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United States District Court, S.D. New York

October 11, 2005.


The opinion of the court was delivered by: DENISE COTE, District Judge


In response to a June 14, 2005 Order to Show Cause, respondents the Succession of Hilliard M. Haik ("Dr. Haik"), Charlene M. Haik, Steven A. Haik, H. Michael Haik, Seannie Haik, and Holly M. Haik (collectively, the "Haik Repondents") argue that they should not be enjoined from pursuing their claims relating to investments in WorldCom, Inc. ("WorldCom") against Salomon Smith Barney Inc. ("SSB"), one of the Citigroup Defendants,*fn1 in a NASD arbitration proceeding. For the reasons described below, the Citigroup Defendants' application for enforcement of the claims release (the "Release") contained in the November 14, 2004 Judgment issued pursuant to the Citigroup Settlement (the "Judgment"), see In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288, 2005 WL 2591402 (S.D.N.Y. Nov. 12, 2004), is granted.


  The relevant history of the WorldCom class action relating to the Citigroup Settlement was recently summarized in In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288 (DLC), ___ F. Supp. 2d ___, 2005 WL 2293190, at *2 (S.D.N.Y. Sept. 21, 2005) (the "2005 Settlement Opinion"). This Opinion incorporates that discussion by reference. All of the following facts are taken from the Haik Respondents' submissions, unless otherwise noted. Dr. Haik, a Louisiana ophthalmologist and clinical professor of ophthalmology, was the decision-maker with respect to his family's investment accounts, which were held by SSB. Dr. Haik made the investment decisions and oversaw a total of nine accounts for himself; his wife, Charlene; his two sons, Steven and Michael; and his two daughters, Holly and Seannie. An SSB broker named Miller Gordon Caffery, who was married to Dr. Haik's daughter Holly, managed the investments. All account statements were mailed to Dr. Haik's residence. Beginning in 1998, all Haik Respondents' accounts became heavily invested in WorldCom securities. The accounts contained a total of 22,834 shares, approximately eleven percent of which were purchased during the Class Period. In October 2003, Dr. Haik died of cancer.

  The Haik Respondents claim that they never received any notice of the class action. In a sworn declaration, in a seeming attempt to explain why the Haik Respondents did not receive notice of the class action, Charlene Haik explains that she changed residences at an unspecified date after Dr. Haik's death. In a letter of July 25, 2005, the Citigroup Defendants submitted property transfer documents to the Court establishing that Charlene Haik's new residence was not purchased until October 29, 2004 — after the opt-out deadline had passed and after class members would have received two notices of the class action. It is undisputed that none of the Haik Respondents opted out of the class action. On March 4, 2005, the Haik Respondents filed a Statement of Claim with the NASD, alleging violations of NASD suitability and fair dealing rules, breach of fiduciary duty, gross negligence, and violations of Louisiana securities law. These claims were premised largely upon the conflict of interest between SSB's analyst and investment banking functions in regard to WorldCom. After a communication from counsel for the Citigroup Defendants regarding the fact that the Haik Respondents had failed to opt out of the class action, the Haik Respondents filed a First Amended and Superseding Statement of Claim on May 19, 2005. On June 2, 2005, the Haik Respondents filed a Second Amended and Superseding Statement of Claim (the "Amended Statement of Claim"), which omits many of the specific allegations against SSB with respect to WorldCom but still indicates that "[t]his Statement of Claim is a case of [SSB's] conflicts of interest that detrimentally affected the Haiks." Similar allegations are described below. The Amended Statement of Claim also specifies that the Haik Respondents do not seek recovery for WorldCom shares purchased during the Class Period.

  Upon receipt of a letter from counsel for the Citigroup Defendants, on June 14, 2005, this Court issued an Order to Show Cause why the Haik Respondents should not be enjoined from pursuing their claims relating to investments in WorldCom against SSB in a NASD arbitration. In their submission in opposition to the Citigroup Defendants' application for an injunction, the Haik Respondents make several arguments. First, they argue that consideration of the Citigroup Defendants' application is premature and should be deferred until after the Fairness Hearing that was held on September 9, 2005. They also contend that the scope of the claims release ("Release") imposed pursuant to the Citigroup Settlement Judgment is too broad, and that they are not adequately compensated for their released claims. Finally, the Haik Respondents argue that they should be given an extension of time to opt out of the action, based on the doctrine of excusable neglect.

  The Haik Respondents have moved to substitute a signed declaration for an unsigned copy originally attached to their opposition papers and for leave to file a reply memorandum. Both motions are granted in an accompanying Order, and those submissions are considered in this Opinion.

  On August 26, 2005, the Haik Respondents filed a motion for extension of time to file proofs of claim in the class action pending a ruling on the Citigroup Defendants' application for an injunction. That motion is granted in the accompanying Order.


  1. Timing of the Citigroup Defendants' Request

  The Haik Respondents argue that consideration of the Citigroup Defendants' application for an injunction should be delayed until after the Fairness Hearing on September 9, 2005. Although this argument is now moot, as the settlements considered in the September 9 Fairness Hearing have been approved, see WorldCom, 2005 WL 2293190, at *1, it would be rejected in any event. SSB is among the Citigroup Defendants, and the Court issued the Judgment regarding those defendants, including the Release, on November 12, 2004. The September 9, 2005 Fairness Hearing involved the approval of settlements between the Lead Plaintiff and a number of other defendants.

  2. Validity and Applicability of the Release

  The Haik Respondents make two general arguments as to why the Release is overbroad and should not bar their claims. Although they admit that some of their claims "are factually similar to the claims raised in the Class Action (i.e. Citigroup's failure to disclose its conflicts of interest with WorldCom and its investment banking business)," they contend that "those claims involve conduct that, for the most part, predates the Class Period." The Haik Respondents argue that they were not adequately represented in the class action because their claims are not based on the same factual predicate as the class action claims, and that extinguishment of their arbitration claims would therefore violate their due process rights. They also argue that, if their arbitration is enjoined pursuant to the Release, they will have received "grossly inadequate consideration for their released claims."*fn2 The scope of a claims release is limited by the "identical factual predicate" and "adequacy of representation" doctrines. Wal-Mart Stores, Inc. v. Visa U.S.A. Inc., 396 F.3d 96, 106 (2d Cir. 2005). Class members' claims may be barred "where there is a realistic identity of issues between the settled class action and the subsequent suit, and where the relationship between the suits is at the time of the class action foreseeably obvious to notified class members." TBK Partners, Inc. v. Western Union Corp., 675 F.2d 456, 461 (2d Cir. 1982). A class action settlement may "prevent class members from subsequently asserting claims relying on a legal theory different from that relied on in the class action complaint, but depending on the very same set of facts." Nat'l Super Spuds, Inc. v. N.Y. Mercantile Exch., 660 F.2d 9, 18 n. 17 (2d Cir. 1981). "[A]dequate representation of a particular claim is determined by the alignment of interests of class members, not proof of vigorous pursuit of that claim." Visa, 396 F.3d at 113.

  The Haik Respondents' original Statement of Claim is substantively identical to the passages of the class action complaint that allege conflicts of interest between SSB's analyst department, including the prominent telecommunications analyst Jack Grubman, and its investment banking wing, which allegedly encouraged SSB's analysts to issue only positive reports about clients, including WorldCom.*fn3 The Haik Respondents' briefs emphasize that their allegations are in reference to a conflict of interest that existed prior to the Class Period, but the original Statement of Claim refers to no facts relating to SSB's conflict of interest prior to 2000. Even the Amended Statement of Claim provides only the following allegations specifying any sort of timeframe: "By early 2000, the stock market began to slide and at that time [SSB] was clearly aware that its research reports and stock recommendations were grossly inaccurate." "As of the end of 2000, all of [the Haik Respondents' accounts] were heavily invested in various equities, likely in a fashion benefitting [SSB's] bottom line for management fees and its profitable investment banking business. . . ."

  The Haik Respondents' allegations in the arbitration are thus based on the same factual predicate as the class action claims against the Citigroup Defendants. Conflict-of-interest allegations were at the heart of the class action complaint, which devotes more than forty pages to the issue of the conflict of interest between SSB's analyst department and its investment banking wing with respect to WorldCom. That the Haik Respondents do not allege the same causes of action, and even bring causes of action that may not have been assertable in the class action, is of no consequence. "The law is well-established in this Circuit and others that class action releases may include claims not presented and even those which could not have been presented as long as the released conduct arises out of the `identical factual predicate' as the settled conduct." Visa, 396 F.3d at 107. Even the Haik Respondents' breach of fiduciary duty, suitability, and overconcentration claims are predicated on the conflict-of-interest allegation, as the Haik Respondents specifically attribute the allocation of securities in their portfolios at least partly to SSB's desire to "benefit[] . . . its profitable investment banking business."

  The fairness of an identical claims release to class members who purchased some portion of their WorldCom securities prior to the Class Period is discussed at length in the 2005 Settlement Opinion. See WorldCom, 2005 WL 2293190, at *18-*20. That Opinion rejected the argument that such purchasers were receiving inadequate compensation for their claims arising from pre-Class Period purchases. Based on the evidence regarding the timeline of the fraud at WorldCom and the low percentage of inflation in WorldCom's stock price attributable to the company's misstated financials at the beginning of the Class Period, it is "highly unlikely that [pre-Class Period purchasers] could establish a factual basis for recovery." Id. at *19. It accordingly cannot be said that the Haik Respondents will receive inadequate compensation for the release of their claims arising from their investments in WorldCom stock prior to the Class Period. It should also be noted that the notice given to the class clearly conveyed that class members needed to opt out if they wished to pursue separate claims against the Citigroup Defendants.*fn4 The December 11, 2003 Notice of Class Action ("Class Notice") described the class claims against the Citigroup Defendants, then known as the Salomon Defendants, including the conflict-of-interest allegations regarding SSB.*fn5 The Class Notice defined the class as "[a]ll persons and entities who purchased or otherwise acquired publicly traded securities of WorldCom during the period beginning April 29, 1999 through and including June 25, 2002, and who were injured thereby," and further stated that "[i]f plaintiffs who have filed Individual WorldCom Actions and meet the definition for Class membership . . . wish to continue to prosecute their Individual WorldCom Actions, they must file a request for exclusion from the class." The Class Notice made clear that if a plaintiff pursuing separate litigation did not request exclusion, "that plaintiff will be precluded from pursuing his Individual WorldCom Action." It was mailed nearly nine months before the eventual opt-out deadline.

  In addition, in an August 2, 2004 Notice of Proposed Settlement of Class Action Against the Citigroup Defendants (the "Citigroup Settlement Notice"), class members were informed of the scope of the Release approximately a month prior to the opt-out deadline. The language of the Release and related portions of the Citigroup Settlement Notice was unambiguous and should similarly have put class members on notice that they needed to opt out of the class if they wished to pursue their claims separately.*fn6 3. Excusable Neglect

  The Haik Respondents also argue that their failure to opt out of the class action should be excused under the doctrine of excusable neglect. See Rule 60(b)(2), Fed.R.Civ.P. A finding of excusable neglect is essentially an equitable determination. Pioneer Investment Servs. Co. v. Brunswick Assocs. Ltd., 507 U.S. 380 (1993). The Supreme Court has enumerated four factors to be considered in connection with a finding of excusable neglect: (1) the danger of prejudice to the party opposing the extension, (2) the length of the delay and its potential impact on judicial proceedings, (3) the reason for the delay, including whether it was within the reasonable control of the party seeking the extension, and (4) whether the party seeking the extension acted in good faith. Id. at 395.

  The Second Circuit has noted that the reason for the delay is the most significant of the four factors, and that in the face of a clear rule, a failure to follow the rule will rarely be excused:

[W]e and other circuits have focused on the third factor: the reason for the delay, including whether it was within the reasonable control of the movant. We have noted that the equities will rarely if ever favor a party who fails to follow the clear dictates of a court rule and held that where the rule is entirely clear, we continue to expect that a party claiming excusable neglect will, in ordinary course, lose under the Pioneer test. Silivanch v. Celebrity Cruises, Inc., 333 F.3d 355, 366-67 (2d Cir. 2003) (citation omitted).
  The Haik Respondents note that Dr. Haik died approximately two months before the December 2003 Class Notice was mailed. After Dr. Haik's death, and as noted above, apparently at the end of October 2004, Charlene Haik sold the family home and moved to a different address. Charlene Haik attests in a signed declaration that neither she nor "to [her] knowledge" any of her children received the Class Notice or any of the later notices. The Haik Respondents also argue that, because the SSB broker servicing the family's accounts was married to Haik's daughter Holly during the time in question, the Citigroup Defendants should have "engage[d] in due diligence as simple as consulting with its own employee, Dr. Haik's son-in-law," to ensure that the Haik Respondents received adequate notice of the class action and ensuing settlement. The records of the class action claims administrator, Garden City Group, indicate that more than seventy notices were sent to the Haik Respondents at three different addresses, including those of Steven Haik and Holly Haik.

  Charlene Haik's declaration is not sufficient to establish that none of the Haik Respondents received notice of the class action, as she makes no representations concerning whether other family members received notice, and evidence submitted by the Citigroup Defendants sheds doubt on Charlene Haik's intimation that her change in residence prevented her from receiving the Class Notice and the Citigroup Settlement Notice. Regardless of whether the Haik Respondents received actual notice, however, they are bound by the terms of the judgment against the Citigroup Defendants. The law is clear that, so long as reasonable steps are taken to provide notice to class members, a class member may be bound by the judgment in a class action even if he or she did not receive actual notice of the action. See Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 314 (1950) (Due process is satisfied if "notice [is] reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections."); In re Prudential Sec. Inc. Ltd. P'Ships Litig., 164 F.R.D. 362, 369 (S.D.N.Y.) ("[N]otice by mail sent to the last known address of the absent class member meets the due process requirement of notice through `reasonable effort' even where numerous class members have since changed addresses and do not receive notice."), aff'd, 107 F.3d 3 (2d Cir. 1996).

  Nor does the fact of Dr. Haik's death compel a finding of excusable neglect. While the circumstances described by the Haik Respondents might have excused a reasonable delay in the return of opt-out forms had the opt-out deadline been impending at the time of Dr. Haik's death, such circumstances do not excuse their failure to opt out of the action at any time prior to the opt-out deadline of September 1, 2004, more than ten months after Dr. Haik died. Cf. In re PaineWebber, Ltd. P'ships Litig., 147 F.3d 132, 135-36 (2d Cir. 1998) (concluding that, although a class member had been hospitalized for six months spanning the notice period and opt-out deadline, it was unnecessary to grant him permission to opt out late, because he did not attempt to do so until nine months after his hospitalization ended). That Holly Haik's former husband worked for SSB and knew of Charlene Haik's address change is of no consequence; the Haik Respondents cite no law to the effect that an individual broker would have been required to take affirmative steps to assure that his clients were informed of the pendency of a class action, and the Lead Plaintiff, not SSB, was responsible for administering the notice to the class.


  The Citigroup Defendants' application for enforcement of the Judgment approving the Citigroup Settlement is granted. The Haik Respondents' claims against SSB arising from their investments in WorldCom securities are enjoined as set forth in the accompanying Order.



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