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In re Omnicom Group

May 1, 2007

IN RE OMNICOM GROUP, INC. SECURITIES LITIGATION


The opinion of the court was delivered by: Richard Conway Casey, United States District Judge*fn1

OPINION & ORDER

I. BACKGROUND

New Orleans Employees' Retirement System ("NORS"), a public pension fund system, is the Lead Plaintiff in this consolidated putative class action against Omnicom Group, Inc. ("Omnicom"); John D. Wren, Omnicom's Chief Executive Officer and President; Randall J. Weisenburger, Omnicom's Executive Vice President and Chief Financial Officer; Bruce Crawford, Chairman of the Board of Directors; and Philip J. Angelastro, Senior Vice President and Controller (together "Defendants"). Plaintiffs allege that Defendants committed securities fraud in violation of §§ 10(b) and 20(a) of the Securities Exchange Act of 1934, causing shareholders of Omnicom common stock to suffer losses.

Pursuant to Rule 23 of the Federal Rules of Civil Procedure ("Rule 23"), NORS now moves for the following: (1) to certify this action as a class action on behalf of "all persons and entities who purchased or otherwise acquired the securities of Omnicom from February 20, 2001 through and including June 11, 2002 (the "Class Period") and who were damaged thereby"*fn2 ("Class"); (2) to appoint Lead Plaintiff NORS as the representative of the Class; and (3) to appoint Bernstein Litowitz Berger & Grossmann LLP as Lead Counsel for the Class. (NORS' Mem. of Law at 21.) For the reasons that follow, the motion is granted in its entirety.

II. FACTS

Plaintiffs alleged three areas of fraud in their Corrected Consolidated Class Action Complaint ("Complaint"), and Defendants moved to dismiss. The Court granted in part and denied in part that motion, leaving one of the claims standing. The remaining claim concerns Omnicom's failure to "write down" overvalued investments and subsequent transfer of these investments to Seneca Investments, LLC ("Seneca"). See generally In re Omnicom Group, Inc. Sec. Litig., 02 Civ. 4483 (RCC), 2005 WL 735937, at *1 (S.D.N.Y. Mar. 30, 2005). The following is a summary of Plaintiffs' factual allegations relevant to the remaining claim in this action.

Omnicom is an advertising holding company that pursued a method of expansion by acquisition; between 1999 and 2002, Omnicom acquired hundreds of other companies through, in part, the issuance of common stock. (Id.) These acquisitions helped Omnicom post thirty-eight consecutive quarters of growth in revenue and earnings, thereby meeting and exceeding Wall Street growth estimates during the Class Period. (Id. ¶¶ 51, 52.)

In or about 1996, Omnicom began investing in Internet-services companies, or "e-services" companies. (Id. ¶ 6.) On Sept. 22, 1996, Omnicom announced that it had agreed to acquire minority participation in five such companies, to be owned and managed by a wholly owned subsidiary of Omnicom called Communicade, Inc. ("Communicade"). (Id. ¶¶ 8, 66.) Communicade, in turn, invested in other e-services companies. (Id. ¶ 66.) Some of these e-services companies in which Omnicom and Communicade invested launched initial public offerings in 1999 and 2000. (Id. ¶¶ 68-70.)

When the Internet market crashed in March 2000, the value of these e-services investments declined. (Id. ¶¶ 6, 71.) This decline meant that Omnicom's earnings from operations would fail to exhibit growth for the first time in close to ten years. (Id. ¶ 6.) In May 2001, one source claimed that Omnicom's Internet investments had depreciated from $2 billion in value to less than $100 million. (Id. ¶ 76.) Plaintiffs allege that Generally Accepted Accounting Principles required that these losses be "written down" because the investments had suffered "serious, non-temporary impairment." (Id. ¶¶ 7, 79, 87, 94.) Instead, Omnicom's 2000 end-of-year financial statements, issued on February 20, 2001, the first day of the proposed Class Period, failed to include these required write downs. (Id. ¶¶ 195(a), (e), (f).) Following this initial disclosure, Omnicom allegedly "engaged in improper accounting machinations so as to remove these investments from their books without causing any negative impact on Omnicom's bottom line." (Id. ¶ 100.)

Plaintiffs allege that in May 2001, as part of this campaign, Omnicom joined with Pegasus Partners II, LP to form Seneca. (Id. ¶¶ 7-8.) Omnicom transferred the now-depreciated e-services investments from Communicade to Seneca; in exchange, Omnicom received preferred non-voting stock in Seneca, valued equally to the amount at which Omnicom was carrying its Internet investments at the time of the transfer. (Id. ¶¶ 8, 9.) Plaintiffs claim that Seneca's creation was a sham designed to obscure Omnicom's true financial state, which entailed losses exceeding $20 million attributable to its investments in e-services companies. (Id. ¶ 9.) By avoiding write downs of these losses, Omnicom's growth streak continued through the fourth quarter of 2000. (Id. ¶¶ 108-10.)

On June 12, 2002, the last day of the proposed Class Period, an article in the Wall Street Journal reported details of Omnicom's relationship with Seneca. (Id. ¶ 141.) Shortly thereafter, the price of Omnicom stock per share fell from $77.25 on June 11, 2002, to $50.94 on June 13, 2002. (Id. ¶¶ 14, 142.)

NORS moves the Court to certify a class of potentially thousands of persons who purchased or acquired Omnicom stock between February 20, 2001 (the date of the 2000 end-of-year financial statements) through and including June 12, 2002 (the date of publication of the Wall Street Journal article).

II. DISCUSSION

Plaintiffs who move for class certification under Rule 23 bear the burden of demonstrating that class certification is appropriate. See, e.g., Caridad v. Metro-North Commuter R.R., 191 F.3d 283, 291 (2d Cir. 1999). Because of the importance of the class action device in securities fraud suits, courts must construe Rule 23's requirements "liberally." Gary Plastic Packaging Corp. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 903 F.2d 176, 179 (2d Cir. 1990), cert. denied, 498 U.S. 1025 (1991). When evaluating a motion for class certification, a court must make factual findings relating to the requirements of Rule 23, but should refrain from evaluating who will prevail on the merits. See Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 177 (1974) (holding that Rule 23 does not give "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").

Rule 23 analysis proceeds in several steps. First, a court must evaluate whether, under Rule 23(a), the proposed class meets four prerequisites: numerosity, commonality, typicality, and adequacy of representation. Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 613 (1997). Second, assuming Rule 23(a)'s prerequisites are met, the Court then inquires whether the action satisfies one of Rule 23(b)'s requirements. Id. at 613-14. Here, Plaintiffs rely on Rule 23(b)(3), which requires that common issues predominate, and that proceeding as a class action be superior to other methods of adjudicating the controversy. Id. at 614. If the proposed class satisfies all of Rule 23(a)'s prerequisites and Rule 23(b)'s requirements, then the class should be certified. The third inquiry concerns definition of the specific class, such as class claims, issues, defenses, and the specific time period that the class covers. Fed. R. Civ. P. 23(c)(1)(B). Finally, a court must address proper administration of the action, including, inter alia, the appointment of class counsel under Rule 23(g) and directing proper notice to absent class members. Fed. R. Civ. P. 23(c). The Court addresses these four issues in turn.

A. Prerequisites to a Class Action Under Rule 23(a)

The Court finds that the proposed Class satisfies all four of Rule 23(a)'s requirements.

1. Numerosity

Rule 23(a) allows for class certification if "the class is so numerous that joinder of all members is impracticable." Fed. R. Civ. P. 23(a)(1). Numerosity tends to exist when the class "consists of forty or more members." In re WorldCom, Inc. Sec. Litig., 219 F.R.D. 267, 279 (S.D.N.Y. Oct. 24, 2003). NORS plausibly claims-without objection from Defendants-that the Class is geographically diverse and "undoubtedly consists of thousands, if not tens of thousands of members," holding some 200 million shares of Omnicom stock. (Lead ...


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