United States District Court, S.D. New York
February 11, 2004.
JEFFREY CROSS and JUDITH ROSENBLATT, on behalf of themselves and all others similarly situated, Plaintiff -against-, 21ST CENTURY HOLDING COMPANY, EDWARD J. LAWSON, MICHELLE V. LARSON, RONALD A. RAYMOND, PATRICK D. DOYLE, JOSEPH A. EPSTEIN, CARLA L. LEONARD, BRUCE SIMSBERG, GILFORD SECURITIES INC., BREAN MURRAY & COMPANY, INC., FIRST OF MICHIGAN CORPORATION, HOBBES MELVILLE SECURITIES CORPORATION, HOEFER & ARNETT, INC., ORMES CAPITAL MARKETS, PENNSYLVANIA MERCHANT GROUP, PRIME CHARTER LTD., REDINE & COMPANY, and VAN KASPER & COMPANY, Defendants
The opinion of the court was delivered by: MICHAEL MUKASEY, Chief Judge, District
OPINION AND ORDER
Plaintiffs Jeffrey Cross and Judith Rosenblatt are purchasers of
common stock issued by defendant 21st Century Holding Company ("21st
Century" or "Company") between November 5, 1998, the date of the
Company's initial public offering ("IPO"), and August 13, 1999.
Plaintiffs are suing 21st Century and others for violations of the
securities laws on behalf of themselves and all persons whose purchases
of 21st Century common stock can be traced to the Company's IPO.
Plaintiffs have moved for class certification, and for the reasons set
forth below, plaintiffs' motion is granted.
Plaintiffs' claims arise under Sections 11 and 15 of the Securities Act
of 1933, Sections 10(b) and 20(a) of the Securities Exchange Act of 1934,
and Rule lOb-5 promulgated by the Securities Exchange Commission.
Therefore, jurisdiction arises under 15 U.S.C. § 77v(a) and 78aa and
under 28 U.S.C. § 1331 and 1337. Venue is proper in this district
pursuant to 15 U.S.C. § 78v and 78aa.
Rule 23(a) of the Federal Rules of Civil Procedure lists four
prerequisites for class certification:
(1) the class is so numerous that joinder is
impracticable, (2) there are questions of law or
fact common to the class, (3) the claims or
defenses of the representative parties are typical
of the claims or defenses of the class, and (4)
the representative parties will fairly and
adequately protect the interests of the class.
These four prerequisites are commonly referred to as (1)
numerosity, (2) commonality, (3) typicality, and (4) adequate
representation. "In light of the importance of the class action device in
securities fraud suits, these factors are to be construed liberally."
Gary Plastic Packaging Corp. v. Merrill Lynch, Pierce,
Fenner & Smith, Inc., 903 F.2d 176
, 180 (2d Cir. 1990). If an
action satisfies these four prerequisites, it may be certified as a class
action provided it meets one of three additional requirements set forth
under Rule 23(b). One of these requirements is "that the questions of law
or fact common to the members of the class predominate over any questions
affecting only individual members, and that a class action is superior to
other available methods for the fair and efficient adjudication of the
controversy." Fed.R.Civ.P. 23(b)(3).
Plaintiffs contend that all four prerequisites are satisfied here and
that the additional requirement in Rule
23(b)(3) is also satisfied. Defendants do not dispute commonality
or any of the factors enumerated under Rule 23(b), but they do dispute
numerosity, typicality and adequate representation.
Plaintiffs are not obligated to prove the exact class size to satisfy
numerosity. Robidoux v. Celani, 987 F.2d 931, 935 (2d
Cir. 1993). "The court may make common sense assumptions to support a
finding of numerosity." See Maywalt v. Parker &
Parsley Petroleum Co., 147 F.R.D. 51, 55 (S.D.N.Y. 1993) (internal
quotation marks omitted). Plaintiffs also need not demonstrate that
joinder is impossible, only impracticable. 987 F.2d at 935. The Court of
Appeals has observed that "[c]onsolidating in a class action what could
be over 100 individual suits serves judicial economy." Id. at
936. Here, 21st Century estimated in its 1998 Annual Report, filed on
March 31, 1999, "that the number of beneficial owners of its Common Stock
is in excess of 1,100." (Marks Dec. at Ex. G) Common sense dictates that
the members of the class here far exceed 100, and therefore the
requirement of numerosity is met.
Defendants pose the same arguments as to both typicality and adequate
representation, and these factors can be addressed together. Typicality
"is satisfied when each class member's claim arises from the same course
of events, and each class member makes similar legal arguments to prove
defendant's liability." Drexel Burnham Lambert Group,
Inc. v. Drexel Burnham Lambert Group, 960 F.2d 285, 291
(2d Cir. 1992). "[A]dequacy of representation is measured by two
standards. First, class counsel must be `qualified, experienced and
generally able' to conduct the litigation. Second, the class members must
not have interests that are `antagonistic' to one another." Id.
" [C]lass certification is inappropriate where a putative class
representative is subject to unique defenses which threaten to become the
focus of the litigation." Gary Plastic, 903 F.2d at 179.
However, the unique defense rule has not been rigidly enforced in this
Circuit. See Dietrich v. Bauer, 192 F.R.D. 119, 125
(S.D.N.Y. 2000); In re Dreyfus Aggressive Growth Mutual Fund
Litigation, No. 98 CIV 4318, 2000 WL 1357509, at *6 (S.D.N.Y. Sept.
20, 2000); In re Avon Securities Litigation, 1998 WL 834366, at
*6 (S.D.N.Y. Nov. 30, 1998); Trief v. Dun & Bradstreet
Corp., 144 F.R.D. 193, 200 (S.D.N.Y. 1992). Further, this rule is
intended to protect the class members, not to serve as a shield for
defendants seeking to avoid or delay a potentially meritorious action.
144 F.R.D. at 200. "[I]t is well settled that the mere existence of
individualized factual questions with respect to the class
representative's claim will not bar class certification. . . . Indeed,
it is beyond reasonable dispute that a representative may satisfy the
typicality requirement even though that party
may later be barred from recovery by a defense particular to him
that would not impact other class members." 903 F.2d at 180.
Defendants do not dispute that the first standard for adequate
representation is met. They challenge only the second standard.
Defendants argue that Cross is atypical of and does not adequately
represent the class because he may be subject to a unique defense as a
"sophisticated investor" based on his education, experience and level of
investment in securities. (Defendants' Memorandum of Law in Opposition to
Plaintiffs' Motion for Class Certification ("Def. Opp.") 11) Defendants
further argue that Cross may also be subject to a unique statute of
limitations defense. (Id. at 12) According to defendants, Cross
spoke directly with officers and directors of defendants, and these
conversation may have required him to take a closer look at 21st
Century's financial statements. (Id.) Finally, defendants
assert the frivolous argument that Cross may be subject to a unique
defense because his wife was disqualified by the court as a lead
plaintiff in the case after a finding that she was not interested in
pursuing the action. (Id. at 13)
In Saddle Rock Partners, Ltd. v. Hiatt, No. 96 CIV 9474, 2000
WL 1182793 (S.D.N.Y. 2000), the plaintiff brought an action for
securities fraud, alleging that the defendants had made false and
misleading statements. Id. at *1. The plaintiff based its
claims on the fraud-on-the-market theory. Id. at *3. The
defendants opposed class certification on the ground that
the lead plaintiff was not typical of the class because the lead
plaintiff was a partnership controlled by a "sophisticated stockbroker."
Id. The Court found no indication that the partner's
"sophistication" would leave the lead plaintiff "vulnerable to any
special defenses." Id. at *4. The Court held that the partner's
"`sophistication' does not detract from the fact that Saddle Rock's
claim of fraudulent conduct flows from the same course of
events . . . and gives rise to the same legal liabilities, as is true for
the class members it seeks to represent." Id. Just as in
Saddle Rock, plaintiffs here have based their claims on the
fraud-on-the-market theory, and likewise there is no indication that
Cross' sophistication means that his claim arises any less from the same
course of events and raises the same legal liabilities as every other
member of the putative class. See also Gulf Oil/Cities Service
Tender Offer Litigation v. Gulf Oil Corp., 112 F.R.D. 383,
388 (S.D.N.Y. Sept. 23, 1986) (holding that "sophisticated investors" did
not raise atypical claims); Fisher v. Plessey
Co. Ltd., 103 F.R.D. 150, 160 (S.D.N.Y. 1984) (and cases cited
therein) ("[C]ourts in this Circuit have frequently found that
sophisticated investors are suitable class representatives.").
Defendants' argument that Cross may be subject to a statute of
limitations defense raises some concerns about his suitability as the
representative plaintiff, see Leroy v. Paytel III
Management Associates, Inc., No. 91 CIV 1933, 1992 WL
367090, at *2 (S.D.N.Y. Nov. 24, 1992), but these concerns are
mitigated by the speculative quality of defendants' argument. In
Leroy, the plaintiff brought an action for securities fraud,
alleging false statements by the defendants. Id. at *1. The
Court denied class certification because there was evidence that the lead
plaintiff had actual knowledge of the fraud the plaintiff had
written a letter suggesting that he was aware of the fraud two years
before he claimed to have learned of it. Id. at *2. Defendants'
argument here is far more speculative. They point only to some
unspecified conversations that Cross had with officers and directors of
defendants, which "may [or may not] have required him, as a sophisticated
investor, to inquire further about the Company's financial statements,"
which may or may not have caused the statute of limitations for his claim
to have begun to run earlier. (Def. Opp. 12) Defendants have not
demonstrated that this potential defense, if available, will divert
attention from the prevailing, common issues, nor have they shown that it
may render Cross "antagonistic" to the members of the putative class.
Last, defendants' inexplicable contention that Cross' wife's unclear
disqualification somehow renders him atypical and inadequate is
Defendants also challenge the typicality and adequacy of Rosenblatt as
class representative. Defendants allege that Rosenblatt invested in 21st
Century based on statements made by
her employer when she was employed by 21st Century and that this
precludes her from relying on the fraud-on-the-market theory. (Def. Opp.
14) They further argue that "she does not possess the requisite amount of
knowledge necessary to carry on the class action." (Id. at 16)
Rosenblatt would be precluded from relying on the fraud-on-the-market
theory only if she relied on non-public information in making her
investment. See Dietrich, 192 F.R.D. at 125 (refusing to deny
class certification where there was no evidence that class representative
had relied on information received from the company president when
investing in the company or that the information was unavailable to the
other investors); Saddle Rock, 2000 WL 1182793, *5 (refusing to
deny class certification where there was no evidence that the class
representative "was privy to any insider information" or that he did not
"purchase the stock at prices set by the operation of the market"). The
only reliance that need be shown for the fraud-on-the-market theory is
that "an investor relies generally on the supposition that the market
price is validly set and that no unsuspected fraud has affected the
price." 2000 WL 1182793, *4 (internal quotation marks omitted).
There is no evidence here that Rosenblatt relied on the statements made
by her employer in making her investment. Further, and more important,
there is no evidence that these statements contained any non-public
information, much less any
information suggesting that "the market price does not reflect the
company's true financial condition." Id. Rosenblatt testified
at her deposition that she did not review the financial records of the
company or discuss these records with anyone before purchasing the stock.
(Marks Dec., Ex. B at 64) She further testified that her employer did not
speak to her personally or recommend to her personally that she buy the
stock. (Id.) Her employer spoke to the employees at employee
meetings and discussed that 21st Century was going public, that it was an
exciting time, and that it was a "chance to get a ground floor
opportunity." (Id. at 65) Her employer did not put up any
overhead presentations or show the employees company financials during
these meetings or at any other time. (Id. at 66) Mere puffery
does not constitute inside information.
Defendants' argument concerning the extent of Rosenblatt's knowledge
and understanding of this case is meritless. Her deposition demonstrates
that she has a basic understanding of the facts and the claims presented
in this case, and the few insignificant deficiencies in her understanding
emphasized by defendants do not render her atypical or inadequate as a
class representative. See In re Frontier Insurance Group, Inc.,
172 F.R.D. 31, 41 (S.D.N.Y. 1997) (holding that class representative's
"imperfect recollection and understanding of her investments do
not . . .
bar her from serving as class representative"). Rosenblatt need not
understand completely the factual and legal complexities of her case;
that is why she has counsel, and defendants have not challenged the
adequacy of counsel.
* * *
For the reasons stated above, plaintiffs' motion for class
certification is granted.
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