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United States District Court, S.D. New York

February 11, 2004.


The opinion of the court was delivered by: MICHAEL MUKASEY, Chief Judge, District


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. Page 2


  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 Page 3 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.

 A. Numerosity

  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 the Page 4 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 Page 5 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 Page 6 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 Page 7 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 meritless.

  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 Page 8 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 Page 9 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 . . . Page 10 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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