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In re NTL

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK


February 14, 2006

IN RE NTL, INC. SECURITIES LITIGATION

The opinion of the court was delivered by: Andrew J. Peck, United States Magistrate Judge

REPORT AND RECOMMENDATION

This Document Relates to: All Cases

To the Honorable Lewis A. Kaplan, United States District Judge:

Plaintiffs, seeking to represent a class of investors who bought securities of NTL, Inc. on the open market between August 10, 2000 and November 29, 2001 (the "Class Period"), allege that defendants NTL, George S. Blumenthal, J. Barclay Knapp, John F. Gregg, and Stephen Carter violated Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act. (Consol. Am. Class Action Compl. ("Compl.") ¶¶ 1-24, 181-187.) See generally In re NTL, Inc. Sec. Litig. 347 F. Supp. 2d 15, 19-20 (S.D.N.Y. 2004) (Kaplan, D.J.), familiarity with which is assumed.

Presently before the Court is the motion of lead plaintiffs Cheyne Fund LP and Fleck T.I.M.E., LP for class certification pursuant to Rule 23 of the Federal Rules of Civil Procedure. (Dkt. No. 69: 9/7/05 Pls. Class Cert. Br.) Defendants oppose the motion on the ground that both Cheyne and Fleck are subject to unique defenses and therefore cannot satisfy the typicality requirement under Rule 23(a). (Dkt. No. 75: Defs. Opp. Br.) The Court heard oral argument on February 10, 2006. (See 2/10/06 Conf. Tr.) The major issue on the motion is whether the named plaintiffs are "typical" or are subject to unique defenses based on loss causation issues.

For the reasons set forth below, plaintiffs' motion for class certification should be GRANTED. The Court finds that the class complaint adequately alleges that certain negative information about NTL leaked out during the class period, and thus the named plaintiffs can show loss causation and are not atypical.

FACTS

The Allegations in Plaintiffs' Consolidated Amended Class Action Complaint*fn1

During the Class Period, NTL was "a corporation, based in New York, that provide[d] telephone, cable television, Internet, and broadband communications and services to the United Kingdom and the Republic of Ireland, telecommunications services to Switzerland, France, and Australia, and made strategic investments in broadband cable operations in Germany and Sweden." (Compl. ¶ 2; see also id. ¶ 15.) See In re NTL, Inc. Sec. Litig., 347 F. Supp. 2d 15, 19 (S.D.N.Y. 2004) (Kaplan, D.J.). "NTL's common stock successively traded in two efficient markets: (i) the Nasdaq National Market System ('NASDAQ'), until October 27, 2000, at which time NTL's common stock was delisted from that exchange; and (ii) the New York Stock Exchange ('NYSE'), until March 28, 2002, at which time NTL's common stock was delisted from that exchange." (Compl. ¶ 15(a).)

Between 1998 and 2000, NTL acquired eleven companies (id. ¶ 3), primarily through debt financing (id. ¶ 5). See In re NTL, Inc. Sec. Litig., 347 F. Supp. 2d at 19. During that time, "NTL's gross debt increased from $8.9 billion to $15.1 billion." (Compl. ¶ 5.) Defendants made numerous positive statements to the investing public regarding NTL's growth strategy, suggesting "that they were exploiting NTL's scale to manage NTL's balance sheet to increase its flexibility and liquidity." (Id. ¶ 7.) Defendants also represented to the public that "through the successful integration of the acquired businesses, NTL would, among other things, increase its subscriber base, generate more revenue, produce better margins, and lower costs and expenses." (Id.)

In spite of defendants' positive public statements, NTL's larger scale did not result in functional efficiencies. (Id. ¶ 8.) To the contrary, NTL's growth strategy "caused a significant financial strain on the Company, thereby impairing its ability to service its debts." (Id.) To mask the lack of progress in meeting their stated goals, "[d]efendants were manipulating the size of NTL's customer base by, among other means, refusing to honor customer requests to terminate their accounts; acquiring new subscribers through false pretenses . . . ; reconnecting customers whose accounts were previously terminated for non-payment; recruiting customers with poor credit histories by waiving credit requirements; and falsifying customer information to facilitate credit approval by frustrating the credit verification process." (Id.) Because of defendants' manipulation of subscriber growth numbers, NTL did not generate sufficient revenue to support its growth strategy. (Id.) As a result, this "impaired Defendants' capacity to refinance NTL's enormous debt at more favorable terms and/or access the capital markets to secure additional financing." (Id.) As Judge Kaplan described plaintiffs' claims:

This for the most part is not a case involving outright falsehoods. Most of plaintiffs' allegations are to the effect that otherwise routine statements by NTL were materially misleading because defendants failed to disclose NTL's alleged internal problems in order to inflate NTL stock price. These alleged problems fall into two major categories, the allegations of which are premised entirely upon information and belief: (1) difficulties in integrating acquired companies, and (2) problems with the customer base. In addition, plaintiffs in a few instances allege that defendants themselves made affirmative statements or are responsible for affirmative misstatements or material omissions made in third-party analyst reports.

In re NTL, Inc. Sec. Litig., 347 F. Supp. 2d at 20 (fn. omitted).

During the Class Period, defendants made numerous positive public statements regarding the status of NTL's businesses, causing the stock to rise to artificially high prices. (Compl. ¶¶ 72-74, 77, 85-88, 96-97, 99, 104, 113-14, 120, 140, 142-44, 146.) However, the underlying problems also were revealed in part to the public during the class period through various means, including reports on a public internet bulletin board about subscribers' frustrations with the company (id. ¶¶ 64-67),*fn2 news reports (id. ¶¶ 118, 147-49), and analysts' reports of downgrades on NTL's debt (id. ¶ 137: 8/21/01 Moody's report). NTL's stock declined throughout the class period, dropping from $48.0625 on August 5, 2000 (id.¶ 70), to $28.0625 on December 1, 2000 (id. ¶ 99), to $7.30 on July 19, 2001 (id. ¶ 126), to $1.60 on November 29, 2001 (id. ¶ 156). See In re NTL, Inc. Sec. Litig., 347 F. Supp. 2d at 20. By April 2002, the stock had decreased to under a dollar and NTL filed for Chapter 11 protection on May 8, 2002. See In re NTL, Inc. Sec. Litig., 347 F. Supp. 2d at 19 & n.2.*fn3

Cheyne and Fleck "purchased the common stock and debt securities of NTL at artificially inflated or distorted prices during the Class Period, . . . and were damaged thereby." (Compl. ¶ 14.) Plaintiffs claim that defendants violated Section 10(b) of the Exchange Act and Rule 10b-5 because they: "(a) employed devices, schemes, and artifices to defraud; (b) made untrue statements of material facts or omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or (c) engaged in acts, practices, and a course of business that operated as a fraud or deceit upon Lead Plaintiffs and others similarly situated in connection with their purchases of NTL publicly traded securities during the Class Period." (Id. ¶ 183.) Cheyne and Fleck also claim that defendants Blumenthal, Knapp, Gregg and Carter (the "Individual Defendants") were controlling persons of NTL under Section 20(a) of the Exchange Act and caused NTL to engage in the above-described wrongful conduct. (Id. ¶ 187.)

Procedural History

Plaintiffs filed their Consolidated Amended Class Action Complaint on or about October 30, 2002. By Stipulation and Order dated July 31, 2002, Judge Kaplan appointed Cheyne and Fleck as "Lead Plaintiff[s] pursuant to 15 U.S.C. §§ 78u-4(a)(3), and the law firms of Milberg Weiss Bershad Hynes & Lerach LLP and Bernstein Liebhard & Lifshitz, LLP are appointed Lead Counsel pursuant to 15 U.S.C. § 78u-4(a)(3)(B)(iv)." (Dkt. No. 19.)

Defendants moved to dismiss. (Dkt. Nos. 30-32, 39: Defs. Mot. to Dismiss Papers.) By Opinion & Order dated December 6, 2004, Judge Kaplan granted defendants' motion in part and sustained the complaint in part. In re NTL, Inc. Sec. Litig., 347 F. Supp. 2d 15, 38 (S.D.N.Y. 2004), familiarity with which is assumed. (Dkt. No. 46.)

Plaintiffs filed their original motion for class certification on May 10, 2005. (Dkt. Nos. 60-62.) On May 19, 2005, Judge Kaplan referred this case to me for decision of the class certification motion and supervision of discovery relating thereto. (Dkt. No. 63.) On June 27, 2005, plaintiffs withdrew their May 2005 motion without prejudice to renewal after discovery related to class certification. (Dkt. No. 67: 6/27/05 Stip. & Order.) Plaintiffs moved to renew their motion for class certification on September 7, 2005. (Dkt. No. 69.)

Lead Plaintiffs' Motion for Class Certification

Lead Plaintiffs seek "an order that this case be maintained as a class action, on behalf of a class consisting of all persons or entities who purchased or otherwise acquired the publicly-traded securities of [NTL] on the open market (the 'Class') during the period August 10, 2000 and continuing through and including November 29, 2001 (the 'Class Period')."*fn4 (Dkt. No. 69: Pls. Class Cert. Br. at 1.) Defendants oppose the motion, asserting that class certification is improper because both Cheyne and Fleck are subject to unique defenses and therefore cannot satisfy the typicality requirement under Rule 23(a). (Dkt. No. 75: Defs. Opp. Br. at 1-2.) The Court heard oral argument on February 10, 2006. (See 2/10/06 Conf. Tr.)

ANALYSIS

I. PLAINTIFFS' MOTION FOR CLASS CERTIFICATION SHOULD BE GRANTED

The Second Circuit requires a liberal, rather than restrictive, interpretation of Rule 23 of the Federal Rules of Civil Procedure, particularly in securities cases. See, e.g., Marisol A. v. Giuliani, 126 F.3d 372, 377 (2d Cir. 1997) ("'Rule 23 is given liberal rather than restrictive construction, and courts are to adopt a standard of flexibility. . . .'"); accord, e.g., In re Natural Gas Commodities Litig., 231 F.R.D. 171, 178 (S.D.N.Y. 2005); Fogarazzo v. Lehman Bros., Inc., 232 F.R.D. 176, 178-79 (S.D.N.Y. 2005); In re Initial Pub. Offering Sec. Litig., 227 F.R.D. 65, 90 (S.D.N.Y. 2004); In re Towers Fin. Corp. Noteholders Litig., 177 F.R.D. 167 (S.D.N.Y. 1997) (Knapp, D.J. & Peck, M.J.) ("The Second Circuit has announced its preference for class certification in securities fraud litigation, and has directed district courts to liberally interpret Rule 23 class certification requirements.") (citing cases); 5 Moore's Federal Practice § 23.03 (2005). Nevertheless, district courts must undertake a "rigorous analysis" to ensure that Rule 23's requirements have been satisfied. Gen. Tel. Co. of the Sw. v. Falcon, 457 U.S. 147, 161, 102 S. Ct. 2364, 2372 (1982); accord, e.g., Heerwagen v. Clear Channel Commc'ns, No. 04-0699-CV, --- F.3d ---, 2006 WL 45859 at *4 (2d Cir. Jan. 10, 2006); In re Visa Check/MasterMoney Antitrust Litig., 280 F.3d 124, 134-35 (2d Cir. 2001), cert. denied, 536 U.S. 917, 122 S. Ct. 2382 (2002); Fogarazzo v. Lehman Bros., Inc., 232 F.R.D. at 179.

"In ruling on class certification, a district court may not simply accept the allegations of plaintiffs' complaint as true." Fogarazzo v. Lehman Bros., Inc., 232 F.R.D. at 179; accord, e.g., In re Initial Pub. Offering Sec. Litig., 227 F.R.D. at 91-93. "[S]ometimes it may be necessary for the court to probe behind the pleadings before coming to rest on the certification question." Gen. Tel. Co. v. Falcon, 457 U.S. at 160, 102 S. Ct. at 2372; accord, e.g., Fogarazzo v. Lehman Bros., Inc., 232 F.R.D. at 179; In re Initial Pub. Offering Sec. Litig., 227 F.R.D. at 91. "In deciding a certification motion, district courts must not consider or resolve the merits of the claims of the purported class." Caridad v. Metro-North Commuter R.R., 191 F.3d 283, 293 (2d Cir. 1999) (citing Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 177, 94 S. Ct. 2140, 2152 (1974)), cert. denied, 529 U.S. 1107, 120 S. Ct. 1959 (2000); accord, e.g., Heerwagen v. Clear Channel Commc'ns, 2006 WL 45859 at *4; Baffa v. Donaldson, Lufkin & Jenrette Sec. Corp., 222 F.3d 52, 58 (2d Cir. 2000); In re Initial Pub. Offering Sec. Litig., 227 F.R.D. at 93; Bolanos v. Norwegian Cruise Lines Ltd., 212 F.R.D. 144, 154-55 (S.D.N.Y. 2002) (Berman, D.J. & Peck, M.J.). "In order to pass muster, plaintiffs -- who have the burden of proof at class certification --must make 'some showing' [that the class comports with Rule 23]. 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." In re Initial Pub. Offering Sec. Litig., 227 F.R.D. at 93; accord, e.g., Heerwagen v. Clear Channel Commc'ns, 2006 WL 45859 at *9-10; Fogarazzo v. Lehman Bros., Inc., 232 F.R.D. at 179.

"In order to maintain a [securities] class action, Plaintiffs must first establish that they have a valid claim with respect to the shares that they purchased. If the named plaintiffs have no cause of action in their own right, their complaint must be dismissed, even though the facts set forth in the complaint may show that others might have a valid claim." Teamsters Local 445 Freight Div. Pension Fund v. Bombardier Inc., 05 Civ. 1898, 2005 WL 2148919 at *4 (S.D.N.Y. Sept. 6, 2005).

A. The Requirements of Rule 23(a)

Rule 23(a) sets forth the requirements for class certification: "One or more members of a class may sue or be sued as representative parties on behalf of all only if (1) the class is so numerous that joinder of all members is impracticable, (2) there are questions of law or fact common to the class, (3) the claims . . . of the representative parties are typical of the claims . . . of the class, and (4) the representative parties will fairly and adequately protect the interests of the class." Fed. R. Civ. P. 23(a).*fn5 "A class must satisfy all four requirements [of Rule 23(a)] before it may be certified under Rule 23." 5 Moore's Federal Practice § 23.20 at 23-46 (2005).

1. Numerosity

Rule 23(a) requires that the class be "so numerous that joinder of all members is impracticable." Fed. R. Civ. P. 23(a)(1). "[J]oinder of all members need not be impossible, but only impracticable in the sense that joinder would 'needlessly complicate and hinder efficient resolution of the litigation.'" In re Avon Sec. Litig., 91 Civ. 2287, 1998 WL 834366 at *5 (S.D.N.Y. Nov. 30, 1998); accord, e.g., Fogarazzo v. Lehman Bros., Inc., 232 F.R.D. 176, 179 (S.D.N.Y. 2005); In re Indep. Energy Holdings PLC Sec. Litig., 210 F.R.D. 476, 479 (S.D.N.Y. 2002); see generally 5 Moore's Federal Practice § 23.22[1].

"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." Fogarazzo v. Lehman Bros., Inc., 232 F.R.D. at 179; see also, e.g., Marisol A. v. Giuliani, 126 F.3d 372, 376 (2d Cir. 1997); Consol. Rail Corp. v. Town of Hyde Park, 47 F.3d 473, 483 (2d Cir.) ("numerosity is presumed at a level of 40 members"), cert. denied, 515 U.S. 1122, 115 S. Ct. 2277 (1995); Korn v. Franchard Corp., 456 F.2d 1206, 1209 (2d Cir. 1972); The Presbyterian Church v. Talisman Energy, Inc., 226 F.R.D. 456, 466 (S.D.N.Y. 2005) ("Numerosity is presumed when a class consists of forty or more members."); In re Avon Sec. Litig, 1998 WL 834366 at *5 ("In general, 'numbers in excess of forty, particularly those exceeding one hundred or one thousand have sustained the requirement.'"); In re Towers Fin. Corp. Noteholders Litig., 177 F.R.D. 167, 170 (S.D.N.Y. 1997) (Knapp, D.J. & Peck, M.J.) (certifying class of "several thousand investors"); Trief v. Dun & Bradstreet Corp., 144 F.R.D. 193, 198 (S.D.N.Y. 1992); 5 Moore's Federal Practice § 23.22[1][b].

Plaintiffs claim that during the Class Period, "NTL had more than 276 million shares of stock outstanding." (Pls. Class Cert. Br. at 8.) In addition, "NTL common stock was traded on the NYSE and the NASDAQ and was held by thousands of shareholders geographically located throughout the United States and abroad." (Id.; see also Compl. ¶ 15(a).) "In securities litigation, courts generally assume that the numerosity requirement is satisfied for classes of sellers or buyers of nationally traded securities . . ." 5 Moore's Federal Practice § 23.22[3] at 23-72. Defendants do not dispute that the proposed class is sufficiently numerous and that joinder would be impractical. (2/10/06 Oral Arg. Tr. at 19-20; see generally Dkt. No. 75: Defs. Opp. Br.) Plaintiffs plainly satisfy the Rule 23(a)(1) numerosity requirement.

2. Commonality

Commonality requires a showing that "there are questions of law or fact common to the class." Fed. R. Civ. P. 23(a)(2). "'The commonality requirement is met if plaintiffs' grievances share a common question of law or of fact.'" Robinson v. Metro-North Commuter R.R., 267 F.3d 147, 155 (2d Cir. 2001) (quoting Marisol A. v. Giuliani, 126 F.3d 372, 376 (2d Cir.1997)), cert. denied, 122 S. Ct. 1349 (2002).*fn6 This requisite "does not mean that all issues must be identical as to each member, but it does require that plaintiffs identify some unifying thread among the members' claims that warrants class treatment." Kamean v. Local 363, Int'l Bhd. of Teamsters, 109 F.R.D. 391, 394 (S.D.N.Y.), appeal dismissed, 833 F.2d 1002 (2d Cir. 1986), cert. denied, 481 U.S. 1024, 107 S. Ct. 1911, 95 (1987).*fn7 The "commonality requirement [is] satisfied if the class shares even one common question of law or fact," and "factual differences in the claims of the class do not preclude a finding of commonality." 5 Moore's Federal Practice § 23.23[2]; accord, e.g., Bolanos v. Norwegian Cruise Lines Ltd., 212 F.R.D. at 153.

"The commonality requirement has been applied permissively in securities fraud litigation." Fogarazzo v. Lehman Bros., Inc., 232 F.R.D. 176, 180 (S.D.N.Y. 2005); accord, e.g., In re Initial Pub. Offering Sec. Litig., 227 F.R.D. 65, 87 (S.D.N.Y. 2004). "In general, where putative class members have been injured by similar material misrepresentations and omissions, the commonality requirement is satisfied." Fogarazzo v. Lehman Bros., Inc., 232 F.R.D. at 180; accord, e.g., In re Initial Pub. Offering Sec. Litig., 227 F.R.D. at 87. "This "common question" requirement has been characterized as a 'low hurdle.'" In re Natural Gas Commodities Litig., 231 F.R.D. 171, 180 (S.D.N.Y. 2005) (citing cases); see also 5 Moore's Federal Practice § 23.23[2] at 23-74.

Plaintiffs state that the common legal and factual issues include whether:

(i) defendants violated the Securities Exchange Act of 1934; (ii) defendants omitted and/or misrepresented material facts about NTL, its subscribers, operations, and financial condition; (iii) defendants' statements omitted material facts necessary to make the statements made, in light of the circumstances under which they were made, not misleading; (iv) defendants knew or recklessly disregarded that their statements were materially false and misleading; (v) the prices of NTL's publicly-traded securities were artificially inflated; and (vi) Lead Plaintiffs and the Class sustained damages, and, if so, the appropriate measure of damages. (Dkt. No. 69: Pls. Class Cert. Br. at 10; see Compl. ¶ 27.) Defendants do not dispute that plaintiffs' claims share common questions of law and fact. (2/10/06 Oral Arg. Tr. at 19-20; see generally Dkt. No. 75: Defs. Opp. Br.)

Plaintiffs clearly satisfy the Rule 23(a)(2) commonality requirement.

3. Typicality

Typicality under Rule 23(a) "requires that the claims of the class representatives be typical of those of the class, and 'is satisfied when each class member's claim arises from the same course of events, and each class member makes similar legal arguments to prove the defendant's liability.'" Marisol A. v. Giuliani, 126 F.3d 372, 376 (2d Cir. 1997) (quoting In re Drexel Burnham Lambert Group, Inc., 960 F.2d 285, 291 (2d Cir. 1992)).*fn8 "The commonality and typicality requirements of Rule 23(a) tend to merge. Both serve as guideposts for determining whether under the particular circumstances maintenance of a class action is economical and whether the named plaintiff's claim and the class claims are so interrelated that the interests of the class members will be fairly and adequately protected in their absence." Gen. Tel. Co. v. Falcon, 457 U.S. 147, 158 n.13, 102 S. Ct. 2364, 2371 n.13 (1982).*fn9

"'While it is settled that the mere existence of individualized factual questions with respect to the class representative's claim will not bar class certification, class certification is inappropriate where a putative class representative is subject to unique defenses which threaten to become the focus of the litigation.'" Baffa v. Donaldson, Lufkin & Jenrette Sec. Corp., 222 F.3d 52, 59 (2d Cir. 2000).*fn10 "However, 'the rule barring certification of plaintiffs subject to unique defenses is not rigidly applied in this Circuit'; it has generally been applied only where a full defense is available against an individual plaintiff's action." Koppel v. 4987 Corp., 191 F.R.D. at 365 (quoting In re Frontier Ins. Group, Inc. Sec. Litig., 172 F.R.D. 31, 41 (E.D.N.Y. 1997)). The unique defense rule is "intended to protect [the] plaintiff class --not to shield defendants from a potentially meritorious suit." Trief v. Dun & Bradstreet Corp., 144 F.R.D. 193, 200-01 (S.D.N.Y. 1992); accord, e.g., Koppel v. 4987 Corp., 191 F.R.D. at 365. "[I]t is beyond reasonable dispute that a representative may satisfy the typicality requirement even though that party may later be barred from recovery by a defense particular to him that would not impact other class members." Trief v. Dun & Bradstreet Corp., 144 F.R.D. at 200-01; accord, e.g., Koppel v. 4987 Corp., 191 F.R.D. at 365; In re Frontier Ins. Group Inc. Sec. Liig., 172 F.R.D. at 41. "For example, the possibility that proof of injury might require separate evaluations of the artificiality of a commodities [or stock] price at the moments affecting each of the class members need not defeat class certification." In re WorldCom, Inc. Sec. Litig., 219 F.R.D. 267, 280 (S.D.N.Y. 2003).

Lead Plaintiffs Cheyne and Fleck assert that their claims are typical of those of the class because "they arise out of the same uniform pattern of NTL's conduct, including the dissemination of materially false and misleading statements about NTL's business operations and financial condition." (Dkt. No. 69: Pls. Class Cert. Br. at 12.) Additionally, Cheyne and Fleck allege that, similar to the rest of the proposed class, they have been financially injured as a result of the defendants' actions. (Id.)

Defendants challenge class certification solely on the basis that Cheyne and Fleck both are purportedly subject to unique defenses that destroy their typicality under Rule 23(a). (Dkt. No. 75: Defs. Opp. Br. at 6.) Defendants claim that Cheyne "is subject to unique defenses concerning loss causation because it sold all of its NTL securities long before the alleged truth about NTL's financial condition was revealed and, thus, its claims are atypical of the putative class." (Id.)

Defendants argue that Fleck is subject to two different unique defenses which destroy typicality under Rule 23(a). (Defs. Opp. Br. at 6.) First, Defendants state that Fleck cannot prove loss causation because it "sold all of its NTL securities before November 14, 2001, the latest date supported by the factual allegations of the Complaint with respect to the end point for the class period." (Id.) Second, because Fleck was a "net-seller of NTL securities during the class period," defendants claim that Fleck "therefore does not have standing to assert the class claims." (Id.)

a. Loss Causation

"To state a claim for relief under § 10(b) and Rule 10b-5, plaintiffs must allege that [defendants] '(1) made misstatements or omissions of material fact; (2) with scienter; (3) in connection with the purchase or sale or securities; (4) upon which plaintiffs relied; and (5) that plaintiffs' reliance was the proximate cause of their injury.'" Lentell v. Merril Lynch & Co., 396 F.3d 161, 172 (2d Cir.) (quoting In re IBM Corp. Sec. Litig., 163 F.3d 102, 106 (2d Cir. 1998)), cert. denied, 126 S. Ct. 421 (2005); see also, e.g., Dura Pharm., Inc. v. Broudo, 125 S. Ct. 1627, 1631 (2005). To prove proximate cause, "a securities-fraud plaintiff 'must prove both transaction and loss causation.'" Lentell v. Merril Lynch & Co., 396 F.3d at 172 (quoting First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763, 769 (2d Cir. 1994), cert. denied, 513 U.S. 1079, 115 S. Ct. 728 (1995)); accord, e.g., Emergent Capital Inv. Mgmt., LLC v. Stonepath Group, Inc., 343 F.3d 189, 196-97 (2d Cir. 2003); Suez Equity Investors, L.P. v. Toronto-Dominion Bank, 250 F.3d 87, 95 (2d Cir. 2001); Citibank, N.A. v. K-H Corp., 968 F.2d 1489, 1495 (2d Cir. 1992). Loss causation "is the causal link between the alleged misconduct and the economic harm ultimately suffered by the plaintiff."

Emergent Capital Inv. Mgmt., LLC v. Stonepath Group, Inc., 343 F.3d at 197; accord, e.g., Lentell v. Merril Lynch & Co., 396 F.3d at 172; Suez Equity Investors, L.P. v. Toronto-Dominion Bank, 250 F.3d at 95-96; 15 U.S.C. § 78u-4(b)(4).

To establish loss causation in a case involving allegations of material misrepresentations and omissions, "a plaintiff must allege . . . that the subject of the fraudulent statement or omission was the cause of the actual loss suffered." Suez Equity Investors, L.P. v. Toronto-Dominion Bank, 250 F.3d at 95; accord, e.g., Lentell v. Merril Lynch & Co., 396 F.3d at 173; see also, e.g., Dura Pharm., Inc. v. Broudo, 125 S. Ct. at 1633-34. It is not enough for a plaintiff to merely allege that, at the time of plaintiff's purchase of a security, the price of that security was artificially inflated as a result of a defendant's misrepresentation. Dura Pharm., Inc. v. Broudo, 125 S. Ct. at 1633-34; Lentell v. Merril Lynch & Co., 396 F.3d at 174; Emergent Capital Inv. Mgmt., LLC v. Stonepath Group, Inc., 343 F.3d at 198.*fn11 Instead, a plaintiff "may do one of two things to sufficiently allege loss causation. 'Where the alleged misstatement conceals a condition or event which then occurs and causes the plaintiff's loss,' a plaintiff may plead that it is 'the materialization of the undisclosed condition or event that causes the loss.' Alternatively, a plaintiff may identify particular 'disclosing event[s]' that reveal the false information, and tie dissipation of artificial price inflation to those events." Catton v. Def. Tech. Sys., Inc., 05 Civ. 6954, 2006 WL 27470 at *5 (S.D.N.Y. Jan. 3, 2006) (quoting In re Initial Pub. Offering Sec. Litig., 399 F. Supp. 2d 298, 307 (S.D.N.Y. 2005)).*fn12

The Complaint alleges that defendants made numerous positive statements to the public throughout the Class Period regarding NTL's subscriber numbers and ability to service its debt obligations, when, in fact, NTL had very serious subscriber retention problems, which in turn led to a lack of revenue with which to service the debt obligations. (See pages 3-4 above.) The Complaint also alleges that there were several "disclosing events" throughout the class period, which gradually alerted investors to the truth about NTL's underlying problems. (See page 4 above.) At least one or more of these disclosing events occurred prior to Cheyne's final sale of NTL securities on July 16, 2001, and several of these disclosing events occurred prior to Fleck's final sale of NTL securities on November 30, 2001. (See Compl. ¶¶ 64-67, 137, 147-49; see page 4 above.) Plaintiffs have linked these gradual disclosing events to a slow dissipation in the value of NTL's stock, demonstrating that throughout the Class Period, NTL's stock dropped from a high of $48.0625 on August 5, 2000 (id. ¶ 70), to $1.60 on November 29, 2001 (id. ¶ 156). As a result of this decline, Cheyne claims losses of more than $1.8 million and Fleck claims losses of more than $1.4 million. (Dkt. No. 21: Compl. Exs.: Cheyne & Fleck Share Charts.)

Because Lead Plaintiffs have made "some showing" that these disclosing events slowly revealed the false information regarding NTL and have tied some if not all of the dissipation in the value of NTL's stock to those events, they have adequately plead loss causation.*fn13 E.g., In re Bearingpoint, Inc. Sec. Litig., No. Civ. A. 1:05CV454, --- F.R.D. ---, 2006 WL 141667 (E.D. Va. Jan. 17, 2006) ("[A]lthough in-and-out traders often have no associated damage because they purchased and sold at prices with the same artificial inflation, this is not always the case. In cases where, as here, there are multiple disclosures, in-and-out traders may well be able to show a loss. Moreover, it is also conceivable that the inflationary effect of a misrepresentation might well diminish over time, even without a corrective disclosure, and thus in-and-out traders in this circumstance would be able to prove loss causation.") (citations omitted); see, e.g., Emergent Capital Inv. Mgmt., LLC v. Stonepath Group, Inc., 343 F.3d at197-98 (loss causation properly alleged where complaint suggested that defendants artificially inflated the stock prices of the companies, sold their own stock in those companies at high profits, and thereafter allowed the stock prices to decline, i.e., a "pump and dump" scheme); Suez Equity Investors, L.P. v. Toronto-Dominion Bank, 250 F.3d at 96-98 (loss causation properly alleged where complaint asserted that misrepresentations in a public announcement regarding ability to manage complex debt loads led plaintiffs to purchase the company's securities at artificially high prices, and company's eventual liquidity problems resulting from the debt loads caused plaintiffs' losses); In re GeoPharma, Inc. Sec. Litig., 399 F. Supp. 2d at 453 (plaintiffs sufficiently plead loss causation where complaint alleged that pharmaceutical company made false or misleading statements regarding FDA approval of a new product, which caused artificial inflation of stock, followed by dissipation of that inflation after corrective disclosures); Teamsters Local 445 Freight Div. Pension Fund v. Bombardier Inc., 2005 WL 2148919 at *12 (plaintiff adequately plead loss causation where complaint alleged that a "risk that was concealed by the defendants materialized in a foreseeable chain of events," that is, defendants conceded that "the collateral pool contained a substantial number of high risk loans," the "concealed risk materialized when the collateral pool experienced high delinquency rates," the company announced it wrote off the losses and as a result the value of plaintiff's investment declined.).*fn14

Lead Plaintiffs therefore are not subject to a unique defense related to loss causation sufficient to destroy typicality for purposes of class certification.*fn15

b. Fleck's Sales During the Class Period

Defendants assert that Fleck is an atypical lead plaintiff because it was a "net-seller" of NTL securities during the Class Period, and that therefore it suffered no injury and instead benefitted from the alleged fraud. (Dkt. No. 75: Defs. Opp. Br. at 15-17.) Assuming arguendo for purposes of this test that the class period runs, as defendants contend, from August 10, 2000 to only November 14, 2001, Fleck has suffered a loss, not a "benefit" from the alleged fraud. Indeed, at oral argument defendants conceded that their net loss argument is based on their view -- which the Court is rejecting --that all declines in the stock price from the beginning of the class period until NTL's November 14, 2001 Form 10Q were caused by external market forces, and that if the "leakage" theory of causation is applicable, Fleck is able to show loss causation, at least at this stage of the case. (See 2/10/06 Oral Arg. Tr. at 18-19.) As noted above, the Court has concluded that the complaint adequately alleges the "leakage" theory. The Court therefore need not further analyze and discuss this issue. Nevertheless, the Court will briefly further discuss Fleck's "net seller" losses.

Fleck purchased a total of 162,790 shares during "defendants' class period." (See Defs. Opp. Br. at 12; Dkt. No. 74: Momborquette Aff. Ex. B: Fleck Dep. Ex. 12 at 1; Compl. Ex.: Fleck Share Chart at 1-2.) Fleck's purchases of the 162,790 shares during "defendants' class period" cost $2,718,544.10. (Compl. Ex.: Fleck Share Chart.) Fleck sold 218,500 shares during the same period (id.), making it a "net seller" of 55,710 shares (those shares were purchased by Fleck before the "defendants' class period"). Even though Fleck sold more shares than it purchased, Fleck received only $1,434,331.50 for the 218,500 shares sold. (Id.) Thus, it lost $1,284,212.60 during the class period (id.), even if the pre-period shares sold during the period had a $0 basis (which of course they did not).*fn16

Some of that loss may be attributable to general stock market declines or decreases in NTL's stock price unrelated to the alleged fraud. The Court cannot determine how much of Fleck's loss is attributable to the alleged fraud and how much is attributable to other factors for which defendants are not liable. (See discussion at pages 18-21 above.) But this same question will have to be determined for the class as a whole -- it is not unique to Fleck (or Cheyne).

Defendants' "net seller" argument as to Fleck assumed that until the November 14, 2001 Form 10Q, all of the decline in NTL's share price was caused solely by market factors unrelated to the alleged fraud, so that Fleck was not harmed at all by the alleged fraud. (See 2/10/06 Oral Arg. Tr. at 18.) If plaintiffs' claims were based solely on a single triggering event (whether November 14 or November 29, 2001), defendants' argument would be valid. Plaintiffs, however, allege several disclosing events throughout the class period that gradually alerted investors to the truth about NTL. (See page 4 above.) Accordingly, Fleck's situation is typical of others in the class -- a need to show the drop in NTL's share price during the class period was not attributable to general factors but to "dribbled" disclosures or "leakage" of truthful information regarding NTL's prior misrepresentations and/or omissions.

Defendants have not shown that Fleck's net sales of NTL stock destroys its typicality for the purposes of class certification.

Lead Plaintiffs have established typicality.

4. Adequacy of Representation

Plaintiffs must also show that "the representative parties will fairly and adequately protect the interests of the class." Fed. R. Civ. P. 23(a)(4). "Under Rule 23(a)(4), adequacy of representation is measured by two standards. First, class counsel must be 'qualified, experienced and generally able' to conduct the litigation. Second, the class members must not have interests that are 'antagonistic' to one another." In re Drexel Burnham Lambert Group, Inc., 960 F.2d 285, 291 (2d Cir. 1992); accord, e.g., Baffa v. Donaldson, Lufkin & Jenrette Sec. Corp., 222 F.3d 52, 60 (2d Cir. 2000); Marisol A. v. Giuliani, 126 F.3d 372, 378 (2d Cir. 1997).*fn17 As a result of the 2003 amendments to the Federal Rules of Civil Procedure, however, the issue of appropriate class counsel is guided by Rule 23(g) rather than Rule 23(a)(4). See 2003 Advisory Comm. Notes to Rule 23 ("Rule 23(a)(4) will continue to call for scrutiny of the proposed class representative, while [Rule 23(g)] will guide the court in assessing proposed class counsel as part of the certification decision."); accord, e.g., Jones v. Ford Motor Credit Co., 00 Civ. 8330, 2005 WL 743213 at *18 (S.D.N.Y. Mar. 31, 2005); see 5 Moore's Federal Practice § 23.25[3]. The Court nonetheless will briefly discuss both here.

Class representatives cannot satisfy the 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 interests of the attorneys.'" Baffa v. Donaldson, Lufkin & Jenrette Sec. Corp., 222 F.3d at 61 (quotation omitted); accord, e.g., Fogarazzo v. Lehman Bros., Inc., 232 F.R.D. at 181; see 5 Moore's Federal Practice § 23.25[2][c]. "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.'" Fogarazzo v. Lehman Bros., Inc., 232 F.R.D. at 181 (quoting In re AM Int'l, Inc. Sec. Litig., 108 F.R.D. 190, 196-97 (S.D.N.Y. 1985)); see 5 Moore's Federal Practice § 23.25[2][c][ii]. "[I]n determining the adequacy of counsel, the court looks beyond reputation built upon past practice and examines counsel's competence displayed by present performance." Bolanos v. Norwegian Cruise Lines Ltd., 212 F.R.D. at 156 (internal quotations omitted); accord, e.g., In re Towers Fin. Corp. Noteholders Litig., 177 F.R.D. at 171; In re Frontier Ins. Group, Inc. Sec. Litig., 172 F.R.D. 31, 44 (E.D.N.Y. 1997).

Defendants do not challenge the adequacy of the Lead Plaintiffs, except as to the typicality issue discussed above. (See 2/10/06 Oral Arg. Tr. at 19-20; see generally Dkt. No. 75: Defs. Opp. Br.) Defendants also do not challenge the adequacy of class counsel. (See id.) The Court has closely supervised extensive discovery practice in this action; plaintiffs' counsel have shown that they are qualified and competent and have the ability to represent the class.*fn18

B. The Requirements of Rule 23(b)

"In addition to satisfying Rule 23(a)'s prerequisites, parties seeking class certification must show that the action is maintainable under Rule 23(b)(1), (2), or (3)." Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 614, 117 S. Ct. 2231, 2245 (1997).*fn19

Plaintiffs here seek certification under Rule 23(b)(3). (Dkt. No. 69: Pls. Class Cert. Br. at 7, 20-24.) Rule 23(b)(3) states that: "An action may be maintained as a class action if the prerequisites of [Rule 23(a)] are satisfied, and in addition . . . the court finds that the questions of law or fact common to the members of the class predominate over any questions affecting only individual members, and that a class action is superior to other available methods for the fair and efficient adjudication of the controversy." Fed. R. Civ. P. 23(b); see generally Amchem Prods., Inc. v. Windsor, 521 U.S. at 715-16, 117 S. Ct. at 2246; Heerwagen v. Clear Channel Commc'ns, 2006 WL 45859 at *4; 5 Moore's Federal Practice § 23.44.

1. 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.'" In re Visa Check/MasterMoney Antitrust Litig., 280 F.3d 124, 136 (2d Cir. 2001), cert. denied, 536 U.S. 917, 122 S. Ct. 2382 (2002); accord, e.g., Heerwagen v. Clear Channel Commc'ns, No. 04-0699-CV, --- F.3d ---, 2006 WL 45859 at *4 (2d Cir. Jan. 10, 2006); Fogarazzo v. Lehman Bros., Inc., 232 F.R.D. 176, 181-82 (S.D.N.Y. 2005). Ultimately, "[t]he Rule 23(b)(3) predominance inquiry tests whether proposed classes are sufficiently cohesive to warrant adjudication by representation." Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 623, 117 S. Ct. 2231, 2249 (1997).*fn20 "Predominance is a test readily met in certain cases alleging consumer or securities fraud . . . ." Amchem Prods., Inc. v. Windsor, 521 U.S. at 625, 117 S. Ct. at 2250; accord, e.g., Fogarazzo v. Lehman Bros., Inc., 232 F.R.D. at 182.

"Common issues may predominate when liability can be determined on a class-wide basis, even when there are some individualized damage issues." In re Visa Check/MasterMoney Antitrust Litig., 280 F.3d at 139; accord, e.g., Bolanos v. Norwegian Cruise Lines Ltd., 212 F.R.D. at 157. "When determining whether common questions predominate courts 'focus on the liability issue . . . and if the liability issue is common to the class, common questions are held to predominate over individual questions.'" Genden v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 114 F.R.D. 48, 52 (S.D.N.Y. 1987); accord, e.g., Bolanos v. Norwegian Cruise Lines Ltd., 212 F.R.D. at 158; see 5 Moore's Federal Practice § 23.45[2][a].

Here, plaintiffs' class claims are based on defendants' alleged violations of Section 10(b) and 20(a) of the Exchange Act and Rule 10b-5 through misrepresentations and/or omissions to the market as a whole. (See page 5 above.) Defendants do not contest predominance. (See 2/10/06 Oral Arg. Tr. at 19-20; see generally Dkt. No. 75: Defs. Opp. Br.) The Rule 23(b)(3) predominance requirement is satisfied here.

2. Superiority

Rule 23(b)(3) sets forth a non-exclusive list of factors pertinent to the Court's inquiry into the superiority of a class action:

(A) the interest of members of the class in individually controlling the prosecution or defense of separate actions;

(B) the extent and nature of any litigation concerning the controversy already commenced by . . . members of the class;

(C) the desirability or undesirability of concentrating the litigation of the claims in the particular forum;

(D) the difficulties likely to be encountered in the management of a class action. Fed. R. Civ. P. 23(b)(3); see generally 5 Moore's Federal Practice § 23.46[2][a].

The Court is not aware of any individual plaintiffs who are interested in "individually controlling the prosecution . . . of separate actions," or of any pending litigation by any class member against defendants, except the Gordon action (02 Civ. 7377) already consolidated with this action. The interests of justice will be well served by resolving the common disputes of potential class members in one forum. Judge Kaplan and I are familiar with the intricacies of this litigation, having ruled on various motions and having managed discovery. The action is manageable as a class action. See, e.g., In re Visa Check/MasterMoney Antitrust Litig., 280 F.3d 124, 140-41 (2d Cir. 2001) (failure to certify under (b)(3) is "disfavored and should be the exception rather than the rule") (internal quotations omitted), cert. denied, 536 U.S. 917, 122 S. Ct. 2382 (2002); Korn v. Franchard Corp., 456 F.2d 1206, 1214 (2d Cir. 1972); Green v. Wolf Corp., 406 F.2d 291, 301 (2d Cir.1968), cert. denied, 395 U.S. 977, 89 S. Ct. 2131 (1969); Bolanos v. Norwegian Cruise Lines Ltd., 212 F.R.D. 144, 158 (S.D.N.Y. 2002) (Berman, D.J. & Peck, M.J.); In re Towers Fin. Corp. Noteholders Litig., 177 F.R.D. 167, 172 (S.D.N.Y. 1997) (Knapp, D.J. & Peck, M.J.). "The Court is not convinced that any unique manageability problems exist in this proceeding . . ." In re Natural Gas Commodities Litig., 231 F.R.D. 171, 185 (S.D.N.Y. 2005). Defendants do not contest the superiority of a class action to individual actions. (2/10/06 Oral Arg. Tr. at 19-20; see generally Defs. Opp. Br.) A class action is the superior method of adjudication here.

C. Defendants' Request to Change the Class Period End Date Should Be Denied

Defendants assert that the end of the Class Period should be November 14, 2001, rather than Lead Plaintiffs' proposed end date of November 29, 2001. (Dkt. No. 75: Defs. Opp. Br. at 12-14.) Defendants argue that NTL's last corrective disclosure was its November 14, 2001 Form 10-Q; Moody's November 29, 2001 downgrade of NTL's rating was not a corrective disclosure because it did not introduce any more information about NTL to the public; and therefore the end date of the Class Period should be November 14, 2001. (Id. at 14.) Plaintiffs claim that there is no factual evidence demonstrating that the Moody's downgrade was based only on previously-released information regarding NTL in the Form 10Q, and suggest that the downgrade may have been based partially on confidential corporate information made available only to debt rating agencies such as Moody's, and therefore that the November 29, 2001 downgrade may have been a corrective disclosure. (Dkt. No. 77: Pls. Class Cert. Reply Br. at 9.) Plaintiffs also argue that the information released in the November 14, 2001 Form 10Q may not have been adequately "translate[d]" for the market until the Moody's downgrade of NTL's rating. (Pls. Class Cert. Reply Br. at 9-10.)

"While the duration of the class period should be based on something more than the non-frivolous allegations set forth in the complaint, this Court need not address the merits of the Plaintiff's individual claim in order to determine the period." In re Oxford Health Plans, Inc., 191 F.R.D. 369, 378 (S.D.N.Y. 2000); accord, e.g., Sirota v. Solitron Devices, Inc., 673 F.2d 566, 572 (2d Cir.), cert. denied, 459 U.S. 838, 103 S. Ct. 86 (1982); Nathan Gordon Trust v. Northgate Exploration, Ltd., 148 F.R.D. 105, 108 (S.D.N.Y. 1993). The Class Period properly ends "when the full truth has been disclosed to the market and the natural market forces have had a reasonable period of time to receive, digest and reflect the bad news in the market price of the security." In re Oxford Health Plans, Inc., 191 F.R.D. at 378 (emphasis in original); accord, e.g., Dorchester Investors v. Peak Trends Trust, 99 Civ. 4696, 2002 WL 272404 at *5 (S.D.N.Y. Feb. 26, 2002). "[A] class period should not be cut off if questions of fact remain as to whether the disclosures completely cured the market." In re WorldCom, Inc. Sec. Litig., 219 F.R.D. 267, 307 (S.D.N.Y. 2003); see Sirota v. Solitron Devices, Inc., 673 F.2d at 572.

Factual questions clearly remain as to whether the November 14, 2001 Form 10Q alone or in combination with the November 29, 2001 Moody's disclosure completely cured the market. This Court accepts at this time, subject to later modification, the Class Period as set forth by Lead Plaintiffs, in preference to the shorter class period suggested by defendants, which would require this Court to adjudicate in advance of trial when the market had digested fully NTL's corretive disclosure.

CONCLUSION

For the reasons set forth above, the Court should certify the class.

FILING OF OBJECTIONS TO THIS REPORT AND RECOMMENDATION

Pursuant to 28 U.S.C. § 636(b)(1) and Rule 72(b) of the Federal Rules of Civil Procedure, the parties shall have ten (10) days from service of this Report to file written objections. See also Fed. R. Civ. P. 6. Such objections (and any responses to objections) shall be filed with the Clerk of the Court, with courtesy copies delivered to the chambers of the Honorable Lewis A. Kaplan, 500 Pearl Street, Room 1310, and to my chambers, 500 Pearl Street, Room 1370. Any requests for an extension of time for filing objections must be directed to Judge Kaplan. Failure to file objections will result in a waiver of those objections for purposes of appeal. Thomas v. Arn, 474 U.S. 140, 106 S.Ct. 466 (1985); IUE AFL-CIO Pension Fund v. Herrmann, 9 F.3d 1049, 1054 (2d Cir. 1993), cert. denied, 513 U.S. 822, 115 S.Ct. 86 (1994); Roldan v. Racette, 984 F.2d 85, 89 (2d Cir. 1993); Frank v. Johnson, 968 F.2d 298, 300 (2d Cir.), cert. denied, 506 U.S. 1038, 113 S.Ct. 825 (1992); Small v. Secretary of Health & Human Servs., 892 F.2d 15, 16 (2d Cir. 1989); Wesolek v. Canadair Ltd., 838 F.2d 55, 57-59 (2d Cir. 1988); McCarthy v. Manson, 714 F.2d 234, 237-38 (2d Cir. 1983); 28 U.S.C. § 636(b)(1); Fed. R. Civ. P. 72, 6(a), 6(e).

Andrew J. Peck United States Magistrate Judge


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