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GANDON v. CAFFERTY

September 13, 2003

DR. STANLEY C. GANDON, FOR HIMSELF AND THE GRANDON FAMILY IRREVOCABLE TRUST, AND MICHAEL CAFFERTY, AS TRUSTEE FOR THE GRANDON FAMILY IRREVOCABLE TRUST, ON BEHALF OF THEMSELVES ANS ALL OTHERS SIMILARLY SITUATED, PLAINTIFFS, -AGAINST- MERRILL LYNCH AND CO., INC. AND MERRILL LYNCH, PIERCE FENNER & SMITH, INC., DEFENDANTS


The opinion of the court was delivered by: Shirley Kram, Senior District Judge [ Page 2]

OPINION AND ORDER

Before the Court is Plaintiffs' motion for certification of the class pursuant to Federal Rule of Civil Procedure 23(b)(2) and (3) . For the reasons set forth below, the motion for class certification is denied.

BACKGROUND*fn1

I. Factual Background

Merrill Lynch and Co., Inc. is the New York-based parent company of Merrill, Lynch, Pierce, Fenner & Smith, Inc., (collectively, "Merrill Lynch") a registered broker-dealer with offices throughout the United States. See Second Amended Complaint ("Compl.") ¶¶ 7-10. Plaintiffs Dr. Stanley Grandon ("Grandon") and Michael Cafferty, trustee for the Grandon Family Irrevocable Trust (the "Trust"), purchased municipal securities from Merrill Lynch. Compl. ¶¶ 5-6.

On November 22, 1994, Merrill Lynch sold Grandon 90,000 municipal bonds at a price listed as 92.47, totaling $83,223.00, and 30,000 municipal bonds at a price listed as 92.47, totaling $27,741.30. Compl. ¶ 48 (a). These bonds were described as "Michigan Public Power Agency Rev Ref Belle River PJ-A OID Mar 93, [ Page 3]

5.2%, Jan 1 04 bonds." Id. Grandon alleges that the price charged was approximately 4.6% above the true market price of the bonds. Compl. ¶ 48(b).

On January 19, 1995, Grandon and the Trust purchased 60,000 municipal bonds from Merrill Lynch at a price listed as 87.04, totaling $52,227.00. Compl. ¶ 45(a). These bonds bore the notation "Southfield MI Pub Ses Facs Nov 93, 4.25%, May 1 04." Id. Grandon alleges that the price charged for these bonds was approximately 3.0% to 6.3% above the true market price. Compl. ¶ 45(a).

On August 25, 1995, Grandon purchased 45,000 municipal bonds from Merrill Lynch at a price listed as 97.414, totaling $44,246.78. Compl. 41(a). These bonds bore the description "Garden City MI Sew Disp Sys Ser B LT MBIA July 95, 5.5%, Nov. 1 11, Interest from 7/1/95, First Coupon 11/1/95" (the "Garden City Bonds") . Id. Grandon alleges that the price Merrill Lynch charged for these bonds was approximately 3.7% to 9.74% above the true market price. Compl. ¶ 41(b). Interest rates declined between Grandon's August 25, 1995 purchase and the August 31, 1995 month-end statement. Compl. ¶(43(a). Plaintiffs claim that as a result of the interest rate decline, the price of the Garden City Bonds should have increased, and that because the price Merrill Lynch charged Grandon bore no reasonable relation to the true market price, the price of the Garden City Bonds was reported by Merrill [ Page 4]

Lynch as 88.78 on August 31, 1995. Id. Plaintiffs also claim that the fees and markups on the sale of the Garden City Bonds to Grandon were approximately three times larger than fees charged for comparable equity transactions. Compl. ¶ 23, 26(b), 27(b). Plaintiffs also claim that Merrill Lynch sent them confirmation statements, yet failed to disclose any of the aforementioned markups. Compl. ¶ 28.

II. Procedural Background

On July 22, 1997, this Court dismissed Plaintiffs1 First Amended Class Action Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6), on the grounds that Merrill Lynch was under no statutory or regulatory duty to disclose markups on municipal securities. See Grandon v. Merrill Lynch & Co., No. 95 Civ. 10742, 1997 WL 411924, *5-7 (S.D.N.Y. July 22, 1997)("Grandon I"). On June 19, 1998, the Second Circuit vacated Grandon I, and held, inter alia, that "there exists an implied duty to disclose markups on municipal securities when those markups are excessive." Grandon v. Merrill Lynch & Co., 147 F.3d 184, 193 (2d Cir. 1998)("Grandon II, "). The Second Circuit left it to this Court to determine whether the previous complaint stated a claim for fraudulent undisclosed markups under Section 10(b) and Rule 10b-5. By opinion dated November 1, 1999, this Court again dismissed the previous complaint, on the grounds that "plaintiffs fail[ed] to state a claim for fraudulent undisclosed markups." Grandon v. Merrill [ Page 5]

Lynch & Co. No. 95 Civ. 10742, 1999 WL 993653, *4 (S.D.N.Y. Nov. 1, 1999) ("Grandon III") . This Court, however, allowed Plaintiffs to file a second amended complaint in order to conform to the standards set forth in Grandon II.

On November 17, 1999, Plaintiffs submitted the Second Amended Complaint, which contained three causes of action. In the first cause of action, Plaintiffs alleged that Merrill Lynch committed securities fraud by charging hidden, excessive markups on municipal bond transactions, in violation of Section 10(b) and Rule 10b-5. See Compl. ¶¶ 57-60. In the second cause of action, Plaintiffs alleged that Merrill Lynch misrepresented the markups by disclosing a $4.85 "Processing Fee" while simultaneously leaving blank a box on the confirmation statements marked "Markup/Markdown," thereby implying that the only compensation Merrill Lynch received was the $4.85 fee. See Compl. ¶¶ 27-29, 62(a). In the third cause of action, Plaintiffs alleged two claims arising under state law, breach of contract and breach of fiduciary duty. See Compl. ¶¶ 64-68.

Merrill Lynch moved to dismiss the Second Amended Complaint, and by opinion dated July 18, 2001, this Court dismissed only the second cause of action and the breach of contract portion of the third cause of action. See Grandon v. Merrill Lynch & Co., No. 95 Civ. 10742, 2001 WL 826092 (S.D.N.Y. July 20, 2001) ("Grandon IV") . Therefore, the surviving causes of action currently before the [ Page 6]

Court are Section 10(b) and Rule 10b-5 claims, and a breach of fiduciary duty claim, each premised on the allegation that Merrill Lynch charged undisclosed, excessive markups on Plaintiffs' municipal bond purchases.

Plaintiffs now seek certification of "a class of persons who were public, retail customers of [] Merrill Lynch who purchased Class Bonds through or from [Merrill Lynch] between July 22, 1994, and December 20, 1995, inclusive."*fn2 Pis.' Mem. in Support of Mot. for Class Certification, dated November 12, 2002, at 1. ("Pls.' Mem."). Class Bonds are defined as municipal bonds which

"(1) are subject to the rules of the Municipal Securities Rulemaking Board, (2) are interest paying non-accretion bonds (i.e., bonds which pay interest and are not "zero coupon bonds"), (3) are AA— or higher rated (by Standard & Poors Corp.) or are insured municipal bonds, (4) have not been deeply discounted (i.e., trade at $80.00 per bond or more, (5) have recently been issued (i.e., within two years of the transaction), (6) were publicly issued in a total face amount of $7,500,000 or greater in cost. . . .
Compl. ¶ 39. Furthermore, the definition includes only retail customer transactions involving a par value of $20,000 or more. See Pis.' Mem. at 1, n.l. [ Page 7]

DISCUSSION

I. Standard of Law

Federal Rule 23 of Civil Procedure sets forth the requirements for bringing and maintaining a class action in federal court. "In determining the propriety of a class action, the question is not whether the plaintiff or plaintiffs have stated a cause of action or will prevail on the merits, but rather whether the requirements of Rule 23 are met." In re Check/MasterMonev Antitrust Litia., 280 F.3d 124, 133 (2d Cir. 2001) (quoting Eisen v. Carlisle & Jacauelin, 417 U.S. 156, 178 (1974)). The Second Circuit has directed district courts to liberally interpret Rule 23, see Korn v. Franchard Corp., 456 F.2d 1206, 1208-09 (2d Cir. 1972), however, a court may not grant certification unless it is satisfied, after "rigorous analysis," that the Rule 23 criteria have been met. See Dodge v. County of Orange. 208 F.R.D. 79, 87 (S.D.N.Y. 2002) (quoting General Tel. Co. v. Falcon, 457 U.S. 147, 161 (1982)) . Plaintiffs bear the burden of establishing each requirement for class certification. See Pecere v. Empire Blue Cross and Blue Shield. 194 F.R.D. 66, 69 (E.D.N.Y. 2000).

The district court must accept all of the allegations in the pleadings as true on a motion for class certification, see Shetter Realty Corp. Allied Maint. Corp. 574 F.2d 656, 661 n. 15 (2d Cir. 1978), and avoid conducting a preliminary inquiry into the merits. See In re Indep. Energy Holdings PLC Sec. Litiq., No. 00 Civ. 6689, [ Page 8]

2002 WL 1059086, *1, n. 5 (S.D.N.Y. May 28, 2002) (citations omitted). Nonetheless, the decision whether to certify a class "may involve some considerations related to the factual and legal issues that comprise the plaintiff's cause of action." Pecere, 194 F.R.D. at 69 (quoting D'Alauro v. GC Servs. Ltd. 168 F.R.D. 451, 454 (E.D.N.Y. 1996)); see also Daniels v. City of New York. 198 F.R.D. 409, 413, n. 5 (S.D.N.Y. 2001) (the court need not rely on bare allegations but "may consider the range of proof necessary to support class certification").

In order to qualify for class certification, a plaintiff must first satisfy the four requirements of Rule 23(a): (1) numerosity; (2) commonality; (3) typicality; and (4) adequacy of representation. Moore v. PaineWebber, Inc. 306 F.3d 1247, 1252 (2d Cir. 2002). Additionally, a plaintiff must also demonstrate that the class fits under at least one of the three subdivisions of Rule 23(b). See Visa Check. 280 F.3d at 133.

For purposes of this motion, the Court assumes without deciding that the requirements of Rule 23(a) are satisfied. See In re Rezulin Prods. Liab. Litiq., 210 F.R.D. 61, 66 (S.D.N.Y. 2002). Nevertheless, it is clear for the reasons set forth below that certification of this case ...


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