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United States District Court, S.D. New York

October 13, 2004.


The opinion of the court was delivered by: SHIRA SCHEINDLIN, District Judge



Between January 11 and December 6, 2001, thousands of investors filed class action lawsuits, alleging that 55 underwriters, 310 issuers and hundreds of individuals associated with those issuers had engaged in a sophisticated scheme to defraud the investing public. In brief, the scheme consisted of a requirement, imposed by the underwriters, that IPO allocants purchase shares in the aftermarket, often at escalating prices, and pay undisclosed compensation. In addition, the underwriters prepared analyst reports that contained inaccurate information and recommendations because the analysts operated under a conflict of interest. As a result of the scheme, plaintiffs allege that they collectively lost billions of dollars. These actions were consolidated before this Court for pre-trial supervision. At the suggestion of the Court, the parties selected six cases to be used as test cases for determining whether these suits can proceed as class actions. Upon plaintiffs' motion, I now address whether these test cases can be certified as class actions.

  Defendants have submitted thousands of pages of briefs, affidavits, exhibits and reports in opposition to the motion. Although they raise every conceivable argument, their major contention is that individual issues predominate over common issues with respect to almost every aspect of proof. In particular, defendants note that each plaintiff differs with respect to her knowledge of the alleged scheme when she invested (e.g., whether she was an allocant or an aftermarket purchaser or both and whether and to what extent she was exposed to press reports and other public disclosures); the nature of her investment (e.g., whether she was a long term investor, a short seller, a day trader, or a momentum trader); the timing of her investment (e.g., the purchase price of the stock and the effect of any artificial inflation at the time of purchase); the amount of her damages (e.g., the subsequent dissipation of any artificial inflation by the time of sale); and the traceability of her shares to a particular offering and registration statement. Because of these differences, defendants argue, common issues cannot predominate, and class certification must be denied. Defendants also contend that it would be impossible to ascertain which investors should be in the class and which must be excluded.

  In their zeal to defeat the motion for class certification, defendants have launched such a broad attack that accepting their arguments would sound the death knell of securities class actions. Yet class-wide adjudication under Rule 23 of the Federal Rules of Civil Procedure is particularly well-suited to securities fraud cases.*fn1 In opposing certification, defendants do not truly seek separate adjudications of each individual claim. In reality, they seek no adjudication because the prospect of 310 million individual lawsuits (based on a hypothetical average class membership of one million investors), represents an impossible burden for all parties — the individual plaintiffs, the defendants and the courts.*fn2 Thus, if certification is denied, defendants will have essentially defeated the claims without ever having been compelled to defend the suits on the merits. Of course, if plaintiffs fail to satisfy the stringent requirements of Rule 23, then a class cannot be certified, even if that results in plaintiffs' inability to press their claims.*fn3

  "The class action device was designed to promote judicial efficiency and to provide aggrieved persons a remedy when individual litigation is economically unrealistic, as well as to protect the interests of absentee class members."*fn4 This underlying purpose of Rule 23 provides much-needed guidance in focusing on the real issues. While highly competent counsel, with unlimited resources, have the capability to advance an almost unlimited array of complex arguments against certification, the Court must not lose sight of the ultimate question: whether class adjudication of the issues raised in these complaints is clearly superior to any other form of dispute resolution. Although defendants' arguments have raised a number of thorny problems, forcing this Court to take a hard look at the pleadings and the many submissions made in support of and in opposition to this motion, the balance tips strongly in favor of certification. Trying these cases will be an arduous task, but that is no reason to close the courthouse door to the alleged victims of a sophisticated and widespread fraudulent scheme. Accordingly, for the reasons set forth below, class certification, to the extent noted, is granted in each of the six focus cases.


  A. The Alleged Scheme

  Plaintiffs seek recovery for securities fraud pursuant to the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act"). Plaintiffs allege that defendants engaged in a comprehensive scheme to defraud investors by artificially inflating the prices of the issuers' stocks. The alleged scheme is described at length in my February 19, 2003 Opinion denying defendants' motion to dismiss.*fn5 Familiarity with that Opinion is assumed.

  B. The Focus Cases

  These proceedings sweep together for pre-trial management 310 consolidated class actions, each with a distinct group of defendants (many of whom are overlapping) but alleging the same scheme to defraud investors. Because the question of whether a class can be certified under the rigorous standard set forth by Rule 23 is common to all of these consolidated actions, judicial efficiency counsels in favor of a test case approach. Accordingly, the parties have presented for the Court's consideration six cases, involving the following issuers: Corvis Corp. ("Corvis"); Engage Technologies, Inc. ("Engage"); Firepond, Inc. ("Firepond"); iXL Enterprises, Inc. ("iXL"); Sycamore Networks, Inc. ("Sycamore"); and VA Software Corp, formerly known as VA Linux Systems, Inc. ("VA Linux") (collectively, the "focus cases").*fn6

  The parties have agreed that "[t]he rulings on the class certification motions in the selected cases will govern those cases only."*fn7 However, most of the issues this Opinion addresses would undoubtedly be raised in a motion for class certification with respect to the remaining 304 consolidated actions. This Opinion is intended to provide strong guidance, if not dispositive effect, to all parties when considering class certification in the remaining actions.*fn8

  C. The Parties' Submissions

  On September 2, 2003, plaintiffs moved for class certification and submitted Plaintiffs' Memorandum of Law in Support of Their Omnibus Motion for Class Certification ("Plaintiffs' Omnibus Mem."). Defendants responded with six opposition briefs: the Underwriter Defendants' Memorandum in Opposition to Plaintiffs' Motion for Class Certification in Corvis ("Corvis Mem."); the Memorandum in Opposition to Omnibus Motion for Class Certification, and to Certification of the Proposed Class in Engage Technologies, Inc. ("Engage Mem."); the Underwriter Defendants' Memorandum of Law in Opposition to Plaintiffs' Motion for Class Certification in Firepond ("Firepond Mem."); the iXL Underwriter Defendants' Memorandum in Opposition to Plaintiffs' Motion for Class Certification ("iXL Mem."); the Underwriter Defendants' Opposition to Plaintiffs' Motion for Class Certification in Sycamore ("Sycamore Mem."); and Credit Suisse First Boston ("CSFB") LLC's Memorandum in Opposition to Plaintiffs' Motion for Class Certification in VA Linux ("VA Linux Mem.").*fn9 Plaintiffs replied on April 19, 2004, with Plaintiffs' Corrected Reply Memorandum of Law in Support of Their Omnibus Motion for Class Certification ("Plaintiffs' Reply"). Defendants responded on May 10, 2004, with the Underwriter Defendants' Sur-Reply Memorandum in Opposition to Plaintiffs' Motion for Class Certification ("Defendants' Sur-Reply"), and plaintiffs submitted Plaintiffs' Response to Underwriter Defendants' Sur-Reply Memorandum in Opposition to Class Certification ("Plaintiffs' Response") on May 19, 2004.

  After oral argument on June 17, 2004, I directed plaintiffs to submit a letter brief refining their proposed class definition, which plaintiffs submitted on July 6, 2004 ("Class Def. Letter"). Defendants responded to the proposed definition on July 20, 2004, in a letter brief of their own ("Class Def. Opp."). Finally, on September 7, 2004, I ordered plaintiffs to submit a proposed trial plan, which plaintiffs submitted on September 15, 2004 ("Trial Plan"). Defendants opposed the Trial Plan in a letter brief dated September 22, 2004, and plaintiffs replied on September 28, 2004.

  The parties have also submitted many expert reports regarding the hotly contested issues of loss causation and damages. Plaintiffs submitted an expert report by Professor Daniel Fischel on January 20, 2004 ("1/20/04 Fischel Report"). Defendants countered with reports by the following experts: Dr. Christopher B. Barry in support of iXL Mem. ("Barry Report"); Dr. Paul A. Gompers in support of Sycamore Mem. ("Gompers Report"); Dr. Allan W. Kleidon in support of Sycamore Mem. ("Kleidon Report"); Dr Maureen O'Hara in support of Corvis Mem. and VA Linux Mem. ("2/23/04 O'Hara Report"); Dr. Erik R. Sirri in support of iXL Mem. ("Sirri Report"); and Dr. René M. Stultz in support of Firepond Mem. ("Stultz Report").*fn10 Plaintiffs submitted a rebuttal report by Professor Fischel dated April 15, 2004 ("4/15/04 Fischel Report"). Defendants countered with a report by Dr. Bradford Cornell, dated May 10, 2004 ("Cornell Report"). In my June 21, 2004 Order, I directed plaintiffs to "submit a supplemental report from [] Fischel in which he analyzes the causal link between the alleged tie-in agreements and their effect on stock price in light of all tie-in purchases in the six focus cases known to plaintiffs' counsel (both in the form of aftermarket trades and pre-opening bids-and-asks). [] Fischel is advised to pay particular attention to the duration of any inflationary effect caused by this activity."*fn11 Plaintiffs submitted a final Fischel report on July 12, 2004 ("7/12/04 Fischel Report"), and defendants countered with a report from Dr. O'Hara dated July 23, 2004 (the "7/23/04 O'Hara Report").

  D. The Proposed Class Periods

  For each of these consolidated actions, "[t]he Class consists of all persons and entities that purchased or otherwise acquired the securities of [Specific Issuer] during the Class Period and were damaged thereby," subject to various exclusions.*fn12 Plaintiffs propose class periods for each case that span the period between the initial public offering ("IPO") and December 6, 2000.*fn13 For the purposes of this Opinion, plaintiffs' proposed class periods are adopted for plaintiffs' Exchange Act claims; however, plaintiffs' proposed class periods must be shortened with respect to plaintiffs' claims pursuant to section 11 of the Securities Act in each of the six focus cases.*fn14

  E. Focus Case-Specific Facts

  1. Corvis

  a. The Corvis IPO

  Corvis held its IPO on July 28, 2000, with CSFB serving as the lead underwriter, offering 31,625,000 shares at $36.00 per share.*fn15 Defendants note that "[p]rior to the IPO, Corvis had issued a significant number of unregistered shares . . . which would have been freely tradeable at the time of the IPO, provided that the shareholders satisfied SEC Rule 144."*fn16 Corvis reported a number of outstanding unregistered shares of stock that had been issued to other companies and to Corvis affiliates before the Corvis IPO.*fn17 On the first day of trading, the stock opened at $74.00, peaked at $98.00 and closed at $84.72, a 135% increase over the offering price.*fn18 By the end of the first day of trading, 28,137,100 shares had changed hands in 35,755 transactions.*fn19

  Plaintiffs allege that 195 of the institutional allocants in the Corvis IPO, to whom 12,193,450 shares were allocated, entered into tie-in agreements with the allocating underwriter.*fn20 Plaintiffs further allege that purchase orders from these allocants accounted for 1,469,600 of the 2,569,600 purchase orders placed during the pre-open bid session, during which the opening share price rose to more than twice the $36.00 offering price.*fn21 During the ten business days from July 28 through August 10, 2000, Corvis allocants purchased a total of 11,582,004 shares in the aftermarket. The same investors sold a total of 1,543,240 shares during that time.*fn22

  Following the IPO, Corvis's stock climbed to its highest price, $108.06 per share, on August 4, 2000, the same day Broadwing disclosed a $44,000,000 investment position in Corvis and announced that it would buy $200,000,000 in equipment.*fn23 By the end of September 2000, the stock had fallen to just over $60.00 per share.*fn24 On October 2, 2000, Corvis filed a prospectus for 2,446,074 newly registered shares acquired through the exercise of employee stock options.*fn25 Corvis explicitly incorporated the disclosures made in its IPO prospectus into its October 2, 2000 prospectus.*fn26 During November 2000, the stock slid from $64.00 to $28.81 per share.*fn27 Corvis experienced a slight rebound in December 2000, reaching $40.38 per share on December 6.*fn28 According to Professor Fischel, Corvis underperformed when compared to various market benchmarks by 27 to 64 percentage points from July 28 to December 6, 2000, and by 35 to 67 points thereafter.*fn29 On May 10, 2001, when the first Corvis case, PRFT Partners v. Corvis Corp., No. 01 Civ. 3994, was filed, shares of Corvis closed at $7.380 per share.*fn30

  b. Corvis Class Representatives*fn31 (1) Satswana Basu

  Satswana Basu, who also seeks to act as a class representative in six other IPO cases, purchased and sold 95,198 Corvis shares, and sold and covered short 20,000 Corvis shares between November 17 and December 6, 2000, resulting in a $736,869.20 loss during that time. Basu also purchased Corvis shares after December 6, 2000.*fn32

  (2) Michael Huff

  Between August 24 and September 26, 2000, Michael Huff bought and sold 12,000 shares of Corvis stock for a $22,755.00 profit. On September 28 and 29, 2000, however, Huff purchased a total of 6,000 shares for $472,832.50, which he had not sold as of December 6, 2000. Had he sold the shares that day, when the stock closed at $40.38 per share, Huff would have suffered a total pre-December 6, 2000 loss of $207,797.50.*fn33

  (3) Sean Rooney

  Sean Rooney purchased 1,000 shares of Corvis stock on August 7, 2000 at $107.50 per share and another 500 shares on August 11, 2000 at $90.00 per share. Rooney sold 500 shares on December 5, 2000, at $39.00 per share, leaving him with 1,000 unsold shares on December 6, 2000. Had he sold his shares that day, when the stock closed at $40.38 per share, he would have suffered a total pre-December 6, 2000 loss of $92,620.00.*fn34 Rooney also received an allocation of 500 shares in the IPO.*fn35

  2. Engage

  a. The Engage IPO

  Engage held its IPO on July 20, 1999, with Goldman Sachs acting as lead underwriter, offering 6,938,000 shares at $15.00 per share.*fn36 The IPO prospectus for Engage notes that 1,225,324 shares of common stock were already outstanding well before the IPO, on April 30, 1999.*fn37 On the first day of trading, the stock opened at $28.00, peaked at $47.00 and closed at $41.00, a 173% increase over its offering price. By the end of the first day of trading, 14,887,200 shares had changed hands.*fn38

  Plaintiffs allege that forty-nine of the institutional allocants in the Engage IPO, to whom 786,900 shares were allocated, entered into tie-in agreements with the allocating underwriter.*fn39 Plaintiffs further allege that purchase orders from these allocants made up 693,000 of the 1,251,000 total purchase orders placed during the pre-open bidding session, during which the opening price for Engage was set at $28.00, $13.00 above the offering price.*fn40 During the ten business days from July 20, 1999 through August 2, 1999, Engage allocants purchased a total of 3,313,660 shares in the aftermarket.*fn41 The same investors sold a total of 135,850 shares during that time.*fn42

  Following the IPO, the price for Engage stock fell, but the stock traded consistently in the mid-twenties through the end of 1999.*fn43 On January 16, 2000, approximately 6,700,000 non-IPO shares associated with "employee stock options, corporate acquisitions, and other transactions became freely tradable in large numbers in the secondary market."*fn44 From January to February 2000, Engage prices climbed to all-time highs, peaking at over $180.00 per share.*fn45 The price declined rapidly in March and April of 2000, and the stock split two for one on April 4, 2000.*fn46 By August 2000, the stock was trading around the offering price of $15.00 per share when adjusted to reflect the split. The price dropped below the offering price for the first time in October 2000, and continued to decline through December 6, 2000, when it was trading at a split-adjusted price of approximately $3.19 per share.*fn47 Fischel asserts that Engage underperformed when compared to various market benchmarks by 35 to 72 percentage points from July 20, 1999 to December 6, 2000, and by 34 to 68 points thereafter.*fn48 On September 7, 2001, when the first Engage case, Chin v. Engage Tech., Inc., No. 01 Civ. 8404, was filed, Engage stock closed at $0.190 per share.*fn49

  b. Engage Class Representatives

  (1) Stathis Pappas

  Stathis Pappas was an allocant in Engage's IPO, receiving 100 shares of Engage stock on July 20, 1999, at $15.00 per share.*fn50 Pappas made no aftermarket purchases in Engage. It does not appear from the facts before this Court that Pappas ever sold any of those shares, which were worth approximately $3.19 per share on December 6, 2000.*fn51 Had he sold his shares that day, he would have suffered a $1,181.26 loss on the transaction. According to defendants, Pappas is a member of more than fifteen potential classes in these consolidated actions.*fn52

  (2) Krikor Kasbarian

  Between March 31 and August 29, 2000, Krikor Kasbarian purchased 20,000 shares of Engage stock for $1,008,687.50 and sold 30,000 post-split shares for $411,450.00, resulting in a total pre-December 6, 2000 loss of $597,237.50.*fn53 On his October 8, 2001 PSLRA certification, Kasbarian failed to disclose several transactions.*fn54 In October, 2000, Kasbarian destroyed records documenting his Engage trades.*fn55 He held no Engage stock on December 6, 2000.*fn56

  Kasbarian engaged in six transactions involving Engage after December 6, 2000. In July 2001, Kasbarian bought Engage twice and sold twice, each sale within a few days of the respective purchase. Kasbarian made a profit of $.06 per share on the first set of trades and broke even on the second set.*fn57 Kasbarian failed to disclose these trades on his PSLRA certification.*fn58 Following submission of the certification, Kasbarian made a final pair of trades in Engage stock, purchasing 4,000 shares on October 25, 2001, and selling those shares for a $.03 profit per share on October 30, 2001.*fn59 According to defendants, Kasbarian is also a member of more than fifteen potential classes in these consolidated actions and seeks to serve as a class representative in the litigation.*fn60

  3. Firepond

  a. The Firepond IPO

  Firepond held its IPO on February 4, 2000, with Robertson Stephens acting as lead underwriter, offering approximately 5,000,000 shares at $22.00 per share.*fn61 On that date, 27,751,713 unregistered shares were already outstanding.*fn62 On the first day of trading, Firepond's stock opened at $52.00, peaked at $102.31 and closed at $100.25, an increase of 356% over its offering price. By the end of the first day of trading, 9,284,900 shares had changed hands.*fn63 Plaintiffs allege that 152 of the institutional allocants in the Firepond IPO, to whom 3,153,100 shares were allocated, entered into tie-in agreements with the allocating underwriter.*fn64 Plaintiffs further allege that purchase orders from these allocants made up 3,965,100 of the 4,125,100 million total purchase orders placed during the pre-open bidding session, during which the opening price for Firepond rose to $30.00 above the offering price.*fn65 During the ten business days from February 4 through February 17, 2000, Firepond allocants purchased a total of 13,970,988 shares in the aftermarket. The same investors sold a total of 12,611,116 shares during that time.*fn66

  Following the IPO, Firepond's stock fell slightly, closing at $71.00 on February 17, 2000. The price then rebounded, reaching a high of $97.44 on February 29, only to rapidly decline to $15.88 by April 17.*fn67 Defendants claim that the number of outstanding shares increased by nearly 2,000,000 between the IPO and April 30, 2000.*fn68 The stock once again rebounded, peaking at $40.69 on June 29, 2000, but soon resumed its decline, trading in the upper teens again by August 1.*fn69 On August 2, 2000, Firepond's 180-day lock-up expired, and more than 26,000,000 shares became tradeable.*fn70 The price of the stock began to fall dramatically in the fall of 2000, declining from over $17.00 a share on September 14 to a closing price of $6.69 on December 6, 2000.*fn71 Fischel asserts that Firepond underperformed when compared to various market benchmarks by 27 to 63 percentage points from February 4, 2000 to December 6, 2000, and 33 to 65 points thereafter.*fn72 On July 31, 2001, when the first Firepond case, Barrett v. FirePond, Inc., No. 01 Civ. 7048, was filed, Firepond closed at $0.66.*fn73

  b. Firepond Class Representatives

  (1) Zitto Investments

  Zitto Investments ("Zitto") purchased 345 shares of Firepond stock between February and April of 2000. It sold 100 shares in February for a profit but sold 245 shares in August 2000 for less than $20.00 per share, resulting in a net loss of $7,258.75.*fn74

  (2) James and Diane Collins

  James and Diane Collins ("the Collinses") made four purchases of Firepond stock between March 14 and May 1, 2000, totaling 500 shares for $24,300.00. The Collinses had not sold any shares of Firepond stock prior to December 6, 2000, when the stock closed at $6.69 per share.*fn75 Had the Collinses sold their shares that day, they would have suffered a $20,955.00 loss on the transaction.

  (3) Joseph Zhen

  Between February 11 and March 17, 2000, Joseph Zhen purchased 2,600 Firepond shares for $192,956.25 and sold 1,600 shares for $126,725.00, resulting in a gain of $7,982.69. Zhen still held 1,000 shares when the price dropped dramatically in late March. He sold his remaining shares on April 17, 2000 for $16,093.80, bringing his total pre-December 6, 2000 loss to $50,137.45.*fn76 Zhen omitted thirteen of his seventeen Firepond trades, some of which resulted in profits, from his September 20, 2001 PSLRA certification.*fn77 During discovery, Zhen failed to produce trading records for transactions in securities other than Firepond.*fn78

  4. iXL

  a. The iXL IPO

  iXL held its IPO on June 2, 1999, with Merrill Lynch serving as lead underwriter, offering close to 7,000,000 shares at $12.00 per share.*fn79 The iXL IPO Prospectus notes that "no restricted securities will be eligible for immediate sale on the date of this prospectus," and that "121,828 restricted securities issuable pursuant to stock options will be eligible for sale 90 days after the date of this prospectus [on August 31, 1999.]"*fn80 During the first day of trading, the stock opened at $15.13, peaked at $24.50 and closed at $17.88, an increase of 49% above the offering price. On the first day of trading, 14,008,117 shares changed hands.*fn81

  Plaintiffs allege that thirty-seven of the institutional allocants in the iXL IPO, to whom 1,222,750 shares were allocated, entered into tie-in agreements with the allocating underwriter.*fn82 During the ten business days from June 3 through June 16, 1999, iXL allocants purchased a total of 3,080,089 shares in the aftermarket. The same investors sold a total of 2,956,325 shares during that time.*fn83

  In the weeks following the iXL IPO, the share price rose slightly, closing at $19.13 on June 28, 1999.*fn84 That day, 4,000,000 shares were registered with the SEC for use in future acquisitions.*fn85 A month later, on July 27, 1999, iXL issued a positive earnings announcement,*fn86 and Merrill Lynch upgraded the stock from near-term "accumulate/buy" to near-term "buy/buy."*fn87 The following day, shares closed at $29.13. In August 1999, the price dropped to $22.00. Shares rebounded to $37.00 in mid-November and, on January 20, 2000, the price reached $58.75, the stock's high-water mark.*fn88

  In February 2000, more than 50,000,000 shares became tradeable due to the expiration of a lock-up that had taken effect shortly after the IPO.*fn89 Between mid-February and late June, 2,400,000 shares that had been subject to lock-up agreements were sold.*fn90 On February 18, 2000, Merrill downgraded iXL to "accumulate" and warned of the risk of sales of unlocked shares.*fn91 Merrill re-classified its long-term rating to "buy" on March 20, 2000.*fn92 In September 2000, Merrill downgraded iXL first to "accumulate"*fn93 and then to "neutral."*fn94 The price of iXL shares closed at $1.25 on December 6, 2000.*fn95 Fischel asserts that iXL underperformed when compared to various market benchmarks by 63 to 99 percentage points from June 2, 1999 to December 6, 2000, and by 36 to 62 points thereafter.*fn96 On October 25, 2001, when the first iXL case, Turner v. iXL Enterprises, Inc., No. 01 Civ. 9417, was filed, iXL closed at $0.32 per share.*fn97

  b. iXL Class Representatives

  (1) John Miles

  Between August 19, 1999 and November 2, 2000, John Miles purchased 16,400 iXL shares for $138,233.41. Miles sold 2,400 shares by August 16, 2000 for $53,452.04, but still held 14,000 shares as of December 6, 2000.*fn98 Had he sold his remaining shares that day, when the stock closed at $1.25 per share, he would have suffered a total pre-December 6, 2000 loss of $67,281.37. (2) John Rowe

  Between June 4 and August 31, 1999, John Rowe purchased 1,335 iXL shares for $25,685.23. He sold 335 shares between September 17 and November 22, 1999 for $12,029.82, at a profit, leaving him with 1,000 unsold shares as of December 6, 2000.*fn99 Had he sold his remaining shares that day, when the stock closed at $1.25 per share, Rowe would have suffered a total pre-December 6, 2000 loss of $12,405.41.

  5. Sycamore

  a. The Sycamore IPO

  Sycamore held its IPO on October 21, 1999, with Morgan Stanley acting as the co-lead underwriter, offering 7,475,000 shares at $38.00 per share.*fn100 On the first day of trading, Sycamore shares opened at $270.88, the day's high price, and closed at $184.75, an increase of 386% above the offering price. Almost 10,000,000 shares changed hands on the first day of trading.*fn101 Plaintiffs allege that eighty-seven institutional allocants in the Sycamore IPO, to whom 1,077,625 shares were allocated, entered into tie-in agreements with the allocating underwriter.*fn102 Plaintiffs further allege that purchase orders from these allocants made up 561,900 of the 2,868,035 total purchase orders placed during the pre-open bidding session, during which the opening price for Sycamore rose to $232.88 above the offering price.*fn103 During the first ten days following Sycamore's IPO, Sycamore allocants purchased a total of 2,297,115 shares. The same investors sold a total of 745,832 shares during that time.*fn104

  Defendants assert that on the first day of public trading, 5,734,183 previously issued non-IPO Sycamore shares were not subject to lock-up.*fn105 At least 368,587 of these shares became tradeable 90 days after the Sycamore IPO — i.e., on January 19, 2000.*fn106 Following the IPO, the price of Sycamore stock climbed steadily, closing at $203.00 on October 26, 1999.*fn107 On January 19, 2000, millions of additional shares that had been issued prior to the Sycamore IPO were released from lock-up,*fn108 and by the end of that week, the stock price reached $280.00.*fn109 The stock split three for one on February 14, 2000.*fn110 On March 2, 2000, the stock soared to a price of $569.81 per share,*fn111 and the next day 8,985,186 more shares, issued one year earlier, were released from lock-up.*fn112 A secondary offering of 10,200,000 Sycamore shares occurred on March 14, 2000.*fn113 On April 18, 2000, 26,965,355 additional shares were released from lock-up.*fn114 After rising and falling several times, the stock price eventually declined, trading around $300.00 per share in October of 2000, and closing at a split-adjusted price of $169.31 per share on December 6, 2000.*fn115 Fischel asserts that Sycamore underperformed when compared to various market benchmarks by 32 to 68 percentage points from October 21, 1999 to December 6, 2000, and by 32 to 64 points thereafter.*fn116 On July 2, 2001, when the first Sycamore case, Pond Equities v. Sycamore Networks, Inc., No. 01 Civ. 6001, was filed, Sycamore closed at $8.63 per share.*fn117

  b. Sycamore Class Representatives

  (1) Barry Lemberg

  Barry Lemberg purchased 100 Sycamore shares for $175.00 per share on March 3 and an additional 100 shares on April 13, 2000 for $71.13 per share.*fn118 Lemberg had not sold those shares as of December 6, 2000, when the stock closed at $56.44 per share.*fn119 Had Lemberg sold the shares that day, he would have suffered a $13,325.00 loss on the transaction. While Lemberg alleges that he is entitled to damages relating to 1,200 shares, he purchased only 200 shares before December 6, 2000.*fn120

  Lemberg's testimony and questionnaire responses conflict as to whether he received an IPO allocation,*fn121 and although Lemberg alleged that he had never personally bought and sold the same stock on the same day, the record reveals that he had conducted a same day transaction on at least one occasion.*fn122 He testified that he does not remember having any involvement in preparing the Complaint.*fn123 Moreover, defendants claim that he "does not understand financial markets well," and is "unable to describe the specific behavior of Morgan Stanley that was improper."*fn124

  (2) Vasanthakumar Gangaiah

  Vasanthakumar Gangaiah purchased and sold 11,600 shares of Sycamore stock between March 1 and December 6, 2000, resulting in a $69,276.21 loss.*fn125 Defendants assert that Gangaiah provided "conflicting and false" testimony about his investment accounts,*fn126 and "falsely claimed never to have received an IPO allocation."*fn127 Defendants also question Gangaiah's understanding of the litigation, noting that he does not know what kind of damages are being sought in the case or which people are members of the class.*fn128

  (3) Frederick Henderson

  Frederick Henderson received an IPO allocation of 50 shares of Sycamore stock at $38.00 per share, which he flipped on October 22, 1999 for $200.00 per share.*fn129 Between May 2 and October 13, 2000, Henderson purchased an additional 14,000 shares for $1,550,081.25. He sold 4,000 shares on November 16, 2000 for $266,675.00, for a loss, leaving him with 10,000 unsold shares as of December 6, 2000. Had he sold them that day, when the stock closed at $56.44, Henderson would have suffered a total pre-December 6, 2000 loss of $710,906.25.*fn130

  Henderson does not recall seeing the Amended Complaint before it was filed.*fn131 He acknowledges that he "has no idea how or why December 6, 2000 was selected as the end of the class period, nor . . . whether it should be the end of the class period."*fn132

  6. VA Linux

  a. The VA Linux IPO

  VA Linux held its IPO on December 9, 1999, with CSFB serving as its lead underwriter, offering 5,060,000 shares at $30.00 per share.*fn133 At that time, VA Linux had already issued 35,301,586 unregistered shares.*fn134 The VA Linux Prospectus notes that VA Linux's "directors and officers as well as other stockholders and optionholders" had agreed to subject themselves to a 180-day lock-up on their unregistered shares, but does not explicitly state whether each and every one of the 35,301,586 unregistered shares was subject to lock-up.*fn135 VA Linux registered 24,863,635 additional shares simultaneously with its IPO as part of its various stock option benefit plans. VA Linux's filings for these stock option benefit plans explicitly incorporate the contents of the VA Linux IPO Prospectus and set their prices at $30, the same as the IPO price.*fn136 On the first day of trading, VA Linux stock opened at $299.00 and peaked at $320.00, with a trading volume of 7,685,600 shares. Shares closed that day at $239.25, an increase of 698% over the offering price.*fn137

  Plaintiffs allege that 147 of the institutional allocants in the VA Linux IPO, to whom 2,174,850 shares were allocated, entered into tie-in agreements with the allocating underwriter.*fn138 Plaintiffs further allege that purchase orders from these allocants made up 294,230 of the 426,230 total purchase orders placed during the pre-open bid session, when the opening price was set at $299.00, $269.00 above the offering price.*fn139 During the first ten days following VA Linux's IPO, VA Linux allocants purchased a total of 1,572,138 shares in the aftermarket. The same investors sold a total of 165,473 shares during that time.*fn140

  On February 3, 2000, VA Linux announced its acquisition of, Inc. in a $913,300,000 stock deal.*fn141 In March and April 2000, VA Linux announced acquisitions, using stock and cash, of Trusolutions, Inc., NetAttach and Precision Insight, Inc.*fn142 On June 7, 2000, a total of 22,940,202 shares became tradeable at the end of a lock-up period.*fn143 On November 6, 2000, the company announced that it would miss its earnings estimates.*fn144 That day, four firms monitoring VA Linux issued analyst reports, and the stock plummeted from $30.00 to $17.38.*fn145 The stock closed at $7.94 on December 6, 2000.*fn146 Fischel asserts that VA Linux underperformed when compared to various market benchmarks by 30 to 66 percentage points from December 9, 1999 to December 6, 2000, and by 26 to 58 points thereafter.*fn147 On January 11, 2001, when the first VA Linux case, Makaron v. VA Linux Sys., Inc., No. 01 Civ. 0242, was filed, VA Linux closed at $9.031 per share.*fn148

  b. VA Linux Class Representatives

  (1) Harold Zagoda

  On December 9, 1999, Harold Zagoda purchased 10,000 shares of VA Linux stock at $300.00 per share and received an allocation of 300 shares at $30.00 per share. He sold 800 shares on December 13, 1999 for $200.06 per share. On June 3, 2000, he purchased 1,000 shares at $61.50 per share; on July 31, he purchased 1,500 shares at $32.00 per share; and on October 27, he purchased 1,000 shares at $27.50 per share. He held 13,000 shares on December 6, 2000, when the stock closed at $7.94 per share.*fn149 Had he sold his remaining shares that day, Zagoda would have suffered a total pre-December 6, 2000 loss of $2,882,732.00.*fn150

  (2) Spiros and Mary Gianos

  Spiros and Mary Gianos purchased 3,000 shares of VA Linux stock on December 10, 1999 for $764,180.00 and an additional 1,000 shares on December 13, 1999 for $200,000.00. Between December 13, 1999 and April 6, 2000, the Gianoses sold their 4,000 shares for $367,183.00, resulting in a loss of $596,997.00.*fn151

  (3) Anita Budich

  Anita Budich purchased 13 shares of VA Linux stock on December 15, 1999, at $230.63 per share, which she still owned on December 6, 2000.*fn152 Had she sold them that day, when the stock closed at $7.94 per share, Budich would have suffered a $2,894.97 loss on the transaction.

  F. Industry-Wide Events Affecting All Focus Cases During the Class Period

  In opposition to these motions, defendants note that throughout the class period, various events affected the markets for each of the six focus cases, and indeed for all of these 310 consolidated actions. First, the market for Internet and technology stock underwent an unprecedented boom in the late 1990s, ignited by the emergence and visibility of the Internet coupled with a streak of economic optimism and experimentation.*fn153 Stock prices soared.*fn154 Eventually, though, the "huge market bubble in Internet stocks burst, propelling prices of those stocks down 90% in a few months,"*fn155 prompting a period of "market chaos."*fn156

  Second, various reports were published describing the use of tie-in agreements by some allocating underwriters in IPOs. In mid-June of 1999, amidst a period of staggering decline in many Internet stock prices, MSNBC published an investigative report stating that underwriters had employed "a widely practiced marketing scheme known as a `tie-in'" to artificially inflate the price of Internet IPO stock.*fn157 According to the MSNBC article, this practice extended to "the industry's leading, most prestigious firms."*fn158 The article described a scheme whereby "the opportunity to get in on IPO offerings at cheap, pre-market prices" was "conditioned on an unwritten, oral agreement" that the customer would "give back to the underwriters what amounts to a blank check to buy many more shares . . . the minute the deal goes public."*fn159 The MSNBC article attained some notoriety within the investment industry.*fn160 Then, on July 14, 2000, the Wall Street Journal published a front page article reporting that Gary Tanaka, a partner in the growth-oriented mutual fund group Amerindo, had made an "agreement to buy shares [of an internet company] in the aftermarket" to increase his fund's allocation in the IPO and that "market experts" believed such agreements "raise regulatory questions."*fn161

  On August 25, 2000, the SEC's Division of Market Regulation issued Staff Legal Bulletin No. 10, warning securities distributors that "solicit[ing] their customers to make additional purchases of the offered security after trading in the security begins" violates Regulation M, promulgated pursuant to the Exchange Act.*fn162 The Bulletin called tie-in agreements "a particularly egregious form of solicited transaction" that "undermine the integrity of the market as an independent pricing mechanism for the offered security." The Bulletin explained that "[u]nderwriters have an incentive to artificially influence aftermarket activity because they have underwritten the risk of the offering, and a poor aftermarket performance could result in reputational and subsequent financial loss."

  The release of the SEC Bulletin prompted Barron's to publish an article on September 11, 2000, stating that despite its "tame" tone, "[t]he bulletin targets one of the main grease guns now lubricating the IPO machine."*fn163 The Wall Street Journal followed suit on December 6, 2000, publishing an article detailing the "new IPO playbook on Wall Street," in which investors who agree to buy in the aftermarket are the ones who receive the largest allocations.*fn164 The article also acknowledged that while the SEC, in its August Bulletin, was "blowing the whistle" to quell the practice of using tie-in agreements, the understandings between investors and brokers were usually informal and unwritten, making them difficult to police. However, despite their "limited and implicit" nature, claimed some investors, "tie-ins . . . have a significant market impact . . . provid[ing] the rocket fuel that sometimes boosts IPO prices into orbit on the first trading day."*fn165 Prices for all six of the focus stocks remained depressed, and never returned to their offering levels.*fn166

  Finally, defendants note that various press reports described apparent conflicts of interest among analysts and underwriters.*fn167 SEC Chairman Arthur Levitt acknowledged the problem on April 13, 1999, issuing an "early warning signal" that the high number of "rosy stock analyses appear to be shaped by the lucrative investment banking ties that analysts' firms have with the companies they're supposed to watch with a critical eye."*fn168 Following Levitt's warning, allegations of analyst conflicts continued to appear in the press. For example, the British Sunday Times reported on April 23, 2000, that "[t]he `Chinese Walls' that once separated researchers and bankers have all but disappeared in today's banking world and researchers have often become blatant pitchmen for bank deals,"*fn169 and an August 1, 2000 article in The Philadelphia Inquirer quoted a finance professor to the effect that the analyst conflict problem "seems to have gotten worse in recent years," with analysts issuing approximately fifty "buy" recommendations for every "sell" recommendation, a far cry from the six to one ratio that existed in the early 1990s.*fn170


   A. The Requirements of Rule 23

   Federal Rule of Civil Procedure 23 governs class certification. To be certified, a putative class must meet all four requirements of Rule 23(a) as well as the requirements of one of the three subsections of Rule 23(b). In this case, as in most cases seeking money damages, plaintiffs bear the burden of demonstrating that the class meets the requirements of Rule 23(a) — referred to as numerosity, commonality, typicality, and adequacy*fn171 — and that the action is "maintainable" under Rule 23(b)(3).*fn172 Under Rule 23(b)(3) — the only applicable subsection of Rule 23(b) — "common" issues of law or fact must "predominate over any questions affecting only individual members," and a class action must be demonstrably "superior" to other methods of adjudication.*fn173

   1. Rule 23(a)

   a. Numerosity

   Rule 23 requires that the class be "so numerous that joinder of all members is impracticable."*fn174 "Impracticability does not mean impossibility of joinder, but refers to the difficulty or inconvenience of joinder."*fn175 Although precise calculation of the number of class members is not required, and it is permissible for the court to rely on reasonable inferences drawn from available facts, numbers in excess of forty generally satisfy the numerosity requirement.*fn176 The numerosity of plaintiffs' proposed classes, each of which includes thousands of investors, is undisputed.

   b. Commonality

   Commonality requires a showing that common issues of fact or law affect all class members.*fn177 A single common question may be sufficient to satisfy the commonality requirement.*fn178 "The critical inquiry is whether the common questions are at the core of the cause of action alleged."*fn179

   The commonality requirement has been applied permissively in securities fraud litigation.*fn180 In general, where putative class members have been injured by similar material misrepresentations and omissions, the commonality requirement is satisfied.*fn181

   c. Typicality

   The typicality requirement "is not demanding."*fn182 A named plaintiff's claims are "typical" pursuant to Rule 23(a)(3) where each class member's claims arise from the same course of events and each class member makes similar legal arguments to prove the defendants' liability.*fn183 "The rule is satisfied . . . if the claims of the named plaintiffs arise from the same practice or course of conduct that gives rise to the claims of the proposed class members."*fn184

   In addition, a putative class representative's claims are not typical if that representative is subject to unique defenses.*fn185 The test is whether the defenses will become the focus of the litigation, overshadowing the primary claims and prejudicing other class members.*fn186 Accordingly, the commonality and typicality requirements "`tend to merge' because `[b]oth serve as guideposts for determining whether . . . the named plaintiff's claim and the class claims are so inter-related that the interests of the class members will be fairly and adequately protected in their absence.'"*fn187

   d. Adequacy

   Plaintiffs must also show that "the representative parties will fairly and adequately protect the interests of the class."*fn188 To do so, plaintiffs must demonstrate that the proposed class representatives have no "interests [that] are antagonistic to the interest of other members of the class."*fn189 Courts have also considered "whether the putative representative is familiar with the action, whether he has abdicated control of the litigation to class counsel, and whether he is of sufficient moral character to represent a class."*fn190

   Class representatives cannot satisfy Rule 23(a)(4)'s adequacy requirement if they "have so little knowledge of and involvement in the class action that they would be unable or unwilling to protect the interests of the class against the possibly competing interest of the attorneys."*fn191 However, it is well established that "in complex litigations such as securities actions, a plaintiff need not have expert knowledge of all aspects of the case to qualify as a class representative, and a great deal of reliance upon the expertise of counsel is to be expected."*fn192

   The requirements of adequacy and typicality tend to bleed into one another. But "[r]egardless of whether the issue is framed in terms of the typicality of the representative's claims . . . or the adequacy of [their] representation . . . there is a danger that absent class members will suffer if their representative is preoccupied with defenses unique to [her]."*fn193

   e. Ascertainability

   Although "`Rule 23(a) does not expressly require that a class be definite in order to be certified[,] a requirement that there be an identifiable class has been implied by the courts.'"*fn194 "This implied requirement is often referred to as `ascertainability.'"*fn195

   "An identifiable class exists if its members can be ascertained by reference to objective criteria."*fn196 "Class members need not be ascertained prior to certification, but `the exact membership of the class must be ascertainable at some point in the case.'"*fn197 It must thus be "administratively feasible for a court to determine whether a particular individual is a member" of the class.*fn198 "The Court must be able to make this determination without having to answer numerous fact-intensive questions."*fn199

   2. Rule 23(b)

   If plaintiffs can demonstrate that the proposed class satisfies the elements of Rule 23(a), they must then establish that the action is "maintainable" as defined by Rule 23(b). Rule 23(b) provides that "an action may be maintained as a class action if the prerequisites of subdivision (a) are satisfied, and in addition" one of three alternative definitions of maintainability is met. Plaintiffs argue that these putative class actions are maintainable under subsection (b)(3), which requires "that 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."*fn200 Rule 23(b)(3) thus has two elements: "predominance" and "superiority."

   a. Predominance

   "In order to meet the predominance requirement of Rule 23(b)(3), a plaintiff must establish that the issues in the class action that are subject to generalized proof, and thus applicable to the class as a whole . . . predominate over those issues that are subject only to individualized proof."*fn201 "The 23(b)(3) predominance requirement is `more stringent' and `far more demanding than' the commonality requirement of Rule 23(a)."*fn202 Courts frequently have found that the requirement was not met where, notwithstanding the presence of common legal and factual issues that satisfy the commonality requirement, individualized inquiries predominate.*fn203 Nonetheless, the Supreme Court has noted that "[p]redominance is a test readily met in certain cases alleging consumer or securities fraud. . . ."*fn204

   b. Superiority

   The superiority prong of Rule 23(b)(3) requires a court to consider whether a class action is superior to other methods of adjudication.*fn205 The court should consider, inter alia, "the interest of the members of the class in individually controlling the prosecution or defense of separate actions" and "the difficulties likely to be encountered in the management of a class action."*fn206

   3. Rule 23(g)

   Rule 23(g) requires a court to assess the adequacy of proposed class counsel. To that end, the court must consider the following: (1) the work counsel has done in identifying or investigating potential claims in the action, (2) counsel's experience in handling class actions, other complex litigation, and claims of the type asserted in the action, (3) counsel's knowledge of the applicable law, and (4) the resources counsel will commit to representing the class.*fn207 The court may also consider "any other matter pertinent to counsel's ability to fairly and adequately represent the interests of the class."*fn208

   Defendants do not contest the qualifications of class counsel, who easily meet the requirements of Rule 23(g).

   B. The Standard of Proof

   All of these requirements are aimed at answering two questions: Can the claims be managed as class actions, and should they be managed as class actions? In this regard, the term "claims" encompasses not only plaintiffs' claims, but also any affirmative defenses that defendants may assert.*fn209 Courts must therefore exercise their judgment to further Rule 23's goals of promoting judicial economy and providing aggrieved persons a remedy when it is not economically feasible to obtain relief through multiple individual actions.*fn210 The Second Circuit requires a "liberal" construction of Rule 23.*fn211 Thus, "to deny a class action simply because all of the allegations of the class do not fit together like pieces in a jigsaw puzzle [] would destroy much of the utility of Rule 23."*fn212 Accordingly, in securities cases, "when a court is in doubt as to whether or not to certify a class action, the court should err in favor of allowing the class to go forward."*fn213

   Notwithstanding the general liberality in this circuit towards class certification motions, the Supreme Court unequivocally requires district courts to undertake a "rigorous analysis" that the requirements of Rule 23 have been satisfied.*fn214 The burden rests on plaintiffs to make this showing.*fn215

   The question remains, however, as to what constitutes a rigorous analysis. Must plaintiffs prove their case? Must a district court make factual and legal findings that the proposed class satisfies the Rule? Given that class certification decisions only became appealable in 1998,*fn216 and that the Supreme Court did not even articulate the "rigorous analysis" standard until 1982, the guidance from higher courts is scant.

   In Eisen v. Carlisle & Jacquelin, a securities and antitrust suit that originated in this district, the Supreme Court made its first significant pronouncement on class certification. In that case, the district court, after conducting a hearing on the merits of plaintiffs' claims, imposed 90% of the cost of the class notice on defendants. Finding fault in the lower court's approach, the Supreme Court explained that "nothing in either the language or history of Rule 23 . . . gives a court any authority to conduct a preliminary inquiry into the merits of a suit in order to determine whether it may be maintained as a class action. Indeed, such a procedure contravenes the Rule. . . ."*fn217

   Many lower courts have understood this passage in Eisen to mean that on a Rule 23 motion, as on a Rule 12(b)(6) motion, a court must assume the allegations contained in the complaint to be true and draw all inferences in plaintiffs' favor. In several cases decided shortly after Eisen, for instance, the Second Circuit held that on a Rule 23 motion, "the facts will be taken as alleged in the complaint or as they appear without dispute in the record before us."*fn218 But such a view — if it was ever correct — is no longer the prevailing view. As Judge Frank Easterbrook recently stated, "[t]he proposition that a district judge must accept all of the complaint's allegations when deciding whether to certify a class cannot be found in Rule 23 and has nothing to recommend it."*fn219

   Just four years after Eisen, the Supreme Court explained in Coopers & Lybrand v. Livesay that although district courts should avoid weighing the merits of a plaintiff's claims at class certification, "class determination generally involves considerations that are `enmeshed in the factual and legal issues comprising the plaintiff's cause of action.'"*fn220 Four years later, the Court imposed its "rigorous analysis" test.*fn221 Repeating the just-quoted language from Livesay, Justice Stevens wrote in General Telephone Company of the Southwest v. Falcon that "sometimes it may be necessary for the court to probe behind the pleadings before coming to rest on the certification question. . . . [A]ctual, not presumed, conformance with Rule 23(a) remains . . . indispensable."*fn222 In light of this language, it would be error to presume plaintiffs' allegations to be true.

   The tricky question that remains, however, is: If a court may not take the allegations of the complaint as true, what showing must plaintiffs make in support of their class certification motion? On this question, the Supreme Court has been silent.

   At least two Courts of Appeal have implied that plaintiffs' showing on a class certification motion must satisfy the requirements of Rule 23 by a preponderance of the evidence or a similar standard. In Szabo v. Bridgeport Machines, Inc., the Seventh Circuit held that where it is necessary to make legal or factual inquiries on a Rule 23 motion, the court should "receive evidence (if only by affidavit) and resolve the disputes before deciding whether to certify the class," even if such a resolution requires a "preliminary inquiry into the merits."*fn223 Szabo likened a district court's finding under Rule 23 to the sorts of "inquiries routinely [undertaken] under Rule 12(b)(1) and 12(b)(2) before deciding whether [the courts] possess jurisdiction over the subject matter of the case and the persons of the defendants, the location of the proper venue, application of forum non conveniens, and other preliminary issues."*fn224 If such situations are truly analogous to class certification, then a district court would need to find that the proposed class satisfies each of the elements of Rule 23 by a preponderance of the evidence.*fn225

   Even more recently, the Fourth Circuit held — in a securities fraud case — that a district court must make "findings" in resolving a Rule 23 motion, even if such findings overlap with the merits.*fn226 The court explained:

The . . . concern that Rule 23 findings might prejudice later process on the merits need not lead to the conclusion that such findings cannot be made. The jury or factfinder can be given free hand to find all of the facts required to render a verdict on the merits, and if its finding on any fact differs from a finding made in connection with class action certification, the ultimate factfinder's finding on the merits will govern the judgment. A model for this process can be observed in the context of the preliminary injunction practice. Courts make factual findings in determining whether a preliminary injunction should issue, but those findings do not bind the jury adjudging the merits, and the jury's findings on the merits govern the judgment to be entered in the case.*fn227
The court's analogy to a preliminary injunction hearing suggests that on a class certification motion in the Fourth Circuit, a plaintiff must establish the elements of Rule 23 by evidence sufficient to establish a "likelihood of success on the merits" — a burden similar to the Seventh Circuit's apparent requirement that plaintiffs prove that they satisfy Rule 23 by a preponderance of the evidence.*fn228

   Both the Supreme Court and the Second Circuit, however, have suggested that requiring a plaintiff to establish the elements of Rule 23 — especially when those elements are "enmeshed" in the merits — by a preponderance of the evidence would work an injustice. In Eisen, the Court noted that

   a preliminary determination of the merits may result in substantial prejudice to the defendant, since of necessity it is not accompanied by the traditional rules and procedures applicable to civil trials. The court's tentative findings, made in the absence of established safeguards, may color the subsequent proceedings and place an unfair burden on the defendant.*fn229 More recently, in Caridad v. Metro-North Commuter Railroad, the Second Circuit reminded district courts that they "must not consider or resolve the merits of the claims of the purported class."*fn230 Rather, a plaintiff is only required to make "some showing."*fn231 Differing from the Seventh and Fourth Circuits, the Second Circuit clearly held that "a weighing of the evidence is not appropriate at this stage in the litigation."*fn232 If a district court is forbidden to weigh the evidence on class certification, a fortiori, plaintiffs need not establish the elements of Rule 23 by a preponderance of the evidence.

   Even more recently, in In re VISA Check/MasterMoney Antitrust Litigation, the Second Circuit reiterated the "some showing" standard. Juxtaposing the requirements of Falcon and Caridad, the court held that "[a]lthough a trial court must conduct a `rigorous analysis' to ensure that the prerequisites of Rule 23 have been satisfied before certifying a class, `a motion for class certification is not an occasion for examination of the merits of the case.'"*fn233 In the context of expert reports, for example, VISA Check teaches that a district court "may not weigh conflicting expert evidence or engage in `statistical dueling' of experts."*fn234 Instead, the sole job of a district court in assessing expert evidence on a class certification motion is to "ensure that the basis of the [plaintiff's] expert opinion is not so flawed that it would be inadmissible as a matter of law."*fn235

   In sum, under the binding caselaw in this Circuit, a district court may not simply accept the allegations of plaintiffs' complaint as true. Rather, it must determine, after a "rigorous analysis," whether the proposed class comports with all of the elements of Rule 23. In order to pass muster, plaintiffs — who have the burden of proof at class certification — must make "some showing." That showing may take the form of, for example, expert opinions, evidence (by document, affidavit, live testimony, or otherwise), or the uncontested allegations of the complaint.


   A. Rule 23(a)

   1. Commonality

   The common issues of liability presented in these six class actions are overwhelming. Any plaintiff seeking damages — whether proceeding individually or as a class member — will have to establish the following facts, all of which defendants vigorously dispute:*fn236


• The participation of each defendant in the alleged scheme.
• The existence and terms of tie-in agreements, and the process by which defendants induced allocants to enter into tie-in agreements.
• Defendants' failure to disclose the existence, extent and purpose of the tie-in agreements, and the materiality of that omission.
• The existence and magnitude of excess compensation, and how such payments were induced. If excess compensation was paid in unusual forms, such as wash sales, that those actions amounted to payment of excess compensation.
• Defendants' failure to disclose excess compensation, and the materiality of defendants' omission.
• Where defendants conducted a secondary public offering ("SPO") (e.g., Corvis, Sycamore and iXL), that the SPO offering price was derived from prices that were artificially inflated through market manipulation, that defendants failed to disclose the price inflation, and the materiality of that omission. • That plaintiffs are entitled to a presumption of reliance.
• That plaintiffs bought their shares in an efficient market.
• That analysts reporting on the specific securities had conflicts of interest, that the analysts failed to disclose such conflicts, and that such omissions were material.
• That analyst coverage was used in the marketing of defendants' IPOs.
• That price-targets set in analyst reports were the product of manipulated prices.
• That tie-in agreements and analyst reports materially affected stock prices.
• That defendants acted with scienter in manipulating stock prices.
• That defendants' manipulation actually caused inflation of stock prices.
• That the artificial inflation of stock prices caused by the unlawful scheme dissipated over time.
• The true value and actual price of the stock at the time plaintiffs purchased and sold stock.
• That press reports and regulatory announcements were neither sufficiently clear nor specific to place plaintiffs on inquiry notice of the alleged scheme with respect to each issuer.*fn237 Proof of these facts may require extensive discovery and expert testimony, and, if the three and one-half years that have elapsed since the filing of the first suit in these consolidated actions, Makaron v. VA Linux, are any indication, the disposition of all of the 310 consolidated class actions will take years.
   By contrast, only a few authentically individualized issues remain. Most prominent is the need to calculate damages individually, but even that may be accomplished by applying a common formula to each individual claim.*fn238 Indeed, the quantum of damages is the only element plaintiffs must prove on an individual basis. All other individual questions (e.g., actual knowledge and inquiry notice) will arise because of issues defendants choose to raise. In fact, many of defendants' anticipated defenses will require proof that is relevant to large groups within the class; for example, if defendants assert that a plaintiff's claim is barred because the June 16, 1999, MSNBC article placed that plaintiff on notice that the IPO market was tainted by fraud, the determination of that issue is relevant to all plaintiffs who purchased after the MSNBC article. Similarly, if defendants argue that a plaintiff's claim is barred because her trading history shows the payment of undisclosed compensation through "wash" sales, the questions of whether the wash sale constitutes undisclosed compensation and whether a particular pattern of trading activity constitutes a wash sale bear on all similarly situated class members.

   As a result, plaintiffs have satisfied the Rule 23(a) commonality requirement. Defendants' contention that individual issues will predominate at trial is addressed in the discussion of the Rule 23(b)(3) predominance requirement.*fn239

   2. Typicality

   "When it is alleged that the same unlawful conduct was directed at or affected both the named plaintiff and the class sought to be represented, the typicality requirement is usually met irrespective of minor variations in the fact patterns underlying individual claims."*fn240 "The factual background of each named plaintiff's claim need not be identical to that of all the class members as long as `the disputed issue of law or fact occup[ies] essentially the same degree of centrality to the named plaintiff's claim as to that of other members of the proposed class.'"*fn241 For example, where plaintiffs allege a market manipulation scheme, typicality may be satisfied despite fluctuations in the amount of inflation over time, even though such fluctuations create differences between class members and class representatives in terms of how much, if any, of their loss was caused by an alleged scheme.*fn242

   Plaintiffs' proposed class representatives allege that they were harmed in the same "unitary scheme" as the rest of the class.*fn243 All class members, including the proposed class representatives, bought shares allegedly inflated by defendants' wrongdoing, and each was damaged thereby.*fn244 The disputed issues are central to the claims of all proposed class representatives and the class members they seek to represent.*fn245

   However, even where a class representative's motivation to prove the underlying fraud is typical of all class members, she may nonetheless be excluded as atypical if she is "subject to unique defenses which threaten to become the focus of litigation."*fn246 Defendants contend that some of plaintiffs' proposed class representatives are subject to unique defenses, and thus atypical, because they: (1) were allocants, engaged in tie-in agreements, or were knowledgeable institutional investors, and thus can be charged with knowledge of the alleged scheme;*fn247 (2) purchased stock after publication of certain articles or after the SEC Bulletin, and thus were on inquiry notice of the alleged scheme;*fn248 (3) were short sellers, momentum traders or day traders, and therefore cannot avail themselves of a presumption of reliance on stock prices;*fn249 or (4) purchased stock after the close of the class period or after filing suit, and therefore cannot be said to have relied on the integrity of the market, because they were willing to buy after learning of the alleged scheme.*fn250

   Defendants' arguments are unavailing. The question of participation resulting in actual knowledge is adequately addressed by the revised class definition.*fn251 The question of whether any particular publication placed a class representative on inquiry notice of the alleged scheme early enough that her claim would be barred under the section 10(b) statute of limitations is itself a question common to all class members. Defendants may also choose to challenge the rebuttable presumption of reliance with respect to any individual class representative on the grounds that some publication (e.g., the MSNBC article or the SEC Bulletin) placed her on inquiry notice of the alleged scheme. This will not raise a unique defense. To the contrary, a determination that such publications were not sufficient to place the class representative on inquiry notice would inure to the benefit of all class members who, like the class representative, bought after the publication was issued.*fn252 Conversely, if defendants succeed in rebutting the presumption of reliance as to any class representative, then each similarly situated class member would be forced to prove reliance individually, thereby causing individual questions to predominate for those investors and mandating amendment of the class definition or decertification.

   Similarly, defendants' attacks on the proposed class representatives' reliance on the integrity of the market because of "unique" investment strategies do not defeat typicality.*fn253 The classes as pled include many investors with similar investment strategies, so any "unique defenses" based on those strategies are in fact common questions.*fn254 Finally, defendants' argument that class representatives who purchased after the close of the class period should be excluded because the "fact that [the] proposed plaintiff purchased shares both after learning of the fraud and after filing suit rebuts the fraud-on-the-market presumption"*fn255 makes no sense. Just because a stock is manipulated at one point in its trading history does not mean that the stock is forever tainted; a plaintiff may legitimately believe that, although his past losses were caused by market manipulation, the effect of that manipulation has dissipated and the stock price once again reflects all available information about its true value.

   Plaintiffs' proposed class representatives' claims arise from the same course of events, and require the same legal arguments, as those of the class at large. Consequently, because defendants have not established that any proposed class representative in the six focus cases will assert atypical claims or be subject to unique defenses that "overshadow[] the primary claims and prejudic[e] other class members," plaintiffs have satisfied the Rule 23(a) typicality requirement with respect to their Exchange Act claims.*fn256 However, certain proposed class representatives are atypical with respect to plaintiffs' section 11 classes because they are subject to the unique defense that they cannot trace their shares to an allegedly defective registration statement, as discussed in Part IV.B.4.b. below.

   3. Adequacy

   a. Antagonistic Interests

   Defendants attack as inadequate any proposed class representative who is either a proposed class representative or a class member in another of these consolidated actions.*fn257 Defendants submit that this dual role creates a conflict of interest because plaintiffs with interests in multiple cases may seek to increase any settlement designation in favor of one action at the expense of another.

   Defendants cite two cases in support of their theory, but both are inapposite. First, in duPont v. Wyly, the court found duPont to be an inadequate class representative because he was also the plaintiff in a personal action he brought against University Computing Company ("UCC"), a defendant in Wyly.*fn258 Given that recovery in either case could have rendered UCC judgment-proof, the court found that duPont could not represent the class as he would have an interest in ensuring his own recovery in his personal law suit.*fn259 Second, in Boro Hall v. Metropolitan Tobacco Co., Jamaica Tobacco, a proposed class representative, had not only brought a personal antitrust action against Metro Tobacco, but was also a competitor of other class members.*fn260 Furthermore, Metro Tobacco counterclaimed against Jamaica Tobacco, giving Jamaica Tobacco an incentive to settle that other class members would not share.*fn261

   It is overwhelmingly likely that the interests of the proposed class representatives, even in a settlement posture, will be in maximizing the possible recovery of all classes in which the class representative is a member. For a class representative to profit by reducing the recovery of the class she represents for the sake of another class, her monetary interest in the benefitted class would have to be many times greater than her interest in the class she represents, because the money sacrificed by one class is likely to be distributed among three hundred different classes, each with thousands of class members. There is no evidence that any class representative has such a disproportionately small interest in the class that he, she, or it seeks to represent. Furthermore, this Court will review the fairness of any settlement to ensure that it is reasonable and adequate, and to prevent inequitable distribution.*fn262 For these reasons, membership in more than one of these consolidated classes does not result in an interest so antagonistic as to prevent the adequate representation of absent class members.

   b. Familiarity with the Action

   Defendants argue that the proposed Sycamore class representatives cannot fulfill their roles as fiduciaries to class members because they are unfamiliar both with their case and their duties as class representatives.*fn263 For example, defendants claim that Henderson, a Sycamore class representative, "does not understand the scheme alleged" in the Complaint.*fn264 However, at his deposition Henderson described the alleged laddering, biased analyst reporting, and the inflated commissions allegedly received by underwriter defendants.*fn265 Henderson also described his responsibilities as class representative to include retaining the best available counsel, remaining involved in the litigation, and ensuring that class members are kept informed about the litigation and that their interests are protected.*fn266 Given his familiarity with the case and his responsibilities, Henderson satisfies Rule 23(a)(4)'s adequacy requirement. Gangaiah's testimony demonstrates a similar level of familiarity with the case and an understanding of his responsibilities.*fn267 Lemberg, on the other hand, is clearly not a sophisticated investor and was unable to describe the operation of the alleged market manipulation.*fn268 "Regardless, `it is unreasonable to expect an ordinary investor . . . to have the requisite sophistication and legal background to assist counsel in assessing liabilities under the securities laws.'"*fn269 Even Lemberg, with his basic understanding of the case, satisfies Rule 23(a)(4)'s adequacy requirement.*fn270 No evidence suggests that any proposed class representative is so lacking in her understanding of and involvement in her case that she is inadequate. c. Abdication of Control to Class Counsel

   Defendants argue that the proposed class representatives have abdicated to class counsel their roles as fiduciaries for the class and so are inadequate to serve as representatives.*fn271 Essentially, defendants raise the concern that by relinquishing responsibility for prosecuting the case to class counsel, the proposed representatives will be unable to protect the class members should a conflict of interest arise between class counsel and class members.

   Defendants' concern is unwarranted. To the extent that it relates to the representatives' purported lack of participation or control, this argument is merely an extension of the familiarity objection, which I have already rejected. Even if, as defendants claim, counsel and the class representatives have conflicting views of the case, "a great deal of reliance upon the expertise of counsel is to be expected."*fn272 For this reason, "[t]he ultimate responsibility to ensure that the interests of class members are not subordinated to the interests of either the class representatives or class counsel rests with the district court" — not the proposed class representatives.*fn273

   d. Moral Character

   "Although credibility may warrant denying certification, `it is generally inappropriate to deny certification based on questions going to the credibility of named plaintiffs.'"*fn274 Defendants assert that certain class representatives are inadequate because of their failure to disclose all transactions in the relevant security, inconsistencies in their sworn statements and testimony, and, in the case of Kasbarian, destruction of trading records after learning of the alleged fraud (but prior to filing suit).*fn275

   Defendants' argument has no merit. There is no evidence that any of the conduct here was the result of bad faith or an attempt to deceive defendants or the court. For example, Kasbarian's destruction of trading records occurred before he was aware of the possibility of a lawsuit; he had no reason to believe he would need those records.*fn276 Such conduct does not render Kasbarian inadequate to prosecute the interests of the class. Furthermore, none of the inconsistencies or omissions complained of by defendants, such as failing to disclose certain specific transactions, affect the merits of the class representatives' manipulation claims. Given the complexity of these actions, minor testimonial inconsistencies and omissions are likely to occur. Only if "the problems alleged call the validity of the plaintiffs' entire case into question" do such credibility issues merit denial of class certification.*fn277 The temporary omission of certain transactions from class representatives' disclosures does not call into question the overall validity of their claim that they lost money because of defendants' manipulation of securities markets. Denial of certification on credibility grounds is not warranted.*fn278

   4. Ascertainability Ascertainability, not ascertainment, is a prerequisite to class certification.*fn279 Accordingly, at this stage of the proceedings, plaintiffs need not present an airtight method of identifying every class member who may be entitled to a recovery. Rather, the goal at this stage is to define a class that excludes, with broad strokes, segments of the proposed class that are not so entitled. Precise identification of every class member may be accomplished at a later stage.*fn280

   Defendants impliedly argue that because the Federal Rules of Civil Procedure were revised in 2003 to eliminate the availability of "conditional certification," perfect ascertainment of class members should be a prerequisite of class certification.*fn281 This is not so. The 2003 revisions to Rule 23 do not require identification of every class member prior to certification. Rather, to certify a class, a court must simply be "satisfied that the requirements of Rule 23 have been met."*fn282 The court may alter or amend the certification order, or even decertify the entire class, at any point before final judgment if the need arises.*fn283 To require the identification of all class members at the class certification stage would impermissibly require a determination, on the merits, of the validity of each proposed class member's claim.*fn284

   "[I]t is axiomatic that one cannot commit a fraud . . . against oneself."*fn285 This truism takes on special importance when the participation of certain investors (i.e., those who engaged in laddering and paid undisclosed compensation) is integral to the alleged scheme. It should be noted that this inquiry — which seeks to ascertain which investors could not have been defrauded because of their actual knowledge of the alleged scheme — is not the same as the question of which investors knew enough that they could not have relied on the market price of securities as an accurate measure of their intrinsic value.*fn286 That question is one of predominance, not ascertainability.*fn287 Plaintiffs concede that investors who knowingly participated in the alleged scheme have no right to recover.*fn288 Plaintiffs' revised class definition seeks to exclude these investors.*fn289

   The first and most important inquiry in determining which groups of investors to exclude on the basis of actual knowledge is the question of what the scheme entails. In this case, plaintiffs have alleged that defendants engaged in the following scheme to manipulate the market:

15. The Underwriter Defendants set about to ensure that there would be large gains in aftermarket trading on shares following initial public offerings by improperly creating artificial aftermarket demand They accomplished this by conditioning share allocations in initial public offerings upon the requirement that customers agree to purchase, in the aftermarket, additional shares of stocks in which they received allocations, and, in some instances, to make those additional purchases at pre-arranged, escalating prices ("Tie-in Agreements").
. . .
16. By extracting agreements to purchase shares in the aftermarket, the Underwriter Defendants created artificial demand for aftermarket shares, thereby causing the price of the security to artificially escalate as soon as the shares were publicly issued.
17. Not content with record underwriting fees obtained in connection with new offerings, the Underwriter Defendants sought, as part of their manipulative scheme, to further enrich themselves by improperly sharing in the profits earned by their customers in connection with the purchase and sale of IPO securities. The Underwriter Defendants kept track of their customers' actual or imputed profits from the allocation of shares in the IPOs and then demanded that the customers share a material portion of the profits obtained from the sale of those allocated IPO shares through one or more of the following types of transactions: (a) paying inflated brokerage commissions; (b) entering into transactions in otherwise unrelated securities for the primary purpose of generating commissions; and/or (c) purchasing equity offerings underwritten by the Underwriter Defendants, including, but not limited to, secondary (or add-on) offerings that would not be purchased but for the Underwriter Defendants' unlawful scheme. (Transactions "(a)" through "(c)" above will be, at varying times, collectively referred to hereinafter as "Undisclosed Compensation").*fn290
Clearly, the laddering scheme plaintiffs allege includes three necessary components: the tie-in agreements, the undisclosed compensation, and the escalation in share prices caused by artificial demand Accordingly, an investor can only be said to have full knowledge of the alleged laddering scheme if she is aware of all three components.

   Defendants complain that "[i]dentifying claimants with knowledge would be a massive undertaking in light of plaintiffs' assertion that thousands of [investors] participated in the alleged manipulation in hundreds of offerings."*fn291 Defendants base their assertion of widespread participation on plaintiffs' own allegations, which read in pertinent part: 30. Institutional and retail investors, who have received allocations in initial public offerings from various firms, have noted that it was common knowledge that the clients who were forced to pay Undisclosed Compensation to the underwriters, in the form of commissions or otherwise, and who agreed to purchase in the aftermarket received allocations in IPOs.


31. This industry-wide understanding was sometimes expressed by the Underwriter Defendants and other times implied, but nevertheless invariably communicated between those with the power to make allocations of shares in initial public offerings (the underwriters) and customers seeking the allocations.*fn292
   Defendants' concerns are unfounded. First, a close look at these paragraphs is absolutely necessary in view of defendants' argument. Paragraph 30 reveals that the allegation is only that "investors [who are allocants] have noted that. . . ." Thus, the pleading is not that "everyone knew of the scheme" but rather that some allocants "noted" that certain information was common knowledge. This is not a judicial admission by plaintiffs that "everyone knew of the scheme."*fn293 In addition, one must look closely at what these investors say was common knowledge. They say that it was common knowledge that investors who paid undisclosed compensation and agreed to purchase in the aftermarket received allocations. This is not surprising. But they do not say that it was common knowledge that the price of stock was artificially inflated through illegal tie-in arrangements that required a large percentage of allocants to pay undisclosed compensation and to agree to make a certain number of purchases in the aftermarket at escalating prices in order to obtain an allocation. That is the guts of the scheme now alleged and nothing in paragraph 30 pleads that such a scheme was commonly known by the investing public.

   The same is true of paragraph 31. The paragraph begins with the words "this industry-wide understanding." This raises the question — to what does the word "this" refer? The natural reading is that it refers back to the immediate prior paragraph so that "this industry-wide understanding" is that investors who paid undisclosed compensation and agreed to purchase in the aftermarket received allocations. Paragraph 31 merely pleads that the underwriters made it known that those who paid undisclosed compensation and agreed to purchase stock in the aftermarket received allocations — not that such investors were aware of an illegal scheme to inflate stock prices.

   Second, even if plaintiffs' allegations are construed as broadly as possible, they do not suggest that many investors knew of the entire scheme alleged. Nowhere do plaintiffs allege that allocants were aware that such agreements were part of an industry-wide scheme to inflate share prices through the creation of artificial demand Many allocants may have been defendants' unwitting tools, each performing certain acts (i.e., paying undisclosed compensation and agreeing to purchase in the aftermarket) that only when aggregated constituted a cohesive scheme to defraud investors. Even to the extent that allocants might have suspected illegality, that wrongdoing could be ascribed a clear and direct goal — the enrichment of the Underwriter defendants through payment of excessive compensation and increased business ensured by tie-in agreements — not the indirect scheme to defraud investors by artificially driving up securities prices alleged here. As plaintiffs' counsel has noted, it is unlikely indeed that investors who had full knowledge of the alleged scheme would retain their shares for any length of time after the securities' immediate price gains if they knew that the heavy demand had artificially inflated the price, and that the artificial inflation would inevitably dissipate over time.*fn294

   Finally, plaintiffs' counsel has explained that, contrary to defendants' assertions that the scheme was "common knowledge" and "invariably communicated" to allocation-seekers, only a limited population of allocants actually paid undisclosed compensation or consummated tie-in agreements:

MR. WEISS: We're not saying that all allocants were subjected to this kind of requirement for laddering and kickbacks. There's a certain small universe, but we say that the universe was sufficient to be able to doctor this market and to create huge additional compensation that was undisclosed for these underwriters; a scheme, information that was never disclosed by . . . the defendants throughout the class period. The population of those allocants who participated is a relatively small population. . . .*fn295
This position is more consistent with information gleaned through the discovery process than is the notion that every customer who ever expressed an interest in an allocation somehow became privy to the alleged scheme.*fn296

   After reviewing plaintiffs' new proposed class definition, and considering the traits most likely to separate investors who knew of the alleged scheme from those who did not know, the following represents an ascertainable class:*fn297 The Class consists of all persons and entities that purchased or otherwise acquired the securities of [Specific Issuer] during the Class Period and were damaged thereby. Excluded from the Class are:

(1) Defendants herein, each of their respective parents, subsidiaries, and successors, and each of their respective directors, officers and legal counsel during the Class Period, and each such person's legal representatives, heirs, and assigns, members of each such person's immediate family, and any entity in which such person had a controlling interest during the Class Period;
(2) all persons and entities that, with respect to [Specific Issuer's] initial public offering: (a) received an allocation, (b) placed orders to purchase shares of that issuer's securities in the aftermarket within four weeks of the effective date of the offering, (c) paid any undisclosed compensation to the allocating underwriter(s), and (d) made a net profit (exclusive of commissions and other transaction costs), realized or unrealized, in connection with all of such person's or entity's combined transactions in [Specific Issuer's] securities during the Class Period; and
(3) all persons and entities who satisfy all of the requirements of subparagraph (2) with respect to any of the 309 initial public offerings that are the subject of these coordinated actions, if that offering occurred prior to [Specific Issuer's] offering.*fn298
   As I have previously noted, the ascertainability inquiry does not demand ascertainment at the class certification stage. Certain investors not automatically stricken by the class definition may later prove to have actual knowledge of the alleged scheme. Any securities fraud class action runs the risk of including individual investors who may be ineligible for recovery for any number of reasons, including actual knowledge of the alleged fraud.*fn299 If the possibility that certain class members might eventually be excluded were sufficient to preclude class certification, there could never be a securities fraud class action. At trial, defendants may choose to bear the burden and the cost of proving that any particular investor had access to nonpublic information that gave that investor actual knowledge of the alleged scheme.*fn300 The class definition broadly excludes those investors who exhibit the hallmarks of full participation in the alleged scheme. Defendants are alleged to have defrauded investors by manipulating the conduct of allocants, both in terms of the compensation they paid and their aftermarket activity, thereby creating a market where the aggregate demand caused by tie-in agreements artificially inflated the price of the stock.*fn301 The class excludes those who engaged in the acts alleged to have driven up securities prices, and who exhibited their knowledge of the overall scheme by selling their shares for a profit before the effects of the scheme dissipated. The class definition further excludes those who had knowledge of the scheme in one case from participating in the classes for any subsequent IPOs in these consolidated actions, because an investor who has knowledge of the alleged fraud in one offering cannot erase that knowledge thereafter.

   Defendants assert that applying plaintiffs' proposed exclusions, which are similar (although not identical) to those just enumerated by the Court, will present serious manageability problems because the information to be gathered with respect to each allocant "would be scattered in multiple formats among many firms" and "would have to be repeated for each of the few thousand allocants in a single case, and for each of the thousands in 309 cases."*fn302 However, the requirement is ascertainability — not ascertainability with ease. Plaintiffs in a class action meet their burden by pleading a class whose membership is ascertainable, even if actual ascertainment might prove "slow and burdensome.*fn303 Here, plaintiffs note that the class definition factors "are all mathematically certain and objectively determinable," and that the documentary evidence required to apply the proposed definition "is legally required to be retained by broker-dealers" and includes "customer monthly statements, trade confirmations, and order tickets."*fn304

   Although defendants mount several attacks on whether the proposed class definition will successfully exclude those with actual knowledge of the alleged scheme, only three require comment. First, defendants complain that the class definition "is based only on investor conduct in the `309' IPOs and thus fails to account for knowledge acquired or shown through participation in [] the 87 follow-on offerings" conducted by 82 issuers in these consolidated actions.*fn305 Defendants make a good point. An investor who participated in an IPO or traded in its aftermarket in ignorance of the alleged scheme, but later exhibited knowledge of the alleged scheme in connection with a follow-on offering, should be charged with knowledge of the scheme only after her knowing participation. Consequently, the class exclusions apply to participants in follow-on offerings, but only exclude those participants with respect to trades executed after they satisfy the class exclusion criteria.

   Second, defendants claim that the class definition does not adequately exclude investors who had knowledge of the fraudulent scheme through participation in "the `more than 900' IPOs that plaintiffs allege were manipulated as part of this purported industry wide scheme," but 600 of which are not part of these consolidated actions.*fn306 I note, however, that defendants have vehemently opposed suggestions that they produce any discovery whatsoever with respect to any IPOs other than those consolidated here.*fn307 Defendants may not now have it both ways; if plaintiffs do not obtain full discovery in the IPOs that are not in suit, then defendants are barred from making this argument. On the other hand, if defendants now believe that it would be beneficial to alter the boundaries of this case to give plaintiffs access to discovery in the approximately 600 remaining IPOs, this issue can be revisited. Otherwise, defendants' argument is without merit.

   Third, defendants note that "the proposal would not exclude those participants who supposedly paid undisclosed compensation through `churned' or `wash' transactions or high volume trades [] or those who allegedly obtained allocations by purchasing shares in `undesired add-on offerings.'"*fn308 Defendants are simply wrong. Allocants who paid undisclosed compensation — in whatever form — are excluded if they also purchased in the aftermarket and profited from their investments. The only question is whether such transactions amount to undisclosed compensation. That is a common question of law, not an ascertainability problem.

   Accordingly, plaintiffs' class is ascertainable.

   B. Rule 23(b): Predominance

   Defendants challenge plaintiffs' proposed class on the grounds that individualized questions will predominate at trial. Defendants' predominance arguments fall into four major categories: transaction causation, loss causation, damages, and section 11 liability. As discussed earlier, plaintiffs' cases offer a wealth of common issues.*fn309 With the exception of defendants' arguments regarding section 11 tracing (which are limited to the duration of the section 11 classes), none of defendants' arguments defeat plaintiffs' showing of predominance.

   1. Transaction Causation

   "Like reliance, transaction causation refers to the causal link between the defendant's misconduct and the plaintiff's decision to buy or sell securities. It is established simply by showing that, but for the claimed misrepresentations or omissions, the plaintiff would not have entered into the detrimental securities transactions."*fn310 Plaintiffs may avail themselves of a rebuttable presumption of reliance under the following theories.

   a. The Affiliated Ute Presumption

   "In securities fraud claims, reliance is presumed when the claim rests on the omission of a material fact."*fn311 This presumption of reliance is not conclusive.*fn312 Rather, "once the plaintiff establishes the materiality of the omission . . . the burden shifts to the defendant to establish . . . that the plaintiff did not rely on the omission in making the investment decision."*fn313 To satisfy this burden, a defendant must prove "that `even if the material facts had been disclosed, plaintiff's decision as to the transaction would not have been different from what it was.'"*fn314

   Defendants attempt to distinguish Affiliated Ute on the following grounds: "Affiliated Ute was not a class action, did not involve alleged market manipulation, was not deemed applicable to the manipulation and misrepresentation claims asserted in Basic, and would [still] require" that plaintiffs demonstrate the materiality of the omissions and their ignorance of the omitted facts.*fn315 While a court need not address every argument it rejects, a few observations are in order. The Second Circuit has applied Affiliated Ute in the class action context.*fn316 Moreover, while Basic adopted the "fraud on the market" presumption, it contains no language disfavoring Affiliated Ute where both market manipulation and material omissions are alleged. Rather, Basic approved the Affiliated Ute presumption and presented the "fraud on the market" presumption alongside it in the panoply of securities fraud-related presumptions.*fn317 Finally, the materiality of the alleged omissions here (i.e., the total nondisclosure of the alleged scheme) has not been disputed. Plaintiffs are entitled to an Affiliated Ute presumption of reliance to the extent their 10b-5 claims derive from material omissions.

   b. The Fraud on the Market Presumption

   Plaintiffs may also avail themselves of a presumption of reliance, under the "fraud on the market" theory, for claims arising from alleged misrepresentations and market manipulation.


The fraud on the market theory is based on the hypothesis that, in an open and developed securities market, the price of a company's stock is determined by the available material information regarding the company and its business. . . . Misleading statements will therefore defraud purchasers of stock even if the purchasers do not directly rely on the misstatements. . . . The causal connection between the defendants' fraud and the plaintiffs' purchase of stock in such a case is no less significant than in a case of direct reliance on misrepresentations.*fn318
"The fraud-on-the-market doctrine, as described by the Supreme Court in Basic v. Levinson, creates a rebuttable presumption that (1) misrepresentations by an issuer affect the price of securities traded in the open market, and (2) investors rely on the market price of securities as an accurate measure of their intrinsic value."*fn319 A defendant, of course, may rebut the fraud on the market presumption by showing that it made no material misrepresentations because the alleged misrepresentations were already known to the market — a so-called "truth on the market" defense.*fn320

   (1) Market Efficiency

   The fraud on the market presumption only applies if the market for the security is open and developed enough that it quickly incorporates material information into the price of the security — in other words, the market must be an "efficient" one.*fn321 Defendants object that plaintiffs have not met their evidentiary burden of showing that the markets for the stocks in the focus cases were efficient.*fn322

   The Second Circuit has not adopted a test or method for determining whether the market for a security is efficient.*fn323 Nonetheless, the record in this case contains several strong indications that the market in which the focus stocks traded was efficient. Three facts stand out as particularly probative: first, all the focus stocks were traded on the NASDAQ National Market;*fn324 second, the focus stocks were traded actively at high volumes throughout the class period; and third, the focus stocks were the subjects of numerous analyst reports and extensive media coverage. Under any conceivable test for market efficiency, these three facts are sufficient to meet plaintiffs' Rule 23 burden to make "some showing" that the stocks in question traded on an efficient market.

   Ultimately, whether the relevant markets were efficient is a question of fact to be resolved at trial.*fn325 The present finding — that plaintiffs have made "some showing" that the focus markets were efficient — is solely for the purposes of adjudicating the pending motion for class certification, and is not binding on the finder of fact. Based on the evidence presented at trial, the finder of fact may conclude that the relevant markets were efficient, in which case all class members will benefit from a presumption of reliance. On the other hand, the finder of fact may conclude that one or more of the relevant markets was inefficient,*fn326 in which case those plaintiffs who traded in such markets would be required to make individual showings of reliance.

   (2) Investment Strategies

   "[I]t has been noted that `it is hard to imagine that there ever is a buyer or seller who does not rely on market integrity. Who would knowingly roll the dice in a crooked crap game?'"*fn327 Defendants believe there are such investors. Indeed, they claim that so many reckless gamblers engaged in a `crooked crap game,' and that exposing their folly would be such an arduous task, that any adjudication of their claims would require innumerable individual inquiries.

   Defendants assert that "thousands of day and momentum traders [] were not concerned about the integrity of a stock's market price," and argue that "[f]or both types of traders the integrity of the market price was irrelevant to the investor's decision to purchase."*fn328 According to defendants, "subjective inquiries" into whether these traders actually relied on market integrity would cause individual issues to predominate.*fn329 But day and momentum traders have the same incentives to prove defendants' liability as all other class members, and their presence in a securities class does not create intra-class conflicts.*fn330

   Similarly, defendants challenge plaintiffs' proposed classes on the grounds that they may contain short sellers,*fn331 and that, "[b]ecause short sellers do not rely on the market price, they do not enjoy a presumption of reliance."*fn332 Defendants cite the Third Circuit's decision in Zlotnick v. TIE Communications in support of this contention.*fn333 But Zlotnick does not control. Not only is Zlotnick a Third Circuit case (and therefore not binding on this Court), it pre-dates the Supreme Court's seminal opinion in Basic. Indeed, in cases like this one, courts in the Third Circuit and elsewhere have almost unanimously rejected the Zlotnick exception.*fn334 One such court noted that: Moreover, under defendants['] view of the case, any plaintiff seeking to represent a class of investors of a large, publicly traded corporation would be unable to satisfy reliance, and, hence, typicality, as a matter of law. . . . It can be stated without fear of gainsay that the shareholders of every large, publicly traded corporation includes [sic] institutional investors, short-sellers, arbitragers etc. The fact that these traders have divergent motivations in purchasing shares should not defeat the fraud-on-the-market presumption absent convincing proof that price played no part whatsoever in their decision making. If defendants believe that this stretches the concept of reliance beyond the intent of the statute, their course of attack is to overrule Basic, not render its holding meaningless.*fn335

  This analysis is far more persuasive than defendants' application of the Zlotnick exception, and it comports with the policy and practice of certifying securities class actions in this Circuit.*fn336 Accordingly, the presence of short sellers does not undermine plaintiffs' showing of predominance.

   (3) Knowledge of Fraudulent Scheme

   A presumption of reliance may be rebutted by a showing that the plaintiff had knowledge of the omitted fact or fraudulent scheme. "[I]f the plaintiff has been furnished with the means of knowledge and he is not prevented from using them he cannot say that he has been deceived by the misrepresentations of the other party."*fn337

   Defendants note that "pervasive press reports mirrored the allegations in these cases,"*fn338 pointing to several occasions exposing class members, through the national media or official releases, to information which, defendants claim, "would have made any reader aware of the allegations here and put them on notice to inquire further."*fn339 Defendants maintain that determining "which purchasers knew what, and when . . . will require . . . subjective inquiry into each claimant's state of mind."*fn340

   However, the question of whether publicly available information "would have made any reader aware of the allegations here"*fn341 presents an important class-wide common issue.*fn342 If any of defendants' proffered publications is determined to have been so relevant, clear and widely disseminated that knowledge of the alleged scheme must be imputed to the universe of investors in the stock market, then reliance cannot be proven individually or collectively.*fn343 Furthermore, differences among class members in terms of access to publicly available information (e.g., whether certain investors actually saw all publicized materials, or whether they had access to sophisticated investment advice in interpreting the releases) are insufficient to defeat certification or rebut plaintiffs' presumed reliance.*fn344

   2. Loss Causation

   In addition to transaction causation, plaintiffs must prove loss causation; that is, they must show a "causal link between the alleged misconduct and the economic harm ultimately suffered by the plaintiff."*fn345 Plaintiffs may submit an expert report suggesting a methodology for determining such a link.*fn346 "A district court must ensure that the basis of [such an] expert opinion is not so flawed that it would be inadmissible as a matter of law."*fn347 At the class certification stage, the question "is whether plaintiffs' expert evidence is sufficient to demonstrate common questions of fact warranting certification of the proposed class, not whether the evidence will ultimately be persuasive;" a district court should therefore refrain from "weigh[ing] conflicting expert evidence or engag[ing] in `statistical dueling' of experts."*fn348 Under Rule 23(b)(3), plaintiffs must present a methodology for determining loss causation that may be commonly applied to all members of the class.*fn349 Unlike damages, which require a showing of the quantum of loss, loss causation requires only that there be a causal connection between the alleged wrongdoing and plaintiffs' loss.*fn350 In a market manipulation case, plaintiffs can satisfy their burden by presenting a means to determine that the scheme caused an increase in price that dissipated throughout the class period.*fn351 To satisfy Rule 23 in the context of loss causation, plaintiffs need not precisely quantify the proportion of each plaintiff's loss attributable to dissipation; they need only provide a mechanism showing that the alleged scheme actually caused some loss to all class members.*fn352 Plaintiffs must, however, provide a mechanism for proving that inflation dissipation occurred throughout the class period. Otherwise, investors who purchased after all artificial inflation created by the alleged scheme had dissipated would be differently situated (i.e., they would be forced to prove loss causation individually using alternatives to the class method of proof), and individual questions would dominate the loss causation inquiry.

   Plaintiffs submit the expert opinion of Professor Fischel to provide a method of proving that the alleged scheme inflated stock prices as early as the beginning of trading, and that the inflation dissipated throughout the class period.*fn353 Fischel's methodology for proving loss causation depends on two separate analyses: first, an analysis of the initial inflation caused by alleged tie-in agreements; and second, an analysis of the dissipation of that inflation over time.

   Fischel empirically demonstrates the effect of tie-in agreements on demand and price through an analysis of the pre-open bid sessions for five of the six focus cases.*fn354 During the pre-open bid session, in which a new issue takes dealer quotes before actual trading begins, the lead underwriter opens the bidding and investors may enter bids to purchase shares. The level of demand in the preopen bid session affects bid prices.*fn355 Fischel describes and analyzes price changes in the "inside bid" — the highest bid at any given time — with respect to the bidding activity of the lead underwriter and investors alleged to have executed tie-in agreements.*fn356 Institutional investors with alleged tie-in agreements constituted much of the demand for shares in each pre-open bid session, and purchase orders executed after these sessions accounted for a substantial portion of all shares issued in the IPO.*fn357 Demand by investors with tie-in agreements remained strong throughout the pre-open bid session.*fn358 Fischel notes that, "consistent with the substantial purchase orders at the end of the pre-open bid session, the opening price for each of the focus case stocks was substantially higher than the offer price."*fn359

   Fischel also observes that the lead underwriter in each pre-open bid session set the initial bid substantially higher than the offering price, and that "[t]his is consistent with . . . knowledge of the volume of pending purchase orders."*fn360 Fischel asserts that:

The literature has documented that even before the opening of trading, significant price discovery takes place and that a large proportion of the change in price from the offer price to the opening price is captured in the first quote entered by the lead underwriter. This evidence supports the conclusion that the alleged tie-in agreements affected prices before trading began.*fn361
   Fischel also notes that "activity in the lead underwriter's bid during the pre-open bid session was [frequently] followed by an increase in the inside [best] bid."*fn362

   Trading activity of allocants with alleged tie-ins was not limited to purchase orders executed at the beginning of trading. Rather, Fischel notes that allocants "purchased substantial quantities of shares in each focus [stock's] aftermarket."*fn363 Fischel also undertakes a regression analysis to show that the size of each allocation correlates to the quantity of stock that allocant purchased in the aftermarket.*fn364 To explain how such purchases might inflate prices, Fischel notes that "Keim and Madhavan . . . find that a buyer-initiated trade of only 0.16 percent of a company's outstanding stock is associated with a permanent price increase of 4.7 percent in the stock price."*fn365

   Having thus established a mechanism for proving that the alleged scheme caused artificial inflation, Fischel turns to the problem of how to determine the duration of that inflation and its rate of dissipation. Fischel adopts the "Comparable Index Approach," in which the overall performance of an issue is compared to a benchmark index averaging the price movements of comparable stocks.*fn366 Defendants' expert asserts, and Fischel concedes, that the Comparable Index Approach is usually invoked to determine damages, not loss causation.*fn367 Specifically, "[t]he premise of the Comparable Index Approach is that all changes in the price of a company's stock not accounted for by movements in the comparable company stock prices and not accounted for by movements in the general market are attributed to the alleged fraud."*fn368 Thus, as generally applied, the Comparable Index Approach is used to calculate damages where loss causation has already been proven or is assumed; that is, it "assumes loss causation rather than detects it."*fn369

   However, Fischel has already provided a method to show that the alleged scheme artificially inflated stock prices. Plaintiffs' loss causation calculation does not depend on the Comparable Index Approach. It is, however, a component of the analysis. Once artificial inflation has been established by the mechanisms discussed earlier (i.e., by a lead underwriter making a high initial bid in the pre-open bid session and raising its own bid; by creation of artificial demand through tie-in agreements, which causes prices to rise; and by permanent changes in beliefs caused by buyer-initiated trading), all that remains is detecting the dissipation of that inflation. Here, each of the focus stocks ultimately plummeted in value to levels far below their offering prices and not far above zero, the lowest possible value. Some loss causation may be inferred simply from the disappearance of the original inflation.*fn370 After all, when an artificially inflated stock tumbles to a fraction of its offering price, it is logical to assume that the artificial inflation has dissipated. The Comparable Index Approach need not carry the load of proving the existence of inflation or dissipation.

   Fischel proposes only to use the Comparable Index Approach to determine the duration of dissipation.*fn371 Under this framework, Fischel finds that each of the focus stocks significantly overperformed on the first day of trading and underperformed in the long term when compared to various benchmark indices.*fn372 Fischel attributes the securities' initial overperformance to artificial inflation in the immediate aftermarket and their later underperformance, at least in part, to a gradual dissipation of that inflation. The rate of dissipation, and its existence, can be inferred from the fact that, in the long run, the focus stocks consistently declined further in price than comparable market benchmarks, which presumably reflected the same market-wide variables. Fischel notes that the markets for the six focus cases significantly underperformed market benchmarks even after December 6, 2000, implying that the stock price continued to shed inflation throughout and after the close of the class period.*fn373 As a result, Fischel has established a method by which a finder of fact could conclude both that stock prices were artificially inflated and that the inflation dissipated throughout the class period, continuing even after December 6, 2000.*fn374

   Fischel's theory is not fatally flawed. Although defendants present a cadre of experts clamoring to apply alternative methods of determining loss causation,*fn375 now is not the time to "weigh conflicting evidence or engage in `statistical dueling' of experts."*fn376 Defendants are free to attack Fischel's theory at trial or present alternative theories if they choose.

   Plaintiffs have satisfied their burden at this stage to articulate a theory of loss causation that is not fatally flawed. Moreover, because plaintiffs' theory posits protracted dissipation throughout the proposed class period, it presents common questions of liability — namely, whether tie-in agreements artificially inflated stock prices and the duration of any such inflation (i.e., whether the inflation dissipated abruptly or over the course of the entire class period). Defendants' alternative theories of loss causation, which generally require intensive trade-by-trade analysis of transitory price effects, would, if adopted by the jury, answer that question in the negative.*fn377 Defendants provide various criticisms of Fischel's "methodology," but these attacks go to the weight of Fischel's conclusions and must be reserved for trial.*fn378 Defendants also point out that Fischel's analysis may not be able to quantify the amount of inflation or dissipation at any given time.*fn379 However, as I have already noted, loss causation only requires that plaintiffs establish some inflation and dissipation, not the precise size of the inflation or amount of the loss. That inquiry relates to damages, not loss causation, and is therefore addressed in the next section.

   3. Damages

   If plaintiffs are successful in proving liability, they will have to provide a methodology for calculating damages. In any publicly traded securities market, some investors own many shares and some own only a few; some maintain their portfolios for years, and some trade shares daily. Thus, the extent of the harm suffered by each class member as a result of the alleged misconduct is, by definition, an individualized inquiry.*fn380

   However, where common questions otherwise predominate, the need for individualized damages inquiries is not enough to scuttle the class action.*fn381 Rather, the Second Circuit has recognized several methods by which a court may address the problem of individual damages while securing the benefits of the class action device for common issues of liability:

There are a number of management tools available to a district court to address any individualized damages issues that might arise in a class action, including: (1) bifurcating liability and damage trials with the same or different juries; (2) appointing a magistrate judge or special master to preside over individual damages proceedings; (3) decertifying the class after the liability trial and providing notice to class members concerning how they may proceed to prove damages; (4) creating subclasses; or (5) altering or amending the class.*fn382
"Particularly where damages can be computed according to some formula, statistical analysis, or other easy or essentially mechanical methods, the fact that damages must be calculated on an individual basis is no impediment to class certification."*fn383 Although there are extreme cases in which calculation of damages may present such an intolerable burden that it renders class certification inappropriate,*fn384 "such cases rarely, if ever, come along."*fn385

   "Before and after the enactment of the PSLRA, absent class members in securities fraud cases have been awarded a common fund of damages computed by the trier of the fact, based usually on expert testimony. . . ."*fn386 For example, a jury may be asked to compute the "true value" of a stock over time, including fluctuations due to various price-affecting events, and consequently determine by what degree the stock was inflated at any given time during the class period.*fn387 Thus, important common questions regarding damages, as well as loss causation, may be resolved by asking the jury to trace a "graph delineating the actual value of the stock throughout the class period. When compared with a comparable graph of the price the stock sold at, the determination of damage will be a mechanical task for each class member."*fn388

   Plaintiffs suggest just such an approach.*fn389 Plaintiffs have proposed using both the "Event Study Approach" and the "Comparable Index Approach" to determine the effect that any given event during the class period had on stock prices.*fn390 While assessing the effect of each salient event over hundreds of days in any given class period may be a laborious and time-consuming task, it nonetheless provides a common basis for calculating the damages of all class members. By contrast, an alternative approach that would force each class member to prove in individual proceedings how various events impacted the stock price when she purchased and sold stock would be staggeringly inefficient, would provide countless opportunities for juries to render inconsistent verdicts, and, if the cost were placed on individual class members seeking to prove damages, would likely present a formidable (if not complete) barrier to recovery.*fn391

   Accordingly, by suggesting a method by which a jury could determine the true value of securities over time, plaintiffs present the common question of magnitude of damages. At this stage of the proceedings, plaintiffs have met their burden to establish that common questions predominate.*fn392 4. Section 11 Claims

   a. Tracing

   "Aftermarket purchasers who can trace their shares to an allegedly misleading registration statement have standing to sue under § 11 of the 1933 Act."*fn393 A plaintiff successfully traces her shares if she demonstrates that her stock was actually "issued pursuant to a defective [registration] statement;" it is "insufficient that [her] stock `might' have been issued pursuant to a defective [registration] statement."*fn394 This requirement has been strictly applied, even where its application draws arbitrary distinctions between plaintiffs based on the remote genesis of their shares.*fn395 Tracing may be established either through proof of a direct chain of title from the original offering to the ultimate owner (e.g., if the owner was an allocant in the IPO, or took actual physical possession of share certificates directly from an allocant), or through proof that the owner bought her shares in a market containing only shares issued pursuant to the allegedly defective registration statement.*fn396 The modern practice of electronic delivery and clearing of securities trades, in which all deposited shares of the same issue are held together in fungible bulk, makes it virtually impossible to trace shares to a registration statement once additional unregistered shares have entered the market.*fn397 Even where the open market is predominantly or overwhelmingly composed of registered shares, plaintiffs are not entitled to a presumption of traceability.*fn398

   Defendants assert that the actual tracing of each plaintiff's stock is "a necessarily individualized inquiry."*fn399 Furthermore, defendants proclaim that, insofar as each class member must individually prove that her shares were issued pursuant to the relevant registration statement, the necessity of trying individual issues should disqualify the class under the Rule 23(b)(3) predominance requirement.*fn400

   Defendants are correct. If the classes for each of the focus cases are to extend from the date of the IPO to the last day of plaintiffs' proposed class period, December 6, 2000, then each class will include plaintiffs who purchased their shares after untraceable shares entered the market. While some individual class members who purchased after the end of the class period might be able to trace their shares successfully, the resulting inquiry would fragment the class action into myriad mini-trials on the subject of tracing. Plaintiffs' proposed section 11 classes are suitable only for those periods in which class members' ability to trace their shares is susceptible to common proof.*fn401 Such generalized proof is possible if plaintiffs' section 11 class periods are limited to exclude all purchases made after untraceable securities entered the market. As a result, the section 11 class periods for each of the focus cases must end at the time when unregistered shares became tradeable.*fn402 For each focus case, the filed registration statement summarizes the number and status of outstanding shares, and tells investors when outstanding shares will qualify to enter the market, including information as to when lock-ups will expire and at what point previously issued shares become eligible for trading under Rule 144, promulgated pursuant to the Securities Act.*fn403 Rule 144 provides, in pertinent part, that affiliated holders of restricted securities who have satisfied the statutory holding period must wait until the issuer "has been subject to the reporting requirements of [either] section 13 . . . or section 15(d) of the [Exchange Act] . . . for a period of at least 90 days" and "has filed all the reports required to be filed thereunder during the 12 months preceding such sale. . . ."*fn404 In either case, the issuer becomes subject to the filing requirements of the Exchange Act when its filed registration statement becomes effective.*fn405

   In the Corvis and VA Linux cases, additional stock offerings were consummated before the 90-day Rule 144 holding period expired.*fn406 Where there are multiple public offerings of a security, a plaintiff is entitled to a presumption that she has satisfied the tracing requirement of section 11 only if every such offering was defective.*fn407 However, in both cases, the additional offerings explicitly incorporated the contents of the IPO prospectuses.*fn408 Thus, to the extent that the IPO registration statements are defective, so are the additional registration statements.

   Under Rule 144(k), non-affiliates who hold unregistered shares may sell their shares without restriction after they have held the shares for a period of two years.*fn409 Defendants imply that some unregistered shares might have been tradeable at the time of the IPOs in Corvis, Firepond and Sycamore. No such inference is supported by the facts. In Corvis, all outstanding shares issued before 1999 (and therefore tradeable under Rule 144(k) before 2001) were issued to affiliates, and defendants have produced no evidence that such shares were ever transferred to non-affiliates.*fn410 In Firepond, all Rule 144(k) shares were subject to 180-day lock-up agreements.*fn411 In Sycamore, the company did not exist two years prior to the IPO, making it impossible for any non-affiliate to have held unregistered shares for the two years required by Rule 144(k).*fn412

   Shares issued in the context of stock-based acquisitions (like those in the VA Linux case) cannot circumvent the required holding periods of Rule 144. Before trading unregistered stock, a recipient must hold the stock for "[a] minimum of one year. . . ."*fn413 Thus, a recipient of stock in VA Linux's first acquisition — of Trusolutions, Inc., on March 28, 2000 — would not have been able to sell that stock until March 28, 2001, well after the end of plaintiffs' proposed class period.

   Accordingly, plaintiffs' section 11 class periods are appropriately limited to the periods between each IPO and the time when unregistered shares entered the market. In Corvis, Engage, Firepond, iXL and Sycamore, unregistered shares became tradeable 90 days after the IPO pursuant to Rule 144. In VA Linux, all outstanding shares appear to have been subject to 180-day lock-up agreements,*fn414 so the VA Linux section 11 class period extends for 180 days after the IPO. Thus, plaintiffs' section 11 class periods are limited to the following: Corvis, July 28, 2000 to October 26, 2000; Engage, July 20, 1999 to October 18, 1999; Firepond, February 4, 2000 to May 4, 2000; iXL, June 2, 1999 to August 31, 1999; Sycamore, October 21, 1999 to January 19, 2000; and VA Linux, December 9, 1999 to June 12, 2000.

   b. Adequacy and Typicality of Section 11 Class Representatives

   A class representative's lack of standing under section 11 qualifies as a "unique defense" sufficient to defeat the typicality of a proposed class representative.*fn415 Moreover, because section 11 grants a right of recovery only to plaintiffs who sold their securities below the offering price, and limits that recovery to the difference between the sale and offering prices (or the difference between the offering price and the value of shares still held at time of suit), plaintiffs who sold all their traceable stock at prices above the offering price have no right to recover under section 11.*fn416 Defendants posit that any proposed class representative who sold her shares at a price in excess of the offering price should be excluded because, absent any possibility of section 11 recovery, her claims are not typical of section 11 class members who have a right to recover damages.*fn417 Defendants are correct. Besides the fact that such a class representative would be subject to unique defenses with respect to her section 11 claims, the foreclosure of any hope for recovery calls into question her motivation to fairly and adequately protect the interests of the class.*fn418

   Consequently, representatives of plaintiffs' proposed section 11 classes must (1) have purchased shares during the appropriate class period, and (2) have either sold the shares at a price below the offering price or held the shares until the time of suit. Accordingly, the following class representatives are appropriate representatives for their section 11 classes: for Corvis, Huff and Rooney; for Engage, Pappas; for Firepond, the Collinses, Zhen and Zitto; and for VA Linux, Budich and Zagoda. Because plaintiffs have no suitable class representatives for their iXL and Sycamore section 11 classes, their motion to certify those classes must be denied.

   C. Rule 23(b)(3): Superiority

   Plaintiffs must show that a "class action is superior to other available methods for the fair and efficient adjudication of the controversy."*fn419 Rule 23 suggests a number of nonexclusive factors the trial judge can weigh to determine superiority, including "the interest of members of the class in individually controlling the prosecution."*fn420 In a case with thousands or millions of claimants, though, a class member's interest in aggregating the claims substantially outweighs her interest in individual control of the litigation. "The more claimants there are, the more likely a class action is to yield substantial economies in litigation."*fn421 "[I]n enacting Rule 23(b)(3), `the Advisory Committee had dominantly in mind vindication of the rights of groups of people who individually would be without effective strength to bring their opponents into court at all.'"*fn422 In a securities class action where millions of shareholders are damaged by fraudulent conduct, none but the very largest individual investors have the capital to prosecute their claims individually. This is especially true in a case such as this one, where expert reports, voluminous briefing and vast discovery are par for the course.*fn423 However, when investors' claims are aggregated, even an investor who bought a single share has the chance to recover for defendants' alleged wrongdoing. This benefit of the class action form is not easily overcome.*fn424

   Any consideration of superiority must be framed in this context. Thus, the mere possibility of complexity or unmanageability does not defeat a class action.*fn425 Because a securities fraud class action offers the opportunity for redress of wrongs where victims would otherwise be unable to press their claims, "a class action has to be unwieldy indeed before it can be pronounced an inferior alternative — no matter how massive the fraud or other wrongdoing that will go unpunished if class treatment is denied — to no litigation at all."*fn426

   Moreover, the superiority of the class action form to alternative means of adjudication cannot — and should not — be considered in a vacuum. "In many respects, the predominance analysis . . . has a tremendous impact on the superiority analysis . . . for the simple reason that, the more common issues predominate over individual issues, the more desirable a class action lawsuit will be as a vehicle for adjudicating the plaintiffs' claims."*fn427 Any consideration of superiority must therefore be subjective; it must weigh the benefits and costs of allowing the class action to proceed versus the benefits and costs of individual adjudication.*fn428

   In this case, class adjudication is clearly superior to any other form of adjudication. Although preparation and trial of 310 class actions, each of which includes the multitude of common questions presented here, is daunting, preparation and trial of 310 million individual suits with virtually identical allegations would be impossible for all participants — plaintiffs, defendants and the courts. Rule 23 is intended to facilitate, not prevent, litigation of a multitude of claims with substantially identical allegations.*fn429

   Defendants make little effort to propose alternative means of adjudication that might be superior to the class action form. The two alternative forms defendants suggest — individual prosecution of claims and NASD arbitration*fn430 — are both impractical for the reasons just described. Because of the costs arbitration or litigation impose on small-stakes securities fraud plaintiffs, neither could result in any recovery for the vast majority of investors included in the class definition, even if defendants' liability is ultimately proved. As neither the defendants nor the Court can suggest a means of adjudicating plaintiffs' claims that would be superior or even comparable to the efficiency and fairness of a class action, plaintiffs have satisfied the superiority requirement of Rule 23(b)(3).


   Accordingly, plaintiffs' motion for class certification is granted in part and denied in part for each of the six focus cases. Plaintiffs' Exchange Act classes are certified to the extent they include investors who acquired shares between the date of the IPO and December 6, 2000 and who satisfy the Court's revised class definition. Plaintiffs' section 11 classes for Corvis, Engage, Firepond and VA Linux are certified as to all investors that satisfy the revised class definition and acquired shares before unregistered shares entered the market, and sold those shares for a loss at prices below the offering price. All of plaintiffs' proposed class representatives except Pappas are suitable to prosecute the Exchange Act claims. Huff, Rooney, Pappas, the Collinses, Zhen, Zitto, Budich and Zagoda are appropriate class representatives for their respective section 11 classes. Because plaintiffs have proposed no suitable class representatives for their iXL or Sycamore section 11 classes, those classes cannot be certified.


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