The opinion of the court was delivered by: DAVID TRAGER, District Judge
On March 27, 2000, a group of shareholders in Ashanti Goldfields
Company Limited ("Ashanti") brought an action against Ashanti and two of
its officers, Mark B. Keatley (CFO and member of the board of directors)
and Sam Jonah (CEO and member of the board of directors) ("defendants"),
alleging that Ashanti and the officers of Ashanti made fraudulent
statements between July 28, 1999 and October 5, 1999 in violation of
§ 10(b) of the Securities Exchange Act of 1934 (the "1934 Act") and
Rule 10b-5 promulgated thereunder, and § 20(a) of the 1934 Act,
concerning commodities futures activity by the company (the "Webster
Action"). A similar action was filed on February 3, 2000 (the "Furman
Action"). A third complaint was filed on April 19, 2000, asserting claims
on behalf of a class of all persons who acquired shares of Ashanti
between April 21, 1997 and October 5, 1999 (the "Kuch Action").
Following consolidation of all three actions, counsel for all parties,
including the defendants, agreed by a stipulated stay, "so ordered" by
this Court on September 8, 2000 ("the
Stipulation," "the Stipulated Stay," or "the Stay"), that the
proposed class period set forth in the Consolidated Amended Complaint
would be limited to the period between July 28, 1999 and October 5, 1999,
the period asserted in the Furman and Webster Actions. The parties agreed
that the plaintiffs would have the right to seek to lift the stay in the
event that the consolidated action is not dismissed in its entirety upon
a motion to dismiss. In March 2001, defendants moved to dismiss the First
Amended Consolidated Complaint. In February 2002, defendants' motion to
dismiss was granted in part and denied in part. In re Ashanti Sec.
Litig., 184 F. Supp.2d 247. On March 7, 2002, a Second Amended
Consolidated Complaint was filed by lead plaintiffs.
Lead plaintiffs William Webster, Ron Moore, and Rosemary Valente
("proposed class representatives," "lead plaintiffs," or "plaintiffs")
now move for an Order lifting the Stipulated Stay, and for leave to amend
plaintiffs' Second Consolidated and Amended Complaint ("SAC") to
encompass the claims originally stayed in the September 2000 Stipulation.
Defendants cross-move to dismiss the Third Amended Complaint in the event
that leave to amend is granted. Lead plaintiffs also move to certify a
class pursuant to Rule 23 of the Federal Rules of Civil Procedure.
II. Motion to Lift the Stipulated Stay and for Leave
to Amend Plaintiffs' Second Consolidated and
Plaintiffs move the Court for an Order lifting the Stipulation, and for
Leave to Amend Plaintiffs' Second Consolidated and Amended Complaint
("SAC"). The Stipulation states:
The stay provided for by this Stipulation and
Order shall not be lifted without the approval of
this Court after prior notice to the defendants
and opportunity for the defendants to contest the
lifting of the stay. In the event that this action
is not dismissed in its entirety, the lead
plaintiffs appointed by the Court shall determine
whether to seek to lift the stay provided by this
Stipulation and Order by no later than 120 days
before the close of fact discovery as to the claim
in the Proposed Class Period.
Plaintiffs assert that the Stipulation places no substantive conditions
on the lifting of the stay except for requiring that the claims first
survive a motion to dismiss. Since the action has not been dismissed in
its entirety, with most of the claims actually surviving the motion to
dismiss, plaintiffs have chosen to seek to lift the stay. Defendants
acknowledge that while plaintiffs waited until the last minute to seek a
lifting of the Stay, plaintiffs did move to lift the stay within the time
permitted by the Stipulation and Order. Def. Mem. 4. Therefore, there can
be no question that plaintiffs' request to lift the stay is timely. The
second ground on which defendants contest the lifting of the stay relates
to the matter of whether the defendants will be prejudiced by lifting of
the stay and a further amendment of the complaint. Since the potential
for prejudice rests not with the lifting of the stay but with the
amendment of the complaint, this objection will be discussed below in the
analysis of the motion to amend. As defendants raise no other objection
to the lifting of the stay and there is no other reason why the stay
should not be lifted, the stipulated stay is hereby lifted.
The question that follows is whether plaintiffs should be permitted to
amend the complaint to extend the proposed class period and include the
claims stayed by the Stipulation. Plaintiffs assert that they should be
permitted to amend to include the claims stayed by the Stipulation
because these claims are based on misstatements and omissions that are
virtually identical, and in most cases verbatim, to those already ruled
actionable by this Court's February 2002 Memorandum and Order. As such,
plaintiffs argue that the additional changes in the PTAC are not new
claims of fraud but simply serve to demonstrate defendants' ongoing
fraudulent conduct over an expanded time period. Pl. Mem. 1.
Amending of a complaint is governed by Rule 15(a) of the Federal Rules
of Civil Procedure, which provides that "leave [to amend] shall be freely
given when justice so requires." Fed.R.Civ.P. 15(a). The decision to
grant a request for leave to amend a complaint is within the discretion
of the Court. Foman v. Davis, 371 U.S. 178, 182 (1962);
Ching v. United States, 298 F.3d 174, 180 (2d Cir. 2002). It is
well-established in the Second Circuit that leave to amend should be
granted freely though the district court may exercise its discretion to
deny a motion to amend if there is a good reason for it. Min Jin v.
Metro. Life Ins. Co., 310 F.3d 84, 101 (2d Cir. 2002) ("Leave to
amend should be freely granted, but the district court has the discretion
to deny leave if there is a good reason for it, such as futility, bad
faith, undue delay, or undue prejudice to the opposing party.").
Defendants argue that the motion to amend should be denied on several
grounds. First, defendants argue that plaintiffs' undue delay and
improper purpose mandates denial of the motion to amend. Second,
defendants argue that they will be prejudiced if lead plaintiffs are
granted leave to amend the complaint. Third, defendants allege that lead
plaintiffs have failed to adequately allege a strong inference of
scienter, so that the Proposed Third Amended Complaint ("PTAC") would not
survive a motion to dismiss. Fourth, defendants argue that the new claims
plaintiffs seek to file are barred by the statute of limitations, and
that this would be another basis on which the new complaint would not
survive a motion to dismiss.
Defendants argue that the motion to amend should be denied because
plaintiffs seek to file the PTAC almost three years after the filing of
the original complaint on February 3, 2000,
and that plaintiffs knew about the additional claims proposed in
the PTAC since the case first began. Furthermore, defendants argue
plaintiffs' motion to amend was filed for an improper purpose in that the
claims in the PTAC "are claims that lead plaintiffs have known about
prior to every prior iteration of their complaint and chose not to
pursue." Def. Mem. 6. The rule in this Circuit with respect to undue
delay is that a court may deny a motion for leave to amend "where the
motion is made after inordinate delay, no satisfactory explanation is
offered for the delay and the amendment would prejudice other parties."
Grace v. Rosenstock, 228 F.3d 40, 53-54 (2d Cir. 2000).
Defendants' claims of bad faith and undue delay are meritless given that
the delay resulted directly from the Stay stipulated to by all parties.
As plaintiffs rightly explain, the delay was contemplated by the
Stipulation, and defendants have known since the date of the Stipulation
that plaintiffs could make a motion to lift the stay and seek to extend
the time period covered by the complaint. Pl. Mem. 5-6. Thus, defendants'
claims of improper purpose and undue delay are unsupported and do not
constitute good reason to deny leave to amend.
Defendants also argue that they will be prejudiced if lead plaintiffs
are granted leave to file the PTAC. However, in their briefing on the
issue defendants fail to make a convincing argument. The only basis for a
claim of prejudice asserted by defendants is that they would have to
conduct discovery and prepare for trial on the new claims. Since
discovery is still ongoing in this case, it is hard to see how expansion
of the class period would prejudice the defendants other than simply
expanding the scope of discovery. In this instance, there is no undue
prejudice to the defendants from amendment of the complaint since the
amended claim arises from the same
conduct set forth in the original pleading and the original
complaint gave the defendant fair notice of the newly alleged claims.
See Wilson v. Fairchild Republic Co., 143 F.3d 733, 738 (2d Cir.
1998) (holding that a district court may grant leave to amend so long as
"the original complaint gave the defendant fair notice of the newly
alleged claims."); O'Hara v. Weeks Marine, Inc., 294 F.3d 55, 68
(2d Cir. 2002) (quoting Fed.R.Civ.P. 15(c)(2)) (holding that a
plaintiff generally may amend the complaint to include a claim if it
"arose out of the conduct, transaction, or occurrence set forth or
attempted to be set forth in the original pleading.").
A third ground advanced by defendants in opposition to the motion to
amend is that plaintiffs have failed to adequately allege a strong
inference of scienter, and amendment would therefore be fufile because
the PTAC would not survive a motion to dismiss. This court has previously
decided that plaintiffs adequately pled scienter with respect to the
claims in the Second Amended complaint ("SAC"). In re Ashanti
Goldfields Sec. Litig., 184 F. Supp.2d 247, 270 (E.D.N.Y. 2002).
Plaintiffs attempt to argue that defendants' scienter challenge is barred
by the law of the case doctrine since it has already been held that
plaintiffs adequately pleaded scienter with regard to statements alleged
in the SAC. The law of the case doctrine "posits that when a court
decides upon a rule of law, that decision should continue to govern the
same issues in subsequent stages in the same case. Law of the case
directs a court's discretion, it does not limit the tribunal's
power. . . ." Arizona v. California, 460 U.S. 605, 618
(1983) (citations omitted). Since this court did not have the claims
advanced in the PTAC before it when it
decided the defendants' motion to dismiss the SAC, the law of the
case doctrine does not bar defendants' scienter challenge.
While defendants' scienter challenge is not barred, the court's
decision with respect to scienter in the SAC informs its analysis of the
issue of scienter with respect to the PTAC. Defendants argue that: (1)
plaintiffs have alleged no facts giving rise to a strong inference of
intent to defraud; (2) plaintiffs have failed to allege motives giving
rise to a strong inference of intent to defraud; and (3) alternative
explanations for defendants' conduct preclude sustaining a scienter
allegation based on a strong inference of intent to defraud. Def. Mem.
8-16. This court has already clearly stated that a `"strong inference
that the defendant[s] acted with the required state of mind' . . . may be
established by either alleging facts to show that defendants had both
motive and opportunity to commit fraud, or alleging facts that constitute
strong circumstantial evidence of conscious misbehavior or recklessness."
Ashanti, 184 F. Supp.2d at 269 (citing Novak v.
Kasaks, 216 F.3d 300, 307 (2d Cir. 2000)). As was the case with the
previous scienter challenge, with respect to the present scienter
challenge "[t]he shareholders only attempt to show scienter under the
second category, conscious misbehavior or recklessness."
Ashanti, 184 F. Supp.2d at 269. That being the case, plaintiffs
are not required to show motive for fraud. Thus, defendants' objections
that plaintiffs have failed to adequately allege a strong inference of
intent to defraud are inapposite.
As was already stated in the previous opinion: "If a plaintiff is
attempting to prove scienter by showing conscious misbehavior or
recklessness, it is not sufficient to merely allege that such behavior
took place. Recklessness in this context is conduct which is `highly
unreasonable representing an extreme departure from the standards of
ordinary care . . . to the
extent that the danger was either known to the defendant or so
obvious that the defendant must have been aware of it.'" In re
Ashanti, 184 F. Supp.2d at 269-70 (quoting Rothman v.
Gregor, 220 F.3d 81, 90 (2d Cir. 2000)). Based on the facts alleged
in the SAC, it has already been concluded that defendants "were aware of
the nature of the transactions in the hedge book" and that plaintiffs
established a "strong inference that Ashanti knew that its
characterization[s] of its futures activity as hedging and not
speculation were false." Ashanti, 184 F. Supp.2d at 270.
The claims advanced in the PTAC merely bolster the prior finding.
Ashanti's public filings during the extended class period indicated that
the company's sales and hedging policy was set at quarterly meetings and
was subject to strict internal controls. PTAC ¶¶ 13-14, 16. Moreover,
plaintiffs have already been granted leave to amend their complaint to
include the transcript of Keatley's July 28, 1999 conference call after
finding that "Keatley's statements regarding the hedge book's ability to
withstand a price rise shows that he and Ashanti were aware of the nature
of the transactions in the hedge book." Ashanti, 184 F. Supp.2d
at 270. Similarly, plaintiffs allege that in statements made during the
April 29, 1999 conference call, which plaintiffs seek to add to the
complaint, defendant Keatley assured investors of the hedge book's
ability to withstand a price rise. PTAC ¶¶ 21-22. Thus, the scienter
analysis with respect to the July 28, 1999 conference call applies to the
April 29, 1999 conference call as well. In short, as with the claims
asserted in the SAC, the additional claims put forward in the PTAC "lead
to the strong inference that Ashanti knew that its characterizations of
its futures activity as hedging and not speculation were false."
Ashanti, 184 F. Supp.2d at 270.
Defendants also argue that lead plaintiffs' claims cannot be reconciled
with the fact that defendants engaged in significant repurchases of their
own securities during the proposed class
period. Def. Mem. at 9-12; Def. Rep. Mem. at 2. While net purchases
or sales of stock may be relevant with respect to a motive for fraud
claim, when the claim is based on conscious misbehavior or recklessness
net purchases of stock by defendants do not necessarily negate an
inference of scienter on a motion to dismiss. See, e.g., In re
Seebeyond Techs. Corp. Secs. Litig., 266 F. Supp.2d 1150, 1169 (C.D.
Cal. 2003) (holding on a motion to dismiss that even though defendants
argued that "purchases of stock negate an inference of scienter because
they are inconsistent with a motive to maximize his personal benefit from
an artificial inflation of the stock price. . . . [T]aking the
allegations together, the plaintiff has presented sufficient allegations
to raise the strong inference of scienter [in the form of] a strong
inference that the defendants acted with deliberate or conscious
recklessness.")-Since in this case the scienter claims are based upon
conscious misbehavior, whether defendants were net buyers or net sellers
of Ashanti is irrelevant. Ashanti, 184 F. Supp.2d at 269. Once
again this court concludes that "[t]aken together, [the] facts pleaded by
the shareholders lead to the strong inference that Ashanti knew that its
characterizations of its futures activity as hedging and speculation were
false." Id. at 270.
4. Statute of Limitations
A fourth ground advanced by defendants in opposition to the motion to
amend is that the claims relating to the expanded portion of the proposed
class period are barred by the statute of limitations. A claim under
Section 10(b) and Rule 10b-5 must be brought within one year after
discovery of the facts constituting the violation, and that one year
period begins to run once a
plaintiff is on "constructive" or "inquiry" notice.*fn2
15 U.S.C. § 78i(e); Kahn v. Kohlberg, Kravis, Roberts & Co.,
970 F.2d 1030, 1042 (2d Cir. 1992) (the one-year limitations period
applicable to discovery of the violation begins to run after the
plaintiff "obtains actual knowledge of the facts giving rise to the
action or notice of the facts, which in the exercise of reasonable
diligence, would have led to actual knowledge."); Menowitz v.
Brown, 991 F.2d 36, 41-42 (2d Cir. 1993) (referring to discovery of
facts giving rise to the violation as "constructive or inquiry notice.").
Defendants argue that the claims regarding the expanded portion of the
proposed class period ...