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.
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.)
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.)
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 ...