United States District Court, S.D. New York
STREAM SICAV and TIEN CHLING, individually and on behalf of all others similarly situated, Plaintiffs,
JAMES JUN WANG, SMARTHEAT, INC., and JOHN DOES 1-4, Defendants.
OPINION & ORDER
PAUL A. ENGELMAYER, District Judge.
On March l7, 2014, the Court issued an order denying, without prejudice, plaintiffs' motion for class certification. See Dkt. 114. The Court did so for several reasons, including because plaintiffs had not yet articulated a credible theory under which injury could be proven on a classwide basis, because fact discovery remained ongoing, and because the Supreme Court's then-forthcoming decision in Halliburton Co. v. Erica P. John Fund, No. 13-317, had the potential to alter the legal analysis governing class certification in putative securities class actions premised on a fraud-on-the-market theory.
With fact discovery now complete, and with the Halliburton decision handed down, plaintifs have moved again for class certification. See Dkt. I44. The Court has carefully reviewed that motion and the materials submitted in support of it, see Dkt. 145 ("P1. Br."), 46 ("P1. Decl."), 156-58, as well as defendants' submissions in opposition, see Dkt. l49 ("Def. Br."), 150 ("Def. Decl.").
For the reasons that follow, the Court denies plaintiffs' motion for class certification, on the grounds that plaintiffs' submission is insufficiently rigorous, and fails to satisfy multiple requirements for class certification set by Federal Rule of Civil Procedure 23, including those of typicality, adequacy, and predominance. However, this ruling is without prejudice. The Court will grant plaintiffs a final opportunity, on the schedule set forth below, to establish that class certification is merited.
By way of background, plaintiffs claim that Smartheat, Inc. violated federal securities laws by secretly amending a written lock-up agreement under which certain company insiders were barred from selling shares of Smartheat stock until the start of 2012, and which Smartheat had publicly touted as a sign of its executives' confidence in the company. Plaintiffs seek to certify a class of "[a]ll persons who purchased or acquired shares of Smartheat, Inc. stock between February 24, 2010 and May 30, 2012." Dkt.l44, at 1.
As explained in its March 17, 2014 order, the Court understood plaintiffs, in seeking class certihcation, to articulate two distinct theories as to how the undisclosed amendment of the lock-up agreement that enabled insiders to sell their Smartheat shares caused classwide injury. See Dkt. 114. The first theory was that Smartheat's public statements that certain insiders had committed to hold their shares had boosted the value of the shares; that purchasers of shares following the announcement of the lock-up agreement had therefore paid a premium to buy the shares; and that these purchasers had suffered losses when it was revealed that the agreement had been amended to permit insiders to sell their shares. The Court referred to this as the "revision theory." As the Court noted, such an approach to proving classwide injury was in line with the manner in which classwide injury is commonly proven. See id.
But as the Court's order also noted, to be sustainable, this theory required that there have been a legally cognizable "corrective disclosure"-, i.e., an announcement or other revelation of the fact that insiders had been freed to sell their shares-that caused a drop in the trading price of Smartheat's stock. There did not appear to have been any such announcement. Rather, the share price had gradually dropped to below $1 per share, to the point at which it had been de-listed and trading had ceased, with no such revelation of the alleged amendment to the lock-up agreement having ever been made. The Court therefore held that, before a class could be certified on this theory, plaintiffs were required to identify some form of corrective disclosure, for otherwise Smartheat's failure to disclose the amendment of the lock-up agreement could not be said to have caused classwide injury. See id.
In their renewed motion for class certification, plaintiffs have abandoned the "revision theory" of liability. Presumably, this is because, as the Court anticipated in its earlier order, the historical record simply does not reveal any disclosure (by Smartheat or otherwise) while the stock was still trading of the abandonment of the company's lock-up agreement, let alone that the company's stock price dropped following such a disclosure.
Instead, plaintiffs now pursue solely the second theory of classwide injury identified in the Court's March 17, 2014 order. See Pl. Br. 2-3. This theory is that the once-prohibited insider sales themselves had driven down the stock's trading price. In other words, plaintiffs contend, the sale of these Smartheat shares, and the ensuing availability on the market of an unexpectedly large number of freely tradable Smartheat shares, drove down the stock's price during the 27-month class period, so as to injure persons who had previously purchased the stock. The Court referred to this as the "insider sale" theory of liability. Dkt. 114.
Plaintiffs' "insider sale" theory is an unusual theory of classwide injury. In a typical securities fraud class action, plaintiffs allege that the market reacted negatively on a given day or several-day period to a corrective disclosure, causing a decline in stock value that simultaneously harmed all shareholder class members in the same way. See, e.g., In re Bank of Am. Corp. Sec., Derivative, & Employee Ret. Income Sec. Act (ERISA) Litig., 281 F.R.D. 134, 143 (S.D.N.Y. 2012); Wagner v. Barrick Gold Corp., 251 F.R.D. 112, 119 (S.D.N.Y. 2008). Here, however, plaintiffs do not allege that their injury resulted from a one-time stock-price drop that affected all class members. Instead, they make an argument based on the mechanics by which trading of Smartheat shares occurred on the NASDAQ market between February 2010 and May 2012. Specifically, plaintiffs argue that, as a consequence of unlocking insider shares, all sales of Smartheat stock during that 27-month period were made at a price below that which would have been set had those shares remained locked up. Although the precise cause of this long period of alleged price diminution is not clear from plaintiffs' papers, plaintifs' expert, Dr. Steven P. Feinstein, appears to attribute it to factors including the increased number of Smartheat shares available for purchase and sale, the percentage increase that the shares unlocked for sale represented over all other shares, and/or the timing at which previously locked-up shares were sold in the market. See Pl. Decl., Ex. 1 ("Feinstein Rep'"), at 29-34.
In claiming classwide injury on these grounds, plaintiffs face daunting precedent. Historically, claims of injury due not to corrective disclosures but rather to the mechanics by which shares of stock were priced during a protracted period of open-market trading have almost always been held ill-suited to classwide resolution. Instead, as the courts that have considered such claims have recognized, trade-specific inquiries are almost always needed to ascertain whether the price a customer paid on a particular trade was, or was not, compromised by a defendant's allegedly unlawful conduct. As these cases have noted, a defendant may be liable as to some trades but not others, and a judgment of liability (or non-liability) on any particulat trade may not bear on (let alone determine) whether there was liability on another. Accordingly, because of the need for a trade-by-trade inquiry into whether or not there was persistent price inflation (or deflation), Rule 23(b)(3)'s requirement that common issues predominate over individualized ones is not met. See, e.g., In re Initial Pub. Offerings Sec. Litig. (" lPO "), 471 F.3d 24, 44 (2d Cir. 2006) (finding class certification unwarranted based on claims that customers suffered price injury based on issuers' practices in allocating IPO shares and trading such shares in the IPO "aftermarket"); Newton v. Merrill Lynch, 259 F.3d 154, 187 (3d Cir. 2001) (upholding denial of motion for class certification based on claim that buyers and sellers of shares on NASDAQ were denied best execution by broker-dealer's policy of executing trades only at the National Best Bid and Offer price); Pearce v. UBS PaineWebber, Inc., No. 02 Civ. 2409-17 (GRA), 2004 WL 5282962, at *10-11 (D.S.C. Aug. 13, 2004) (denying motion for class certification based on claim that broker-dealer added two cents per share to best execution price charged to customers for NASDAQ stocks); Grandon v. Merrill Lynch, No. 95 Civ. 10742 (SWK), 2003 WL 22118979, at *9 (S.D.N.Y. Sept. 11, 2003) (denying motion for class certification based on claim that broker-dealer marked up municipal bond prices by 4.6%).
For a number of reasons, the Court holds, a class similarly cannot be certified here on plaintiffs' insider sale theory, based on the present record:
l. Inadequate explication of theory of consistent price-decrease during class period:
Plaintiffs' expert, Dr. Feinstein, opines that it is theoretically possible for the infusion of a large number of shares to affect a stock's price over a long period of time. See Feinstein Rep. 29-34. Perhaps so: Although the Court is quite skeptical that the existence of a discrete number of even large sell orders and/or the availability for purchase and sale on a stock market of larger number of shares would tend to deflate a stock's trading price over a long period of time so as to harm all shareholders,  it is not the Court's place on a class-certification motion to find against plaintiffs on this theoretical point. And the Court does not ...