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Katz v. Image Innovations Holdings

July 22, 2010


The opinion of the court was delivered by: John G. Koeltl, District Judge


This is a purported class action for securities fraud brought on behalf of the purchasers of the stock of Image Innovation Holdings, Inc. ("Image"). The plaintiffs move to certify a class consisting of all persons who purchased Image stock during the period from April 13, 2004 through March 16, 2006 (the "class period") pursuant to Federal Rules of Civil Procedure 23(a) and 23(b)(3). The plaintiffs also seek certification as Class Representatives and the appointment of Lead Counsel, Federman & Sherwood, as Class Counsel. The motion is unopposed, but the Court has carefully considered the motion in any event.


The following facts are presumed true for the purposes of this motion. Image was in the business of selling high and medium-value sports and entertainment celebrity artwork and collectibles. (Am. Compl. ¶ 33.) The gravamen of the plaintiffs' complaint is that Image's financial results reflected revenues that were artificially enhanced through the recording of fictitious sales. (Am. Compl. ¶¶ 118-201.)

The plaintiffs allege that Image materially misrepresented its financial results and position throughout the Class Period, including improperly reporting revenues of $6.1 million in its annual report for fiscal year 2004, filed with the SEC on Form 10-KSB on April 15, 2005. (Am. Compl ¶ 134.) On December 5, 2005, Image's Audit Committee concluded that a forensic accounting investigation concerning Image's 2004 annual report would be necessary to confirm Image's recorded revenue and receivables. (Am. Compl. ¶ 150.) On March 16, 2006, the forensic accounting firm retained by the Audit Committee to conduct the investigation presented preliminary findings to the Audit Committee, concluding that a number of items of revenue and receivables with respect to Image's inventory sales were improperly recorded. (Am. Compl. ¶ 151.) On this same day and based on these findings, the Audit Committee determined that the 2004 annual report could no longer be relied upon. (Am. Compl. ¶ 151.) The following day, Image stock fell about 16% from $1.55 on March 17, 2006 to $1.30 on March 20, 2006, the next trading day. (Am. Compl. ¶ 152.)

The plaintiffs assert claims pursuant to sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) & 78t(a), respectively, and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. The plaintiffs move to certify a class consisting of all persons who purchased Image stock during the class period.



Before certifying a class, the Court must determine that the party seeking certification has satisfied the four prerequisites of Rule 23(a): numerosity, commonality, typicality, and adequacy of representation. See, e.g., Marisol v. Giuliani, 126 F.3d 372, 375 (2d Cir. 1997); Comer v. Cisneros, 37 F.3d 775, 796 (2d Cir. 1994); In re Buspirone Patent & Antitrust Litig., 210 F.R.D. 43, 56-57 (S.D.N.Y. 2002); Dajour B. v. City of New York, No. 00 Civ. 2044, 2001 WL 1173504, at *3 (S.D.N.Y. Oct. 3, 2001). The Court must find, more specifically, that: (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 or defenses of the representative parties are typical of the claims or defenses of the class, and (4) the representative parties will fairly and adequately protect the interests of the class. Fed. R. Civ. P. 23(a). The Court must also find that the party qualifies under one of the three sets of criteria set forth in Rule 23(b)(1), (2), or (3). See Amchem Products, Inc. v. Windsor, 521 U.S. 591, 614 (1997); Comer, 37 F.3d at 796.

The plaintiffs here seek certification under Rule 23(b)(3), which provides for a class to be maintained where "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)(3). If the Court finds both that the requirements of 23(a) have been met, and that the claims fall within the scope of Rule 23(b)(3), the Court may, in its discretion, certify the class. See In re Initial Pub. Offerings Sec. Litig., 471 F.3d 24, 41 (2d Cir. 2006) ("[A] district judge may certify a class only after making determinations that each of the Rule 23 requirements has been met."); In re Drexel Burnham Lambert Grp., Inc., 960 F.2d 285, 290 (2d Cir. 1992); Krueger v. New York Tel. Co., 163 F.R.D. 433, 438 (S.D.N.Y. 1995); Dajour B., 2001 WL 1173504, at *3.

A motion for class certification should not, however, become a mini-trial on the merits. See Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 177-78 (1974); Krueger, 163 F.R.D. at 438. The dispositive question is not whether the plaintiffs have stated a cause of action or will prevail on the merits, but rather whether the requirements of Rule 23 have been met. See Eisen, 417 U.S. at 178 (citing Miller v. Mackey Int'l, 452 F.2d 424, 427 (5th Cir. 1971) (Wisdom, J.)). It would be both unwise and unfair to reach the merits of a dispute in this context: resolution of merits issues at this stage might allow some parties seeking certification to secure the benefits of the class action mechanism without first having met its requirements, and might subject some parties to adverse merits rulings without the benefit of the rules and procedural safeguards that traditionally apply in civil trials. See Eisen, 417 U.S at 177-78. In deciding this motion, the Court should therefore refrain from deciding any material factual disputes between the parties concerning the merits of the claims, see, e.g., Sirota v. Solitron Devices, Inc., 673 F.2d 566, 570-72 (2d Cir. 1982); Meyer v. Macmillan Publ'g Co., 95 F.R.D. 411, 414 (S.D.N.Y. 1982), and should accept the underlying allegations from the Amended Class Action Complaint as true. See Shelter Realty Corp. v. Allied Maint. Corp., 574 F.2d 656, 661 n.15 (2d Cir. 1978).

At the same time, the Court must conduct a "rigorous analysis" to determine whether the relevant requirements of Rule 23 have been met. See Gen. Tel. Co. v. Falcon, 457 U.S. 147, 161 (1982). The burden of persuasion lies with the party seeking certification, in this case the plaintiffs. See, e.g., Bishop v. New York City Dep't of Hous. Pres. and Dev., 141 F.R.D. 229, 234 (S.D.N.Y. 1992). In deciding whether the requirements of Rule 23 have been met, the Court may examine not only the pleadings but also the evidentiary record, including any affidavits and results of discovery. See, e.g., Sirota, 673 F.2d at 571; Chateau de Ville Prods. v. Tams-Witmark Music Library, Inc., 586 F.2d 962, 966 (2d Cir. 1978). Hence, the issue on this motion is whether the plaintiffs have met their burden of establishing, on the basis of the pleadings, affidavits, and the results of discovery, that the four prerequisites of Rule 23(a) have been met, and that the proposed class can be maintained under Rule 23(b)(3). See Dajour B., 2001 WL 1173504, at *4; Krueger, 163 F.R.D. at 438.


Courts have consistently held that claims alleging violations of Sections 10(b) and 20(a) of the Exchange Act are especially amenable to class certification. See, e.g., Amchem Prods., 521 U.S. at 624; Green v. Wolf Corp., 406 F.2d 291, 296 (2d Cir. 1968); In re NYSE Specialists Sec. Litig., 260 F.R.D. 55, 75 (S.D.N.Y. 2009). Indeed, courts have acknowledged that "[b]ecause of the usefulness of class actions in addressing allegations of securities fraud, the class certification requirements of Rule 23 are to be construed liberally." Darquea v. Jarden Corp., No. 06 Civ. 722, 2008 WL 622811, at *4 (S.D.N.Y. Mar. 6, 2008) (citing Gary Plastic Packaging Corp. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 903 F.2d 176, 179 (2d Cir. 1990)); see also Maywalt ...

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