The opinion of the court was delivered by: Brieant, District Judge
On January 28, 2003, certain Defendants in this consolidated private
securities class action filed a document described as a Motion to
"bifurcate the trial for damages and reliance issues." The motion, now
joined in by all Defendants, was heard on January 30, 2003 and fully
submitted for decision on February 7, 2003. The motion seeks more than
mere bifurcation; it is a broadside attack on the long existing
assumptions and procedures relating to trials of class action litigation
generally, and specifically securities fraud class actions.
Familiarity of the reader with prior proceedings in this litigation is
assumed. Specifically, familiarity is assumed with this Court's
decision. In re Oxford Health Plans, Inc. Securities Litigation,
191 F.R.D. 369 (S.D.N.Y. 2000). This case is controlled by the Private
Securities Litigation Reform Act of 1995 (the PSLRA),
15 U.S.C. § 78u-4.
As a result of this Court's decision dated February 28, 2000, a class
action was declared. The class consists of persons or entities who
purchased Oxford Health Plans, Inc. common stock or purchased Oxford call
options or sold Oxford put options during the period November 6, 1996
through and including December 9, 1997.
The shares of Oxford were publicly traded at all relevant times, and
this case is being tried on the theory of "fraud on the market".
Therefore, with possible theoretical exceptions not believed to exist in
the case, there can be no disputed issue of reliance as to absent class
members: "It has been held that `it is hard to imagine that there ever is
a buyer or seller who does not rely on market integrity. Who would
knowingly roll the dice in a crooked crap game?'" Basic, Inc. v.
Levinson, 485 U.S. 224, 246-47 (1988) (quoting Schlanger v. Four-Phase
Systems, Inc., 555 F. Supp. 535, 538 (S.D.N.Y. 1982)).
It is this Court's understanding that Plaintiffs propose to prove to
the trial jury several events, separate as to time, constituting material
misleading omissions or false representations; and to prove the inflation
in market value per share caused thereby on the effective dates.
Plaintiffs and presumably also Defendants will present evidence as to
whether there were any other contemporaneous secular changes which
combined with disclosure of the fraud to cause the devaluation of the
price of the stock following the Denouement. (See the "negative causation"
defense. McMahan & Co. v. Wherehouse Entertainment, Inc., 65 F.3d 1044,
1048 (2d Cir. 1995)). The damages of a purchaser will be computed by the
so-called Lookback formula which provides that:
except as provided in paragraph (2), in any private
action arising under this chapter in which the
plaintiff seeks to establish damages by reference to
the market price of a security, the award of damages
to the plaintiff shall not exceed the difference
between the purchase or sale price paid or received,
as appropriate, by the plaintiff for the subject
security and the mean trading price of that security
during the 90-day period beginning on the date on
which the information correcting the misstatement or
omission that is the basis for the action is
disseminated to the market.
15 U.S.C. § 78u-4 (West Group 2002).
Probably the closing prices on each trading day during the so-called 90
day "Lookback provision" under § 78u-4(e)(1) can be stipulated. If
they cannot be stipulated, the jury should be requested by a special
interrogatory to establish the closing prices on each of the trading days
during that period.
The essential issue tendered by this motion is, in effect, Defendants'
contention that the PSLRA bars an award at trial of aggregate class wide
damages in order to create a common fund for the non-party absent class
members. This challenged practice was traditionally followed in
securities class action litigation both before and after the PSLRA. The
first and only case holding otherwise appears to be Bell v. Fore
Systems, Inc., an unreported decision of the Western District of
Pennsylvania, issued August 2, 2002, under Docket #97-1265.
Counsel for Plaintiff class representatives urge that Bell was "wrongly
decided". As this Court has previously noted, principles of stare decisis
do not require this Court to give any deference to decisions of another
district judge. See 28 James William Moore, et al.; Moore's Federal
Practice § 134.02[D] ("a decision of a federal district court
judge is not binding precedent in either a different judicial district,
the same judicial district, or even upon the same judge in a different
case") cited In re Oxford Health Plans, Inc. Securities Litigation,
191 F.R.D. 369,
377 (S.D.N.Y. 2000). See also Gasperini v. Center for the
Humanities, 518 U.S. 415, 430 n. 10 (1996). Accordingly, this Court need
not hold that Bell was wrongly decided in order to decline to follow
We should hesitate to cast aside years of prior practice experience
with class action litigation, stampeded by a single district court
decision in another circuit. The Court in Bell simply concluded that
reliance by a trial jury on the trading models traditionally used to
determine total damages of the absent class members as a group, was, as a
matter of law, inconsistent with the limitation on an individual
purchaser's damages contained in the PLSRA. The initial apparent
difficulty with this legal conclusion is that the reasons relied upon by
the court in Bell, and by Defendants in their argument of this motion,
were all present and available to litigants in such cases long prior to
the enactment of PLSRA. There is nothing new about the legal theory of
the "Lookback" provisions found in 15 U.S.C. § 78u-4(e) or the
limitations of a purchaser's damages found in Section 78bb(a). The
damages of a purchaser were always understood to be the difference
between the purchase price and the true value of the shares (adjusted for
any negative causation) as disclosed after the revelation of the fraud to
the public, followed by a reasonable period (usually no longer than a
week or ten days) during which the market took cognizance of the fraud
and the publicly traded price was presumed, under the "efficient market"
hypothesis endorsed by the Supreme Court in Basic, to reflect an
adjustment for the fraud. If the plaintiff or absent class member
retained the security after the period of time within which the efficient
market adjusted for the revelation of the fraud, he or she made a new
investment decision, and could not collect damages for any further drop
in the market price. The securities holder who sold immediately after the
revelation, and before the price bottomed out, was also limited to the
difference between the inflated value and the actual price at which he or
she sold. All these basic rules were enshrined in the case law prior to
the PSLRA. They remain valid. The existence of these rules was never held
to require bifurcation, or prevent an award of lump sum damages to a
class of purchasers to be administered by the Court as a common fund for
The PSLRA amendment relied on does nothing more that is new, except to
extend to a ninety day period after the revelation, the prior period of
time, generally determined as an issue of fact in each case, during which
the efficient market was presumed to have adjusted the price of the
security to its real value absent the fraud. The statute contains an
express exception for a sale or repurchase during the ninety day period,
in which case the Plaintiffs' damages shall not exceed the difference
between the actual price, paid or received, and the mean trading price of
the security during the Lookback period. This is also consistent with
prior case law. The only change effected is a substantial enlargement of
the time period during which the efficient market is deemed to have
recognized and adjusted for the fraud, and has begun to reflect (again)
the "true value" of the security. Common sense suggests that the sudden
revelation of a fraud may cause a momentary overcorrection in market
price, and dearth of potential buyers
may exist for a longer period while
whatever cloud the revelation placed on the issuer, dissipates.
Assuming, as we do, that the Court in Bell has correctly construed the
Lookback provision in accordance with its plain meaning, it represents no
significant change from the law as it previously existed, except that
determining the time period during which the efficient market adjusts
from the inflated value to the true value, which used to be measured in
each case as an issue of fact, has now, ...