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United States District Court, Southern District of New York

May 24, 2002


The opinion of the court was delivered by: Shira A. Scheindlin, U.S.D.J.:


On October 17, 2001, certain underwriter defendants (the "Moving Defendants") moved for this Court to disqualify itself pursuant to 28 U.S.C. § 455 in In re Initial Public Offering Securities Litigation, 21 MC 92 (SAS) ("IPO securities litigation"). See 10/17/01 Notice of Motion. That motion was denied on November 28, 2001. See In re Initial Pub. Offering Secs. Litig., 174 F. Supp.2d 70 (S.D.N.Y. 2001). The Moving Defendants then filed a petition for a writ of mandamus with the United States Court of Appeals for the Second Circuit on December 13, 2001.

A week later, this Court determined that another case, MDCM Holdings, Inc. v. Credit Suisse First Boston Corp., 01 Civ. 9333, should be coordinated with the IPO securities litigation for pretrial purposes. See 12/21/01 Transcript ("Tr.") at 3. The decision to coordinate the two cases rested in part on the fact that the cases have similar factual allegations, even though MDCM Holdings is brought under state law on behalf "of 182 U.S. ___ domiciled issuers that [Credit Suisse] led or co-led" since 1998 and the IPO securities litigation is brought under federal law on behalf of all shareholders who owned the IPO stock.*fn1 1/4/02 Tr. at 5. See also Fed.R.Civ.P. 42(a); Rule 15(a) of the Local Rules for the Division of Business Among District Judges.

On January 4, 2002, Credit Suisse, a defendant in MDCM Holdings and a Moving Defendant in the IPO securities litigation, argued that this Court should disqualify itself from presiding over MDCM Holdings because of its stock ownership in Fairchild Semiconductors and Jupiter Communications, two of the putative members of the plaintiffs' class in MDCM Holdings.*fn2 See 1/4/02 Tr. at 3-4. Credit Suisse argued that recusal was required because these two issuers were "part[ies] to the proceeding," 28 U.S.C. § 455(b)(4).*fn3 See id. at 5. Credit Suisse also argued that disqualification was required under 28 U.S.C. § 455(a), although it conceded that this issue was "exactly the same" as the one rejected by this Court in the IPO securities litigation. 1/04/02 Tr. at 6. See also In re Initial Pub. Offering Secs. Litig., 174 F. Supp.2d at 92-93. Because the decision on the mandamus petition was still pending, I agreed not to decide any substantive motions in either case until the Second Circuit had issued its opinion. See 1/4/02 Tr. at 10.

On April 1, 2002, the Second Circuit denied the Moving Defendants' petition. See In re Certain Underwriter Defendants, ___ F.3d ___, ___ (2d Cir. 2002). Now that the Second Circuit has issued its decision, Credit Suisse's motion in MDCM Holdings must be resolved. In addition, I must consider another issue that no party has raised: I currently own stock in AOL Time Warner, Inc., ("AOL") and Intel Corporation ("Intel"), companies that, according to the parties' financial disclosure statements, own stock in five of the companies that are issuer defendants in the IPO securities litigation.*fn4 The question is whether this financial interest mandates recusal.*fn5


A. Stock Ownership in Putative Members of the Plaintiff Class

As mentioned above, this Court currently owns stock two companies that entered into a contract with Credit Suisse underwrite their respective IPOs. Because section 455(b) requires a judge to recuse herself if she knows that she has "a financial interest . . . in a party to the proceeding," 28 U.S.C. § 455(b)(4), the first question is whether these putative class members are "part[ies] to the proceeding." 28 U.S.C. § 455(b)(4). This issue was raised by the Moving Defendants in the IPO securities litigation where my son and I, as former owners of certain IPO stocks, were putative class members until we waived any interest in the actions. See In re Initial Pub. Offering Secs. Litig., 174 F. Supp.2d at 92-93. In that case, the Moving Defendants argued that I was disqualified from presiding over the case because my son and I were "part[ies] to the proceeding" under subsection (b)(5)(i).*fn6 See id. The Second Circuit, however, held that recusal was not required because I was no longer a putative class member due to divesture and waiver. See id. at ___.

While the Second Circuit never reached the issue of whether putative class members are deemed to be parties to the proceedings,*fn7 every court that has addressed this issue has concluded that they are not. See Tramonte v. Chrysler Corp., 136 F.3d 1025, 1030 (5th Cir. 1998) (holding that "members of a putative class are not `parties' to a class action for these purposes [under section 455(b)(5)]."); New Orleans Pub. Serv. v. United Gas Pipe Line Co., 719 F.2d 733, 735 (5th Cir. 1983) (holding that judges are not disqualified if they are only putative class members); LeRoy v. City of Houston, 592 F. Supp. 415, 419 (S.D. Tex. 1984) ("If nothing more, to hold a judge to be a `party' in any situation where he was a member of a potential class would do violence to the rules governing class actions. . . . The interests of a potential member of a class are too `uncertain' to justify holding those potential members to be parties under § 455.").*fn8 By definition, a putative class member is only a potential class member, rather than a party in fact. See id. At most, this Court currently has a financial interest in two companies that may, or may not, be parties to this litigation (as a member of the plaintiff class) at some future date. Such an interest is too speculative to trigger the recusal provisions of section 455(b)(4).

"Of course, if the class were already certified and it included this Court, the Court would be [a] `party to the proceeding.'" In re Initial Pub. Offering Secs. Litig., 174 F. Supp.2d at 92 n. 34 (citing In re Cement and Concrete Antitrust Litig., 688 F.2d 1297, 1315 (9th Cir. 1982)). Therefore, if Fairchild Semiconductors and Jupiter Communications are included in the defined and certified class, and they do not opt out, this Court must either sell its stock or disqualify itself before any further substantive decisions are made. See 28 U.S.C. § 455(f); cf. Union Carbide Corp. v. U.S. Cutting Serv., Inc., 782 F.2d 710, 714 (7th Cir. 1986) (Posner, J.) (holding that a judge need not recuse herself if a conflict arises for the first time in the middle of the litigation as long as she "divested [her]self of the interest as soon as [she] discovered it[,] and made no rulings between the date of discovery and the date of divestment.").

The second question raised under subsection (b)(4) is whether the stock I own "could be substantially affected by the outcome of the proceeding" at this stage of the litigation. 28 U.S.C. § 455(b)(4) (emphasis added). Deciding this question requires speculation as to (1) whether the companies will be included in the class, (2) whether any companies will recover money from the class action, and (3) how such recovery will affect the prices of the companies' stock. At this time, the effect of this litigation on the prices of these two stocks is, at best, "remote, contingent, or speculative" and thus cannot serve as a basis for disqualification. In re Initial Pub. Offering Secs. Litig., 174 F. Supp.2d at 92 (quotation marks and citations omitted).

B. Stock Ownership in a Company that Has a Financial Interest in a Party to the Proceeding

Under section 455(b), the same two questions are raised by my ownership of AOL and Intel, corporations that own stock in five issuer defendants in the IPO securities litigation. See supra note 4. Under the plain language of the statute, such stock ownership does not constitute a disqualifying interest because it is not a "financial interest in a party to the proceeding." 28 U.S.C. § 455(b)(4) (emphasis added). Rather, they are financial interests in corporations that, in turn, have an interest in parties to the proceedings. And, for the same reasons given above, it cannot be said that the stock price of AOL or Intel will be substantially affected by the outcome of this litigation.

Of course, form must not be elevated over substance. If these companies were owned exclusively by AOL or Intel, or the companies were corporate subsidiaries, then stock ownership in AOL or Intel would require disqualification if not promptly sold. At the same time, nothing in the text of section 455(b) or its legislative history indicates that Congress intended to require disqualification whenever a judge owned stock in a company that is a shareholder in a party (e.g., if AOL was not a parent corporation but only owned a small percentage of shares in a party to this litigation).

The key question is whether the company in which the judge owns stock has effective control over the party to the litigation — that is, at least 50% of the voting stock or a majority of the capital interest in the party.*fn9 Thus, for example, a judge who owns stock in a corporation that "holds 80% of the outstanding stock of [a party to the proceedings] through one of its wholly owned subsidiaries" must disqualify herself unless she has properly divested herself of ownership. Kidder, Peabody & Co. v. Maxus Energy Corp., 925 F.2d 556, 561 (2d Cir. 1991). In contrast, because AOL and Intel do not exercise control over any of the issuer defendants, my stock ownership does not trigger the disqualification provision of section 455(b)(4)

It is worth emphasizing that Local Rule 1.9 provides:

To enable judges and magistrate judges of the court to evaluate possible disqualification or recusal, counsel for a private (non-governmental) party shall submit at the time of filing the initial pleading or other court paper (e.g., complaint, answer, notice of motion, notice of removal) on behalf of that party a certificate of identification of any corporate or other parents, subsidiaries, or affiliates of that party, securities or other interests in which are publicly held. A revised certificate of identification shall be filed promptly upon any change in such corporate parents, subsidiaries or affiliates.

S.D.N.Y. Local Civ. R. 1.9 (emphasis added).*fn10 Rule 1.9 only requires parties to disclose publicly-owned parents (i.e., corporations that control them), subsidiaries (i.e., corporations that they control), or other affiliates.*fn11 It was thus inappropriate for the issuer defendants to include noncontrolling stock interests in their companies in their disclosure statements. Given the limited resources of the Court, which must review hundreds of 1.9 statements every year, parties should only disclose what the local rule requires.

C. Recusal Under Section 455(a)

"Even where the facts do not suffice for recusal under § 455(b), however, those same facts may be examined as part of an inquiry into whether recusal is mandated under § 455(a)." In re Certain Underwriter Defendants, — F.3d at —. Section 455(a) requires a judge to disqualify herself if her partiality "might reasonably be questioned." 28 U.S.C. § 455(a). "Examination of the reasons given for recusal under § 455(a) `is not mechanical but requires an exercise of reasoned judgment.'" In re Certain Underwriter Defendants, — F.3d. at — (quoting In re Aguinda, 241 F.3d 194, 201 (2d Cir. 2001)). Moreover, "the grounds asserted in a recusal motion must be scrutinized with care and judges should not recuse themselves solely because a party claims an appearance of partiality." In re Aguinda, 241 F.3d at 201. "Litigants ought not have to face a judge where there is a reasonable question of impartiality, but they are not entitled to judges of their own choice." Id. (quoting S. Rep. No. 93-419, at 5 (1973); H. R. Rep. No. 93-1453 (1974), reprinted in 1974 U.S.C.C.A.N. 6351, 6355)).

In In re Certain Underwriter Defendants, the Second Circuit reviewed this Court's stock ownership and found no ground for disqualification under section 455(a). The only new information raised by Credit Suisse in the MDCM Holdings motion is my ownership in Fairchild Semiconductors and Jupiter Communications. These interests do not affect my determination that "an objective, disinterested observer fully informed of the underlying facts" would not entertain a "significant doubt that justice would be done absent recusal."*fn12 In re Aguinda, 241 F.3d at 201. Nor does my ownership in AOL and Intel affect this analysis.*fn13


For the reasons set forth above, I find that there is no conflict under section 455(b)(4) or section 455(a). See In re Aguinda, 241 F.3d at 201 ("[W]here the standards governing disqualification have not been met, disqualification is not optional; rather, it is prohibited."). Accordingly, Credit Suisse's motion in MDCM Holdings is denied.

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