The opinion of the court was delivered by: Seybert, District Judge
Pending before the Court is a motion for class certification by the proposed Lead Plaintiffs, REG Partners, LLP*fn2 ("REG") and Robert Herpst ("Herpst") (collectively, "Lead Plaintiffs"), pursuant to Rule 23 of the Federal Rules of Civil Procedure. For the reasons that follow, the Court DENIES the motion for class certification without prejudice, and with leave to renew. Plaintiffs may put forth alternate proposed lead plaintiffs within sixty days of the issuance of this Memorandum & Order.
Lead Plaintiffs are the proposed class representatives for all those who purchased Allou Class A common shares during the class period. (Pls' Mem. in Supp. Of Class Cert. 2). Allou was a public company, and was traded on the American Stock Exchange ("AMEX") during the proposed class period. (3d Consol. Compl. ¶ 15). It distributed various personal care products and prescription pharmaceuticals to major retailers. (Id. ¶ 15).
Until June 24, 2001, Mayer Rispler & Co., P.C. was Allou's auditor and issued reports for the fiscal year ended March 31, 2000, certifying that the financial statements had been audited in accordance with Generally Accepted Accounting Standards ("GAAS"). (Id. ¶ 30). Mayer Rispler also certified, that in its opinion, the financial position of Allou was fairly represented and in accordance with Generally Accepted Accounting Principles ("GAAP"). (Id. ¶ 30). Arthur Andersen was the independent auditor for Allou for the fiscal year that ended March 31, 2001. (Id. ¶ 31). Andersen also issued similar certification reports, reflecting the financial situation of Allou, for that year. (Id. ¶ 31). In addition, Andersen reviewed the financial reports that were included in Allou's Quarterly Reports filed with the Securities and Exchange Commission ("SEC") on Form 10-Q in 2001 and 2002. (Id. ¶ 31). KPMG then became the independent auditor, issuing unqualified reports for the fiscal year ended March 31, 2002. (Id. ¶ 33).
On the night of September 25, 2002, a fire destroyed Allou's Brooklyn warehouse that had been used to store inventory. (Id. ¶¶ 7, 57). Allou had insurance on the inventory including the profit that could be made based on the value of the inventory. On November 7, 2002, the New York City Fire Department finished its investigation, and concluded that the fire was the result of arson. (Id. ¶¶ 7, 57). Over the next few months, Allou was unable to resolve its over $100 million insurance claim regarding the warehouse fire. (Id. ¶ 57).
On April 9, 2003, Allou's lenders forced the company into an involuntary Chapter 11 bankruptcy. (Id. ¶ 61). The lenders had uncovered a large scale fraud that Allou had inflated inventory and accounts receivable through the creation of a fictitious salesperson. (Id. ¶¶ 3, 45). The company had then borrowed money from the lenders based on these inflated numbers. AMEX halted the trading of Allou's stock shortly after the bankruptcy announcement. (Id. ¶ 9).
II. Procedural Background
Beginning May 1, 2003, seventeen class action securities complaints were filed in the Eastern District of New York. On September 18, 2003, the Court ordered the consolidation of these actions. William D. Witter Partners, LLP (now REG Partners, LLP), Robert Herpst, and David Hust were appointed as lead plaintiffs.*fn3
Abbey Spanier Rodd & Abrams, LLP were appointed as lead counsel for the consolidated action.
The Court dismissed Plaintiffs' First Amended Complaint on September 17, 2004, but granted leave to amend. On September 30, 2005, the Court dismissed in part the Second Amended Complaint and granted leave for Plaintiffs to amend. On September 30, 2007, the Court granted in part the motion to dismiss the Third Amended Complaint. Finally, on October 19, 2006, the Court approved a settlement and dismissed with prejudice the action between Lead Plaintiffs and Defendants Sol Naimark, Jeffery Berg, and Stuart Glasser.
Plaintiffs' current claims allege that the Auditors knew, or recklessly disregarded, the falsity of Allou's financial statements. (3d Consol. Compl. ¶ 34). In support of these claims, Plaintiffs assert that the Auditors were reckless because of deviations from appropriate audit standards, and that, if performed correctly, the audits would have revealed the fraud. (Id. ¶ 34). In their current application, Plaintiffs seek to certify a class of all owners of Allou Class A common shares for the time period of June 21, 2000 through April 9, 2003. As of the date of the application for Class Certification, Plaintiffs sought to hold (1) Mayer Rispler liable for the period from June 21, 2000 to April 9, 2003; (2) Arthur Andersen liable for the period of July 2, 2001 through April 9, 2003; (3) KPMG liable for the period from July 1, 2002 through April 9, 2003 (collectively "Auditors"). (Pls' Mem. in. Supp. of Class Cert. 2). Currently, however, Plaintiffs have sought to settle their claims with Mayer Rispler, so only Arthur Andersen and KPMG oppose this motion.
To be certified as a class, Plaintiffs must satisfy the requirements of Rule 23 of the Federal Rules of Civil Procedure. Each requirement of Rule 23 must be established by a preponderance of the evidence. See Teamsters Local 445 Freight Division Pension Fund v. ...