers of securities), reh'g denied, 423 U.S. 884 (1975). Second, defendants argue that because the named plaintiffs purchased their stock after a revealing April 5 , 1989 news release,3 qualitative differences in available public
3 In the April 5 release, NHSBC revealed both that it anticipated a large increase in its first quarter loan loss reserves and that it had taken title to the "Sky Meadow" project
5 information preclude them from representing investors who
purchased before April 5 . Only defendants' first argument
presents an Article III issue. Defendants' second argument
concerns the commonality and typicality of the class action
claims. Thus, I address this argument in a subsequent section.
An individual's standing to sue and his right to represent a
class are separate issues, one applicable to substantive claims
and the other to procedural claims. United States Parole Comm'n
v . Geraghty, 445 U.S. 3 8 8 , 402 (1980). An individual's standing
to sue hinges on her substantive claim: whether she has "a
personal stake in the outcome of the controversy" and "whether
the dispute 'touches upon the legal relations of parties having
adverse legal interests.'" Flast v . Cohen, 392 U.S. 8 3 , 100-101
(1968) (citations omitted). A class action is not a means to
escape this requirement. Plaintiffs still must "allege and show
that they personally have been injured, not that injury has been
suffered by other, unidentified members of the class to which
they belong and which they purport to represent". Warth v .
Seldin, 422 U.S. 4 9 0 , 502 (1975). Thus, it is not sufficient for
the representative plaintiffs merely to share attributes common
which served as security for its largest non-performing loan. 6 to persons in the proposed class. Id. A plaintiff cannot
acquire standing "through the back door of a class action".
Allee v . Medrano, 416 U.S. 8 0 2 , 829 (1974).
An individual's right to represent a class, in contrast, is
a "procedural claim," the scope of which is defined by Rule 2 3 .
Geraghty, 445 U.S. at 402-04. As the Supreme Court reasoned in
Geraghty, The justifications that led to the development of the class action include the protection of the defendant from inconsistent obligations, the protection of the interests of absentees, the provision of a convenient and economical means for disposing of similar lawsuits, and the facilitation of the spreading of litigation costs among numerous litigants with similar claims. Although the named representative receives certain benefits from the class nature of the action, some of which are regarded as desirable and others as less s o , these benefits generally are byproducts of the class- action device. In order to achieve the primary benefits of class suits, the Federal Rules of Civil Procedure give the proposed class representative the right to have a class certified if the requirements of the Rules are met. This "right" is more analogous to the private attorney general concept that to the type of interest traditionally thought to satisfy the "personal stake" requirement.
Id. at 402-03 (citations and footnotes omitted); see also id. at
422-23 (Powell J., dissenting); Deposit Guaranty Nat. Bank v .
Roper, 445 U.S. 326, 338-39, reh'g denied, 446 U.S. 947 (1980).
Thus, a proposed plaintiff who has suffered the injury in fact
necessary to give rise to a personal stake in the outcome of the
7 litigation has standing to represent any class that is certifiable under Rule 2 3 . In the present case, the named plaintiffs have satisfied the requirements of Article III by alleging sufficient injuries to demonstrate the requisite personal stake in the outcome of the case. They have alleged that defendants' common course of misrepresentations artificially inflated the market price of NHSBC stock and thereby caused them demonstrable, particular injuries. Whether the named plaintiffs may serve as
representatives for class members who purchased stock after the named representatives made their final purchases thus will depend solely on whether the purported class satisfies the requirements of Rule 2 3 .
III. CERTIFICATION OF §10(b) CLAIMS UNDER RULE 23
Under Rule 23(a), plaintiffs bear the burden of showing that
(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(a). The first two prerequisites,
8 numerosity and commonality, require the named plaintiffs to show
that an identifiable class exists. The second two, typicality
and adequacy, require these plaintiffs to show that they are
appropriate representatives of this class. See Advisory
Committee Note, 39 F.R.D. 6 9 , 100 (1966); 1 H . Newberg & A .
Conte, Class Actions, §3.01 (3d ed. 1992). If plaintiffs meet
their burden under Rule 23(a), they must then demonstrate that
the action satisfies Rule 23(b). Because plaintiffs here move
that the class be certified pursuant to Rule 23(b)(3), the action
can only be maintained i f : (i) questions of law or fact common to
the class predominate over any questions affecting only
individual members; and (ii) a class action is "superior to other
available methods" of adjudicating the case.
A. Standard of Review
Plaintiffs and defendants have spent much time and effort
debating the standard of review I must use and the materials I
may consider in determining whether the requirements of Rule 23
have been met. Plaintiffs appear to support the standard used to
evaluate a motion to dismiss pursuant to Rule 12(b)(6) of the
Federal Rules of Civil Procedure. In support of this position,
they cite the Supreme Court's admonition that an inquiry into the
merits of a claim is inappropriate prior to the resolution of the 9 class certification issue. Eisen v . Carlisle & Jacquelin, 417 U.S. 156, 177-178 (1974). Defendants disagree and base their position on an apparently contradictory statement in another Supreme Court decision stating that a District Court must first conduct a "rigorous analysis" and, if necessary, look behind the pleadings to determine whether class certification is
appropriate. General Telephone C o . of Southwest v . Falcon, 457 U.S. 1 4 7 , 160-61 (1982). While neither party is entirely correct, the defendants' position more closely describes the standard against which I review plaintiffs' class certification motion.
It will generally not be necessary to look beyond a plaintiff's well pleaded complaint in determining whether the requirements of Rule 23 have been satisfied. However, where a defendant produces evidence calling into question one or more of the factual assertions upon which the plaintiff's certification motion rests, it is necessary to look beyond the pleadings and conduct a "searching inquiry" to determine whether plaintiff has met her burden under Rule 2 3 . While this inquiry should not degenerate into a hearing on the merits, the court should not disregard facts that bear on the propriety of class certification simply because those facts are also relevant to the merits of the
10 plaintiff's claim. With these principles in mind, I now turn to whether the named plaintiffs in this case have satisfied Rule 23(a)'s requirements of commonality, typicality and adequacy.4 B. Commonality
Defendants challenge the named plaintiffs' standing to represent investors who purchased NHSBC stock before April 5 , 1989. On that date, NHSBC announced that it anticipated a substantial increase in loan loss reserves for the first quarter of 1989 and that it would take title to Sky Meadow, the security for its largest non-performing loan. All of the named plaintiffs purchased after this announcement. Defendants therefore argue that, because "the information in the market was qualitatively different after April 5," there can be no common questions of law or fact between plaintiffs and the pre-April 5 investors.
I disagree. The threshold imposed by Rule 23(a)(2) is low: if one common legal or factual issue exists, the requirement is met. Margaret Hall Foundation, Inc. v . Atlantic Financial
4 Defendants do not dispute that plaintiffs have satisfied Rule 23(a)'s numerosity requirement, and I so find. Approximately 500 investors nationwide purchased 9 million shares of NHSBC stock during the proposed class period. Joinder is therefore clearly impracticable.
11 Management, N o . 82-2534-T, 1987 U.S. Dist. LEXIS 7528, at *6 (D.
Mass. July 3 0 , 1987). 5 In this case, plaintiffs allege that,
over a sixteen month period, defendants engaged in a common
course of conduct designed to misrepresent NHSBC's financial
position and future prospects to the investing public; that this
conduct artificially inflated the market price of NHSBC common
stock; that, as a result, all purchasers of the stock during this
period were damaged; and that defendants' conduct violated
§10(b). All members of the proposed class thus have to prove the
same course of misrepresentation and omission, the materiality of
this conduct, and defendants' scienter. These common issues
clearly exceed what is required by Rule 23(a)(2). See, e.g.,
Abelson, 1987 U.S. Dist. LEXIS at * 5 ; Kirby v . Cullinet Software,
Inc., 116 F.R.D. 303, 306 (D. Mass. 1987) (amended, summ.
judgment granted, in part, 721 F. Supp. 1444 (1989)).
5 As Judge Skinner noted, commonality is "largely irrelevant to motions brought under Rule 23(b)(3), where the moving party must establish not only the existence of common questions of law or fact, but that such common questions predominate over questions particular to individual class members." Abelson v . Strong, N o . 85-05925, 1987 U.S. Dist. LEXIS 7515, at *5 (D. Mass. July 3 0 , 1987). Instead, the commonality requirement appears to be aimed at motions for certification brought under sections (b)(1) and (b)(2), which otherwise do not require that commonality exist. Id.
12 To establish that the claims of named plaintiffs and of the
pre-April 5 investors share no common issues of law or fact,
defendants would have to show that the April 5 release marked the
end of one fraudulent course of conduct and the beginning of
another. Cf., e.g., In re Endotronics (no number in original),
1988 U.S. Dist. LEXIS 745, at *16-17 (D. Minn. Jan. 2 4 , 1988)
(class period ended on date of "watershed" disclosure that
revealed defendants' fraud); In re Memorex Security Cases, 61
F.R.D. 8 8 , 97 (N.D. Cal. 1973) (class period ended on date of
disclosure that removed "alleged taint of earlier statements");
In Re LTV Securities Litigation, 88 F.R.D. 1 3 4 , 147-48 (N.D. Tex.
1980) (same). Defendants, however, argue merely that there was a
qualitative difference between the information available before
and after April 5.6 These contentions might affect damages, but
as a matter of law, they are insufficient to establish that the
periods before and after April 5 have no issues of law or fact in common.7
6 Defendants' attack on named plaintiffs' Article III standing also involved concerns appropriately addressed to commonality. For the same reasons discussed above, defendants arguments are insufficient as a matter of law. 7 This ruling of course in no way prevents defendants from introducing evidence later in this proceeding that might prompt
13 C. Typicality
Defendants also argue that the named plaintiffs are atypical
because they are subject to unique defenses. However, unique
defenses do not enter into the certification analysis until the
district court is called upon to determine whether questions
common to the class predominate over those relating only to the
individual representative plaintiffs. I therefore address this
contention at a later stage of my analysis.8
Rule 23(a)(3) focuses on whether the "claims or defenses of
the representative parties are typical of the claims or defenses
of the class." Defendants' "unique defense" argument assumes
that in referring to the "claims or defenses of the
representative parties," section (a)(3) means the claims of or
defenses against a representative plaintiff. I disagree.
me to modify or change this order. See Fed. R. Civ. P. 23(c)(1). Class certification orders are inherently tentative and can be changed at any time before determination of the merits of the case. General Telephone, 457 U.S. at 160. 8 To the extent that I may have suggested in a prior order that the presence of unique defenses may render a named representative's claims atypical, I was in error. Because of the presumption of reliance that exists in fraud-on-the-market cases, unique non-reliance issues are similar to affirmative defenses and thus are more properly considered when determining whether the claims common to the class predominate over the claims of the individual class members.
14 Section (a)(3) must be construed in accordance with the Rule's
earlier statement that a class member "may sue or be sued on
behalf of all." In other words, Rule 23 applies to
representative plaintiffs or defendants. When read in this
light, "the claims or defenses of the representative parties"
refers to "the claims of the representative plaintiff or the
defenses of the representative defendant". See 1 H . Newberg & A .
Conte, Class Actions, §3.16 (3d ed. 1992); Abelson, 1987 U.S.
Dist. LEXIS at *8 n.4. This keeps the typicality requirement in
line with the general purpose of Rule 23 -- "to limit the class
claims to those fairly encompassed by the named plaintiffs'
claims", General Telephone, 457 U.S. at 156 (citations omitted)
-- without requiring an impermissible determination of the
merits.
To be typical, plaintiffs must show that their "claim[s]
arise from the same event or course of conduct that gives rise to
the claims of other class members and is based on the same legal
theory." Moskowitz v . Lopp, 128 F.R.D. 6 2 4 , 629 (E.D. P a . 1989).
In the present case, each class member's claim depends upon proof
of the same course of conduct, the materiality of the conduct and
defendants' scienter. The named plaintiffs' claims depend upon
exactly the same showing. By presenting their claims, named
15 plaintiffs will therefore "necessarily present the claims of the
absent plaintiffs". Abelson, 1987 U.S. Dist. LEXIS at * 1 5 .
While I recognize that there are factual variations between
plaintiffs' cases and those of other class members, Rule 23 looks
for a common course of conduct, not for exact identity. Priest
v . Zayre Corp., 118 F.R.D. 5 5 2 , 555 (D. Mass. 1988). If it were
otherwise, certification motions could rarely be granted in
fraud-on-the-market cases. "[T]he effectiveness of the
securities laws [however] may depend in large measure on the
application of the class action device". Eisenberg v . Gagnon,
766 F.2d 7 7 0 , 785 (3d C i r . ) , cert. denied sub nom. Wasserstrom v .
Eisenberg, 474 U.S. 946 (1985) (quoting Kahan v . Rosensteil, 424
F.2d 1 6 1 , 169 (3rd C i r . ) , cert. denied, 398 U.S. 950 (1970)).
Accordingly, I determine that the named plaintiffs' claims are
typical of the claims of the class.
D. Adequacy
The final prerequisite imposed by Rule 23(a) is that the
proposed representatives "fairly and adequately protect the
interests of the class". Fed. R. Civ. P. 23(a)(4). This
requirement is satisfied where the named plaintiffs demonstrate
(1) that they are committed to vigorously prosecuting the action
through qualified counsel; and (2) that their interests do not
16 antagonize or conflict with the interests of the class they represent. Andrews v . Bechtel Power Corp., 780 F.2d 1 2 4 , 130 (1st Cir. 1985), cert. denied, 476 U.S. 1172 (1986). Defendants do not contest plaintiffs' claim that they have shown their interests to be in harmony with those of absent class members, and I so find. Defendants d o , however, dispute plaintiffs' commitment to vigorously prosecute the action.9 Defendants argue that plaintiffs are inadequate representatives because their agreements with counsel absolve them of personal liability for all litigation costs, including expert witness fees.
Defendants' argument is unpersuasive. The losses that the named plaintiffs sustained -- Weisburgh $1,700, Emond $10,000 and Taylor $22,000 -- give each a substantial incentive to remain involved in this litigation and ensure its vigorous prosecution. Plaintiffs have also demonstrated their commitment to this litigation by appearing for depositions, answering
9 Defendants do not dispute the qualifications and experience of plaintiffs' counsel. Plaintiffs' counsel have attested that they are experienced in federal securities class action litigation. Counsel has also vigorously prosecuted this action for over two years.
17 interrogatories and providing trading records.10 See Zaccoli v .
Harrison, N o . C-90-1006, slip o p . at 13 (D.N.H. 1990). In
addition, plaintiffs' counsel have attested to their willingness
to finance the costs of this litigation, including notice costs.
Finally, plaintiffs' fee arrangements are also entirely
consistent with New Hampshire's Rules of Professional Conduct.
See New Hampshire Rule 1.8(e)(1) ("a lawyer may advance court
costs and expenses of the litigant the payment of which may be
contingent on the outcome of the matter"). Given the assurances
that the above facts provide, I cannot see how personal liability
for plaintiffs' minimal11 share of any litigation costs would tip
the balance between vigorous prosecution and inadequate
representation. I therefore find that named plaintiffs will
10 Although defendants remark upon plaintiffs' failure to investigate the facts of this case, a plaintiff "need not have personal knowledge of all the relevant facts to be deemed adequate." Priest, 118 F.R.D. at 556. Parties oftentimes leave it up to their attorneys to conduct any necessary factual investigations. This is clearly not a case where plaintiffs are "startlingly unfamiliar" with the action. Greenspan v . Brassler, 78 F.R.D. 1 3 0 , 133-34 (S.D.N.Y. 1978). 11 If plaintiffs had agreed to remain personally liable for out-of-pocket litigation expenses, they would only have been liable for their pro rata share, i.e., their share of the costs after they were apportioned over the 9 million shares traded during the period.
18 adequately represent the interests of the absent class members.
E. Predominance and Superiority
Because plaintiffs have satisfied the prerequisites set out
in Rule 23(a), their class action may be maintained if (1) common
questions of law or fact predominate over questions affecting
only individual members, and (2) a class action is "superior to
other available methods" of adjudicating the case. Fed. R. Civ.
P. 23(b)(3).
Although defendants' "unique defense" arguments could not be
considered in determining the typicality of plaintiffs' claims,
these arguments can and should be considered in determining
whether the proposed class action may be maintained. See Blackie
v . Barrack, 524 F.2d 8 9 1 , 905 (9th Cir. 1975) cert. denied, 429
U.S. 816 (1976). Under Rule 23(b)(3), a district court may only
certify a class action if questions common to the class
predominate over "any questions affecting only individual
members". Fed. R. Civ. P. 23(b)(3) (emphasis added). The
Advisory Committee's Note to the Rule also suggests that unique
defenses may be considered when engaging in a predominance
analysis. In discussing section (b)(3) of Rule 2 3 , the Committee
stated that "a fraud case may be unsuited for treatment as a
class action if there was material variation in the
19 representations made or in the kinds or degrees of reliance by
the persons to whom they were addressed". 39 F.R.D. 6 9 , 103
(1966) (emphasis added). The Committee also stated that a "mass
accident" might be an inappropriate subject for a class action
because "of the likelihood that significant questions, not only
of damages but of liability and defenses of liability would be
present, affecting the individuals in different ways". Id.
(emphasis added). Finally, consideration of defendants' proposed
defenses under Rule 23(b)(3) does not require that I decide the
merits of this case. See Blackie, 524 F.2d at 905-08.
As defendants argue that all three proposed representatives
are subject to unique defenses, I consider each representative in
turn. After considering whether these defenses raise individual
questions of fact or law, I go on to determine whether a class
action is a superior means of adjudicating this dispute. See
Fed. R. Civ. P. 23(b)(3).
1. Weisburgh
Defendants contend that Weisburgh is subject to the unique
defense that he purchased in reliance on the integrity of his
broker and not the integrity of the market. Weisburgh's
PaineWebber broker was his sole source of information about
NHSBC. Shortly before speaking with Weisburgh, the broker read a
20 PaineWebber report which predicted, based on new economic data, that NHSBC would experience the very problems that plaintiffs allege defendants were hiding from the public at that time: that NHSBC's problem loans would double and that the bank would probably experience capital reserve and regulatory capital problems down the line. The report therefore downgraded NHSBC stock from "attractive" to "neutral." When he met with Weisburgh, the broker mentioned the downgrade but did not, or does not remember, discussing all of the report's negative projections. Moreover, the broker continued to believe that NHSBC's fundamentals remained sound. After considering both his broker's recommendation and the stock's price, Weisburgh made his purchase. At his deposition, however, Weisburgh testified that he did not know whether he would have purchased the stock if he had known all of the negatives contained in the report.
Defendants contend that the broker "misled" Weisburgh into believing that the investment was not risky because he did not "accurately convey" the "important publicly available cautionary information" contained in the report. Defendants argue that Weisburgh therefore did not rely on "publicly available information, i.e., the integrity of the market," in purchasing NHSBC stock, but on information from a private source -- his
21 broker.12 Defendants then conclude that this failure of reliance
is fatal to Weisburgh's fraud-on-the-market § 10(b) claim.
I disagree. First, defendants stretch the facts beyond
their breaking point to argue that the broker "misled" Weisburgh.
The broker presented a brief overview of his impressions and
then advised Weisburgh that NHSBC appeared to be a good
investment. In other words, the broker was conveying his
analysis of available investment information. The fraud-on-the-
market doctrine does not require investors to rely on primary
source materials. See Kirby, 116 F.R.D. at 307; Grace v .
Perception Technology Corp., 128 F.R.D. 165, 168 (D. Mass. 1989);
Priest, 118 F.R.D. at 555. As another court in this circuit has
remarked,
There will always be some individuals who read the financial statements directly, others who read secondary analyses such as Moody's or Value Line, and many others who relied on the advice of stockbrokers or friends. If defendants' argument were to prevail that factual differences of this nature were sufficient to defeat class action certification, there could never be a class action of securities purchasers.
12 Defendants also assert that Weisburgh "ignored" explicit warnings of the very problems that he alleges defendants concealed. This argument has no merit. In the same breath defendants argue that Weisburgh had no knowledge of these warnings.
22 Priest, 118 F.R.D. at 554-55 (quoting In re Data Access Systems
Security Regulation, 103 F.R.D. 1 3 0 , 139 (D.N.J. 1984)).
Second, even if the broker misled Weisburgh into thinking
that NHSBC stock was not a risky investment, defendants do not
contradict Weisburgh's sworn statement that price was an
important factor influencing his decision to buy. As long as
price was a "significant contributing" cause of Weisburgh's
decision, see Wilson v . Comtech Telecommunications Corp., 648
F.2d 8 8 , 91 (2d Cir. 1981), defendants can only assert an
arguable reliance defense by showing that Weisburgh bought the
stock even though he knew or should have known that the stock had
been subject to manipulation. See Basic, Inc. v . Levinson, 485
U.S. 2 2 4 , 248 (1988).
Contrary to the premise underlying defendants' argument,
Weisburgh's reliance on the integrity of the stock's market price
cannot be rebutted merely by showing that he failed to become
aware of public, non-fraudulent information that might have
dissuaded him from making his purchase. This premise mistakenly
assumes that Weisburgh's reliance on publicly available
information provides the requisite causal link between his
financial losses and defendants' alleged fraudulent conduct. In
a fraud-on-the-market case, however, this is simply incorrect --
23 the causal link is supplied by plaintiffs' reliance on the market
price being free from manipulation. Id. at 241-47. In essence,
the theory recognizes that modern securities markets have
interposed themselves between buyers and sellers, making face to
face transactions virtually nonexistent. Id. at 241-42, 244.
The markets have not, however, completely severed the link
between buyers and sellers. Instead, the markets have become
"the unpaid agent[s] of the investor[s], informing [them] that
given all information available to i t , the value of the stock is
worth the market price." Id. at 244 (quoting LTV, 88 F.R.D. at
143). As a result, reliance in a fraud-on-the-market case is
established by demonstrating that the buyer relied on the
market's pricing of the seller's public disclosure. Because
market price supplies the link between defendants' fraud and
plaintiffs' injuries, defendants cannot sever this link merely by
showing that Weisburgh did not directly rely on the information
that the market used to set the price of NHSBC stock. Instead,
defendants can only sever this causal link by severing "the link
between the alleged misrepresentation ... and his decision to
trade at a fair market price." Id. at 248 (emphasis added). As
defendants have not made such a showing, I find that the unique
reliance defense they assert against Weisburgh is not an arguable
24 defense and so does not present an individual question for Rule 23 purposes. 2. Taylor Defendants contend that Taylor is subject to three unique defenses. First, defendants argue that Taylor is subject to a unique non-reliance defense because he more than doubled his holdings of NHSBC stock after he knew of the company's losses and of this lawsuit. In other words, defendants ask that I infer from these post class-period purchases that Taylor would have bought stock during the period even if he had known that the stock was artificially overpriced. In urging me to pursue this course, however, defendants ignore the most obvious inference to be drawn from these purchases -- that Taylor believed the stock had bottomed out and that, if he bought at this price, he might later recoup the losses he incurred by buying NHSBC stock at an artificially inflated price. My purpose in mentioning this alternative is not to show that defendants' inference is necessarily wrong, but that it is extremely speculative. It is this speculativeness that prevents the inference from rebutting Taylor's presumed reliance on the integrity of the stock's market price. In upholding the validity of this presumption, the Supreme Court stated:
25 "[r]equiring a plaintiff to show a speculative state of facts, i.e., how he would have acted if omitted material information had been disclosed or if the misrepresentations had not been made, would place an unnecessarily unrealistic evidentiary burden on the Rule 10b-5 plaintiff who has traded on an impersonal market." Basic, 485 U.S. at 245 (citations omitted). This logic would be turned on its head if the presumption of reliance could be rebutted by speculating as to the inferences that could conceivably be drawn from certain facts. Moreover, it would largely preclude use of the class action device in a fraud-on- the-market case, thereby rendering it much more difficult to privately enforce federal securities laws. For these reasons, I conclude that defendants' first "unique defense" is insufficient to create an individual question within the meaning of Rule 2 3 .
Defendants allege that Taylor is subject to a second unique defense because he engaged in an "averaging out" investment strategy when he purchased his shares in NHSBC. To support their allegations, defendants point to three facts: (1) that Taylor had previously admitted to having successfully used this strategy with another stock; (2) that Taylor thought NHSBC stock was undervalued when he bought it during the period; and (3) that Taylor doubled his holdings after the proposed class period ended, halving his average cost per share. From these facts,
26 defendants ask that I infer that when Taylor purchased NHSBC
stock during the class period, he was buying into NHSBC's decline
in the hopes that the market would turn around.
"[A]n investment strategy [however] is of little importance
to ... suitability as a class representative". Randle v .
Spectran, Fed. Sec. L . Rep. para. 95,167, 94,637 (quoting Kirby,
116 F.R.D. at 3 0 8 ) . Investors may purchase because of a favorable price trend, price earnings ratio, or some other factor. Nevertheless, he relies generally on the supposition that the market price is validly set and that no unsuspecting manipulation has artificially inflated the price, and thus indirectly on the truth of the representations underlying the stock price.
Blackie, 524 F.2d at 907. Moreover, as with defendants' first
argument, there could be many reasons for Taylor's purchases
during and after the class period.13 For the same reasons, the
logic of Basic also precludes me from indulging in such speculation.
Finally, defendants allege that Taylor is subject to the
unique defense that he recklessly failed to investigate his
13 Taylor's post-period purchases, for example, would be entirely justified as an attempt to average down to perhaps recoup the losses he incurred by buying NHSBC stock at an artificially inflated price. This would not indicate that Taylor averaged down when he bought stock during the class period.
27 investment in NHSBC. Taylor first purchased NHSBC stock
approximately two weeks after NHSBC announced that it anticipated
a substantial increase in loan loss reserves and that it was
going to take title to its biggest non-performing loan, the Sky
Meadow project. The Portsmouth Herald, the paper to which Taylor
subscribed, ran the story five days before his purchase.
However, Taylor did not know about the article and thus did not
read i t . Defendants contend that Taylor was reckless because he
possessed the paper when he purchased NHSBC stock and admits that
he would not have made the purchase had he read the article.
This argument has no merit. This is not a case where an
investor has recklessly closed his eyes to the falsity, or
probably falsity, of a particular piece of public information.
See Astor Chauffeured Limousine C o . v . Runnfeldt Inv. Corp., 910
F.2d 1540, 1546 (7th Cir. 1990). Instead, defendants allege that
Taylor was recklessly unaware of public, non-fraudulent
information that might have prompted him not to buy NHSBC stock.
As outlined above in discussing the unique defense asserted
against Weisburgh, Taylor is presumed to have known and relied on
such information because he relied on the stock's market price
when deciding to make his purchase. Moreover, § 10(b) does not
require that plaintiffs inform themselves about their
28 investments. The obligations imposed by the statute "rest with
the speaker, not the listener". Id. As Judge Easterbrook stated,
The first question for the legal system is whether to create a duty to disclose information truthfully. Such a duty, if created, rests on the proposition that the information ought to come out, and that people ought not be left to their own investigative talents. Once the duty to disclose exists, and lying or nondisclosure is condemned as an intentional tort, it no longer matters whether the buyer conducts an investigation well or at all.
Teamsters Local 282 Pension Trust Fund v . Angelos, 762 F.2d 5 2 2 ,
528 (7th Cir. 1985). "This is just another way of saying that
contributory negligence is not a defense to an intentional or
reckless tort." Id.
3. Emond
Defendants "unique defense" against Emond is virtually
identical to the recklessness defense asserted against Taylor. Defendants assert that Emond subscribed to the Concord Monitor,
which ran an article on May 2 , 1989 reporting that NHSBC was
"stuck" with the $22 million Sky Meadow project and that it would
be increasing its loan loss reserves by $3.7 million. Emond
purchased his shares of NHSBC six days later. He did not read
the article, and does not know whether he would have purchased
the stock if he had. Defendants contend that Emond is therefore
29 subject to the unique defense that he "recklessly failed to investigate information in his possession concerning NHSBC". For the reasons described above when discussing the applicability of this defense to Taylor, I find this argument equally meritless. As I find as a matter of law that none of the "unique defenses" defendants assert arguably raise individual questions concerning Weisburgh, Taylor and Emond, I conclude that the common issues of law and fact detailed in earlier portions of this opinion predominate.14 I also find that because the class is so large and the common issues so prevalent, the class action mechanism is the superior means of adjudicating plaintiffs' § 10(b) claims.
IV. PENDANT STATE CLAIMS
In addition to their § 10(b) claims, plaintiffs ask that I certify their state law negligent misrepresentation claims.
Plaintiffs argue that certification is appropriate because all
class members were injured by defendants' common course of
14 Even if defendants' arguments did raise questions about any of the named plaintiffs' reliance, separate trials could be held on these particular issues. See In Re AM Int'l., Inc. Sec. Litigation, 108 F.R.D. 1 9 0 , 194 (S.D.N.Y. 1985) (and cases cited therein).
30 conduct, members' proof of this conduct will be the same, and
common issues therefore predominate over any questions relating
to individual class members. Plaintiffs also argue that New
Hampshire law can be applied to the misrepresentation claims,
thus avoiding the individual questions that might arise if the
laws of the members' respective states must be applied.
Defendants do not dispute plaintiffs' contention that New
Hampshire law will apply. Instead, they argue that the lack of a
state law fraud-on-the-market theory will cause questions of
individual reliance to predominate over questions common to the class.15
Defendants have the better argument on this point. Although
several federal courts have remarked that the recent trend is
toward certification of pendant securities claims,16 I believe
that questions of individual reliance would predominate if certification were granted. As the Supreme Court stated in
Basic,
15 Because I find that common issues will not predominate, I assume, arguendo, that the prerequisites set out in Rule 23(a) have been met. 16 E.g., Priest, 118 F.R.D. at 557; Peil v . Speiser, 806 F.2d 1154, 1159 n.8 (3d Cir. 1986).
31 Requiring proof of individualized reliance from each member of the proposed plaintiff class effectively would have prevented respondents from proceeding with a class action, since individual questions then would have overwhelmed the common ones. 485 U.S. at 242. Plaintiffs have not supplied a satisfactory
answer as to how this problem may be overcome. I agree with
Chief Judge Carter that, "[w]hereas that problem is resolved in
the federal securities law context by resort to the fraud-on-the-
market presumption of reliance, it does not appear that a similar
presumption is available with respect to Plaintiffs' state law
fraud and negligent misrepresentation claims". In Re One Bancorp
Sec. Litigation, 136 F.R.D. 526, 533 (D. M e . 1991).
I also disagree with plaintiffs' suggestion that it is
appropriate for me to establish such a presumption where none
existed before. Novel questions of state law should be decided
by state courts. Carlton v . Worcester Ins. Co., 923 F.2d 1 , 3 (1st Cir. 1990); Ryan v . Royal Ins. C o . of America, 916 F.2d 7 3 1 ,
744 (1st Cir. 1990); Porter v . Nutter, 913 F.2d 3 7 , 40-41 (1st
Cir. 1990); Taylor v . Aetna Casualty & Surety Co., 867 F.2d 705,
706 (1st Cir. 1989) (per curiam).
32 V. CONCLUSION Regarding plaintiffs' claims under § 10(b), I find that the named plaintiffs have standing to represent the proposed class and that they have satisfied the prerequisites to a class action set out in Rule 23(a)(1)-(4). I also find that a class action may be maintained under Rule 23(b)(3). I therefore order that plaintiffs' federal securities law claims be certified as a class action; that Weisburgh, Taylor and Emond be the named plaintiffs; and that the class period extend from January 3 0 , 1989 to April 3 , 1990. With regard to plaintiffs' state claims for negligent misrepresentation, I find that questions of individual reliance will predominate over questions common to the class. I therefore deny plaintiffs' certification motion (document n o . 94) with respect to these claims.
SO ORDERED.
Paul Barbadoro United States District Judge September 3 0 , 1993 c c : Glen DeValerio, Esq. Stephen Whinston, Esq. Dennis Johnson, Esq. Kenneth Bouchard, Esq. Thomas Dougherty, Esq. John Broderick, Esq. Christopher Reid, Esq.