United States District Court, E.D. New York
MICHAEL J. GOODMAN, ET AL., INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED, Plaintiffs,
GENWORTH FINANCIAL WEALTH MANAGEMENT, INC., ET AL., Defendants.
MEMORANDUM AND ORDER
JOSEPH F. BIANCO, District Judge.
Plaintiffs Michael J. Goodman, Clarice Yassick, Steven Yoelin, Martin Wasser, and Edward Schiller (collectively, "plaintiffs") commenced this securities fraud class action against defendants Genworth Financial Wealth Management, Inc. ("GFWM"), Genworth Financial, Inc. ("Genworth Financial"), and Gurinder S. Ahluwalia ("Ahluwalia") (collectively, "defendants") on December 22, 2009. Plaintiffs allege that defendants violated Sections 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) ("Section 10(b)"), and Securities and Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5 ("Rule 10b-5"), and breached their fiduciary duties to plaintiffs. In addition, plaintiffs seek to hold Ahluwalia, who is the President and Chief Executive Officer of GFWM, liable as a controlling person under Section 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78t(a). The crux of plaintiffs' claims is that defendants misrepresented the role that Robert Brinker ("Brinker")-an individual renowned for his expertise in the investment field-played in the management of GFWM's BJ Group Services portfolios. According to plaintiffs, they and other members of the putative class relied upon that misrepresentation in deciding to invest with defendants. They claim to have lost millions of dollars as a result.
Before the Court is plaintiffs' motion for class certification under Federal Rule of Civil Procedure 23. Plaintiffs seek to certify a class of over 2, 000 individuals who invested in GFWM's BJ Group Services portfolios during the period from December 22, 2003 to December 22, 2009 (the "Class Period"). Defendants argue that plaintiffs have failed to satisfy the requirements of Rule 23(a) and Rule 23(b)(3). For the following reasons, based on plaintiffs' allegations and the record before this Court, the Court agrees with defendants and denies plaintiffs' motion for class certification. In particular, the Court determines that plaintiffs have failed to prove by a preponderance of the evidence that common questions of law or fact predominate, as Rule 23(b)(3) requires, because they have not demonstrated that the reliance element of their securities fraud claims is susceptible to a common method of proof for all class members. Specifically, plaintiffs are not entitled to either of the two well-established presumptions of reliance, which obviate the need for an individual assessment of each class member's reliance at trial. First, the Court does not apply the fraud-on-the-market presumption of reliance to plaintiffs' claims because plaintiffs identify no efficient market or market price for the particular securities in which the putative class invested. In fact, plaintiffs concede the inapplicability of the fraud-on-the-market presumption. Second, the presumption of reliance for cases primarily concerning a failure to disclose, as set forth by the Supreme Court in Affiliated Ute Citizens of Utah v. United States, cannot apply here. See 406 U.S. 128, 153-54 (1972). Plaintiffs' own amended complaint demonstrates that this case primarily concerns misrepresentations, not omissions. Nonetheless, plaintiffs attempt to invoke the Affiliated Ute presumption of reliance by recasting defendants' alleged misrepresentations as omissions. However, the alleged omissions are merely the inverse of the alleged misrepresentations concerning Brinker's role in managing the BJ Group Services portfolios. Essentially, plaintiffs claim that defendants promised them an investment approach guided by Brinker's investment philosophy, but defendants failed to disclose that they did not actually follow Brinker's approach. That is not enough to trigger the Affiliated Ute presumption of reliance. To the extent any of the omissions identified by plaintiffs amount to more than the inverse of an alleged misrepresentation, the Court still concludes that this case primarily concerns representations, not omissions. Finally, having failed to establish a presumption of reliance in the instant case, plaintiffs contend that they can prove classwide reliance circumstantially. In particular, plaintiffs argue that a jury could reasonably infer class-wide reliance from the facts that defendants made the same representations to all class members, and that all class members invested with defendants. The Second Circuit has approved the use of circumstantial evidence to prove class-wide reliance in fraud cases (but never in a securities fraud case), but only where the inference of reliance is practically inescapable. In this case, however, the evidence that defendants made uniform representations, and that all class members invested with defendants, does not compel the conclusion that all class members must have relied upon defendants' representations. Accordingly, if this case went to trial, each class member's reliance would have to be proven individually. That is reason enough to conclude that class certification under Rule 23(b)(3) is unwarranted in this case.
1. An Overview of Genworth
Genworth Financial is an international financial services organization that offers consumer-focused products including, inter alia, investment services. (Am. Compl. ¶ 10.) GFWM is a registered investment advisor and wholly owned subsidiary of Genworth Financial. ( Id. ¶ 11.) GFWM's Private Client Group provides investment advisor services to individual and institutional clients. ( Id. ; see also Defs.' Opp'n at 6.) GFWM's Private Client Group originated as the BJ Group, which was founded in 1986 by Brinker and Sheldon Jacobs. (Am. Compl. ¶ 20; Defs.' Opp'n at 6 n.1.) Centurion Capital Group acquired the BJ Group in 2000, and General Electric ("GE") acquired Centurion Capital Group in 2001. ( Id. ) GE managed Centurion Capital Group under its subsidiary, GE Private Asset Management, Inc. ( Id. ) In 2005, GE Private Asset Management became Genworth Financial Asset Management, Inc., when GE sold its remaining shares to the public. (Am. Compl. ¶ 21.) Sometime thereafter, Genworth Financial Asset Management, Inc. changed its name to Genworth Financial Wealth Management ("GFWM"). For simplicity's sake and the purposes of this opinion only, the Court refers to Genworth Financial and GFWM collectively as "Genworth."
2. Representations About Brinker
On obtaining a client, Genworth typically made two different forms of communications: written and oral. For instance, Genworth would distribute various written materials to the investor-client. ( Id. ¶¶ 22-31; see also Def.'s Opp'n at 1.) These materials included marketing materials, as well as an information booklet, that were sent to new and existing clients. They described the management aspects of the BJ Group Services portfolios, which served as the means through which clients' investments were assessed, allocated, and managed. (Am. Compl. ¶¶ 1, 2, 22-30.) In addition to providing prospective and current clients with written information, a Genworth account executive would typically speak directly with the client to discuss that client's investment profile, including such matters as risk tolerances, timelines, and the manner in which his or her money was to be invested. ( See Pls.' Reply at 10-11; see also Tullman Decl. Exs. 81-85; Defs.'s Opp'n at 1-2.) Based on a given client's risk objectives and stated preferences, an account executive would then identify what he or she considered an appropriate portfolio (or portfolios) for that client.
Of central significance to this dispute are certain representations that defendants allegedly made to their prospective and current clients regarding Brinker's role in the management of the BJ Group Services portfolios. In particular, the Amended Complaint alleges that "[d]efendants routinely represented to prospective and current private clients that the Portfolio was being managed by Brinker, or at a minimum, [Genworth] was going to implement Brinker's recommendations, including mutual fund selection and asset allocation." (Am. Compl. ¶ 22.) The Amended Complaint further alleges that defendants, in their marketing materials to clients of Genworth's Private Client Group, described Brinker as "recommend[ing] asset allocations and fund selection for [Genworth's] management of accounts for the BJ Group Advisory Services." ( Id. (internal quotation marks omitted).)
According to plaintiffs, defendants made these written representations in various documents that were distributed to current and prospective investors. For instance, plaintiffs highlight the "Account Application" that defendants allegedly sent to all prospective clients. ( Id . ¶ 23; see also Pls.'s Mem. at 3.) The Account Application provided investors the following information regarding Genworth's portfolios:
The BJ Group Service offers clients tactical asset allocation by implementing recommendations from Robert ("Bob") J. Brinker, author of the Marketimer newsletter. Mr. Brinker analyzes economic trends and financial markets and makes asset allocation recommendations to [Genworth] based on that analysis. [Genworth] implements Mr. Brinker's recommendations by selecting mutual funds for client accounts.
(Tullman Decl. Ex. 9, at 10.) The Account Application further stated that "[Genworth] shall provide the investment advisory services selected by the client." ( Id. at 12.) Another written representation that plaintiffs identify is a Disclosure Brochure that defendants regularly sent to all of their new and current clients. ( See Pls.'s Mem. at 4 & n.6; see also Tullman Decl. Ex. 10, Defs.' Interrogs. Resps. at 6 (stating that "[a]ll clients received a then-current account application and welcome kit... as well as [Genworth's]... disclosure brochures containing the then-current Form ADV").) Within the Disclosure Brochure was a Form ADV, which stated, in relevant part:
The BJ Group Service offers clients tactical asset allocation by implementing recommendations from Robert ("Bob") J. Brinker, author of the Marketimer newsletter. Mr. Brinker analyzes economic trends and financial markets and makes asset allocation recommendations to [Genworth] based on that analysis. [Genworth' s] Investment Management ("IM") Department implements Mr. Brinker's recommendations by selecting mutual funds for client accounts. [Genworth] pays Mr. Brinker annual fees, not based on assets under management, for his services, which include investment management services and marketing services, including referring potential clients to [Genworth's] Private Client Group division.
(Tullman Decl. Ex. 13, at 11; Am. Compl. ¶ 25; see also id. ¶ 27 (alleging same language in Disclosure Brochures from 2007 and 2008).)
Plaintiffs allege that defendants made additional representations throughout the Class Period in reports and brochures, always emphasizing Brinker's abilities and significant role in Genworth's investment services. For instance, plaintiffs allege that defendants stated the following in a 2004 Genworth report:
Balanced Growth: This portfolio is based on the Bob Brinker model, offered through our exclusive partnership with him. This objective is designed for clients' core holdings.... When Brinker is bullish, maximum targeted equity exposure is 60%.
(Am. Compl. ¶ 26.) Brochures sent to clients during the Class Period similarly highlighted Brinker's professional experience. For instance, in an Introductory Brochure, defendants made the following statements:
Bob Brinker is a rare breed in the investment field. An independent strategist with more than 25 years of experience, he makes bold pronouncements. He isn't beholden to Wall Street....
We at Genworth Financial Asset Management, Inc. ("GFAM") have an exclusive relationship with Bob to offer one of the nation's leading tactical asset allocation strategies. Founded in 1986 and acquired by GFAM in 2000, BJ Group Services offers customized investment solutions tailored to meet clients' personal objectives. Long considered an expert in identifying market trends through his proprietary Marketimer model, Bob recommends asset allocation and fund selection for GFAM's management of accounts for the BJ Group advisory services. Our experienced professionals work to implement Bob's investment strategy utilizing his proprietary tactical asset allocation model....
(Tullman Decl. Ex. 2, at 3; see also Tullman Decl. Ex. 1, at 3.) Additionally, in Genworth's "BJ Group Services Overview, " defendants made the following statements:
"Long considered an expert in identifying market trends through his proprietary Marketimer model, Bob [Brinker] directs the asset allocation of The BJ Group Portfolios."
"When it comes to helping affluent investors reach their financial goals, [Genworth] takes a unique perspective: yours. Let [Genworth] and Bob Brinker simplify your investment life."
(Tullman Decl. Exs. 15 & 16.) Along with these representations that defendants distributed to potential and existing clients, plaintiffs allege that defendants also featured Brinker on their website, including both an image of Brinker, as well as the following language: "Bob directs the asset allocation of the BJ Group portfolio" and performs "fund selection for [Genworth's] management of accounts for the BJ Group advisory services." (Am. Compl. ¶ 31.)
Plaintiffs also assert that defendants sent letters to prospective clients, all of which represented Brinker as a key component of Genworth's investment services. ( See Tullman Decl. Ex. 17 (quoting a Genworth e-mail to potential client stating, "Thank you for your interest in Bob Brinker and Genworth Financial Asset Management, Inc. We are excited that you are considering our services and look forward to sharing with you the tremendous difference that the combination of Brinker and Genworth Financial has made to so many investors like you.").) Moreover, in their deposition testimony, plaintiffs stated that any doubts or questions concerning the extent of Brinker's role in Genworth's services were resolved by oral communications with their respective financial advisors during the Class Period.
According to plaintiffs, on the basis of the foregoing representations, plaintiffs believed that Brinker held a critical role in guiding Genworth's selection of mutual funds and allocation of assets for its investors. For instance, representative plaintiff Steven Yoelin testified that documents he received from Genworth represented to him that Genworth's selection of mutual funds would be based on Brinker's recommendations. Representative plaintiff Michael Goodman testified similarly about his understanding of the content of the documents he received from Genworth. Other representative plaintiffs testified that Genworth's representations led them to believe Brinker was selecting the mutual funds and determining the proper asset ...