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In Re Dynex Capital

March 7, 2011


The opinion of the court was delivered by: Hon. Harold Baer, Jr., United States District Judge:


Lead Plaintiff Teamsters Local 445 Freight Division Pension Fund ("Teamsters" or "Plaintiff") in this purported class action brings claims under sections 10(b) and 20(a) of the 1934 Securities Exchange Act (the "Act"), 15 U.S.C. §§ 78j(b), 78t(a). Its claims arise from its purchase of Merit Securities Corporation Collateralized Series 12 and Series 13 Bonds (collectively, the "Bonds") between February 7, 2000 and May 13, 2004 (the "Class Period"). The Bonds are mortgage-backed securities collateralized by several thousand mobile home loans (the "Bond Collateral") originated and initially serviced by Defendant Dynex Capital, Inc. and its affiliates.

Plaintiff alleges that Dynex, its subsidiary Merit Securities Corporation, and two senior executives of the companies, Thomas H. Potts and Stephen J. Benedetti (collectively, "Defendants") made false and misleading statements about the Bond Collateral. Specifically, Plaintiff alleges that Defendants sold the Bonds to investors for over $630 million without revealing that the Bond Collateral was seriously impaired, and continued to conceal material deficiencies in the Bond Collateral through May 13, 2004. Plaintiff's Section 20(a) claims are derivative of its Section 10(b) claims and allege "control person" liability against Potts and Benedetti. The factual and procedural history of this case is detailed in a previous Opinion and Order which granted in part and denied in part Defendants' motion to dismiss. See In re Dynex Capital, Inc. Secs. Litig., No. 05 Civ. 1897 (HB), 2009 WL 3380621 (S.D.N.Y. October 19, 2009).

The Teamsters now move pursuant to Fed. R. Civ. P. 23(b)(3) for certification of a class consisting of "[a]ll purchasers of Merit Securities Corporation's Collateralized Bonds Series 12 and Series 13 Bonds during the period between February 7, 2000 and May 13, 2004 who were damaged thereby." Pl. Notice of Mot. Class Cert., dated June 4, 2010, at 1. Plaintiff also moves to be appointed as Class Representative and to have Cohen, Milstein, Sellers & Toll, PLLC appointed as Class Counsel. For the reasons that follow, the motions are GRANTED.


"In order to qualify for class certification under Rule 23(b)(3), class counsel must satisfy four basic requirements [under Rule 23(a)]: (1) numerosity; (2) commonality; (3) typicality; and (4) adequacy of representation. If these criteria are met, the court must decide whether common questions of law or fact predominate and whether a class action is the superior means of adjudicating the controversy fairly and efficiently." Seijas v. Republic of Argentina, 606 F.3d 53, 57 (2d Cir. 2010); Fed. R. Civ. P. 23(b)(3). These factors must be established by a preponderance of the evidence. Teamsters Local 445 Freight Div. Pension Fund v. Bombardier Inc., 546 F.3d 196, 202 (2d Cir. 2008).



Numerosity requires that the proposed class be so large that joinder of individual members would be "inconvenient or difficult." In re J.P. Morgan Chase Cash Balance Litig., 242 F.R.D. 265, 272 (S.D.N.Y. 2007). The Second Circuit has held that a proposed class of 40 members presumptively satisfies this requirement. See, e.g., id. (citing Consol. Rail Corp. v. Town of Hyde Park, 47 F.3d 473, 483 (2d Cir. 1995)). Trade data shows at least 2,718 trades during the Class Period-a significant amount for bond trading. See Rehns Decl., Ex. C. Among the firms that provided trade data some also provided the number of institutions who purchased from them, including the Bank of New York which alone identified 56 different institutions that purchased the Bonds during the Class Period. Pl. Mem. Supp. Class Cert. at 8, n.2. Defendants have failed to rebut the presumption of numerosity.


The "commonality requirement is met if plaintiffs' grievances share a common question of law or of fact." Cent. States Se. & Sw. Areas Health & Welfare Fund v. Merck-Medco Managed Care, LLC, 504 F.3d 229, 245 (2d Cir. 2007). Class certification will not necessarily be precluded by differing individual circumstances of class members; rather, "the critical inquiry is whether the common questions are at the core of the cause of action alleged." Vengurlekar v. Silverline Techs., Ltd., 220 F.R.D. 222, 227 (S.D.N.Y. 2003). Even "a single common question may be sufficient." Bakalar v. Vavra, 237 F.R.D. 59, 67 (S.D.N.Y. 2006); see also Marisol A. v. Giuliani, 929 F. Supp. 662, 690 (S.D.N.Y. 1996) (citation omitted), aff'd 126 F.3d 372, 376 (2d Cir.1997).

The proposed class satisfies commonality because "putative class members have been injured by similar material misrepresentations and omissions." Fogarazzo v. Lehman Bros. Inc., 232 F.R.D. 176, 180 (S.D.N.Y. 2005). Indeed the putative class members here are alleged to have been impacted by the same misrepresentations and omissions, and all will be required to show that Defendants committed fraud with the requisite mental state. See Second Am. Class Action Compl. ("SAC"), ¶¶ 96-151.


"Adequacy entails inquiry as to whether: (1) plaintiff's interests are antagonistic to the interest of other members of the class and (2) plaintiff's attorneys are qualified, experienced and able to conduct the litigation." In re Flag Telecomm. Holdings, Ltd. Secs. Litig., 574 F.3d 29, 35 (2d Cir. 2009). "The focus is on uncovering conflicts of interest between named parties and the class they seek to represent . . . In order to defeat a motion for certification, however, the conflictmust be fundamental." Id. (internal quotations omitted).

Defendants argue first that Plaintiff's interests will conflict with those of other class members because it purchased from only one tranche of the Series 13 Bonds, and purchasers of different tranches, whether superior or subordinate, will have different repayment rights and potential damages. While investors' repayment rights may vary slightly based on the seniority of the tranches they purchased, this does not present a "fundamental" conflict within the class. Id. Plaintiff's claims allege damages as a result of fraud on the entire proposed class, and Plaintiff is committed to pursuing a class-wide remedy. See Pl. Mem. Supp. Class Cert. at 10. Moreover, differences ...

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