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November 28, 2001


The opinion of the court was delivered by: Shira A. Scheindlin, United States District Judge



These actions represent a consolidation of unique proportions. Since January 2001, plaintiffs have filed more than 1,000 class actions in the Southern District of New York related to the Initial Public Offerings ("IPOs") of over 263 companies (the "Securities Actions"). In the broadest terms, the complaints allege that certain companies issuing stock to the public ("issuers"), their directors and officers, and those investment banks underwriting the IPO process ("underwriters"), violated federal law by manipulating the stocks' prices. Because these actions share some common issues, Chief Judge Michael B. Mukasey consolidated them for pretrial purposes and assigned the cases to this Court on August 9, 2001. See Order, In re Initial Public Offering Sec. Litig., 21 MC 92 (Aug. 9, 2001) ("Transfer Order").

Of the more than 1,000 defendants, thirty-eight of the underwriters (the "Moving Defendants") now seek this Court's disqualification on various grounds raised under 28 U.S.C. § 455 (a)-(b).*fn1 For the reasons that follow, the Moving Defendants' motion is denied.


The disqualification of federal judges is governed by 28 U.S.C. § 455, which Congress enacted in two stages — the first in 1974, the second in 1988. Specifically, in 1974, Congress passed subsections (a)-(e), the relevant portions of which reads:

(a) Any justice, judge, or magistrate of the United States shall disqualify [her]self in any proceeding in which [her] impartiality might reasonably be questioned.
(b) [She] shall also disqualify [her]self in the following circumstances:
(1) Where [she] has a personal bias or prejudice concerning a party, or personal knowledge of disputed evidentiary facts concerning the proceeding; . . .
(4) [She] knows that [she], individually or as a fiduciary, or [her] spouse or minor child residing in [her] household, has a financial interest in the subject matter in controversy or in a party to the proceeding, or any other interest that could be substantially affected by the outcome of the proceeding; .
(5) [She] or [her] spouse, or a person within the third degree of relationship to either of them, or the spouse of such a person:
(i) Is a party to the proceeding, or an officer, director, or trustee of a party;

(ii) Is acting as a lawyer in the proceeding;

(iii) Is known by the judge to have an interest that could be substantially affected by the outcome of the proceeding;
(iv) Is to the judge's knowledge likely to be a material witness in the proceeding.

28 U.S.C. § 455(a)-(b).

Section 455 thus provides two separate grounds for disqualification. Subsection (a) sets out a general standard requiring a judge to disqualify herself "in any proceeding in which [her] impartiality might reasonably be questioned," 28 U.S.C. § 455(a), while subsection (b) lists a number of specific instances in which recusal is mandated. For example, if the judge "served as lawyer in the matter in controversy," she must disqualify herself from the proceedings. 28 U.S.C. § 455(b)(2).

In the words of the Supreme Court, "[t]he 1974 revision made massive changes" to the law of disqualification. Liteky et al. v. United States, 510 U.S. 540, 546 (1994).*fn2 Subsection (a) was the more significant change because it added "an entirely new `catchall' recusal provision." Id. at 548. By contrast, most of the revisions codified in subsection (b) "merely rendered objective and spelled out in detail the `interest' and `relationship' grounds of recusal that had previously been covered by § 455." Id.

Fourteen years later, Congress amended section 455 by adding subsection (f), which states:

Notwithstanding the preceding provisions of this section, if any . . . judge . . . to whom a matter has been assigned would be disqualified, after substantial judicial time has been devoted to the matter, because of the appearance or discovery, after the matter was assigned to him or her, that he or she individually or as a fiduciary, or his or her spouse or minor child residing in his or her household, has a financial interest in a party (other than an interest that could be substantially affected by the outcome), disqualification is not required if the justice, judge, magistrate, bankruptcy judge, spouse or minor child, as the case may be, divests himself or herself of the interest that provides the grounds for the disqualification.

28 U.S.C. § 455(f) (emphasis added). As the plain language, i.e., "Notwithstanding", and legislative history of the subsection show, Congress did not intend to otherwise alter the statute by enacting subsection (f). The Moving Defendants correctly explain:

Section (f)'s legislative history . . . includes the statement that the provision was "directed at a specific problem that has arisen . . . in class action cases,' H.R. Rep. No. 100-889 (Aug. 26, 1988), reprinted in 1988 U.S.C.C.A.N. 5982, 6029, and illustrates `the problem' by citing and describing In re Cement and Concrete Antitrust Ligation, 515 F. Supp. 1076, 1080 (D. Ariz. 1981), in which the judge was required to recuse because his wife owned stock in some of the parties. . . . Congress not only had a `specific problem' in mind, it had a specific case in mind.

Moving Defendants' Reply Memorandum of Law in Further Support of Motion for Recusal Pursuant to 28 U.S.C. § 455 ("Reply Mem.") at 7-8.


The trial judge herself must rule on a motion to recuse under section 455. See In re Drexel Burnham Lambert, Inc., 861 F.2d 1307, 1312 (2d Cir. 1988) ("Discretion is confided in the district judge in the first instance to determine whether to disqualify [herself]."); see also Schurz Communications, Inc. v. FCC, 982 F.2d 1057, 1059 (7th Cir. 1992) (Posner, J.) ("Section 455 clearly contemplates that decisions with respect to disqualification should be made by the judge sitting in the case, and not by another judge.") (quoting United States v. Balistrieri, 779 F.2d 1191, 1202-03 (7th Cir. 1985)); Lambert v. Blackwell, No. 96 Civ. 6244, 2001 WL 410639, at *2 n.2 (E.D. Pa. Apr. 20, 2001) ("It is well-established, if not entirely intuitive, that the resolution of such a motion is entrusted to the judge who is the subject of the motion.") (citation omitted).

The Second Circuit has explained that the reasons for this discretion are "plain":

The judge presiding over a case is in the best position to appreciate the implications of those matters alleged in a recusal motion. In deciding whether to recuse [her]self, the trial judge must carefully weigh the policy of promoting public confidence in the judiciary against the possibility that those questioning [her] impartiality might be seeking to avoid the adverse consequences of [her] presiding over their case. Litigants are entitled to an unbiased judge; not to a judge of their choosing.

In re Drexel Burnham Lambert, Inc., 861 F.2d at 1312 (citation omitted).

Indeed, even if the parties do not move for recusal, section 455 creates an independent duty requiring federal judges to evaluate in every case whether they should disqualify themselves. See 28 U.S.C. § 455 (stating that "[a]ny justice, judge, or magistrate of the United States shall disqualify [her]self in any proceeding" if certain conditions exist) (emphasis added); United States v. Cerceda, 139 F.3d 847, 852-53 (11th Cir. 1998) (holding that "[a] judge is under an `affirmative, self-enforcing obligation to recuse himself sua sponte whenever the proper grounds exist'"); Aronson v. Brown, 14 F.3d 1578, 1581 (Fed. Cir. 1994) ("Section 455 is `self-enforcing' in that it is self-executing."); Alexander v. Primerica Holdings, Inc., 10 F.3d 155, 162 (3d Cir. 1993) (holding that section 455 "commands the judge to disqualify [her]self sua sponte"); Taylor v. O'Grady, 888 F.2d 1189, 1200 (7th Cir. 1989) ("Recusal under Section 455 is self-executing; a party need not file affidavits in support of recusal and the judge is obligated to recuse herself sua sponte under the stated circumstances."); In re Manoa Fin. Co., 781 F.2d 1370, 1373 (9th Cir. 1986) (per curiam) (holding that "section 455 is stated in terms of a self-enforcing obligation upon the judge").

If section 455 applies, the judge must recuse herself. But if it does not apply, she should not recuse. As the Second Circuit has repeatedly held, a "judge is as much obliged not to recuse [herself] when it is not called for as [s]he is obliged to when it is." In re Drexel Burnham Lambert, Inc., 861 F.2d at 1312; see also In re Aguinda, 241 F.3d 194, 201 (2d Cir. 2001). In making its determination, a court must remember that "where the standards governing disqualification have not been met, disqualification is not optional; rather, it is prohibited." In re Aguinda, 241 F.3d at 201; see also Southwestern Bell Tel. Co. v. FCC, 153 F.3d 520, 523 (8th Cir. 1998) ("Because the rules do not require my recusal, I am obliged to remain on the panel."); In re Nat'l Union Fire Ins. Co., 839 F.2d 1226, 1229 (7th Cir. 1988) ("Judges have an obligation to litigants and their colleagues not to remove themselves needlessly, because a change of umpire in mid-contest may require a great deal of work to be redone . . . and facilitate judge-shopping.") (citation omitted); Hinman v. Rogers, 831 F.2d 937, 939 (10th Cir. 1987) ("There is as much obligation for a judge not to recuse when there is no occasion for [her] to do so as there is for [her] to do so when there is.").


A. General Background of the Actions, the Consolidation and the Recusal Motion

Since January 12, 2001, plaintiffs have filed more than 1,000 class actions ("the Securities Actions") against 263 issuers, 42 underwriters and hundreds of individuals: over 1,000 defendants in total. Each of these Securities Actions alleges "widespread manipulation of IPOs and IPO aftermarkets, including nondisclosure of commissions and other compensation, undisclosed pre-arranged `tie-in arrangements,' and the issuance of misleading analyst reports." Memorandum of Law in Support of Motion for Recusal Pursuant to 28 U.S.C. § 455 ("Moving Mem.") at 5 (quoting various portions of the Complaints in In re VA Linux Securities Litigation, 01 Civ. 0241 and In re Calico Commerce Securities Litigation, 01 Civ. 2601 (collectively "Securities Complaints")). The proposed classes in these actions include every investor who purchased the common stock of the company from the date it initially issued stock until December 2000. Id. at 6 (citing various Securities Complaints).

In related actions pending before the Honorable William H. Pauley, III, plaintiffs have brought nine separate antitrust actions alleging that the "defendants manipulated the prices of securities brought to market in the IPOs traded in the aftermarkets" (the "Antitrust Actions").*fn3 Id. (quoting Antitrust Compl. ¶ 57). The manipulated securities may include "as many as 1,000 IPOs," and the putative class includes "`all persons who purchased any of the Manipulated Securities in the aftermarket of IPOs conducted by defendants from March 1997 through the present.'" Id. (citing Antitrust Compl. ¶¶ 57-58, 67 and quoting Antitrust Compl. ¶ 59). In the words of the Moving Defendants, "[t]he actions attack the integrity of the fundamental capital formation function of the nation's investment banks with the charge that IPOs were manipulated and distorted by unlawful industry-wide practices . . . . [T]he litigation calls into question the very legitimacy of the United States securities markets." Id. at 2.*fn4

Hundreds of the Securities Actions had been assigned to many judges in this district. In an effort to coordinate pretrial matters and to avoid taxing the limited judicial resources of the this district, the Assignment Committee of the Court decided to consolidate all of the Securities Actions. The August 9, 2001 Transfer Order directed that all of the Securities Actions be transferred to this Court for "coordination and decision of pretrial motions, discovery and related matters other than trial." 8/9/01 Transfer Order.

B. The Status of the Consolidated Actions

While a great deal of organizational time and effort has been expended, this Court has not made any substantive decisions. In preparation for the mass transfer of cases in early August, I supervised administrative staff in organizing the unprecedented amount of simultaneous filings of class actions (each naming multiple parties). I also held numerous meetings with other judges, the District Executive's Office, the Clerk of the Court and his staff, and the Court's Computer Department. Extra staff was added to handle these matters.

I also prepared and issued a multi-page Case Management Order, which required hundreds of case management submissions and the processing of those submissions. See 8/8/01 Order. A detailed Case Management Agenda was prepared for the first Case Management Conference, which was attended by hundreds of attorneys. See 9/7/01 Tr. at 13 (referencing and describing agenda). Hundreds of lead plaintiff and lead counsel motions have been filed. The Court assisted in the formation of a Plaintiffs' Executive Committee, Steering Committee and the selection of Plaintiffs' Liaison Counsel.

Finally, this Court has also addressed a number of smaller matters, such as deciding which cases should be part of this massive consolidation and which fall outside the consolidation and should be assigned to a different judge.*fn5 In addition to the pending motions for the selection of lead plaintiffs and lead counsel, there is now a fully submitted motion addressing discovery issues.*fn6 A Case Management Conference is scheduled for December 7, 2001, at which time the parties will address such topics as the possible selection of test cases and the scheduling of anticipated motions to dismiss.

C. The Court's Alleged Conflicts

1. Defendants' Stocks

Prior to the consolidation, I was presiding over eight cases involving an IPO for Internet Capital Group. In July 2001, I notified the parties that I had purchased this stock on August 4, 1999, and sold it on August 5, 1999 at a small profit. I also notified the parties that I was opting out of membership in any class action involving that IPO. See 7/18/01 Tr. at 4. No party sought the Court's recusal based on this disclosure.*fn7

On August 3, 2001, aware that hundreds of cases would be reassigned shortly, I provided written notification to the parties in two actions involving the IPO for Breakaway Solutions. In that notice I informed the parties that I purchased that stock in July 2000 and sold it on August 1, 2001, at a loss. I also opted out of membership in any class action involving that IPO. The notice asked any counsel who "objects to this Court retaining jurisdiction of these cases" to notify the Court in writing within 10 days. 8/3/01 Order ("August 3rd Order"). No party registered any objection or sought the Court's recusal based on this disclosure.*fn8

After the hundreds of cases were reassigned to this Court pursuant to the August 9, 2001 Transfer Order, and after I issued the first Case Management Order and held the first case management conference, certain defendants asked to meet with me regarding potential conflicts. At that meeting, which was attended by liaison counsel for plaintiffs, issuers and underwriters, I was asked to identify my broker (and my husband's broker) and to describe how I intended to check for any current conflicts.*fn9 After considering this inquiry, I decided that the parties should check for conflicts due to the extraordinarily large number of disclosure statements filed pursuant to Rule 1.9 of the Joint Local Civil Rules for the Southern and Eastern Districts of New York.*fn10 I therefore prepared redacted versions of my Financial Disclosure Forms for 1998 through 2000 and sent a packet to each liaison counsel.*fn11

The Moving Defendants identified what they perceived to be one previously undisclosed conflict. At the time of their conflict check, I owned stock in According to Moving Defendants, this stock was implicated in Klein v. Merrill Lynch, 01 Civ. 7654, one of the Securities Actions, because the allegations in Klein relate to the IPO of a security called "Internet Infrastructure Holdrs".*fn12 As explained in the complaint, this security is a "basket securit[y]" which "represent[s] an undivided beneficial ownership interest in 20 specified internet infrastructure companies (the `Underlying Securities')." Klein Compl. ¶ 2. The price of each Internet Infrastructure Holdrs security "was directly related to, and moved with, the price of the Underlying Securities."*fn13 Id.

Two of the Underlying Securities that comprise Internet Infrastructure Holdrs are and Kana Communications.*fn14 See Moving Mem. at 9, 10 n.10. "The complaint in Klein, however, does not define the plaintiff class to include purchasers of constituent stocks. See Klein Compl. ¶ 12. Moreover, Internet Infrastructure Holdrs, Kana Communications, and are not named as defendants in that action. See id. ¶¶ 6-11. And while Kana Communications is a defendant in several other Securities Actions, I never purchased stock in that company. Rather, I purchased stock in Broadbase Software, Inc., which later merged with Kana Communications, Inc. to create Kana Software, Inc.*fn15, whose stock I did purchase, is not named as a defendant in any of the Securities Actions.

In response to these disclosures, of which I was unaware at the time of the reassignments in August, I immediately sold my stock in Kana Communications and and again waived any interest in pursuing any claims with respect to these purchases. See 9/30/01 Notice to All Counsel; 10/1/01 Waiver.

2. Other "IPO" Stocks

The Moving Defendants also assert that my past and present ownership of stocks that were sold through IPOs from 1997 through 2000 creates a conflict because (a) these stocks may be among the "1,000" stocks referred to as potentially Manipulated Stocks in the Antitrust actions, or (b) these stocks may become the subject of future actions.*fn16 The Moving Defendants supplied a list of ten IPO stocks (other than the four previously discussed) that I purchased at some time beginning in 1997.*fn17 See Moving Mem at 10 n.11. Seven of those stocks were sold prior to the filing of any of these actions. I still hold two of these stocks. The remaining stock merged with Hewlett-Packard, Co., which did not issue an IPO during the relevant time period, is not a party to these actions, and is a company in which I held stock prior to the merger. Five of the fourteen purchases resulted in realized gains; six resulted in realized losses; and the three that are still held now have less value than when they were purchased.*fn18

3. The Judge's Family

During a series of telephone conferences held to discuss the questions raised by the recusal motion, the Moving Defendants informed me that they had reviewed my adult son's brokerage statement without his permission or mine. See 9/28/01 Tr. at 8-11; 10/2/01 Tr. at 6, 16-17. Based on their review of his financial statements, the Moving Defendants stated that my son owned stock in one of the issuer defendants. I did not know of his ownership and never asked the Moving Defendants to identify the stock.*fn19 My son contacted the counsel who raised the subject, asked that the stock be identified, sold the stock and waived any interest in participating in any action arising from that investment. See 10/2/01 Tr. at 6. I have never learned the identity of that stock.

4. Relationship with Broker

The Moving Defendants base part of their argument on comments the Court made during the course of judicial proceedings. The comments that Moving Defendants cite were made at a July 18, 2001 conference concerning the Internet Capital cases:

All I know is that the broker called and said this is a good stock [to] buy and I said sure, then the next day she called and said this is a good stock [to] sell and I said sure. That's it. Sad to say, very sad to say, I don't read anything that I should read. And that's the end of it. So I know nothing. . . . I think I probably am not in the class by definition anyway, because I made money, and if I was in it, I don't want to be in it, I opt out, and I don't know anything other than there is that name on the list of things that were bought and sold that year — who has a problem? . . . I know nothing. I read nothing. Nobody tells me anything. I am really one of those sad investors. The brokers call, I say ["]yes, good-bye["]; they say ["]sell["], I say ["]yes, good bye.["] I regret all of my yesses for all these past few years. Every one was a mistake. But that is what I know.

7/18/01 18 Tr. at 5-6. At a later conference, in these consolidated actions, the Court clarified its remarks when the Moving Defendants referenced them.

Right. And to get specific[,] to discuss that it would be everything that has gone down, which as far as I can tell is techs and everything else I bought[.] [S]ome of my worst losers were REITs. I was absolutely creamed in REITs from the broker, KMart, Elder Trust, [C]orporate [O]ffice [P]roperties, there was a whole slew of that. I apparently just am not talented at this in general and would not pick a stock ever again of any variety. So, I say that again[,] ...

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