The opinion of the court was delivered by: Sand, J.,
This Document Relates to: ALL ACTIONS
Plaintiffs in these consolidated cases are investors in the Beacon Associates LLC I and II investment funds (collectively, the "Beacon Fund" or "Fund") who lost money when the Fund invested its assets with Bernard Madoff ("Madoff") and his firm, Bernard L. Madoff Securities LLC ("BLMIS"). Plaintiff bring claims under §§ 10(b) and 20(a) of the Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §§ 78j(b), 78(t)(a), the Investment Advisers Act of 1940 ("IAA"), 15 U.S.C. § 80b-15, and the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1001 et seq., against various individuals and companies associated with the Fund.
Plaintiffs have moved the Court, pursuant to Federal Rule of Civil Procedure 23, to certify two classes and two subclasses. For the reasons provided below, Plaintiffs' motion is granted.
Plaintiffs are union pension funds and individuals who invested in the Beacon Fund between 2000 and 2008 and who suffered losses after the Fund invested a majority of its assets with Madoff and BLMIS. As is by now well known, Madoff did not use the funds entrusted to him by investors such as the Beacon Fund to engage in trading, as he claimed; instead, he used new clients' money to prop up the massive Ponzi scheme he ran for almost twenty years by using it to provide fictitious "returns" for older clients. The scheme was eventually discovered and on December 11, 2008, Madoff was arrested by federal officials. He later pled guilty to securities fraud and related offenses, and was sentenced to 150 years in prison. Soon after Madoff's fraud became public, on December 11, 2008, BAMC informed its members that it was going to liquidate the fund and distribute its remaining assets to the members. The Fund's Madoff investments-which were considerable-were written off as a loss.*fn2
On June 21, 2010 Plaintiffs filed the Second Amended Class Action and Derivative Complaint ("SAC"). In the SAC, they brought claims under the Exchange Act, the IAA, ERISA and New York state law against a variety of individuals and institutions associated with the Beacon Fund for various misrepresentations and breaches of fiduciary duty committed in connection to the Fund's Madoff investments. Defendants moved to dismiss the case in its entirety.
In an Order filed on October 5, 2010, we dismissed Plaintiffs' state law claims but sustained a number of Plaintiffs' federal claims against three sets of actors: first, Beacon Associates Management Corporation ("BAMC"), the entity that operated the Beacon Fund, as well as its founders, Harris Markhoff ("Markhoff") and Joel Danziger ("Danziger") (collectively the "Beacon Defendants"); second, J.P. Jeanneret Associates, Inc. ("JPJA"), which provided investment advice to the ERISA-covered pension plans that invested in the Fund, its president John P. Jeanneret, Ph.D. ("Jeanneret"), and director Paul L. Perry ("Perry") (collectively, the "Jeanneret Defendants"); third, Ivy Asset Management LLC ("Ivy"), its founders Lawrence Simon ("Simon") and Howard Wohl ("Wohl"), and Ivy executives Fred Sloan ("Sloan") and Adam Geiger (Geiger") (collectively the "Ivy Defendants"). In re Beacon, 754 F. Supp. 2d 386 (S.D.N.Y. 2010) ("the October 5 Order"). Ivy provided JPJA and BAMC research and advice about investment managers for their clients' funds. During the relevant period, it also provided JPJA and BAMC access to what at the time were Madoff's coveted investment services.
In the October 5 Order, we held that Plaintiffs had adequately alleged that the Ivy Defendants engaged in securities fraud and breached their obligations as ERISA fiduciaries when they failed to inform either JPJA or BAMC about the serious doubts concerning the legitimacy of Madoff's operations that they began to have as early as the mid 1990s, if not before. Id. at 410-411. We also found that Plaintiffs had adequately alleged that the Beacon Defendants engaged in securities fraud and breached their ERISA fiduciary duties when they failed to disclose to the members of the Beacon Fund that, as a result of amendments to their contract with Ivy in December 2006 that absolved Ivy of any responsibility to provide BAMC advice or information about Madoff, no due diligence would be performed on Madoff's management of the Fund's assets.*fn3 Id. at 414. We sustained similar allegations against the Jeanneret Defendants for their failure to disclose to their clients that they would not be able to fulfill their contractual obligation to "supervise and direct the investment of [their clients' assets]." Id. at 414--415. We concluded that the Jeanneret Defendants must have realized that they would be unable to actively supervise the management of their clients' assets no later than December 1, 2007, when JPJA's contract with Ivy was amended to explicitly exclude Madoff from the list of investment managers for whom Ivy provided JPJA research, monitoring and advice. Id. at 414--415.
Plaintiffs now move the Court to certify two classes and two subclasses. To litigate their Exchange Act and IAA claims, Plaintiffs seek certification of a class ("the Investor Class") consisting of all investors in the Beacon Fund who had not redeemed their interest in the Funds as of Dec. 11, 2008-the date of Madoff's arrest. They also seek certification under 23(b)(3) of a subclass of this class consisting of all investors who invested in the Beacon Funds as the result of the investment advice of the Jeanneret Defendants ("the Jeanneret Investor Subclass").
To litigate their ERISA claims, Plaintiffs seek certification under Rule 23(b)(1), or in the alternative Rule 23(b)(3), of a class consisting of all fiduciaries, participants and beneficiaries of any ERISA-covered employee benefit plan that invested in the Beacon Fund at any time through the present (the "ERISA Class"). They also seek certification of a subclass of this class consisting of all ERISA-covered employee benefit plans that invested in the Beacon Fund as a result of the investment managements services of the Jeanneret Defendants ("the Jeanneret ERISA Subclass").
Plaintiffs seeking class certification bear the burden of demonstrating by a preponderance of the evidence that the proposed class or subclass meets each of the requirements for class certification set forth in Federal Rule of Civil Procedure 23. Teamsters Local 445 Freight Div. Pension Fund v. Bombardier, Inc., 546 F.3d 196, 202 (2d Cir. 2008); Fed. R. Civ. P. 23(c)(5) ("[A] class may be dividedinto subclasses that are each treated as a class under this rule.").When assessing the merits of a motion for class certification, a court must take into account "all of the relevant evidence admitted at the class certification stage." Teamsters, 546 F.3d at 202 (quoting Miles v. Merrill Lynch & Co. (In re Initial Pub. Offering Sec. Litig.), 471 F.3d 24, 42 (2d Cir. 2006)). The court must determine that "whatever underlying facts are relevant to a particular Rule 23 requirement have been established." In re IPO, 471 F.3d at 41. "[T]he obligation to make such determinations is not lessened by overlap between a Rule 23 requirement and a merits issue, even a merits issue that is identical with a Rule 23 requirement." Id. However, "in making such determinations, a district judge should not assess any aspect of the merits unrelated to a Rule 23 requirement." Id.
In the Second Circuit, "Rule 23 is given liberal rather than restrictive construction, and courts are to adopt a standard of flexibility" when assessing motions for class certification. Forbes v. Giuliani, 126 F.3d 372, 377 (2d Cir. 1997). "[I]f there is an error to be made, let it be in favor and not against the maintenance of the class action, for it is always subject to modification should later developments during the course of the trial so require.'" In re Alstom SA Sec. Litig., 253 F.R.D. 266, 275 (S.D.N.Y. 2008) (quoting Green v. Wolf Corp., 406 F.2d 291, 298 (2d Cir. 1968)).
A.The Investor Class and Jeanneret Investor Subclass
Plaintiffs seek certification of the Investor Class and Jeanneret Investor Subclass under Rule 23(b)(3), which allows certification when "the court finds that the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy." Fed. R. Civ. P. 23(b)(3).
Defendants challenge the adequacy of the proposed class and subclass on a number of grounds. First, the Ivy Defendants argue that some or all of the members of the class lack standing to pursue the federal securities claims against them. Second, Ivy Defendants argue that the class claims are barred by the statute of repose set forth in 28 U.S.C. §1658(b)(2). Third, Ivy Defendants argue that the Investor Class, as Plaintiffs define it, is overbroad, because it includes members who invested in the Beacon Fund after December 1, 2006-the date Ivy amended its contract with BAMC. They argue that the Jeanneret Investor Subclass is similarly overbroad because it includes members that invested in the Beacon Fund after December 31, 2007-the date on which Ivy amended its contract with JPJA. Finally, Defendants argue that Plaintiffs fails to show that the class satisfies the Rule 23(a) prerequisites and Rule 23(b) requirements for class certification.
We deal with the first four objections, before examining whether Plaintiffs have demonstrated by a preponderance of the evidence that the class satisfies each of the Rule 23 requirements. In re IPO, 471 F.3d at 41 ("[A] district judge may certify a class only after making determinations that each of the Rule 23 requirements has been met.").
The Ivy Defendants argue that class certification is improper because none of the class representatives and, in all likelihood, none of the proposed members of the Investor Class, have standing to litigate the § 10(b) Exchange Act claimsagainst them under the Birnbaum Rule, which limits standing in securities fraud cases to defrauded purchasers or sellers of securities. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 731-732 (1975) (affirming the rule as set forth in Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2d Cir. 1952)). Defendants argue that none of the members of the class are defrauded purchasers or sellers of securities, as the Birnbaum Rule requires, because none of them were induced by Ivy's misrepresentations to make investments with Madoff and BLMIS. It was only BAMC that made investments in Madoff as a consequence of Ivy's alleged misrepresentations and omissions. Hence, Ivy Defendants argue, it is only BAMC that has standing to raise a direct §10(b) claim against Ivy for the fraud alleged in the SAC under the Birnbaum Rule.
We do not agree. In our October 5 Order, we considered-and rejected-a very similar argument when analyzing whether the fraud alleged in the SAC was "in connection with the purchase or sale of any security," as required by §10(b) of the Exchange Act. See 15 U.S.C. § 78j(b). We found that, even if Plaintiffs did not themselves invest money in Madoff, there was a sufficiently close relationship between Plaintiffs' investment in the Beacon Fund and the Beacon Fund's decision to invest in BLMIS to satisfy the "in connection with" requirement. In re Beacon, 745 F. Supp. 2d at 410. Although the Order did not directly address the standing issue, it presumed that because Plaintiffs purchased securities-namely the interests in the Beacon Fund-that were "in connection with" the fraud alleged in the SAC, they therefore satisfied the Birnbaum Rule. No arguments have been provided that lead us to reach any different conclusion now.
Ivy Defendants interpret the Birnbaum Rule to prohibit anyone who was not personally induced by fraud to purchase or sell a security from bringing claims under § 10(b). Ivy Defs.' Mem. Opp. Beacon Pls.' Mot. Class. Certif. ("Ivy Opp."), at 19-20. This is too restrictive a reading of the Rule however. As the Supreme Court made clear in Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 79 (2006), the Birnbaum Rule requires only that a plaintiff who raises a §10(b) claim "seek to remedy a fraud associated with his or her own sale or purchase of securities." Id. at 79 (emphasis added). Plaintiffs therefore do not themselves have to have been the direct target of the fraud in order to bring suit. Id. at 85 (noting that the "requisite showing is.deception in connection with the purchase or sale of any security, not deception of an identifiable purchaser or seller") (internal citations omitted).
In this case, Plaintiffs have demonstrated that the class representatives and members of the proposed class purchased securities-namely, their interests in the Beacon Fund-that were closely associated with an alleged fraud-namely, Ivy's misrepresentations regarding the Fund's Madoff investments. They do not allege that they were personally defrauded by the Ivy Defendants into making the Madoff investments but they do allege that their agents-BAMC and JPJA-were so defrauded. In pursuing this litigation, they therefore "seek to remedy a fraud associated with their sale or purchase of security." This is sufficient to confer standing. The Birnbaum rule is therefore no bar to class certification.
2.The Timing of the Claims
Ivy Defendants also challenge the class certification motion on the ground that the securities claims against them are categorically barred by the 5-year statute of limitations imposed by 28 U.S.C. §1658(b)(2) ("the statute of repose"). Because none of the affirmative misrepresentations alleged in the SAC, or apparent in the evidence provided to the Court thus far,occurred less than five years before the first case involved in this act was filed, Ivy Defendants argue that the claims are untimely, and on that ground move to deny class certification.
This argument has no merit, given our conclusion in the October 5 Order that throughout the relevant period, Ivy was under a "continuing duty to disclose its true concerns [about Madoff] so as to render prior statements of opinion not misleading during the time period Madoff was making trades with Plaintiffs' money." In re Beacon, 745 F. Supp. 2d at 410. Ivy has presented no evidence indicating that it did in fact comply with its disclosure obligations during the relevant class period. This is notwithstanding what appear to have been frequent, even weekly communications with BAMC about the investments in question. See, e.g., Hart Reply Decl. Exs. 65-68. Ivy's omissions render these communications materially misleading. In re Beacon, 745 F. Supp. 2d at 409 ("There can be no doubt that Ivy's alleged omissions were material.").
These continuing misrepresentations mean that Plaintiffs' claims are not untimely, given the rule, adopted by the majority of courts in this Circuit, that the statute of repose "first runs from the date of the last alleged misrepresentation regarding related subject matter." Plymouth County Ret. Ass'n v. Schroeder, 576 F. Supp. 2d 360, 378 (E.D.N.Y. 2008). See also In re Dynex Capital Secs. Litig., 05 Civ. 1897 (HB), 2006 U.S. Dist. LEXIS 4988, at *13-14 (S.D.N.Y. Feb. 10, 2006) ("In a case like this one, in which a series of fraudulent misrepresentations is alleged, th[e] 'period of repose begins when the last alleged misrepresentation was made'") (quoting Teamsters Local 445 Freight Div. Pension Fund v. Bombardier Inc., No. 05 Civ. 1898 (SAS), 2005 U.S. Dist. LEXIS 19506, at *19 (S.D.N.Y. Sept. 6, 2005)). Because Ivy continued to make misrepresentations about Madoff throughout the class period, the period of repose did not begin until, at the earliest, December 11, 2008. Plaintiffs filed suit well within five years of this date.*fn4
Section 1658(b)(2) is therefore no bar to certification.
3.Composition of the Class
Defendants argue that the Investor Class is overbroad because it includes members who purchased investments in the Beacon Fund after January 1, 2006-the date on which Ivy amended its contract with BAMC to disclaim any obligation to research, monitor or evaluate Madoff as an investment manager for the Fund. They similarly argue that the Jeanneret Investor Subclass is overbroad because it includes members who received investment advice from the Jeanneret Defendants after December 31, 2007, when the contract between Ivy and JPJA was amended to explicitly exclude Madoff from the list of investment managers for whom Ivy provided JPJA research, monitoring and access.
Both arguments are unpersuasive, for the same reason that we rejected Ivy Defendants' statute of repose argument above. The fact that Ivy continued to possess a duty to update or correct its earlier representations about Madoff to BAMC and JPJA until the date of Madoff's arrest means that it continued to be liable towards all investors for whom JPJA and BAMC acted during this time as agents.
Under the fraud on the agent theory which we approved in the October 5 Order, "plaintiffs need only allege that an agent acting on their behalf reasonably relied on the alleged misrepresentations of the defendants." In re Beacon, 745 F. Supp. 2d at 408 (quoting In re Fine Host Corp. Secs. Litig., 25 F.Supp.2d 61, 71--72 (D.Conn.1998)). It does not therefore matter whether the proposed class members became clients of JPJA or BAMC during a time when Ivy had an affirmative obligation to research and advise JPJA or BAMC about Madoff. What matters is that they became clients of JPJA and BAMC during a time when their agents-JPJA and/or BAMC-continued to reasonably rely upon Ivy's misrepresentations. Accordingly, we conclude that the proposed classes are not overbroad.
4.Rule 23(a) prerequisites
Defendants also argue that the proposed Investor Class and Jeanneret Investor Subclass fail to satisfy the requirements for class certification set forth in Rule 23. These requirements include the four prerequisites of class certification set forth in Rule 23(a). Rule 23(a) requires plaintiffs to show: (1) "that the class is so numerous that joinder of all members is impracticable" (numerosity); (2) that "there are questions of law or fact common to the class" (commonality); (3) that "the claims or defenses of the representative parties are typical of the claims or defenses of the class" (typicality); and (4) that "the representative parties will fairly and adequately protect the interests of the class" (adequacy). Fed. R. Civ. P. 23(a).
In addition to showing that the proposed class satisfies the four Rule 23(a) prerequisites, plaintiffs must show that the class satisfies the particular requirements of the subdivision of 23(b) under which they seek certification. In this case, Plaintiffs seek certification pursuant to 23(b)(3). They must therefore demonstrate that: (1) "questions of law or fact common to class members predominate over any questions affecting only individual members" (predominance); and (2) "that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy" (superiority). Fed. R. Civ. P. 23(b)(3).
Rule 23(a)(1) calls for class certification when "the class is so numerous that joinder of all members is impracticable." Fed. R. Civ. P. 23(a)(1). "Generally speaking, courts will find that the 'numerosity' requirement has been satisfied when the class comprises 40 or more members and will find that it has not been satisfied when the class comprises 21 or fewer." Ansari v. New York Univ., 179 F.R.D. 112, 114 (S.D.N.Y. 1998). However, "[d]etermination of practicability depends on all the circumstances surrounding a case, not on mere numbers." Robidoux v. Celani, 987 F.2d 931, 936 (2d Cir. 1993)."Relevant considerations include judicial economy arising from the avoidance of a multiplicity of actions, geographic dispersion of class members, financial resources of class members, the ability of claimants to institute individual suits, and requests for prospective injunctive relief which would involve future class members." Id.
Plaintiffs claim that the Investor Class comprises at least 300 members. As evidence of this estimate, they provide a document listing 330 investors in the Beacon Fund. Hart Decl. Ex. 6. Ivy Defendants argue that the class in fact consists of only 119 members. Ivy Opp. at 48. They reach this conclusion, however, on the basis of the overbreadth arguments that we rejected above. Their numerosity arguments based on these numbers are therefore not persuasive.
Ivy Defendants also argue that because only 75% of Beacon Fund assets were invested with Madoff, some members of the proposed class might have ended up with a residual profit rather than a loss from their investments in the Beacon Fund. and therefore should not be included in the class. Ivy Opp., at 48 n.5. We do not have to reach the merits of this argument because, even assuming arguendo that a quarter of Beacon Fund investors must be excluded from the class, its size would remain well above the range for which courts in this Circuit have found certification appropriate. See, e.g., Consolidated Rail Corp. v. Town of Hyde Park, 47 F.3d 473, 483 (2d Cir. 1995) ("Because numerosity is presumed at a level of 40 members . . . whether viewed as 700 tax-collecting jurisdictions or 300 assessing jurisdictions, the number of defendants vastly exceeds this threshold. Numerosity is therefore satisfied.").
We reach the same conclusion with respect to the Jeanneret Investor Subclass, which although considerably smaller than the Investor Class, remains well above the forty-member threshold at which courts in this Circuit generally presume numerosity to be satisfied. Jeanneret Defs'. Mot. Opp. Class Certif. ("Jeanneret Opp."), at 17 (conceding that the Jeanneret Investor Subclass may number as many as 55 members).
Defendants argue that other considerations mitigate against the conclusion that the size of the Investor Class and Jeanneret Investor Subclass are so numerous as to make joinder impracticable. They point to the fact that the names and addresses of all Beacon Investor Class members are ascertainable from the contracts they signed when they joined the Fund, the fact that most class members live in New York state, and the significant amount of money at stake in each member's claim, as evidence that the joinder of individual class members' claims would be not only possible but practicable.
Defendants are correct that these are all factors that in other contexts have led courts to deny class certification. Given the circumstances of this case, however-and specifically the size of the proposed class, and the fact that each one of the members of the class represents potentially hundreds or thousands of individual investors-we find that joinder would impose a significant burden on the Court and prove, ultimately, a far less efficient mechanism for resolving Plaintiffs' claims than class certification. Abu Dhabi Commer. Bank v. Morgan Stanley & Co., 269 F.R.D. 252, 258-259 (S.D.N.Y. 2010) (To satisfy numerosity, ...