the Barron's article on November 14, 1997. That article made public for the first time the original class action complaint's assertion that EXTL had been "systematically understating its expenses," an allegation which had not been touched upon by Judge Sweet's opinion in Krauth. Compare The Insider article in Barron's at 31 with Krauth, 1994 U.S. Dist. LEXIS 15255. Thus, the Expert Witness was correct in determining that "disclosure began with Judge Sweet's Opinion, and the Barron's article, which appeared in the November 14, 1994 edition, constituted full dissemination." See Original Report at P 8., Accordingly, this Court concludes that the Expert Witness was at least correct in his use of the ten days following publication of the Barron's article as the normative period by which to measure damages.
In any case, even assuming that the ten days following October 27, 1997 somehow represents a more appropriate normative period, and even accepting defendants' assertions that in those ten days there was "zero" price decline in EXTL's stock price, that does not mean that there were "zero" Class damages. Once again, as a general principle, damages in a securities fraud case are measured by the difference between the price at which a stock sold and the price at which the stock would have sold absent the alleged fraud. Absent the alleged fraud, the price at which EXTL stock would have sold during the ten days following October 27, 1994 may well have been much higher than it actually was. Indeed, rather than not declining, EXTL's stock price may well have appreciated during that period. The question of whether that hypothetical appreciation could represent real Class damages is in itself enough of a genuine issue of material fact to defeat defendants' summary judgment motion.
Even if it were not, however, this Court should be reluctant to grant defendants' motion. This is a class action brought by fiduciaries to enforce the rights of the absent members. Thus, in considering whether to grant summary judgment, this Court must consider that members of the Class not actually present as parties to this litigation may be bound by the judgment--but only where they are in fact adequately represented by the parties who are present. Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 812, 105 S. Ct. 2965, 2974, 86 L. Ed. 2d 628 (1985) ("The Due Process clause of course requires that the named plaintiff at all times adequately represent the interests of the absent class members.") (citing Hansberry v. Lee, 311 U.S. 32, 41-42, 45, 61 S. Ct. 115, 118-19, 85 L. Ed. 22 (1940) ("It is familiar doctrine of the federal courts that members of the class not present as parties may be bound by the judgment where they are in fact adequately represented by parties who are present.")).
Under the circumstances present here we should not allow this case which appears to have merit on the issue of liability, to go off on what is tantamount to a pleading failure. By failing to proffer expert testimony of sufficient reliability to be admitted at trial, the class representative plaintiffs seem to have fallen short in fulfilling their obligation adequately to represent the interests of the absent members. Accordingly, while the flaws in the Expert Witness' testimony mean that plaintiffs have thus far failed to offer any admissible proof on the issue of damages, summary judgment would be inappropriate at this time, and the motion is denied.
In the interests of allowing plaintiffs to fulfill their obligation adequately to represent the interests of the absentee Class members, this Court grants plaintiffs a reasonable time to enlist the services of a new damages expert, or alternatively to have the Expert Witness revisit the issues in order to correct the flaws described herein.
B. Plaintiffs' Motions
1. Partial Summary Judgment
We now turn to plaintiffs' motion for partial summary judgment on the materiality of EXTL's alleged failure to disclose the Bertoli connection. Relying on the Supreme Court's explanation of the materiality of omissions in TSC Industries v. Northway. Inc., 426 U.S. 438, 449, 96 S. Ct. 2126, 2132, 48 L. Ed. 2d 757 (1976), plaintiffs claim that there are no genuine issues of fact as to whether the additional disclosures EXTL should have made about the Bertoli connection would have altered "the 'total mix' of information" available to shareholders during the Class Period.
This Court disagrees. In TSC Industries, the Supreme Court "warned against deciding on summary judgment the issue of whether an omission or misrepresentation is material. Only if the established omissions are 'so obviously important to an investor that reasonable minds cannot differ on the question of materiality' should the ultimate issue of materiality be resolved by summary judgment." Langner v. Brown, 913 F. Supp. 260, 269 (S.D.N.Y. 1996) (12b-6 motion)(quoting TSC Industries, 426 U.S. at 450, 96 S. Ct. at 2133).
Plaintiffs here have failed to demonstrate that defendants' omission of the Bertoli connection during the Class period would have been of such obvious importance to investors as to justify summary judgment. As defendants point out, the fact that EXTL's management may have conferred with a convicted felon, with a history of securities violations, is not per se material.
Even a crook may have valuable business judgment to share with the management of a corporation in which his family owned substantial share holdings. Indeed, the market may very well have appreciated Mr. Bertoli's expertise--defendants assert that the market price of EXTL stock held relatively steady in the days following disclosure and dissemination of the Bertoli connection through Judge Sweet's opinion in Krauth, an assertion which plaintiffs apparently do not dispute and which we take as true within this inquiry. See Lendino v. Trans Union Credit Information Co., 970 F.2d 1110, 1112 (2d. Cir. 1992) (noting that in the summary judgment context courts must draw all reasonable inferences and resolve all ambiguities in favor of the nonmoving party). While EXTL's purported price stability in the days following disclosure of the Bertoli connection does not mean that management's reliance on Bertoli was immaterial, it does at least indicate that there are sufficient issues of disputed fact on the question as to preclude summary judgment.
2. Issue Preclusion
As a final matter we address plaintiffs' claim that they are entitled to collateral estoppel, or issue preclusion,
on the issue of the materiality of the Bertoli connection, based on Judge Sweet's decision in Krauth. See 1994 U.S. Dist. LEXIS 15255. To invoke issue preclusion successfully, plaintiffs must show that (1) the issues in both proceedings were identical, (2) the issue in the prior proceeding was actually litigated and actually decided, (3) there was a full and fair opportunity for litigation in the prior proceeding, and (4) the issue previously litigated was necessary to support a valid and final judgment on the merits. Interoceanica Corp. v. Sound Pilots, Inc., 107 F.3d 86, 91 (2d Cir. 1997). Where a party seeks to seek to use issue preclusion offensively, as plaintiffs do here, this Court has "broad discretion to determine when it should be applied" and should not do so where it would be "unfair" to defendants. Parklane Hosiery Co., Inc. v. Shore, 439 U.S. 322, 331, 99 S. Ct. 645, 651, 58 L. Ed. 2d 552 (1979).
According to plaintiffs, the identical issue of the materiality of the Bertoli connection was raised, litigated, and adjudicated by Judge Sweet in Krauth. Thus, plaintiffs' argue that it would be fair to preclude defendants from re-litigating that issue in this case. Again, we disagree.
In Krauth, Judge Sweet enjoined EXTL from soliciting proxies without disclosing what he determined to be the material facts surrounding the Bertoli connection. 1994 U.S. Dist. LEXIS 15255 at *24. The issue confronting Judge Sweet in Krauth was whether, under Section 14(a) of the Exchange Act, EXTL's 1994 proxy materials adequately disclosed to shareholders who were voting for new board members the extent of Richard Bertoli's involvement with members of EXTL management who were running for re-election. Id. at *18. In resolving that issue, Judge Sweet held that Bertoli's involvement with EXTL's directors was "material in an election context in which [the directors'] loyalty and competency is per force an issue."
The issue with respect to the Bertoli connection in this case is different from that encountered in Krauth in at least two respects. First, as Judge Sweet notes, the materiality of the Bertoli connection in Krauth was considered within the context of the election of a board of directors, where questions of integrity and loyalty necessarily come into play. In this case, the materiality issue stands in an entirely different posture--namely, whether a reasonable investor would find that had EXTL disclosed the Bertoli connection, whatever it was, the 'total mix' of information available to shareholders would have been altered. Second, while in Krauth material omissions were alleged with respect to the proposed 1994 proxy statement alone, the alleged omissions in this case cover the entire Class Period, from 1991 to 1994. As such, defendants had no opportunity to litigate the issue of whether the Bertoli connection was material over the entire course of the 1991-1994 Class Period; or whether to the extent that the market had preexisting knowledge of it, disclosure of Bertoli's involvement would not have altered the total mix of knowledge available to investors anyway.
For these reasons, this Court concludes that application of issue preclusion would be unfair to the defendants in this case. Parklane Hosiery Co., 429 U.S. at 331, 99 S. Ct. at 651.
For the reasons set forth above, defendants motion to exclude the proposed testimony of plaintiffs' Expert Witness is granted. Plaintiffs are entitled to a reasonable time to enlist the services of a new damages expert or alternatively to have the Expert Witness reform his analysis to correct the flaws described in this opinion. Defendants motion for summary judgment is denied. Finally, plaintiffs' motion for summary judgment is denied. Accordingly, we reject plaintiffs' assertion that Magistrate Gold's acceptance of the Expert Witness' proposed testimony in Winkler should prompt this Court to accept the proposed testimony in this case.
Dated: White Plains, New York
October 16, 1997
Charles L. Brieant, U.S.D.J.