The opinion of the court was delivered by: CHARLES S. HAIGHT, JR.
This federal securities action arises out of the failure of the Matthews & Wright Group, Inc. ("M & W"), an underwriter of tax exempt housing bonds, and plaintiffs' attempts to recover money invested in M & W.
This case is before the Court on several motions. Defendant Satterlee Stephens Burke & Burke ("Satterlee Stephens") has moved to dismiss on the grounds that the action is barred by the statute of limitations, that the complaint does not plead fraud with particularity, and that the complaint fails to state a claim. Plaintiffs have cross-moved for summary judgment on Satterlee Stephens' statute of limitations defense. The Court consolidated this case with In re Matthews & Wright Group, Inc. Securities Litigation, 87 Civ. 4672 (CSH) ("In re Matthews & Wright") and defendant opposes such consolidation. Plaintiffs move for class certification.
For the reasons set forth below, defendant's motion to dismiss is denied and plaintiff's motion for summary judgment is granted. The motion opposing consolidation is denied and the class is certified.
M & W, a Delaware corporation which had its principal place of business in New York, New York, was a holding company which, through its subsidiaries, provided investment and underwriting services, principally in connection with the issuance, sale and trading of municipal securities in both primary and secondary markets. M & W represented in an August 14, 1986 prospectus that it was the 15th largest underwriting firm in the United States in new municipal bond issues and the fourth largest firm in housing bond underwritings, principally to finance multi-family housing. Complaint P 19.
Plaintiff Fred Werner, a resident of New York, purchased 4,000 shares of the common stock of M & W during the class period. Plaintiff Paul Oberkircher is trustee of Radiology Medical Associates Money Purchase Pension Trust, a Pennsylvania pension trust, which purchased 4,000 shares of the common stock of M & W during the class period. Plaintiffs bring this action (i) individually and on behalf of purchasers of M & W common stock between August 14, 1986 through June 26, 1987 pursuant to Rules 23(a) and (b), Fed. R. Civ. P.; and (ii) as assignees under a Settlement Agreement dated January 5, 1989 (the "Settlement Agreement") of the claims of M & W and its wholly-owned subsidiary, M & W Capital, Inc. ("M & W Capital") arising out of and based upon the professional legal counsel rendered by Satterlee Stephens. Complaint PP 10-11, 13.
Satterlee Stephens is a New York law partnership which is the successor to the partnership known as Satterlee & Stephens. Plaintiffs allege Bernard A. Althoff was the Satterlee Stephens partner responsible for providing legal services to M & W; that Satterlee Stephens acted as general corporate counsel to M & W and participated in sham bond closings in December 1985 and a public offering of M & W stock on August 14, 1986; and that Satterlee Stephens assisted M & W in preparing the registration statement and prospectus for the offering which omitted material information. Complaint PP 16(a) -(c) - 17, 79-92.
The gravamen of plaintiffs' complaint is that securities fraud was committed in connection with the registration and sale to the public of 1.5 million shares of M & W common stock issued in August 14, 1986 (the "Offering") and the sale of M & W common stock on the open market from August 14, 1986 through June 26, 1987 (the "Class Period"). Complaint PP 5, 78 (a)-(o).
When this information became public the market price of M & W stock, which had been offered at $ 11 per share and which traded at more than $ 13 per share during the Class Period, plummeted. As of January 1989, the stock was trading between $ .25 to $ .50 per share. Complaint PP 7, 73-76.
After the revelation of the wrongdoing, M & W abandoned the underwriting of municipal bonds. M & W and two of its principals have agreed to the revocation of their licenses as registered broker-dealers as a result of the S.E.C.'s civil suit against M & W, three of its principals, and its legal counsel, Bernard M. Althoff, a partner in Satterlee Stephens. See S.E.C. v. Matthews & Wright Group, Inc., supra. A third principal of M & W pled guilty to criminal charges in the Territory of Guam, where M & W underwrote housing bonds in 1985. See United States v. Goldberg, (C.D. Calif. July 11, 1989). Two attorneys involved in the issuance of M & W bonds have also pled guilty to criminal charges. See United States v. Strauss, (D. Guam January 14, 1988); United States v. Newman, (E.D. Mo. April 12, 1988). Complaint PP 8-9, 77.
Plaintiffs bring this action as a class action pursuant to Fed. R. Civ. P. 23(a) and (b) on behalf of themselves and all others who purchased M & W shares during the Class Period pursuant to a registration statement dated August 14, 1986. Plaintiffs allege that because the purchasers are so numerous a class action is the best method of proceeding in this case. A class identical to the class in this case was certified by this Court in In re Matthews & Wright on consent of the defendants therein. Complaint P 21.
Count I of the complaint alleges that Satterlee Stephens violated § 10(b) of the Securities and Exchange Act and Rule 10b-5 promulgated thereunder by engaging in a conspiracy and course of business which operated as a fraud on plaintiffs. Plaintiffs allege that Satterlee Stephens made untrue statements of material fact and omitted to state material facts which were required to make statements not misleading. Plaintiffs allege that the purpose of this scheme was to bring about the public offering of M & W common stock, to conceal material adverse information about M & W, and to induce investors to purchase stock at an inflated price. Complaint PP 93-100.
Counts II and II assert claims for common law fraud and negligent misrepresentation. Count IV asserts claims for negligence and malpractice. Complaint PP 101-20. Plaintiffs seek an award of damages suffered, including punitive and exemplary damages, and interest. Plaintiffs also seek the costs of this action, including attorneys' fees.
Satterlee Stephens has moved to dismiss on the grounds that the action is barred by the statute of limitations, that the complaint does not plead fraud with particularity and that the complaint fails to state a claim. Plaintiffs have cross-moved for summary judgment on Satterlee Stephens' statute of limitations defense. The Court consolidated this case with In re Matthews & Wright, 87 Civ. 4672 (CSH) and defendant opposes such consolidation. Plaintiffs move for class certification.
As the cross-motions on the statute of limitations question present an issue that could be dispositive, these motions will be taken up first. I will then take up the other grounds for dismissal raised in Satterlee Stephens' motion to dismiss. After considering those motions, I will turn to the issues of consolidation and class certification.
I. Statute of Limitations
The statute of limitations to be applied in federal securities cases has undergone recent judicial and legislative transformation.
Previously, the Second circuit rule was that actions alleging fraudulent violations of the federal securities laws brought in the district courts sitting in New York State were governed by the New York statute of limitations for actions based on common law fraud, including the New York borrowing statute. See Armstrong v. McAlpin, 699 F.2d 79, 86-87 (2d Cir. 1983); Stull v. Bayard, 561 F.2d 429, 431 (2d Cir. 1977), cert. denied., 434 U.S. 1035, 54 L. Ed. 2d 783, 98 S. Ct. 769 (1978); Arneil v. Ramsey, 550 F.2d 774, 779-81 (2d Cir. 1977).
In 1988, the Third circuit decided In re Data Access Systems Securities Litigation, 843 F.2d 1537 (3rd Cir.) (in banc), cert. denied, 488 U.S. 849, 109 S. Ct. 131, 102 L. Ed. 2d 103 (1988), which held that "the proper period of limitations for a complaint charging violation of section 10(b) and Rule 10b-5 is one year after the plaintiff discovers the facts constituting the violation, and in no event more than three years after such violation." Id. at 1550.
The Second Circuit adopted the Data Access rule in Ceres Partners v. GEL Associates, 918 F.2d 349 (2d Cir. 1990). See also Levine v. N.L. Industries, Inc., 926 F.2d 199, 201 (2d Cir. 1991).
In Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 115 L. Ed. 2d 321, 111 S. Ct. 2773, reh'g denied, 115 L. Ed. 2d 1109, 112 S. Ct. 27, (1991), decided on June 20, 1991, the Supreme Court approved those one year/three year limitation periods and applied them retroactively, so as to bar a federal securities claim which was timely when brought under then existing law.
Following considerable public comment, Congress overruled Lampf by enacting section 476 of the Comprehensive Deposit Insurance Reform and Taxpayer Protection Act of 1991 (new section 27A of the Securities Exchange Act of 1934, to be codified at 15 U.S.C. § 78(aa)), P.L. 102-242, 105 Stat. 2236, signed into law on December 12, 1991. Section 27A(a) provides that the limitation period for a § 10(b) private civil action "that was commenced on before June 19, 1991, shall be the limitation period provided by the laws applicable in the jurisdiction, including principles of retroactivity, as such laws existed on June 19, 1991." (emphasis added). June 19, 1991 is the day before the Supreme Court decided Lampf.
In Henley v. Slone, 961 F.2d 23 (2d Cir. 1992), the Second Circuit reasoned that the italicized phrase in the statute required the district courts to consider, on a case-by-case basis, whether the one-year/three-year rule of Ceres should be applied retroactively. In resolving that issue, district courts in the Second Circuit are instructed by Henley to consider the principles declared in Welch v. Cadre Capital, 923 F.2d 989 (2d Cir. 1991) "Welch I"), vacated and remanded sub nom. Northwest Savings Bank v. Welch, 115 L. Ed. 2d 1048, 111 S. Ct. 2882 (1991). In Henley, the Second Circuit said that "if it would be inequitable under Welch I to apply Ceres Partners" to a given case, "then the more generous limitations period of prior state law applies." 961 F.2d at 26. The Second Circuit remanded Henley to the district court for a determination of that issue. I must make that determination in the case at bar.
In Welch I, the Second Circuit applied the three-part test of nonretroactivity set forth in Chevron Oil Co. v. Huson, 404 U.S. 97, 30 L. Ed. 2d 296, 92 S. Ct. 349 (1971). A general presumption favors application of the law prevailing at the time of appeal. Chevron instructs the courts to consider three factors in deciding whether a particular ruling qualifies for purely prospective application; contrary to that presumption. The first factor, that the new rule of law must overrule established precedent, is clearly met by Ceres. See Welch I, 923 F.2d at 994. Once the first factor is satisfied, the court should "'weigh' in each case whether retroactive application would conflict with the purposes of the rule and whether it would produce inequitable results." Id. at 993 (quoting Chevron at 106-07) (footnote omitted). Welch I also holds that the second Chevron factor is satisfied: "The purposes of the '34 Act will not be impaired by continuation of a handful of lawsuits filed within the longer time limits of previously applicable state law." Id. at 995.
The third Chevron factor is whether it would be inequitable to apply Ceres retroactively. Retroactive application of new statutes of limitations implicates equity if the effect would be to bar a claim that was timely when filed. Absent that effect, no equitable concern arises.
The circumstances of the case at bar are these. The purported plaintiff class purchased common shares of M & W during the period August 14, 1986 through June 26, 1987. Plaintiffs allege that the prospectus and registration statement relating to the public offering of the shares were fraudulent.
The complaint alleges at P 21(a) that June 26, 1987 is "the date immediately prior to the publication of news articles which first revealed information relating to investigations by the SEC and IRS, of bond issues underwritten by the Company . . ." Those news articles were not attached to or further identified in the complaint. Deposition testimony of plaintiffs include references to several newspaper accounts suggesting that one municipal bond issue or another underwritten by M & W might be questionable. Those press reports made no reference to Satterlee Stephens or indeed to any attorneys.
Those negative press reports prompted plaintiffs at bar to join with other plaintiffs in filing a complaint on June 30, 1987 in this Court against M & W, its directors, and Donaldson Lufkin and Jenrette ("DLJ"), the underwriters of M & W's common stock. International Apparel Assoc. v. Matthews & Wright Group, Inc., 87 Civ. 4672 (CSH). As the litigation metastasized, on December 3, 1987 those plaintiffs filed an amended complaint containing expanded allegations against the same defendants. See In re Matthews & Wright, 87 Civ. 4672, 87 Civ. 5650 and 87 Civ. 6013 (CSH).
On January 15, 1988, a trade publication, the Bond Buyer, published an article describing a plea of guilty offered by a bond lawyer, Edward K. Strauss, to a criminal charge in the United States District Court for the District of Guam. Strauss, a Pittsburgh lawyer, had served as bond counsel in respect of a number of issues sold by M & W. The Bond Buyer article contained prominent reference to "Bernard Althoff, a partner in the New York law firm of Satterlee & Stephens and a major Matthews & Wright shareholder." Strauss was said to have reported his suspicions of fraud to Althoff and to the chairman of M & W.
So far as the extensive record developed during discovery reveals, this is the first public reference to possible wrongdoing by anyone at Satterlee Stephens. The only prior reference to Satterlee Stephens was in the prospectus and registration statement themselves, which identified the firm as bond counsel to M & W and set forth certain opinions with respect to the common shares of the company.
On April 27, 1989, the SEC filed a civil enforcement against Althoff among others for participation in M & W's fraudulent conduct.
On July 27, 1989 plaintiffs filed this action against Satterlee Stephens.
Retroactive application of Ceres to Werner (a New York resident) or Data Access to Oberkircher (a Pennsylvania resident) would not bar the claims of these plaintiffs. The three-year period of repose does not bar the claim; that elapsed not earlier than August 14, 1989, three years after the initial offering. Plaintiffs filed suit in July 1989. The issue then is the one-year period from plaintiffs' discovery of defendants' fraud. That means actual discovery, not when plaintiffs might have discovered it by the exercise of due diligence.
Lampf explicitly rejects the equitable tolling doctrine triggered by the victim's ignorance of fraud:
Notwithstanding this venerable principle, it is evident that the equitable tolling doctrine is fundamentally inconsistent with the 1-and-3-year structure.
The 1-year period, by its terms, begins after discovery of the facts constituting the violation, making tolling unnecessary. The 3-year limit is a period of repose inconsistent with tolling. One commentator explains: "The inclusion of the three-year period can have no significance in this context other than to impose an outside limit." Bloomenthal, The Statute of Limitations and Rule 10b-5 Claims: A Study in Judicial Lassitude, 60 U.Colo.L.Rev. 235, 288 (1989). See also ABA Committee on Federal Regulation of securities, Report of the Task Force on Statute of Limitations for Implied Actions 645, 655 (1986) (advancing "the inescapable conclusion that Congress did not intend equitable tolling to apply ...