United States District Court, S.D. New York
September 20, 2004.
The CONSTANCE SCZESNY TRUST and EDWARD S. SCZESNY TRUST, individually and on behalf of all others similarly situated Plaintiffs,
KPMG LLP, GARY DICAMILLO, CARL LEUDERS, and DONALD HALSTEAD Defendants. LOUIS J. DECANIO, individually and on behalf of all others similarly situated Plaintiffs, v. GARY DICAMILLO, CARL LEUDERS, DONALD HALSTEAD, WILLIAM L. FLAHERTY, JUDITH G. BOYNTON and KPMG LLP, Defendants. EARNEST HACK, individually and on behalf of all others similarly situated Plaintiffs, v. GARY DICAMILLO, CARL LEUDERS, DONALD HALSTEAD, and KPMG LLP, Defendants. MICHAEL E. MAGNUSKI, individually and on behalf of all others similarly situated Plaintiffs, v. GARY DICAMILLO, CARL LEUDERS, DONALD HALSTEAD, WILLIAM L. FLAHERTY, JUDITH G. BOYNTON and KPMG LLP, Defendants. RICKY B. BLOCK, individually and on behalf of all others similarly situated Plaintiffs, v. GARY DICAMILLO, CARL LEUDERS, DONALD HALSTEAD, and KPMG LLP, Defendants. ALFRED and SANDRA DAY, individually and on behalf of all others similarly situated Plaintiffs, v. GARY DICAMILLO, CARL LEUDERS, DONALD HALSTEAD, and KPMG LLP, Defendants. NORMAN MOSCOWITZ, individually and on behalf of all others similarly situated Plaintiffs, v. KPMG LLP GARY DICAMILLO, CARL LEUDERS DONALD HALSTEAD, WILLIAM L. FLAHERTY, and JUDITH G. BOYNTON Defendants. ELWOOD LUTSEY, individually and on behalf of all others similarly situated Plaintiffs, v. GARY DICAMILLO, CARL LEUDERS, DONALD HALSTEAD, WILLIAM L. FLAHERTY, JUDITH G. BOYNTON and KPMG LLP, Defendants. THOMAS B. and DEBRA A. ACKERKNECHT, individually and on behalf of all others similarly situated Plaintiffs, v. GARY DICAMILLO, CARL LEUDERS, DONALD HALSTEAD, WILLIAM L. FLAHERTY, JUDITH G. BOYNTON and KPMG LLP, Defendants.
The opinion of the court was delivered by: SIDNEY STEIN, District Judge
OPINION AND ORDER
These are nine related securities actions arising from alleged
misrepresentations in Polaroid Corporation's public securities
filings in the spring of 2001. Plaintiffs, purchasers of shares of Polaroid common stock and options for the purchase
of Polaroid shares, allege that defendant KPMG LLP and the
individual defendants caused the issuance of false or misleading
financial disclosures regarding the proper accounting for
Polaroid's deferred tax credits and its restructuring costs, in
violation of Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934 and Securities and Exchange Commission Rule 10b-5.
Four sets of plaintiffs have moved this Court to consolidate,
pursuant to Rule 42(a) of the Federal Rules of Civil Procedure,
the nine pending related actions and any subsequently filed
related action.*fn1 Three sets of plaintiffs: the Catherine
Sczesny Trust and the Edward S. Sczesny Trust (the "Sczesny
Trusts"); Stephen Morgan; and Martin A. Braver and Harold K.
Schultz have moved for their respective appointment as the lead
plaintiff for those related actions and for approval of their
selections for the lead counsel. Additionally, Jacob Bash, who
purchased options for Polaroid common stock as well as shares of
that stock, has moved for his appointment as the lead plaintiff
for a sub-class of purchasers of Polaroid options and for
approval of his selection of the lead counsel for that sub-class.
For the reasons set forth below, the motions for consolidation,
unopposed by defendants, are granted. Moroever, Sczesny Trusts'
motion for appointment as the lead plaintiff and for approval of
its selection of Goodkind, Labaton, Rudoff & Sucharow LLP as the
lead counsel is granted, while the two similar motions filed on
behalf of Braver and Schultz and on behalf of Morgan are denied.
Finally, Bash's motion for his appointment as the lead plaintiff
of a sub-class of option purchasers and for approval of his
selection of the lead counsel for that sub-class is denied as premature, without
prejudice to its renewal.
Polaroid Corporation was a "leading instant imaging company,"
well-known for its instant film products and instant cameras.
(Sczesny Trusts' Complaint at ¶ 11) In October of 2001, Polaroid
filed a voluntary petition for bankruptcy protection under
Chapter 11 of the U.S. Bankruptcy Code, 11 U.S.C. § 1101 et.
seq., in the District of Delaware. See In re Polaroid Corp.,
01-10864, 2004 WL 253479 at *1 (D.Del. Feb. 09, 2004).
The pending related securities actions pertain to financial
disclosures in Polaroid's 2000 Form 10-K and first quarter 2001
Form 10-Q filings, issued a few months before Polaroid's foray
into bankruptcy, regarding the accounting for more than $300
million of deferred tax credits and more than $5 million in
restructuring costs. Plaintiffs allege that those disclosures
contravened public accounting standards and resulted in the
dissemination of materially false or misleading financial
information to investors. Plaintiffs further allege that
defendant KPMG LLP, Polaroid's outside auditor during the
relevant period, and the individual defendants, who were
Polaroid's corporate officers or KPMG partners responsible for
Polaroid's audit, knowingly or recklessly caused the issuance of
those false or misleading financial disclosures and thereby
caused substantial losses to plaintiffs and other investors.
Sczesny Trusts filed the initial class action complaint on
August 26, 2003. In accordance with the requirements of the
Private Securities Litigation Reform Act of 1995 (the "PSLRA"),
15 U.S.C. §§ 78u(3)(A)(i)(I)-4a, Sczesny Trusts also published a
notice, over the PR Newswire, on that day announcing the pendency
of the securities action. (Declaration of Joel H. Bernstein at
Exhibit B) Within the statutory 60-day period, see 15 U.S.C. §§ 78u-4a(3)(A)(i)(II), eight related class action
complaints were filed in this District based upon the same
factual allegations and asserting substantially similar claims.
Rule 42(a) of the Federal Rules of Civil Procedure vests this
Court with the authority to order the consolidation of all
actions that "involv[e] a common question of law or fact . . .
pending before the court." Consolidation of multiple actions
alleging securities fraud is appropriate where those actions
relate to "the same `public statements and reports'" and where
consolidation would not prejudice the defendants. See
Primavera Familienstiftung v. Askin, 173 F.R.D. 115, 129
(S.D.N.Y. 1997) (internal quotations omitted).
Here, the gravamen of the complaints in each of the related
actions is the same allegedly fraudulent accounting treatment of
certain tax credits and expenses in Polaroid's public securities
filings issued in the spring of 2001. Therefore, crucial factual
and legal questions are common to all the related actions.
Although some variations exist in the parameters of the alleged
class periods, such "minor differences" are insufficient to
preclude consolidation. See Ferrari v. Impath, Inc., 03 Civ.
5667, 2004 WL 1637053 at *2 n. 5 (S.D.N.Y. July. 20, 2004).
Moreover, it is clear that consolidation would not prejudice the
defendants, who have not opposed the motions for consolidation.
Accordingly, this Court finds that it is appropriate to
consolidate the nine pending related securities actions.
B. Appointment of the Lead Plaintiff
1. Legal Standards
In consolidated securities litigations, the PSLRA recommends
courts to make the decision regarding the appointment of the
"most adequate" plaintiff as the lead plaintiff for the consolidated actions "[a]s soon as practicable after [the
consolidation] decision is rendered." See
15 U.S.C. § 78u-4a(3)(B)(ii). Under the PSLRA, the selection of lead
plaintiff proceeds in a two-stage inquiry.
First, this Court must determine which member of the putative
class of plaintiffs is entitled to the statutory presumption of
being the "most adequate" lead plaintiff. A party qualifies for
that presumption if it "(1) filed an initial complaint or timely
moved for appointment as lead plaintiff; (2) has the largest
financial interest in the case; and (3) otherwise satisfies the
requirements of Rule 23, describing the requirements for class
actions generally." See In re IPO Sec. Litig.,
214 F.R.D. 117, 120-21 (S.D.N.Y. 2002) (citing
15 U.S.C. § 78u-4a(3)(B)(iii)(I)(aa)-(cc)). Once those criteria for the
statutory presumption have been met, that presumption can be
rebutted by another member of the class upon a showing that the
presumptive lead plaintiff either suffers from the inability to
"fairly or adequately protect the interests of the class" or is
"incapable of adequately representing the class" due to being
subject to "unique defenses." See
15 U.S.C. § 78u-4a(3)(B)(iii)(II).
2. Each Movant Meets the Notification and Timely Filing
The PSLRA requires the plaintiff responsible for filing the
initial complaint in a series of related securities actions to
publish a notice within 20 days of filing that initial complaint
to inform potential class members of their right to seek
appointment as the lead plaintiff. See
15 U.S.C. § 78u-4a(3)(A). Those plaintiffs who file a complaint or move
within 60 days of publication of the notice may qualify for the
appointment as the lead counsel. See
15 U.S.C. § 78u-4a(3)(B)(iii)(I)(aa).
As noted above, Sczesny Trusts filed the initial complaint on
August 26, 2003 and promptly published a notice announcing the pendency of that
action. The other movants, Bash; Morgan; and Braver and Schultz
made their motions within the 60-day statutory period for seeking
appointment as the lead plaintiff. Accordingly, the procedural
requirements of the PSLRA are satisfied.
3. Sczesny Trusts Have the Largest Financial Interest
Because the PSLRA does not specify a particular method for a
court to determine the size of a proposed lead plaintiff's
financial interest, courts have examined a number of factors to
make that evaluation, including "(1) the number of shares
purchased during the class period, (2) the number of net shares
purchased during the class period, (3) the total net funds
expended during the class period, and (4) the approximate loss
suffered during the class period." See Ferrari, 2004 WL
1637053 at *4 (citing In re Olsten Corp. Sec. Litig.,
3 F.Supp.2d 286, 296 (E.D.N.Y. 1998)). Examining the evidence
adduced by the movants in light of those standards, this Court
finds that Sczesny Trusts have the largest financial stake in the
relief sought among the four movants.
Morgan urges this Court to assess his financial interest in
this litigation not solely on the basis of his individual losses
but to aggregate, instead, the losses suffered by the members of
a group of Polaroid shareholders who had, according to Morgan,
banded together to intervene in Polaroid's bankruptcy proceedings
in the District of Delaware. This Court has the discretion to
appoint more than one lead plaintiff and can aggregate the losses
suffered by that group of investors. See e.g., In re Oxford
Health Plans, Inc. Sec. Litig., 182 F.R.D. 42, 46 (S.D.N.Y.
1998). However, while Morgan has shown a commendable initiative
in becoming involved in the Polaroid bankruptcy proceedings,
see In re Polaroid, 2004 WL 253479 at *1, he has not proffered sufficient evidence that the support of the
other shareholders he points to is adequate to support
aggregation of the financial interests of that putative group of
shareholders for purposes of determining which moving party has
the largest financial interest. Accordingly, this Court finds
that Sczesny Trusts are the class members with the largest
financial interest in the outcome of this litigation.
4. Sczesny Trusts Have also Met the Rule 23 Requirements
Rule 23 of the Federal Rules of Civil Procedure sets forth the
four prerequisites for certification of a class action, which are
known colloquially as numerosity, commonality, typicality, and
adequacy. See In re Deutsch Telecom AG Sec. Litig.,
229 F. Supp. 2d. 277, 280 (S.D.N.Y. 2002). Of those four prerequisites,
only the last two factors typicality and adequacy are
pertinent to the selection of lead plaintiff at the consolidation
stage. See In re Oxford Health Plans, 182 F.R.D. at 50
(internal citations omitted); Weinberg v. Atlas Air Worldwide
Holdings, Inc., 216 F.R.D. 248, 252 (S.D.N.Y. 2003).
Typicality of claims exists if "each class member's claim
arises from the same course of events, and each class member
makes similar legal arguments to prove the defendants'
liability," even if some "minor variations" exist in the factual
allegations asserted by different class members. See In re
Deutsch Telecom, 229 F. Supp. 2d. at 281 (internal quotations
omitted); Ferrari, 2004 WL 1637053 at *5 (noting that "claims
of the proposed lead plaintiff need not be identical to the
claims alleged by other class members"). Adequacy of a proposed
lead plaintiff turns on whether that plaintiff "will fairly and
adequately protect the interests of the class." See
Fed.R.Civ. P. 23(a). In this examination, the Court scrutinizes (1)
whether the proposed class counsel is "qualified, experienced,
and generally able to conduct the litigation;" see In re Deutsch Telecom,
229 F. Supp. 2d. at 282 (internal quotations omitted); (2) whether the
proposed lead plaintiff has interests that are antagonistic to
other class members; see In re Universal Access, Inc. Sec.
Litig., 209 F.R.D. 379, 386 (E.D. Tex. 2002); and (3) whether
the proposed lead plaintiff and the class possess sufficient
interest to pursue vigorous prosecution of their claims. See
Weltz v. Lee, 199 F.R.D. 129, 133 (S.D.N.Y. 2001).
Here, the Sczesny Trusts' claims arise from the same alleged
misrepresentations regarding Polaroid's financial state in the
same public securities filings as alleged in the eight other
actions. Those claims are premised on violations of federal
securities laws and share the same legal basis as claims asserted
by other class members. Therefore, Sczesny Trusts satisfy the
typicality requirement of Rule 23(a).
Sczesny Trusts have also satisfied the adequacy requirement of
Rule 23. First, the firm of Goodkind, Labaton, Rudoff & Sucharow
LLP, Sczesny Trusts' selection for the lead counsel, has
represented both individual shareholders and institutional
investors in numerous federal securities litigations and has
served as lead counsel in prior securities class actions. In
light of its experience, this Court finds that Goodkind, Labaton,
Rudoff & Sucharow LLP is qualified and capable of conducting this
litigation on behalf of the putative class. Second, there is no
evidence that Sczesny Trusts have any conflict of interest, such
as the existence of a unique defense, that would render its
interests antagonistic to that of other members of the putative
class. Finally, Sczesny Trusts have displayed a willingness to
vigorously pursue its claims.
In sum, Sczesny Trusts have satisfied the three-prong
requirements of the PSLRA and are therefore entitled to the presumption of being the "most
adequate" candidate as the lead plaintiff.
5. Morgan Has Not Rebutted the Statutory Presumption
As delineated above, to rebut the statutory presumption in
favor of Sczesny Trusts, another movant must adduce proof that
Sczesny Trusts would not be able to "fairly or adequately protect
the interests of the class" or to adequately represent the class
due to its being subject to "unique defenses." See Ferrari,
2004 WL 1637053 at *6. The other movants have not met this
Morgan asserts that Sczesny Trusts will not "fairly and
adequately protect the interests of the class" because "there is
no evidence that either of . . . the named trustees of the
[Sczesny Trusts] has any experience in business affairs that
would qualify them to make the difficult decisions that may be
required as this case moves forward to trial." (Morgan Reply
Memorandum of Law at 2) Such conclusory assertions of inadequacy
are, however, insufficient to rebut the statutory presumption
under the PSLRA without specific support in evidence of the
existence of an actual or potential conflict of interest or a
defense to which Sczesny Trusts would be uniquely subject. See
e.g., Sofran v. LaBranche & Co., Inc., 220 F.R.D. 398, 403-04
(S.D.N.Y. 2004) (emphasizing that the PSLRA requires proof of
inadequacy and not merely speculations).
6. Appointment of a Lead Plaintiff for a Sub-Class of Polaroid
Option Purchasers Is Premature
Jacob Bash seeks to be appointed the lead plaintiff for a
sub-class of purchasers of options for Polaroid's common stock.
According to Bash, the appointment of lead plaintiff for such a
sub-class is necessary because the option investors could face
unique defenses that would not confront such purchasers of Polaroid shares as Sczesny
Bash is correct that some courts have dismissed securities
fraud claims asserted by option holders, where their losses
resulted from alleged omissions. See e.g., Leventhall v.
General Dynamics Corp., 704 F.2d 407 (8th Cir. 1983). Here,
however, the option holders have alleged that defendants made
affirmative misrepresentations in Polaroid's public securities
filings, which, as numerous courts have held, can support claims
for securities fraud under the Exchange Act. See e.g., In
re: Oxford Health Plans Inc. Securities Litig., 244 F. Supp. 2d.
247 (S.D.N.Y. 2003); In re: Arakis Energy Corp. Securities
Litig., 95 Civ. 3431, 1999 WL 1021819 at *3-4 (E.D.N.Y. Apr. 27,
2003); In re: Waste Management Inc. Securities Litig.,
128 F. Supp. 2d. 401, 427-28 (S.D. Tex. 2000). Therefore, the interests
of Polaroid option investors and shareholders are not
sufficiently differentiated to require the appointment of a
"niche" lead plaintiff at this time. See Weinberg,
216 F.R.D. at 253-54.
To the extent that different formulas may apply to the
calculation of any damages suffered by option investors and
shareholders, this Court can order certification of appropriate
sub-classes at a later juncture within its broad discretion in
arranging the structure of a class action litigation "at any time
before the decision on the merits." See In re Deutsch
Telecom, 229 F. Supp. 2d at 283. In sum, the appointment of lead
plaintiff for a sub-class of Polaroid option investors is
premature. Accordingly, Bash's motion for appointment as lead
plaintiff and for approval of his selection of lead counsel is
denied, without prejudice to its renewal.
C. Appointment of Lead Counsel
Subject to this Court's approval, the lead plaintiff is
empowered under the PSLRA to select and retain counsel to represent the class members in the
consolidated actions. See 15 U.S.C. § 78u-4a(3)(B)(v). This
Court finds that Goodkind, Labaton, Rudoff & Sucharow LLP, the
lead plaintiff's proposed selection, possesses the requisite
experience to represent the interests of the class members and
approves its selection as the lead counsel.
For the reasons set forth above, the motions for consolidation
of these nine actions pertaining to the allegedly fraudulent
financial reporting in Polaroid's public statements are granted.
Furthermore, the Sczesny Trusts' motion for appointment as the
lead plaintiff and for the approval of the selection of Goodkind,
Labaton, Rudoff & Sucharow LLP as lead counsel are granted, while
similar motions filed by Morgan; Braver and Schultz; and Bash are
denied. Bash's motion for his appointment as the lead plaintiff
for a sub-class of option purchasers and the appointment of his
selection for lead counsel for that sub-class is denied without
prejudice to its later renewal, if appropriate. Lead plaintiffs
shall serve and file an amended consolidated class action
complaint within 45 days of this Opinion and Order.