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IN RE CRAZY EDDIE SECS. LITIG.

September 4, 1992

IN RE CRAZY EDDIE SECURITIES LITIGATION OPPENHEIMER-PALMIERI FUND, L.P., ENTERTAINMENT MARKETING, INCORPORATED, and ELIAS ZINN, Plaintiffs, against PEAT MARWICK MAIN & CO., KMG MAIN HURDMAN, EDDIE ANTAR, SAM ANTAR, MITCHELL ANTAR, EDDY ANTAR, SAM E. ANTAR, SOLOMON E. ANTAR, DAVID V. PANOFF, ISAAC KAIREY, STEVE PASQUARIELLO, WILLIAM H. SALTZMAN, JAMES H. SCOTT, JR., EDMOND LEVY, and CARL G. ZIMEL, Defendants. CRAZY EDDIE, INC., Plaintiff, -against- PEAT MARWICK MAIN & CO., Defendant.


The opinion of the court was delivered by: EUGENE H. NICKERSON

MEMORANDUM AND ORDER

 NICKERSON, District Judge:

 Numerous memoranda and orders have recounted the facts of this litigation. The court assumes familiarity with its previous published memoranda and orders dated December 30, 1988, Bernstein v. Crazy Eddie, Inc., 702 F. Supp. 962 (E.D.N.Y. 1988) (the 1988 Order); June 16, 1989, In re Crazy Eddie Sec. Litig., 714 F.Supp. 1285 (E.D.N.Y. 1989) (the 1989 Order); June 19, 1990, In re Crazy Eddie Sec. Litig., 740 F.Supp. 149 (E.D.N.Y. 1990) (the June 1990 Order); September 19, 1990, In re Crazy Eddie Sec. Litig., 747 F.Supp. 850 (E.D.N.Y. 1990) (the September 1990 Order); March 6, 1991, In re Crazy Eddie Sec. Litig., 135 F.R.D. 39 (E.D.N.Y. 1991) (the 1991 Order); and May 1, 1992, In re Crazy Eddie Sec. Litig., 792 F.Supp. 197 (E.D.N.Y. 1992) (the May 1992 Order).

 The court has before it motions by various defendants for partial summary judgment of the claims brought against them under Section 10(b) of the Securities Exchange Act, 15 U.S.C. § 78(j), and Rule 10b-5, as well as common law claims for fraud and negligent misrepresentation. In its May 1992 Order the court reserved decision on these issues pending argument on the constitutionality of a relevant statute.

 Also before the court is a motion for summary judgment by defendant Peat Marwick Main & Co. (Peat Marwick) on its cross-claim against defendant Sam E. Antar. There are also motions by Peat Marwick directed to claims in Crazy Eddie, Inc. v. Peat Marwick Main & Co., the Adversary Proceeding brought in the United States Bankruptcy Court for the Southern District of New York. That proceeding has been transferred to this court and consolidated for pretrial purposes with this litigation.

 I

 THE FRAUD CLAIMS

 Peat Marwick, Wertheim Schroder & Co., Inc. (Wertheim), Bear Stearns & Co. (Bear Stearns), Salomon Brothers, Inc. (Salomon), and Oppenheimer & Co., Inc. (Oppenheimer) seek dismissal of the claims against them under Section 10(b) of the Exchange Act, Rule 10b-5, and principles of common law fraud and negligent misrepresentation, to the extent those claims are based upon (a) a September 13, 1984 public offering of Crazy Eddie stock underwritten by Oppenheimer, (b) the December 1985 and March 1986 so-called "Oppenheimer Prospectus" sales of Crazy Eddie stock by Oppenheimer, and (c) the June 1986 public offering of Crazy Eddie debentures by Wertheim, Bear Stearns and Salomon.

 The motion does not affect claims based on the March 13, 1985 public offering of Crazy Eddie stock by Oppenheimer or the March 7, 1986 public offering of Crazy Eddie stock by Wertheim, Bear Stearns and Salomon.

 Defendants urge that plaintiffs' Section 10(b) and Rule 10b-5 claims are barred by the statute of limitations.

 Because Section 10(b) contains no express statute of limitations the courts had typically applied analogous limitations periods of the forum state.

 In the 1988 order this court suggested its agreement with In re Data Access Sys. Sec. Litig., 843 F.2d 1537 (3d Cir.) (en banc), cert. denied, 488 U.S. 849, 109 S. Ct. 131 (1988), that courts should apply to Section 10(b) claims statutes of limitations governing other sections of the Exchange Act rather than state limitations periods. Bernstein v. Antar, 702 F.Supp. 962, 980-81 (E.D.N.Y. 1988).

 In the September 1990 Order the court declined to apply the federal limitations period retroactively because plaintiffs had reasonably relied on the old rule. In re Crazy Eddie Sec. Litig., 747 F.Supp. 850, 857-58 (E.D.N.Y. 1990). The court relied on the Supreme Court's analysis in Chevron Oil Co. v. Huson, 404 U.S. 97, 106-7, 92 S. Ct. 349, 355 (1971). That case held that a new rule of law should not be applied retroactively if retaining the old rule solely for the purpose of the pending case would not retard the new rule's purpose and effect and if retroactivity would be inequitable.

 In November, 1990 the Second Circuit adopted the federal statute of limitations, but because the claims in that case were time-barred under both the new rule and the old rule the court left open all questions of retroactivity. Ceres Partners v. GEL Assoc., 918 F.2d 349, 364 (2d Cir. 1990). In Welch v. Cadre Capital, 923 F.2d 989 (2d Cir. 1991) ("Welch I"), vacated and remanded sub nom. Northwest Savings Bank v. Welch, U.S. , 111 S. Ct. 2882 (1991), the Second Circuit relied on a Chevron Oil analysis and declined to apply the new limitations period retroactively to bar the complaint.

 On June 20, 1991 the Supreme Court held that Section 10(b) claims were governed by a federal statute of limitations of one year after the plaintiff discovers the facts constituting the violation, and in no event more than three years after such violation. Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, U.S. , 111 S. Ct. 2773 (1991). The Court applied the rule to the litigants in the case.

 On the same day the Supreme Court decided James B. Beam Distilling Co. v. Georgia, U.S. , 111 S. Ct. 2439 (1991), holding that "when the Court has applied a rule of law to the litigants in one case it must do so with respect to all others not barred by procedural requirements or res judicata," id. at 2448, and that it is therefore "error to refuse to apply a rule of federal law retroactively after the case announcing the rule has already done so." Id. at 2446. Justice Souter, who announced the judgment, saw the retroactivity question as a "choice of law" matter in which "principles of equity and stare decisis" prevail over claims based on a Chevron Oil analysis. Id. at 2446.

 On September 5, 1991 defendants moved for summary judgment as to the Section 10(b) and Rule 10b-5 claims on the basis of Lampf and Beam. Under those decisions this court would have granted defendants' motion. See Welch v. Cadre Capital, 946 F.2d 185 (2d Cir. 1991) ("Welch II") (barring complaint after remand in light of Lampf and Beam).

 But on December 19, 1991 the President signed the Federal Deposit Insurance Corporations Improvement Act of 1991, Pub. Law 102-242, 105 Stat. 2236, codified as 15 U.S.C. § 78aa-1. Section 476 of that legislation amends section 27A of the Securities Exchange Act of 1934 to provide that:

 The limitation period for any private civil action implied under section 10(b) of this Act that was commenced on or 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.

 By letter dated April 9, 1992, defendants asked the court to consider the constitutionality of Section 27A. By order dated April 24, 1992, the court ordered the parties to address the issue, and pursuant to 28 U.S.C. § 2403 the court also certified to the United States Attorney General the question of the statute's constitutionality. On August 24, 1992 the United States submitted a statement of interest arguing in favor of constitutionality but declining to intervene in the action.

 Defendants say that section 27A is an unconstitutional exercise of power by Congress to alter the outcome of particular cases. The Second Circuit declined to address this question until it was squarely presented to that court. Henley v. Slone, 961 F.2d 23, 26 (2d. Cir. 1992). But one panel of the court suggested its view that the statute was constitutional. Litton Industries, Inc. v. Lehman Brothers Kuhn Loeb, Inc., 967 F.2d 742, 752 n.6 (2d Cir. June 17, 1992) ("we are unimpressed by the cogency" of analyses finding unconstitutional Section 27A).

 In this circuit district courts confronting the issue have found the statute constitutional. See Adler v. Berg Harmon Assoc., 790 F.Supp. 1235 (S.D.N.Y. April 27, 1992) (Conner, J); Brown v. Hutton Group, F.Supp. , 89 CV 611, 1992 U.S.Dist. LEXIS 5818 (S.D.N.Y. April 27, 1992) (Conner, J); Axel Johnson, Inc. v. Arthur Andersen & Co., 790 F.Supp. 476 (S.D.N.Y. April 25, 1992) (Lasker, J.); Kalmanson v. McLaughlin, No. 86 CV 9366 (S.D.N.Y. July 27, 1992) (Keenan, J.).

 Other district courts are divided on the issue. Compare, e.g., In re Brichard Sec. Litig., 788 F.Supp. 1098 (N.D.Cal. 1992) (finding Section 27A unconstitutional); Bank of Denver v. Southeastern Capital Group, Inc., 789 F.Supp. 1092 (D.Colo. 1992) (same); Bankard v. First Carolina Communications, Inc., No. 89 CV 8571, 1992 U.S.Dist. LEXIS 53 (N.D.Ill. 1992) (upholding Section 27A).

 This court agrees with the courts that have found Section 27A constitutional, primarily for the reasons stated in Adler v. Berg Harmon Assoc., 790 F.Supp. 1235 (S.D.N.Y. 1992) and Axel Johnson, Inc. v. Arthur Andersen & Co., 790 F.Supp. 476 (S.D.N.Y. 1992). No purpose would be served by rehearsing those reasons here.

 The court thus adheres to its previous decision not to apply the limitations period retroactively. Although after the Beam decision the contours of the Chevron Oil test are unclear, that case has not been overruled. Moreover, Section 27A mandates that the court apply the principles of retroactivity as they existed before June 19, 1991. The court had already held by that date that plaintiffs had reasonably relied on the prior law adopting state statutes of limitations when they filed this action in 1987. The Section 10(b) claims are therefore timely.

 B. The Common Law Claims

 The argument for summary judgment dismissing plaintiffs' common law fraud and negligent representation claims is based on the contention that plaintiffs are unable to prove that they relied upon any of defendants' allegedly false or misleading statements.

 Reliance is an element of both a common law fraud claim and a negligent misrepresentation claim under the laws of the two states whose law various parties seek to apply, New York and New Jersey. See, e.g., Jo Ann Homes at Bellmore, Inc. v. Dworetz, 25 N.Y.2d 112, 119, 302 N.Y.S.2d 799, 803 (1969) (reliance by plaintiff is an element of misrepresentation in New York); Harris v. Camilleri, 77 A.D.2d 861, 431 N.Y.S.2d 65 (2d Dep't 1980) (reliance is an essential element of a fraud claim in New York); In re Orfa Sec. Litig., 654 F.Supp. 1449 (D.N.J. 1987) (reliance is an element of fraud under New Jersey law).

 Plaintiffs have submitted no authority for the proposition that class certification should modify the elements of common law fraud or minimize plaintiffs' burden at trial. One federal court has adopted a fraud on the market theory for a New York state fraud claim, but noted an absence of state court holdings on the issue. See Minpeco, S.A. v. Hunt, 718 F.Supp. 168, 176 (S.D.N.Y. 1989). This court has found no judicial authority in New York or New Jersey signalling a shift in the law in those states.

 Reliance may be presumed for purposes of class certification "subject to such proof as is required on the trial." Weinberg v. Hertz Corp., 116 A.D.2d 1, 7, 499 N.Y.S.2d 693, 696 (1st Dep't 1986), aff'd on other grounds, 69 N.Y.2d 979, 516 N.Y.S.2d 652 (1987). On this motion for summary judgment the court must determine whether such proof exists.

 To satisfy the reliance requirement plaintiffs must come forth with "clear and convincing evidence" that at least one plaintiff relied on defendants' allegedly misleading statements. Katara v. D.E. Jones Commodities, Inc., 835 F.2d 966, 970-71 (2d Cir. 1987).

 Plaintiffs have not met their burden with respect to underwriters Bear Stearns, Wertheim, Salomon, and Oppenheimer. Only one named plaintiff mentions having seen a ...


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