pays the distributor DW Distributors for its services a monthly fee calculated daily by applying the annual rate of 0.75% to the Fund's net assets.
The standard for granting a motion for reconsideration is strict, and such a motion will "generally be denied unless the moving party can point to controlling decisions or data that the court overlooked -- matters, in other words, that might reasonably be expected to alter the conclusion reached by the court." Shrader v. CSX Transp., Inc., 70 F.3d 255, 257 (2d Cir. 1995).
Defendants first basis for seeking reconsideration of the May 8 Order is that the Court failed to refer to, let alone adhere to, an earlier decision of this Court. See In re Hyperion Sec. Litigation, 1995 U.S. Dist. LEXIS 10020, 1995 WL 422480 (S.D.N.Y. July 14, 1995) (Mukasey, J.). First, the Court notes that the Hyperion decision is not a controlling decision, and therefore cannot properly support a motion for reconsideration. Moreover, the Court did in fact give careful consideration to Judge Mukasey's decision in the Hyperion case, but found the instant case distinguishable. It is true that Judge Mukasey granted a motion to dismiss for failure to state a claim where the prospectus at issue, like the Fund's prospectus in this case, made no mention of maturity extension risk when disclosing risks associated with mortgage-backed securities such as CMOs. However, considering that there is no mention of the concept of maturity extension risk in the Hyperion decision, it does not necessarily follow that Judge Mukasey considered the failure to disclose such risk immaterial. It is equally plausible to conclude that maturity extension risk was never raised by the parties in the Hyperion case, and therefore never considered by the Hyperion Court. Regardless, even if maturity extension risk were considered by the Hyperion Court, because this Court is not bound by that decision, it maintains its earlier position that failure to disclose such risk is not immaterial as a matter of law.
In the earlier Order, the Court addressed only a single group of statements which the Fund's prospectus failed to disclose -- statements concerning maturity extension risk. Upon finding that adequate disclosure of this risk was not immaterial as a matter of law, the Court denied defendants' Rule 12(b)(6) motion to dismiss plaintiffs' causes of actions based upon §§ 11, 12(2), and 15 of the Securities Act. In their memorandum of law in support of their motion for reargument, defendants correctly state that plaintiffs' complaint identifies other allegedly material misrepresentations and omissions in the prospectus.
While aware that the May 8 Order expressly declined to consider these other alleged misrepresentations and omissions, see May 8 Order at 7 n.5, observing that the Court may grant a Rule 12(b)(6) motion in part and deny it in part, defendants now asks the Court to analyze plaintiffs' other allegations. Defendants argue that a decision as to whether the other allegations state a claim would not be a mere academic exercise because dismissal of any of these claims would limit the scope of discovery.
The Court agrees that, if possible, reducing the number of claims alleged would provide efficiency benefits for the parties to this litigation, and therefore grants defendants' request. Based on its reading of the complaint, the Court finds that plaintiffs' assert three other claims resulting from disclosures in or omissions from the prospectus. Specifically, plaintiffs allege that disclosures about (1) investments in Mexican government debt securities and (2) the Fund's stated investment objective to earn a high level of current income while maintaining a relatively low volatility of principle, constitute material misstatements in violation of §§ 11, 12(2) and 15 of the Securities Act. In addition, the complaint appears to allege that the prospectus's failure to disclose the alleged inherent illiquidity of the CMO market constitutes material omissions in violation of the same laws.
As detailed in the May 8 Order, § 11 states that if "any part of the registration statement . . . contain[s] an untrue statement of a material fact or omit[s] to state a material fact . . . necessary to make the statements therein not misleading," then any person acquiring such security may sue, among others, underwriters of the security, officers of the issuer, or signers of the registration statement. 15 U.S.C. § 77k(a). Section 12(2) prohibits any person from offering or selling a security "by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements . . . not misleading." 15 U.S.C. § 771(2).
A misrepresented or omitted fact is material if there is a substantial likelihood that a reasonable investor would consider it important in deciding whether to invest. See TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449, 48 L. Ed. 2d 757, 96 S. Ct. 2126 (1976); Folger Adam Co. v. PMI Indus., Inc., 938 F.2d 1529, 1532 (2d Cir. 1991). In other words, a fact is material if it "would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available." TSC, 426 U.S. at 449.
A plaintiff pleading a violation of § 11 need not allege that she relied on the alleged material misrepresentation or omission. See Westinghouse Elec. Corp. v. '21' Int'l Holdings, Inc., 821 F. Supp. 212, 218 (S.D.N.Y. 1993). Rather, the plaintiff need only plead that she purchased securities which were issued and sold pursuant to a defective registration statement (which includes a prospectus). See Barnes v. Osofsky, 373 F.2d 269, 271 (2d Cir. 1967); Klein v. Computer Devices, Inc., 591 F. Supp. 270, 273 (S.D.N.Y. 1984). As in a § 11 claim, a plaintiff need not plead reliance to state a claim under § 12(2). See Wilson v. Saintine Exploration & Drilling Corp., 872 F.2d 1124, 1126 (2d Cir. 1989); Wigand v. Flo-Tek, Inc., 609 F.2d 1028, 1034 (2d Cir. 1979); Polycast Technology Corp. v. Uniroyal, Inc., 792 F. Supp. 244, 259 (S.D.N.Y. 1992). Indeed, a plaintiff need not even prove that she received the prospectus before purchasing shares to recover under § 12(2). See Klein v. Computer Devices, Inc., 591 F. Supp. 270, 277 (S.D.N.Y. 1984). Rather, the plaintiff must simply prove that defendants sold the security "by means of a prospectus or oral communication." However, under both § 11 and § 12(2), if the defendant proves that the plaintiff knew of the material misstatement or omission, then no liability will attach. See 15 U.S.C. § 77k(a); 15 U.S.C. § 771(2); Mayer v. Oil Field Sys. Corp., 803 F.2d 749, 755 (2d Cir. 1986).
Regarding the Mexican government debt securities, plaintiffs first allege that the prospectus failed to fully disclose the risks of investing in peso-denominated securities. See Complaint PP 124-141. The prospectus did disclose, however, various risk factors regarding investing in Mexican government debt securities, including: (1) the high levels of inflation, large amounts of government debt and political and social uncertainties in Mexico, see Prospectus at 3; (2) that fluctuations in the relative rates of exchange among the currencies of the United States and Mexico will impact the Fund's total return on the Mexican-currency denominated assets, see id. at 14; and (3) the potential and unpredictable impact of the Mexican government on the yield from Mexican debt obligations, see id. at 15. The Court finds that, based upon these disclosures, the level of risk associated with investing in Mexican debt securities was adequately disclosed in the prospectus. Plaintiffs' complaint identifies no misstatements or omissions in the prospectus concerning the riskiness of investing in these securities which a reasonable investor would find important in making an investment decision. Therefore, any misstatements or omissions are immaterial as a matter of law. See Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir. 1985) (Kearse, J.).
Plaintiffs' other claim with respect to the Fund's investment in Mexican government debt securities is that the prospectus was misleading in that it indicated that investment in peso-denominated debt securities would be balanced with investment in lower risk dollar-denominated debt securities. In fact, the Fund invested almost exclusively in peso-denominated debt securities, and that investment was negatively impacted by the substantial devaluation of the peso during the class period. Again, however, the Court does not find a material misstatement or omission in the prospectus with respect to this issue. Put simply, nowhere in the prospectus does it state that a goal of the Fund would be to balance peso-denominated Mexican debt with dollar-denominated Mexican debt. In fact, the prospectuses dated June 2, 1992 and January 8, 1993 both stated that "currently there are no Mexican Government Securities denominated in the U.S. dollar which qualify for investment in the Fund. If qualified investments of this type appear in the future, the Fund will consider them for investment." Consistent with this statement, during those time periods no U.S.-denominated Mexican debt was owned by the Fund.
It is true that the language stating that no dollar-denominated Mexican debt securities qualified for investment was removed from the December 9, 1993 prospectus, and it is also true that an investment in such securities was both made and liquidated in 1994. However, these facts do not bear on the basic point, which is that the prospectus did not imply any balance between dollar-denominated and peso-denominated securities, but rather left decisions to balance, or not balance, investment in these securities to the discretion of the Advisor. See Prospectus at 9. Mere identification in the prospectus of various types of Mexican debt securities, including dollar-denominated securities, could not create an impression with a reasonable investor that these debts would be owned by the Fund in any particular relative quantity. Therefore, because there was no material misstatement with respect to investment in peso-denominated, versus dollar-denominated, Mexican debt securities, plaintiffs' §§ 11, 12(2) and 15 claims as to this issue are dismissed.
According to the prospectus, the "investment objective [of the Fund] is to earn a high level of current income while maintaining relatively low volatility of principal." Prospectus at 1. For several reasons, the Court does not find this statement actionable under the securities laws. First, the statement does not make a promise, but rather announces the goal of the Fund. Forward-looking statements which do not make a promise to investors, but rather only state objectives, are not actionable under the securities laws. See Lasker v. New York State Elec. & Gas Corp., 1995 WL 867881, at * 9 (E.D.N.Y. Aug. 22, 1995) (broad descriptions of goals of company not actionable as no reasonable investor would rely upon them), aff'd, 85 F.3d 55 (2d Cir. 1996); Heil v. Lebow, 1994 U.S. Dist. LEXIS 16236, 1994 WL 637686, at *5 (S.D.N.Y. Nov. 14, 1994) (Keenan J.) (statements of opinion that express no guarantee do not support a cause of action under the securities laws), aff'd, 1995 U.S. App. LEXIS 39921, 1995 WL 736327, at *1 (2d Cir. Dec. 12, 1995). Even if some forward-looking statements of opinion were actionable, general and indefinite statements such as the instant statement of investment objective are not actionable. See San Leandro Emergency Medical Group Profit Sharing Plan v. Philip Morris Co., Inc., 75 F.3d 801, 811 (2d Cir. 1996) (Newman, C.J.) (statements that company "should deliver income growth consistent with its historically superior performance" and "we are optimistic about 1993" are non-actionable puffery statements). The Court finds that the Fund's investment objective is simply not the kind of statement which a reasonable investor would consider important in deciding whether or not to invest.
Indeed, if it were reasonable for an investor to consider such a statement, the Court presumes that many, if not most securities offerings would expose their issuers to federal securities law liability. Plaintiffs' causes of action alleging that the investment objective announced in the prospectus constituted a material misstatement are dismissed.
Plaintiffs' complaint also alleges that failure to disclose the inherent illiquidity of the market for CMOs was a material omission. Defendants argue that such disclosure was made by pointing to a sentence, in the section of the prospectus labeled "Determination of Net Value," that states in relevant part: "When market quotations are not readily available, including circumstances under which it is determined by the Adviser that sale or bid prices are not reflective of a security's market value, portfolio securities are valued at their fair value . . ." Prospectus at 24. While this sentence makes a general observation about all securities in the Fund, because it neither specifically refers to, or even suggests reference to, CMOs, nor discusses illiquidity explicitly, the Court cannot conclude as a matter of law that it constitutes adequate disclosure of the alleged inherent illiquidity of the CMO market. Therefore, unless no reasonable investor would find disclosure of this alleged omission important in making an investment decision, defendants' motion to dismiss this claim must be denied.
The Court does not consider failure to disclose adequately the allegedly inherent illiquidity of the CMO market to be immaterial as a matter of law. Defendants argue that failure to disclose the alleged illiquidity of the CMO market cannot be a material omission because there is a risk of illiquidity in any market. While it is true, as defendants argue, that there is a risk of illiquidity in any market, such truth does not render the instant omission necessarily immaterial because there may well be illiquidity risks particular to the CMO market which a reasonable investor would want to know about before investing. More particular information about the CMO market is necessary to make this determination, meaning that discovery is needed, and denial of the instant Rule 12(b)(6) motion is appropriate.
Finally, in their motion for reconsideration, defendants contend that certain statements in the May 8 Order indicate that the Court decided ultimate issues of materiality as to certain omissions regarding maturity extension risk. Because it was deciding a motion to dismiss, where the factual allegations of the complaint are taken as true for the purposes of the motion, the Court intended only to conclude that the failure to disclose maturity extension risk in the prospectus was not, as a matter of law, immaterial. Therefore, in order to clarify any confusion, the Court now issues a separate order which amends its May 8 Order.
II. Certification of the Class
In determining whether or not a class should be certified by a district court, the following threshold requirements must be met:
(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 plaintiff bears the burden of proof in establishing that the prerequisites for a class action are met. See Bishop v. New York City Dep't of Hous. Preservation & Dev., 141 F.R.D. 229, 234 (S.D.N.Y. 1992). If each of these prerequisites is satisfied, plaintiff must then show that its putative class fits within one of the three subsections listed in Rule 23(b). Because of "the importance of the class action device in securities fraud suits, these factors are to be construed liberally." Gary Plastic Corp. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 903 F.2d 176, 179 (2d Cir. 1990), cert. denied, 498 U.S. 1025, 112 L. Ed. 2d 667, 111 S. Ct. 675 (1991).
Defendants concede that the first two prerequisites of Rule 23(a) are met in this case. Rule 23(a)(1) is satisfied as the class contains over 80,000 members. See Consolidated Rail Corp. v. Town of Hyde Park, 47 F.3d 473, 483 (2d Cir.) (numerosity presumed at a level of 40 members), cert. denied, 115 S. Ct. 2277 (1995). Because the remaining claims in this case are based upon alleged omissions either in the prospectus or by DWR brokers selling shares in the Fund pursuant to the prospectus, the Court find that the Rule 23(a)(2) commonality test is also met. "The key inquiry of Rule 23(a)(2) is whether the plaintiffs' claims arise from a common nucleus of facts. Such cases are considered particularly appropriate for class action treatment." David v. Showtime/The Movie Channel, Inc., 697 F. Supp. 752, 756 (S.D.N.Y. 1988).
In this case, defendants' main argument to support their position that the Court should not certify the proposed class is that plaintiffs have failed to establish, as required by Rule 23(a)(4), that the proposed representatives will fairly and adequately protect the interests of the class. "The question of whether the named plaintiffs can fairly and adequately represent the class is one 'committed to the sound discretion of the district court.'" County of Suffolk v. Long Island Lighting Co ("LILCO"), 710 F. Supp. 1407, 1413 (E.D.N.Y. 1989) (Weinstein, J.), aff'd, 907 F.2d 1295 (1990) (quoting Malchman v. Davis, 761 F.2d 893, 899 (2d Cir. 1985)). Courts typically analyze whether the requirements of Rule 23(a)(4) have been met by considering whether (1) the plaintiffs' interests are not antagonistic to the interests of other members of the class and (2) plaintiffs' attorneys are qualified, experienced and able to conduct the litigation. See In re Joint E. and S. Dist. Asbestos Litigation, 78 F.3d 764, 778 (2d Cir. 1996). The Court finds both of these considerations satisfied, and defendants do not contend otherwise.
Defendants do, however, offer a Rule 23(a)(4) representative adequacy challenge based upon a line of cases which require a representative plaintiff "to demonstrate a thorough familiarity with the underlying basis for his cause of action." Kamerman v. Steinberg, 113 F.R.D. 511, 517 (S.D.N.Y. 1986). Defendants contend that deposition testimony reveals that the proposed representatives show a "woeful lack of knowledge and understanding about the basic claims and allegations in the Complaint," and "a failure to read the prospectus at issue -- even in connection with preparation of the complaints in their name." Defendants' Opposition to Plaintiffs' Motion for Class Action Certification at 4. They argue that if representatives lack familiarity with the case they will be unable to supervise their counsel during the litigation, and are thus inappropriate as representatives. See id. (citing In re Marion Merrell Dow Inc. c Sec. Litig., 1994 WL 396190, at *8 n.4 (W.D. Mo. 1994)); see, e.g., Darvin v. International Harvester Co., 610 F. Supp. 255, 257 (S.D.N.Y. 1985). The cases supporting this approach suggest that the motivation behind requiring representative plaintiffs to demonstrate great familiarity with the case is a fear that the representatives, during pretrial discovery and at trial, will give misleading and contradictory testimony with regard to basic issues in the case that might make their claims subject to unique defenses. See LILCO, 710 F. Supp. at 1416; Darvin, 610 F. Supp. at 257. Thus, in that situation, the challenge to class certification can alternatively be viewed as a challenge to the representative plaintiffs' compliance with the typicality requirement of Rule 23(a)(3).
While familiar with the authority cited by defendants which finds a plaintiff without detailed knowledge of the underlying suit to be inappropriate as a class representative, the Court notes that many other courts, especially in complex securities fraud cases such as this one, do not impose such a requirement. See Trief v. Dun & Bradstreet Corp., 144 F.R.D. 193, 201 (S.D.N.Y. 1992) (detailed knowledge of which acts create liability in Rule 10b-5 action not required of class representative); Trautz v. Weisman, 846 F. Supp. 1160, 1168 (S.D.N.Y. 1994) (in RICO case, plaintiff whose deposition testimony revealed an extremely limited understanding of (1) the RICO statute, (2) facts asserted in complaint, and (3) his role as a class representative, found to be adequate representative). As Judge Weinstein, a preeminent scholar who has written books and articles on class actions, as well as presided over many high-profile class action cases, noted in the LILCO case, "in the context of complex securities litigation, attacks on the adequacy of the class representative based on the representative's ignorance . . . are rarely appropriate." LILCO, 710 F. Supp. at 1416 (citing Surowitz v. Hilton Hotels Corp., 383 U.S. 363, 370-74, 15 L. Ed. 2d 807, 86 S. Ct. 845 (1966)). Judge Weinstein further stated that in complex actions "named plaintiffs are not required to 'have expert knowledge of all the details of the case . . . and a great deal of reliance on expert counsel is to be expected.'" Id. (quoting In re AM Int'l, Inc. Sec. Litig, 108 F.R.D. 190, 197 (S.D.N.Y. 1985)). Thus, in complex securities fraud cases, this Court is in agreement with "the recent trend in this district to assess the adequacy of the representative's attorney rather than the personal qualification of the named plaintiff." Klein v. A.G. Becker Paribas Inc., 109 F.R.D. 646, 651 (S.D.N.Y. 1986).
Based on this authority, the Court will not deny any proposed representative's motion for certification solely because their lack of knowledge about the case makes them unable to supervise their attorney. In complex securities fraud cases, the approach suggested by defendants would limit class representative status to sophisticated investors who also have strong knowledge of the securities laws, as only they could adequately supervise their attorneys. Yet, one purpose of class actions lawsuits is to allow individuals, whose damages claims are less than the costs of litigating the action individually, an opportunity to vindicate their rights in court while spreading the costs of pursuing the action across the class. See, e.g., Gulf Oil Co. v. Bernard, 452 U.S. 89, 99-100 n.11, 68 L. Ed. 2d 693, 101 S. Ct. 2193 (1981). In securities fraud cases, those with small damages claims will often be the smaller, less sophisticated investor. Therefore, limiting representative status to plaintiffs who could adequately supervise their counsel is counter to a fundamental goal of class action lawsuits. Once this is conceded, and therefore it is conceded that ability to supervise counsel should not be required of a class representative, at least for Rule 23(a)(4) adequate representative purposes, there is no reason to draw distinctions between proposed representatives with detailed knowledge and understanding of the case, from proposed representatives with moderate or limited knowledge.
A more appropriate consideration with respect to individual representatives is whether or not they have shown a willingness to pursue actively the litigation by participating in discovery and staying abreast of the litigation as it proceeds. Cf. Darvin, 610 F. Supp. 255, 257 (S.D.N.Y. 1985) (failure to comply with reasonable discovery requests is indication that individual is not suitable as a class representative). In this case there is no evidence before the Court that any of the proposed class representatives have been unwilling to actively participate in this litigation, and all representatives have a basic understanding of their claims in this case. Moreover, the Court has high regard for and confidence in both the lead class counsel and other counsel representing this class, and finds no evidence of antagonism between any of the proposed representatives. In short, the Court finds that the interests of the class are adequately represented, and therefore finds Rule 23(a)(4) is satisfied as to all proposed representatives.
Beyond challenging all plaintiffs on Rule 23(a)(4) grounds, defendants also challenge certification of four of the proposed representative plaintiffs by asserting that their claims are not typical of the rest of the class, and are therefore subject to unique defenses. The typicality requirement of Rule 23(a)(3) "is satisfied when each class member's claim arises from the same course of events, and each class member makes a similar legal argument to prove the defendant's liability." In re Drexel Burnham Lambert Group, Inc., 960 F.2d 285, 291 (2d Cir. 1992). Moreover, the mere presence of questions unique to the class representatives will not bar class certification. See Gary Plastic, 903 F.2d at 180. Only if these questions subject the class representative "to unique defenses which threaten to become the focus of the litigation," id., is denial of certification appropriate.
Based upon the proof necessary to sustain claims pursuant to §§ 11 and 12(2), and based upon the alleged material omissions remaining in this case, the Court finds that plaintiffs' Bruce Stauderman, Joseph Gualdoni, John McCullough and John Steven McCullough should not be denied representative status because unique defenses particular to each of these individuals do not threaten to become the focus of the litigation. The evidence presented by defendants show that these plaintiffs had a greater understanding of the characteristics of the securities of the Fund, including in some cases pre-investment knowledge that there would be some volatility in principle. However, when one considers the liability requirements for § 11 and 12(2) claims, as discussed in Part I of this Order, it is clear that this knowledge by these defendants will not create defenses unique that threaten to become the focus of this litigation. Based on the evidence presently before the Court,
there is no indication that any of these defendants had knowledge prior to investing of the remaining alleged omissions in this case. Thus, this defense, offered by the language of §§ 11 and 12(2), appears unavailable in this case. The Court finds the Rule 23(a)(3) typicality requirement satisfied in this case.
Addressing the final issue relevant to class certification, because the Court also finds that the requirements of Rule 23(b)(3) have been met in this case, the Court grants plaintiffs' motion for certification. Rule 23(b)(3) states:
An action may be maintained as a class action if the prerequisites of subdivisions (a) are satisfied, and in addition: