Opinion
No. 99 Civ. 11877 (CMB)
January 25, 2003
Brian P. Murray, Joseph v. McBride and Rabin Peckel LLP, Curtis L. Bowman and Cauley Getter LLP, Attorneys for Plaintiffs.
Todd Gordinier, Stradling, Yocca, Carlson Roth, Richard A. Williamson, Flemming, Zulack Williamson LLP, Attorneys for Defendant Life Financial Corporation.
Jay Kasner Skadden, Arps, Slate, Meagher Flom LLP, Attorneys for Defendant Keefe Bruyette.
Jamie L. Wine, Latham Watkins, Attorneys for Defendant Deloitte Touche LLP.
Ronald D. Reynolds, Kaye Scholer LLP, Attorneys for Defendant Daniel Pearl.
MEMORANDUM OPINION AND ORDER
On December 18, 2002, the court heard argument on three motions. The first was a Motion to Transfer Venue Pursuant to 28 U.S.C. § 1404 (a) or To Dismiss or Transfer Pursuant to Federal Rule of Civil Procedure 12(b)(3) and 28 U.S.C. § 1406 (a) brought by defendant Life Financial Corporation ("LFC"), joined by defendants Deloitte Touche ("Deloitte") and Keefe Bruyette ("Keefe"). After hearing argument, the court, by Order dated December 18, 2002, denied the motion with an opinion to follow. The second and third motions — to appoint lead plaintiffs and approve co-lead counsel, respectively, were brought by plaintiffs. With respect to those motions, the court reserved decision. The court now addresses all three motions in order.
The individual defendants — officers and directors of LFC (named infra in the Background paragraph) — also bring this motion. Unless otherwise noted, in this opinion, "LFC" refers to the corporation and its defendant officers and directors.
Defendant Keefe did not join in this motion until the day of oral argument.
In fact, these two motions were brought within the same document, but the court will treat them as separate motions within this decision for organizational purposes.
Background
By Opinion and Order dated December 10, 2002, this court adopted the Recommendation and Report of Magistrate Judge Dolinger, thus dismissing plaintiffs' claims under the Securities Exchange Act of 1934 ("the Securities Exchange Act") but sustaining their claims under sections 11 and 15 of the Securities Act of 1933 ("the Securities Act"). The facts of this case were explained at length in that Opinion and familiarity with it is presumed. Briefly, plaintiffs have alleged that the registration statement and prospectus proffered by defendant LFC at its 1997 initial public offering ("IPO") contained false and misleading statements concerning its financial performance in 1996 and the first quarter of 1997. Plaintiffs have further alleged that LFC continued to misrepresent its financial health in a series of public statements from the second quarter of 1997 through 1998. Plaintiffs have implicated both defendants Keefe and Deloitte, LFC's lead underwriter and the accounting firm that audited the LFC's financial statements, respectively, in these claims. Finally, plaintiffs have also sued several individual defendants — Daniel L. Perl, L. Bruce Mills, Ronald G. Skipper (who signed the registration statement and as officers of LFC are alleged to be "controlling persons" under section 15 of the Securities Act), and Richard C. Caldwell, John D. Goddard, Milton E. Johnson (who signed the registration statement).
I. Motion To Transfer Venue, or To Dismiss or Transfer Venue
Defendant LFC moves to dismiss or transfer pursuant to Federal Rule of Civil Procedure 12(b)(3) and 28 U.S.C. § 1406 (a) or to transfer venue pursuant to 28 U.S.C. § 1404 (a). The court will address these grounds in order.
Section 1406(a).
A party brings a motion pursuant to 28 U.S.C. § 1406 (a) when "a case laying venue in the wrong division or district" is filed. Id. The court may either "dismiss, or if it be in the interest of justice, transfer such case to any district or division in which it could have been brought." Id. There is no question in the instant case that venue is proper in the Southern District of New York. The applicable venue statute allows for suit to be brought in the "district where the offer or sale took place," or "wherein the defendant is found or is an inhabitant or transacts business." 15 U.S.C. § 77v, 78aa, respectively. The IPO in this case occurred in the Southern District, and defendant Keefe is headquartered here. A dismissal or transfer based on section 1406(a) is unwarranted.
Section 1404(a)
A motion to transfer venue pursuant to 28 U.S.C. § 1404 (a) is brought when "the convenience of parties or witnesses," would be better served by trying the case in a different district where venue would also be proper. Id. The threshold inquiry in a § 1404(a) transfer motion is whether venue would be proper in the district to which transfer is urged — in this case, the Central District of California. Defendant LFC is headquartered in that district and its officer and director defendants also reside there. The accounting calculations alleged to be misleading also occurred there, at Deloitte's California offices. Under 15 U.S.C. § 78aa, therefore, venue would be proper in that district.
The court must next decide whether a transfer is in fact called for, given the competing interests of the parties. "The determination whether to grant a change of venue [pursuant to § 1404(a)] requires a balancing of conveniences, which is left to the sound discretion of the district court." Gateway Companies, Inc. v. Vitech America, Inc., 33 Fed Appex. 578, 579-80 (2d Cir. 2002) (citation omitted). Defendants make a strong argument for transfer under § 1404(a), but, after weighing the relevant factors to be considered in relation to such a motion, the court concludes that the balance tips in favor of keeping the action in this district.
The factors to be considered by the court include both what have been called "private interest factors," which refers to the convenience of the litigants, Iragorri v. United Technologies Corp., 274 F.3d 65, 74 (2d. Cir. 2001) (en banc), and "public interest factors," which refers to the administrative and jurisdictional interests of the districts involved.Id. (citations omitted). In Gulf Oil Corp. v. Gilbert, 330 U.S. 501 (1947), the Supreme Court articulated several factors for determining whether a court should dismiss a case under the common law doctrine of forum non conveniens. These factors included, but were not limited to: (1) the convenience of the parties; (2) the convenience of the witnesses; (3) the relative case of access to proof; (4) the availability of compulsory process to compel the attendance of unwilling witnesses; (5) the cost of obtaining unwilling witnesses; (6) the weight accorded to the plaintiffs choice of forum; (7) the locus of operative facts; (8) trial interests; and (9) the interests of justice. Id. at 508-09. Applying these factors, the Court held that "the District Court did not exceed its powers or the bounds of its discretion in dismissing plaintiff's complaint and remitting him to the courts of his own community." Id. at 512.
The Court did not specifically enumerate these factors as they appear in this decision, but each was included in its discussion in some fashion.
"Congress apparently took issue with the Court's interpretation in . . . Gilbert of its intent and enacted 28 U.S.C. § 1404 (a)," in order to provide for transfer of venue, rather than dismissal under the doctrine of forum non conveniens. Gazis v. John S. Latsis (USA) Inc., 729 F. Supp. 979, 987 (S.D.N.Y. 1990). The Supreme Court, however, reaffirmed Gilbert's balancing test in Piper Aircraft Co. v. Reyno, 454 U.S. 235, 250 (1981). Gazis, 729 F. Supp. at 986. The Gilbert test survives in the Southern District in a slightly modified form, used by district courts to resolve motions for transfer pursuant to § 1404(a). There exists now a nine factor balancing test, which includes:
(1) the convenience of witnesses; (2) the location of relevant documents and relative case of access to sources of proof; (3) the convenience of the parties; (4) the locus of operative facts; (5) the availability of process to compel the attendance of unwilling witnesses; (6) the relative means of the parties; (7) the forum's familiarity with the governing law; (8) the weight accorded the plaintiff's choice of forum; and (9) trial efficiency and the interest of justice, based on the totality of the circumstances.MBCP Peerlogic LLC v. Critical Path, Inc., 2002 WL 31729626 at *3 (S.D.N.Y.) (Kram, J.) (citing Constitution Reins. Corp. v. Stonewall Ins. Co., 872 F. Supp. 1247, 1250 (S.D.N.Y. 1995)). See also, Dwyer v. General Motors Corp., 853 F. Supp. 690, 692 (S.D.N.Y. 1994) (collecting cases).
In the instant case, while it is probably true that the majority of witnesses and documents are to be found in California, see Riley Decl., ¶¶ 7-12, some are in New York — those of defendant Keefe. While there will be inconvenience involved no matter where the trial occurs, it will not be particularly onerous for any party. See Cavalo Growers of Cal. v. Generali Belgium, 632 F.2d 963, 969 (2d. Cir. 1980) (Newman, J., concurring) ("It will often be quicker and less expensive to transfer a witness or a document than to transfer a lawsuit. Jet travel and satellite communications have significantly altered the meanings of `non conveniens'"), cert. denied, 449 U.S. 1084 (1981). This is not a torts case in which the jury might require access to a site for evidentiary purposes. See Irragori, 274 F.3d at 74. The locus of operative facts is likewise split — some occurred in California (the accounting calculations); some occurred in New York (the underwriting and the IPO). The court anticipates that compulsory process will not be necessary, since almost all the witnesses are within the control of the parties.
Counsel for plaintiffs has informed the court that witnesses will be deposed in their home states. Tr. of Oral Argument, December 18, 2002 at 8:21.
The two factors which weigh most heavily in favor of keeping the action in the Southern District are the deference afforded to the plaintiff's choice of forum and trial efficiency. Irragori instructs that plaintiff's choice of forum is to be afforded greater deference when "it was motivated by legitimate reasons, including the plaintiff's convenience . . . and diminishing deference . . . to the extent it was motivated by tactical advantage." 274 F.3d at 73. Further, that the chosen forum is not where the plaintiffs are domiciled (in this case, most live in Ohio) does not necessarily mean the choice is afforded less deference; as long as the choice was for legitimate reasons, it is to be respected. Id. at 72. In the instant case, since one of the three corporate defendants is headquartered in the Southern District of New York and the IPO itself took place here, this district has a much greater connection to this case than does the plaintiffs' home district in Ohio. That was a legitimate reason for them to bring suit outside their home forum. Compared with the Central District of California — the other logical choice based on the facts of the case, New York is obviously more convenient for residents of Ohio.
In terms of trial efficiency, while it is true, as counsel for defendant Deloitte noted at oral argument, that the Central District of California has fewer cases per judge than the Southern District of New York, this particular court (to which this case was transferred in July of 2002) has a comparatively light docket and takes great pride in its ability to move cases along with diligence and dispatch. Further, Magistrate Judge Dolinger is now intimately familiar with the facts of this case, should a matter need to be referred to him. To transfer this case now would be to waste the considerable judicial resources expended thus far.
II. Motion To Be Appointed Lead Plaintiff
Funke et al. — a collection of nine individual investors — have moved to be appointed lead plaintiffs in this matter. Under the Private Securities Litigation Reform Act ("PSLRA"), the court is required to choose as a lead plaintiff (or plaintiffs) that indivual (or individuals) who is (or are) "most capable of adequately representing the interests of class members." 15 U.S.C. § 78u-4 (a)(3)(B). To determine who is most capable of representing the class,
James E. Funke, Karen Rastenis and John Rastenis were the original three plaintiffs who filed the instant complaint. They are joined by Christian R. Bunk, William O. Brisben, Bradford Burrows, David Buse, E.J. Rachwal and Denise Zidenberg and together have timely moved to be appointed lead plaintiffs. Each has filed a certification to serve as a lead plaintiff in this matter. See Murray Decl. Ex. 3. This opinion will refer to this group as "movants."
the court shall adopt a presumption that the most adequate plaintiff . . . is the person or group of persons that — (aa) has either filed the complaint or made a motion in response to a notice . . .; (bb) in the determination of the court has the largest financial interest in the relief sought by the class; and (cc) otherwise satisfies the requirements of Rule 23 of the Federal Rules of Civil Procedure."15 U.S.C. § 78u-4 (a)(3)(B)(iii)(I).
Only one set of plaintiffs has filed a complaint; other than movants, no one else has come forward seeking lead plaintiff status in response to the notice the instant plaintiffs published in THE BUSINESS WIRE, a widely circulated national business-oriented wire service on December 23, 1999. Murray Decl., Ex. 2. As movants note, they benefit from the presumptions codified in the above section of the PSLRA: (1) insofar as they are the only group who filed the complaint or came forward in response to the notice; (2) since no other putative lead plaintiffs have approached the court to demonstrate a larger financial stake, they have the largest; and (3) to the extent that, as set out in the Complaint, the requirements of Fed.R.Civ.P. 23 are satisfied. See Pls' Mem. in Supp. of Lead Pl. Mot. at 5-7.
To satisfy the third prong in § 78u-4, movants need only demonstrate Rule 23's typicality and adequacy requirements in a preliminary fashion. Weltz v. Lee, 199 F.R.D. 129, 133 (S.D.N.Y. 2001) (citing In re Olsten Corp. Sec. Litig., 3 F. Supp.2d 286 (E.D.N.Y. 1998)). Here, plaintiffs will all state identical claims arising out of the allegedly false statements issued before or after the IPO and thereby meet the typicality requirement. In re Oxford Health Plans, Inc. Securities Litigation, 182 F.R.D. 42, 50 (S.D.N.Y. 1998).
The adequacy requirement is met when counsel is found qualified, there are no conflicts of interest between class members and class members have a sufficient stake in the outcome of the litigation to ensure that they will pursue it vigorously. Weltz, 199 F.R.D. at 133 (citing In re Olston, 3 F. Supp.2d at 296 (E.D.N.Y. 1998)). In the instant case, movants' suggested co-lead counsel has substantial experience in these matters, movants themselves have suffered collective losses of over $200,000 under the Securities Act, and there has been no suggestion of a conflict among the class members.
That presumption notwithstanding, all defendants have opposed plaintiffs' motion; defendants LFC and Keefe on the grounds that the PSLRA cautions against appointing such a group as lead plaintiffs. It is well-settled that the central purpose of the PSLRA is to ensure that plaintiffs, and not their attorneys, control the direction of litigation.See e.g., In re Oxford Health Plans, Inc. Securities Litigation, 182 F.R.D. 42, 43-44 (S.D.N.Y. 1998) ("In enacting the PSLRA, Congress intended to increase the likelihood that parties with significant holdings in issuers. will participate in the litigation and exercise control over the selection and actions of plaintiffs counsel" (citation and internal quotes omitted)).
Whether defendants in a securities action have standing to oppose such a motion has not yet been addressed by the Second Circuit. Since "the PSLRA requires Courts to take a more active role in supervising the process of selecting lead plaintiffs," Mitchell v. Complete Management Inc., 1999 WL 728678, *2 (S.D.N.Y.), this court finds the information provided by the defendants useful in rendering its decision, regardless of whether or not they have standing to formally oppose plaintiffs' motion.
Several cases have held that a collection of individuals with no relation to each other beyond their ownership of the same company's stock should not be appointed lead plaintiffs, since that is more likely to result in litigation controlled by the lawyers. See e.g., In re Donnkenny Sec. Litig., 171 F.R.D. 156, 157 (S.D.N.Y. 1997) (disallowing the aggregation of two institutional investors and four individuals in order to create the largest financial interest, since it would "defeat the purpose" of the PSLRA "to prevent lawyer-driven litigation"); see also, Mitchell v. Complete Management Inc., 1999 WL 728678 (S.D.N.Y.) (denying motion to appoint aggregation of 141 investors as lead plaintiffs).
In those cases, however, the motion to be appointed lead plaintiff was rejected for reasons which are inapplicable to the case at bar. In In re Donnkenny, the proposed set of plaintiffs involved both institutional and individual investors. 171 F.R.D. at 157. Since the court had determined that the aims of the PSLRA were better served by having "institutional plaintiffs with expertise in the securities market and real financial interests in the integrity of the market" as lead plaintiffs id., it chose to appoint such an institutional investor as the sole lead plaintiff. Id at 158. In this case, however, the court is not offered such an option — no institutional investors are among the putative plaintiffs. If the court were to order plaintiffs' counsel to solicit such a group, in addition to presenting ethical problems for the attorneys, it would be contrary to the purpose of the PSLRA, under which "Congress hoped that the lead plaintiff would seek the lawyers, rather than having the lawyers seek the lead plaintiff." Id. at 157.
In Complete Management, plaintiffs offered 141 individual investors as the lead party, which Judge Batts found too unwieldy a number and ordered plaintiffs to select a smaller group. Complete Management, 1999 WL 728678 at *3-4. Here, the number of individual investors suggested is nine, which is not far from the seven Judge Batts sanctioned in Weltz v. Lee, 199 F.R.D. 129 (S.D.N.Y. 2001). In this court's estimation (not to mention that of the designers of the American jury system), nine people (as opposed to 137 or 141 or 250) is not too large a group to convene for the purpose of reaching a decision and directing litigation.
See Weltz, 199 F.R.D. at 133 (citing cases in which aggregations of large numbers of plaintiffs have been rejected by courts) (citations omitted).
In light of the foregoing, movants' motion to be appointed lead plaintiffs is granted. It is worth noting, however, that since 15 U.S.C. § 78-u-4 requires only preliminary class-certification findings, this decision does not preclude a party from opposing formal certification of the class. See Weltz, 199 F.R.D. at 133-34.
III Motion for Approval of Co-Lead Counsel.
Funke et al. have also moved to have this court approve their selection of the law firms of Rabin Peckell LLP and Steven E. Cauley, P.A. as co-lead counsel. Having reviewed the résumés of the two firms, Murray Decl. Ex. 4 and Ex. 5, respectively, the court is satisfied that they are sufficiently experienced and competent to undertake this litigation. Defendants have raised two objections: first, that there has been some suspicious behavior on the part of the two firms regarding the improper dismissal of a complaint in California; and second, that there is no need for two law firms.
Defendants note that one of the nine movants, David Buse, filed a class action complaint in the Central District of California virtually identical to the one in the instant case one month before the three original plaintiffs in this action filed theirs. Cannon Decl. Ex. A. Then, on the same day that the instant complaint was filed in the Southern District of New York, Buse executed a Notice of Dismissal without Prejudice, pursuant to Fed.R.Civ.P. 41(a)(1). Cannon Decl. Ex. B. Defendants urge this court to find that dismissal improper since, as they cite it, Rule 23 (to which Rule 41 is subject) requires that "a class action shall not be dismissed or compromised without the approval of the court, whether before or after an answer is filed. . . . Fed.R.Civ.P. 23(e)." LFC's Mem. in Opp. to Pl.'s Mot. at 11. If Rule 23(e) actually read as defendants cite, it would seem to preclude movants' argument that since defendants had not yet answered Buse's complaint, there was nothing improper about withdrawing it without court approval. See Pl.s' Reply Mem. at 7-8.
Rule 23 has been interpreted to require court approval for dismissal even if the class has not yet been certified. See, e.g., Moreno v. Lo-Vaca Gathering Co., 80 F.R.D. 282, 283 (D.C. Tex. 1978) ("Before a class action can be voluntarily dismissed, it must be treated as a class action, even without certification, so that unknown members of the alleged class, if it exists, are not prejudiced").
The court notes, however, that the cited language, "whether before or after an answer is filed," appears neither in Rule 23(e) nor, according to Westlaw, anywhere else in the United States Code. See Fed.R.Civ.P. 23(e). Accordingly, while the Notice of Dismissal executed by Buse (and his attorneys) may have been unusual, it was not clearly improper. Further, since it seems to have been undertaken as part of a concerted effort to file the same action in a different federal district, Moreno's concern about prejudice to unknown members of the class does not apply.See Moreno, supra n 9. cf. Tyco Labs., Inc. v. Koppers Co., Inc., 82 F.R.D. 466, 469 (E.D. Wis. 1979) ("Since the basis of the dismissal motion is to recommence the action in state court . . . there is no reason to believe that the class members will be prejudiced by a dismissal without a hearing"), aff'd, 627 F.2d 54 (7th Cir. 1980). To the extent that attorneys on both sides of this law-suit maybe exploring the edges of ethical behavior, this court will be watching them closely.
Defendants' second objection to the requested approval of co-lead counsel is that "there is no compelling reason why there is a need for `co-lead' counsel," and that the PSLRA does not specifically mention "co-lead counsel." LFC Mem. in Opp. to Pl.s' Mot. at 13. As to the first objection, movants note that the documents and witnesses in this case are located in California and New York, see Part I, supra, and so it makes sense to have two firms representing the parties, one in California (Steven E. Cauley P.A.) and one in New York (Rabin Peckell LLP). As to the second objection, while the PSLRA may not explicitly discuss more than one lead counsel, there is nothing in it to suggest that two law firms is inappropriate. Other courts have approved the selection of more than one lead counsel. See, e.g., In re Donnkenny, 171 F.R.D. 158 (approving the selection of co-lead counsel); see also In re Lernout Hauspie Securities Litigation, 138 F. Supp.2d 39, 46 (D. Mass. 2001) (approving three firms as co-lead counsel in part because of the geographic scope of the litigation and the attendant need for greater attorney resources).
Accordingly, Rabin Peckell LLP and Steven E. Cauley P.A. are hereby approved as co-lead counsel "provided that there is no duplication of attorneys' services, and the use of co-lead counsel does not in any way increase attorneys' fees and expenses." In re Donnkenny, 171 F.R.D. at 158.