The opinion of the court was delivered by: WILLIAM C. CONNER
This class action suit is brought by plaintiffs on behalf of all individuals who purchased securities of the AES corporation ("AES") between June 25, 1991, and June 23, 1992, pursuant to two public offerings. The First Consolidated and Amended Class Action Complaint ("Complaint") alleges violations of Sections 11 and 12(2) of the Securities Act of 1933; Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder; and common law fraud against AES, a number of its officers and directors, and the investment banking firms which underwrote the public offerings.
On June 25, 1993, this Court granted in part and denied in part defendants' motion to dismiss. That opinion details the alleged facts in this case, familiarity with which is presumed.
The case is presently before the Court on defendants' motion to compel certain documents and responses to interrogatories from members of the plaintiff class and third party WHB/Wolverine Asset Management ("WHB"). For reasons stated below, defendants' motion is granted.
Defendants are seeking discovery concerning plaintiffs' past securities investments. Specifically, defendants seek to compel plaintiffs to produce all documents reflecting any security owned, held, or sold by or for the account of any plaintiff from January 1, 1988 to 1992,
and to identify any broker or other financial advisor who has knowledge of any of plaintiffs' past securities investments.
Plaintiffs object to these requests as irrelevant, but have offered to produce documents concerning their investments in companies "in the same business" as AES.
Defendants also seek to compel third party WHB, which was identified by certain plaintiffs as an investment advisor, to produce all documents reflecting any security held by plaintiffs from January 1, 1988 to 1992, and any documents reflecting the "nature, objectives or investment criteria" of these accounts.
WHB joins plaintiffs' objections.
Pursuant to Rule 26(b)(1) of the Federal Rules of Civil Procedure, parties may obtain discovery "regarding any matter, not privileged, which is relevant to the subject matter involved in the pending action." Rule 26(b)(1) "has been construed broadly to encompass any matter that bears on, or that reasonably could lead to other matter that could bear on, any issue that is or may be in the case." Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340, 351, 57 L. Ed. 2d 253, 98 S. Ct. 2380 (1978) (citing Hickman v. Taylor, 329 U.S. 495, 501, 91 L. Ed. 451, 67 S. Ct. 385 (1947)).
Defendants argue that plaintiffs' past investments are indicative of plaintiffs' sophistication, which is relevant to two elements under Section 10(b) and Rule 10b-5: plaintiffs' reliance on the alleged misrepresentations, and the materiality of these misrepresentations. Defendants contend that they need to discover plaintiffs' past securities investments in order to procure evidence that, contrary to the Complaint's allegations, (1) plaintiffs' investment decisions were not in fact induced by AES's statements concerning its "Shared values" and environmental compliance; (2) plaintiffs did not in fact rely on the integrity of the market for the AES securities; and (3) such statements were not material to the average investor.
Plaintiffs argue that while past investments in companies in the same industry as AES may be relevant, all other investments are irrelevant to the instant case. They contend that if defendants want to rebut plaintiffs' alleged reliance, "the simplest way to do so is to ask plaintiffs, at their depositions, what they relied on in making their investments in other companies." Plaintiffs' Memorandum of Law in Opposition at 2.
It is beyond question that reliance is an essential element of a Rule 10b-5 cause of action. Basic, Inc. v. Levinson, 485 U.S. 224, 243, 99 L. Ed. 2d 194, 108 S. Ct. 978 (1988). In a class action complaint, plaintiffs may allege that class members directly relied on defendants' misrepresentations, or they may allege that they relied on the integrity of the market, i.e., the "fraud on the market" theory. Id. at 247. The fraud on the market theory is based on the premise that "an investor who buys or sells stock at the price set by the market does so in reliance on the integrity of that price." Id. As most public information is reflected in market prices, class ...