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finding dismissal "too harsh a penalty" and allowing joinder of real parties under Rule 17 where plaintiffs' counsel failed to investigate whether named plaintiffs had their claimed legal status.
Summary of this case from In re Stone Energy Corporation Securities LitigationOpinion
Nos. 21 MC 92 (SAS), 01 Civ. 9741, 01 Civ. 10899.
December 27, 2004
Melvyn I. Weiss, Esq., Christian Siebott, Esq., MILBERG WEISS BERSHAD SCHULMAN LLP, New York, NY, Stanley Bernstein, Esq., Rebecca M. Katz, Esq., Jessica Francisco, Esq., Theresa Vitello, Esq., BERNSTEIN LIEBHARD LIFSHITZ, LLP, New York, NY, Liaison Counsel for Plaintiffs.
Gandolfo V. DiBlasi, Esq., John L. Hardiman, Esq., Penny Shane, Esq., David M.J. Rein, Esq., Richard J.L. Lomuscio, Esq., Taleah E. Jennings, Esq., SULLIVAN CROMWELL, New York, NY, Liaison Counsel and Counsel for Underwriter Defendants in Juniper Networks.
Phillip M. Goldberg, Esq., Dean M. Jeske, Esq., Ellen M. Wheeler, Esq., Lisa L. Tharpe, Esq., FOLEY LARDNER LLP, Chicago, IL, Counsel for Underwriter Defendants in Antigenics.
OPINION AND ORDER
I. INTRODUCTION
This opinion concerns two of the 310 consolidated cases that collectively compose the coordinated In re Initial Public Offering Securities Litigation ("In re IPO") proceedings. Defendants challenge plaintiffs' claims in Antigenics, Inc. ("Antigenics") and Juniper Networks, Inc. ("Juniper"), claiming that amendment of the Antigenics and Juniper complaints to substitute new lead plaintiffs would be futile because the original lead plaintiffs did not have standing to prosecute their claims and the proposed substitute lead plaintiffs' claims are time-barred. Defendants' arguments, if adopted, would effectively terminate the class proceedings in Antigenics and Juniper. Accordingly, on August 24, 2004, I ordered the parties to brief the statute of limitations issue more fully than they had done in the context of plaintiffs' June 21, 2004 motion to withdraw, add and substitute lead plaintiffs and class representatives.
The allegations in these coordinated cases are discussed at length in my Opinion of February 19, 2003. See In re IPO, 241 F. Supp. 2d 281 (S.D.N.Y. 2003). Familiarity with that Opinion is assumed.
See In re IPO, No. 21 MC 92, 2004 WL 1900342, at *5 (S.D.N.Y. Aug. 24, 2004).
II. FACTS
A. Antigenics
The Antigenics IPO occurred on February 3, 2000. Joseph Baum filed a complaint in connection with the Antigenics IPO on November 5, 2001, and moved for appointment as lead plaintiff on January 4, 2002, asserting that he had purchased Antigenics shares during the alleged class period — i.e., February 3, 2000 to December 6, 2000. In fact, Baum had purchased shares of Aronex Pharmaceuticals, Inc. ("Aronex"), which Antigenics acquired in July 2001. As part of the Aronex acquisition, Aronex shareholders like Baum received "Contingent Value Rights" redeemable for Antigenics shares, and Baum's records accordingly reflected sales, but no purchases, of Antigenics securities.
See 9/13/04 Memorandum of Law in Support of the Underwriter Defendants' Motion to Dismiss ("Def. Mem.") at 2.
See 10/7/04 Declaration of Rebecca Katz, counsel for Plaintiffs ("Katz Decl.") ¶ 3.
On June 21, 2004, Baum moved to withdraw as lead plaintiff, and Leonard Cohen moved for appointment as lead plaintiff. On August 24, 2004, I granted Baum's motion to withdraw and appointed Cohen interim lead plaintiff pending the resolution of the instant motion.
See 6/21/04 Notice of Omnibus Motion for Certain Lead Plaintiff Withdrawals, Additions and Substitutions ("Substitution Motion") at 2.
See In re IPO, 2004 WL 1900342, at *5.
B. Juniper
The Juniper IPO occurred on June 24, 1999. Collegeware Asset Management, LP ("Collegeware") filed a complaint on December 4, 2001, purporting to bring suit on behalf of a class of investors who had acquired Juniper shares between June 24, 1999 and December 6, 2000. However, Collegeware had made only two purchases of Juniper securities, both after the end of the alleged class period. Collegeware's failure to purchase shares during the alleged class period was evident on the face of the Juniper Complaint. Collegeware moved to be appointed lead plaintiff in the Juniper case on February 1, 2002.
See Def. Mem. at 1; 12/4/01 Class Action Complaint for Violations of the Federal Securities Laws in Juniper ("Juniper Complaint").
See 11/27/01 Collegeware Certification of Named Plaintiff Pursuant to Federal Securities Laws ("Collegeware Cert.").
See Schedule A to Juniper Complaint (listing Collegeware's purchases of Juniper stock, which occurred on 2/2/01 and 8/15/01).
See 2/1/02 Memorandum of Law in Support of the Motion of Collegeware Asset Management, LP for Appointment as Lead Plaintiff and Approval of Selection of Lead Counsel.
On April 9, 2002, Thomas McDaniel and Amy Varani moved to substitute themselves as lead plaintiffs, replacing Collegeware. McDaniel and Varani purchased Juniper securities during the alleged class period. I deferred ruling on whether McDaniel and Varani would be time-barred from prosecuting their claims, instead appointing McDaniel and Varani as interim lead plaintiffs until the matter was addressed on a motion to dismiss.
See 4/9/02 Memorandum of Law in Support of the Motion of Thomas McDaniel and Amy Varani for Appointment as Lead Plaintiffs and Approval of Selection of Lead Counsel.
See 3/19/02 McDaniel Lead Plaintiff Certification (showing that McDaniel purchased Juniper shares on 1/11/00, 2/18/00 and 4/4/00); 3/18/02 Varani Lead Plaintiff Certification (showing that Varani purchased Juniper shares on 10/27/00).
See 4/16/02 Hearing Transcript at 38:6-21.
III. LEGAL STANDARD
Under Rule 12(b)(6) of the Federal Rules of Civil Procedure, a motion to dismiss should be granted only if "`it appears beyond doubt that the plaintiff[s] can prove no set of facts in support of [their] claim[s] which would entitle [them] to relief.'" The task of the court in ruling on a Rule 12(b)(6) motion is "merely to assess the legal feasibility of the complaint, not to assay the weight of the evidence which might be offered in support thereof." When deciding a motion to dismiss, courts must accept all factual allegations in the complaint as true, and draw all reasonable inferences in plaintiffs' favor.
Weixel v. Board of Educ. of New York, 287 F.3d 138, 145 (2d Cir. 2002) (quoting Conley v. Gibson, 355 U.S. 41, 45-46 (1957)).
Levitt v. Bear Stearns Co., Inc., 340 F.3d 94, 101 (2d Cir. 2003) (quotation marks and citations omitted).
See Chambers v. Time Warner Inc., 282 F.3d 147, 152 (2d Cir. 2002).
Under section 9(e) of the Exchange Act, "[n]o action shall be maintained to enforce any liability created under this section, unless brought within one year after the discovery of the facts constituting the violation and within three years after such violation."
A plaintiff in a federal securities case will be deemed to have discovered fraud for purposes of triggering the statute of limitations when a reasonable investor of ordinary intelligence would have discovered the existence of the fraud. . . . Moreover, when the circumstances would suggest to an investor of ordinary intelligence the probability that she has been defrauded, a duty of inquiry arises, and knowledge will be imputed to the investor who does not make such an inquiry.
15 U.S.C. § 78i(e). This limitations period applies to claims under section 10(b). See Lampf, Pleva, Lipkind, Prupis Petigrow v. Gilbertson, 501 U.S. 340, 359-60 (1991).
Dodds v. Cigna Sec. Litig., 12 F.3d 346, 350 (2d Cir. 1993) (citations omitted).
Facts triggering a duty to inquire are frequently termed "storm warnings." "Discovery of facts for the purposes of this statute of limitations `includes constructive or inquiry notice, as well as actual notice.'"
Id.
Rothman v. Gregor, 220 F.3d 87, 96 (2d Cir. 2000) (quoting Menowitz v. Brown, 991 F.2d 36, 41-42 (2d Cir. 1993)).
To be placed on inquiry notice, plaintiffs "need not be able to learn the precise details of the fraud, but they must be capable of perceiving the general fraudulent scheme based on the information available to them." A plaintiff in a securities fraud case "is charged with knowledge of publicly available news articles and analysts' reports" to the extent that they constitute storm warnings sufficient to trigger inquiry notice. "The issue that the Court must consider is . . . whether Plaintiffs `had constructive notice of facts sufficient to create a duty to inquire further into that matter. An investor does not have to have notice of the entire fraud being perpetrated to be on inquiry notice.'"
Salinger v. Projectavision, Inc., 972 F. Supp. 222, 229 (S.D.N.Y. 1997).
Westinghouse Elec. Corp. v. `21' Intern. Holdings, Inc., 821 F. Supp. 212, 222 (S.D.N.Y. 1993).
Newman v. Warnaco Group, Inc., 335 F.3d 187, 193 (2d Cir. 2003) (quoting Dodds, 12 F.3d at 351-52).
Available information must establish "a probability, not a possibility" of fraud to trigger inquiry notice. Moreover, in the context of dismissal, "defendants bear a heavy burden in establishing that the plaintiff was on inquiry notice as a matter of law. Inquiry notice exists only when uncontroverted evidence irrefutably demonstrates when plaintiff discovered or should have discovered the fraudulent conduct." Pending civil or criminal claims that "specifically concern the very misrepresentations alleged in the complaints" may constitute sufficient storm warnings to place plaintiffs on inquiry notice as a matter of law. Once sufficient storm warnings appear, "plaintiffs must exhibit `reasonable diligence' in investigating the possibility that they have been defrauded. If they fail to meet this obligation, plaintiffs will be held to have had `constructive knowledge' of the fraud against them."
Id. at 194.
Nivram Corp. v. Harcourt Brace Jovanovich, Inc., 840 F. Supp. 243, 249 (S.D.N.Y. 1993).
Menowitz, 991 F.2d at 42. See also Lenz v. Assoc. Inns Rests. Co. of Am., 833 F. Supp 362, 375 (S.D.N.Y. 1993) ("[I]n this Circuit awareness of other lawsuits . . . involving a defendant puts a plaintiff on inquiry notice of the probability of fraud within another transaction involving the defendant.").
Addeo v. Braver, 956 F. Supp. 443, 449 (S.D.N.Y. 1997) (quoting Dodds, 12 F.3d at 350) (citations omitted).
The Supreme Court has held that a statute of limitations may be tolled by "the commencement of the original class suit . . . for all purported members of the class who make timely motions to intervene after the court has found the suit inappropriate for class action status." A tolled statute of limitations generally begins to run again when class certification is denied, not when lead plaintiffs or class representatives are disqualified as inadequate. When class certification has been definitively denied, American Pipe tolling cannot operate to sustain substantially identical claims sharing the same defects.
American Pipe and Constr. Co. v. Utah, 414 U.S. 538, 553 (1974).
See Alidina v. Penton Media, Inc., 143 F. Supp. 2d 363, 365 n. 1 (S.D.N.Y. 2001) (finding that, despite judge's disqualification of inadequate class representatives, the "tolling period continued in effect despite such disqualification. This is because . . . [the judge] never found class certification inappropriate per se, but rather focused on the inadequacy and atypicality of proposed plaintiffs").
See Korwek v. Hunt, 827 F.2d 874, 876 (2d Cir. 1987) (denying tolling "to permit the filing by putative class members of a subsequent class action nearly identical in scope to the original class action which was denied certification [because of manageability problems and intraclass conflicts]").
Additionally, motions to amend a complaint to substitute a real party in interest may be held to relate back to the original complaint under Advanced Magnetics, Inc. v. Bayfront Partners, Inc., and "should be liberally allowed when . . . `the change is merely formal and in no way alters the original complaint's factual allegations as to the events or the participants.'" Even if neither American Pipe tolling nor Advanced Magnetics relation back is available, "[e]quitable tolling . . . permits courts to extend a statute of limitations on a case-by-case basis to prevent inequity."
106 F.3d 11 (2d Cir. 1997).
Hutnik v. Securities Messenger Serv., Inc., No. 98 Civ. 6481, 1999 WL 619592, at *6 (S.D.N.Y. Aug. 16, 1999) (quoting Advanced Magnetics, 106 F.3d at 20).
Chao v. Russell P. LeFrois Builder, Inc., 291 F.3d 219, 223 (2d Cir. 2002) (quotation marks and citation omitted).
IV. DISCUSSION
A. Statute of Limitations
Defendants argue that, because extensive media coverage and the actual filing of purported class actions throughout early 2001 triggered inquiry notice for members of the Antigenics and Juniper classes, the statute of limitations precluded the filing of additional suits by the time Cohen, McDaniel and Varani were named as substitute lead plaintiffs. Strictly speaking, despite defendants' best efforts to assert that because Baum and Collegeware lacked standing to pursue their claims, "there was never a case or controversy before the court," the fact remains that the proposed substitute lead plaintiffs merely seek to replace the original representatives of class actions that have already been filed and, indeed, litigated for several years. The question is thus not whether new claims would be timely, but whether the substitution of new proposed lead plaintiffs was permissible at the time plaintiffs sought substitution.
Def. Mem. at 4 n. 1.
I have previously held that such substitutions are timely where substitutes "either (a) filed a complaint in these consolidated actions, as explicitly contemplated by the PSLRA, 15 U.S.C. § 78u-4(a)(3)(B)(iii)(I)(aa), (b) moved to be appointed lead plaintiff in response to the initial notice of pendency, id., or (c) moved to be appointed lead plaintiff within 60 days of the withdrawal of the previous lead plaintiff." Cohen, McDaniel and Varani all moved to be appointed lead plaintiffs within 60 days of the withdrawal of the original lead plaintiffs, Baum and Collegeware. However, defendants assert that, because the original lead plaintiffs in Antigenics and Juniper lacked standing to bring any alleged class claims, substitute plaintiffs should be deemed to be bringing new claims, and that such `new' claims accordingly fall outside the usual statute of limitations.
In re IPO, 214 F.R.D. 117, 120 (S.D.N.Y. 2002).
Of course, proposed substitute lead plaintiffs bringing class claims are entitled to American Pipe tolling at least to the extent they would be so entitled were they to bring new individual claims. See Yang v. Odom, No. 03-2951, 2004 WL 2902517, at *8 (3d Cir. Dec. 15, 2004) ("Given that American Pipe tolling would unquestionably apply were the plaintiffs here to bring individual actions, it would be at odds with the policy undergirding the class action device . . . to deny [lead plaintiffs, who sought to file class actions after the district court had denied class certification because of the inadequacy of the original lead plaintiffs,] the benefit of tolling . . . when no defect in the class itself has been shown.").
Assuming arguendo that defendants' assertion is correct, their position demands a two-step analysis: first, whether the statute of limitations on class claims had run by the time the proposed substitute lead plaintiffs moved for appointment; and second, whether the proposed substitute lead plaintiffs are eligible for any exception to the normal statute of limitations ( i.e., American Pipe tolling, relation back or equitable tolling). If, however, defendants fail to satisfy either prong of this analysis in either Juniper or Antigenics, then their motion to dismiss that case must be denied regardless of whether the proposed lead plaintiffs assert new claims or whether the class claims were adequately pled in the original complaints.
In the Antigenics case, defendants satisfy the first prong, because Cohen did not move to become lead plaintiff until more than two years after the filing of the Antigenics action unequivocally placed potential plaintiffs on inquiry notice. In the Juniper case, though, defendants have not established as a matter of law that potential plaintiffs were on inquiry notice of the alleged fraud prior to April 9, 2001. Although plaintiffs have used a December 6, 2000 Wall Street Journal article, which discussed improprieties in allocation practices surrounding some IPOs, to determine the close of their alleged class periods (December 6, 2000) and to create a self-imposed deadline for filing these consolidated cases (December 6, 2001), plaintiffs have always been quick to note that they do not concede that that article triggered inquiry notice for all potential plaintiffs. Indeed, that article never mentions Juniper (or Antigenics), and contains denials from various underwriters that they had engaged in the alleged unlawful practices. Moreover, defendants' argument that, by April 9, 2001 (one year before McDaniel and Varani moved to replace Collegeware as lead plaintiff), "multiple complaints had been filed making the same allegations that were made in Juniper and by the same counsel," is unconvincing. Although some of these consolidated cases were filed before April 9, 2001, defendants point to no allegations in any of those complaints that refer specifically to Juniper or the Juniper IPO. Defendants have not established as a matter of law that the class claims of McDaniel and Varani were time-barred on April 9, 2002; accordingly, defendants' motion to dismiss the Juniper complaint must be denied.
Indeed, even if the Antigenics plaintiffs were placed on inquiry notice no earlier than the date the Antigenics action was filed, on November 5, 2001, and the applicable statute of limitations was lengthened by the Public Company Accounting Reform and Investor Protection Act of 2002 ("Sarbanes-Oxley"), Pub.L. No. 107-204, § 804, to allow claims brought within two years from discovery, Cohen's claim would have expired on November 5, 2003, well before Cohen moved to be appointed lead plaintiff.
McDaniel and Varani sought appointment as lead plaintiffs on April 9, 2002. Assuming their motion constituted a new claim (as opposed to a timely motion to intervene) asserted before July 30, 2002, when the Sarbanes-Oxley extension became law, their claims must be analyzed under the previous one-year statute of limitations following discovery or constructive discovery of the alleged fraud. See In re Enterprise Mortgage Acceptance Co., LLC, Sec. Litig., Nos. 03-9261, 03-9265, 04-0392, 2004 WL 2785776, at *3 (2d Cir. Dec. 6, 2004).
See 10/7/04 Plaintiffs' Memorandum of Law in Opposition to Underwriter Defendants' Motion to Dismiss ("Opp. Mem.") at 6-7 n. 6.
See Ex. A to 10/7/04 Declaration of Christian Siebott, counsel for plaintiffs ("Siebott Decl.").
10/21/04 Reply Memorandum of Law in Further Support of the Underwriter Defendants' Motion to Dismiss ("Reply Mem.") at 4.
Rather, defendants cite several complaints that state that the alleged fraud occurred with respect to "allocation in . . . hot IPOs." Reply Mem. at 4 (quotation marks and citations omitted).
B. Tolling and Relation Back
In Antigenics, defendants contend that Cohen's claims may not be tolled under American Pipe because "`the allowance of intervention after certification has been denied for lack of standing may condone or encourage attempts to circumvent the statute of limitations by filing a lawsuit without an appropriate plaintiff and then searching for one who can later intervene with the benefit of the tolling rule.'" Defendants seize on the Supreme Court's limitation of its holding in American Pipe to instances in which plaintiffs fail to satisfy the numerosity requirement in support of their contention that standing defects should not toll the claims of substitute lead plaintiffs. However, nowhere in American Pipe did the Supreme Court explicitly state that tolling is unavailable in cases where, as in Antigenics, the original lead plaintiff appeared to have standing, and the lead plaintiff's lack of standing did not become obvious to absent class members until the assertion of new claims became time-barred.
Def. Mem. at 6 (quoting In re Elscint Ltd. Sec. Litig., 674 F. Supp. 374, 378 (D. Mass. 1987)).
Defendants cite another American Pipe dictum, reading a standing exclusion into the Supreme Court's acknowledgment that "[a]s the Court of Appeals was careful to note in the present case, maintenance of the class action was denied not for . . ., [inter alia,] lack of standing of the representative. . . ." Id. (alterations, quotation marks and citation omitted).
I note that, in Korwek v. Hunt, the Second Circuit agreed that the American Pipe Court "confined its holding to some extent to the facts before it." 827 F.2d at 876-77 (finding that American Pipe tolling was unavailable where new class actions, substantially identical to a class action that the district court had previously narrowed in light of "significant problems of manageability and intraclass conflict," were filed in an apparent effort to expand the class action to its earlier breadth). However, the Korwek court itself noted that the "specific question presented [in its decision was] a narrow one: whether the tolling rule established by the Supreme Court in [ American Pipe] applies to permit the filing by putative class members of a subsequent class action nearly identical in scope to the original class action which was denied certification [because of manageability problems and intraclass conflicts]." Id. at 876. Although the Supreme Court's holding in American Pipe may be limited, its purpose — to preserve the utility of the class action form and protect absent class members by discouraging duplicative filings — is applicable here.
Defendants cite various opinions from district courts in other Circuits for the general, but incorrect, proposition that American Pipe tolling can never be applied to cases where the original lead plaintiff lacks standing. No Second Circuit authority, though, prohibits the proposed substitution of lead plaintiffs where a lead plaintiff asserts that he has standing — and files a lead plaintiff certification delineating trades that, had they actually occurred, would indisputably have conferred standing — and class counsel fails to adequately investigate his claims. I find that tolling the applicable statute of limitations in Antigenics, where class counsel mistakenly believed that Baum had standing to assert his claims, and no prejudice to the defendants will result from allowing the substitution of qualified lead plaintiffs, best satisfies the goals of American Pipe.
See Def. Mem. at 5-7 (citing, inter alia, In re Elscint, 674 F. Supp. at 378; Warden v. Crown Am. Realty Trust, No. Civ.A 96-25J, 1998 WL 725946, at *5 n. 5 (W.D. Pa. Oct. 15, 1998); Fleming v. Bank of Boston Corp., 127 F.R.D. 30 (D. Mass. 1989)). Although none of these cases is binding on this Court, it should be noted that these cases never state that a district court is precluded from allowing intervention of substitute named plaintiffs when an original named plaintiff lacks standing to assert class claims. The District of Massachusetts noted, while denying tolling for a standing defect in In re Elscint, that "lack of standing may not per se mandate an exemption from the application of the tolling rule," but that such an exemption would be justified where tolling would "encourage attempts to circumvent the statute of limitation by filing a lawsuit without an appropriate plaintiff and then searching for one who can later intervene with the benefit of the tolling rule." In re Elscint, 674 F. Supp. at 378. Defendants do not charge, and there is no evidence to suggest, that plaintiffs in Antigenics selected Baum as their original lead plaintiff based on anything other than a misapprehension, buttressed by Baum's own trading records, that he was a suitable representative. Both Warden and Fleming, while refusing to grant intervention, note that the decision to grant a motion to intervene lies squarely in the discretion of the district court. See Warden, 1998 WL 725946, at *7; Fleming, 127 F.R.D. at 33.
Defendants do cite Korwek, for the proposition that American Pipe tolling "does not apply to permit a plaintiff to file a subsequent class action following a definitive determination of the inappropriateness of class certification." Korwek, 827 F.2d at 879. Korwek, though, involved a denial of "class certification mainly because of overwhelming manageability difficulties," not lack of standing. Thus, Korwek addressed the unsuitability of tolling class claims, not the inadequacy of proposed lead plaintiffs, and prohibits the repetitious filing of purported class actions for which class certification has already been denied. See Yang, 2004 WL 2902517, at *4 (holding that " Korwek . . . would end tolling only upon a determination by the district court that provided `dispositive reasons indicating unequivocally that a class action suit was inappropriate.'") (citing Korwek, 827 F.2d at 877).
See, e.g., McKowan Lowe Co. v. Jasmine, Ltd., 295 F.3d 380, 384-85 (3d Cir. 2002) (tolling claims under American Pipe to allow intervention of a qualified class representative although original representative had no claim against one defendant, stating that such tolling was "consistent with the twin functions of statutes of limitations — providing defendants with timely notice and avoiding stale claims").
Indeed, "[a] federal class action is n[ot] an invitation to joinder but a truly representative suit designed to avoid, rather than encourage, unnecessary filing of repetitious papers and motions." Punishing class members for counsel's mistaken reliance on Baum's assertion that he had purchased Antigenics stock, like punishing them for failing to meet the numerosity requirement (as in American Pipe), "would frustrate the principal function of a class suit, because then the sole means by which members of the class could ensure their participation in the judgment . . . would be to file earlier individual motions or join or intervene as parties — precisely the multiplicity of activity [that] Rule 23 was designed to prevent. . . ." Indeed, as opposed to the defect in Collegeware's purported representation of the Juniper class, which was clear from the face of the Juniper Complaint, Baum's assertion of standing was buttressed by the Antigenics Complaint and Baum's own lead plaintiff certification. Holding that the inaccuracy of Baum's assertions and class counsel's failure to adequately investigate them should provide the basis for excluding all absent class members from the opportunity for class-wide recovery would be akin to establishing an obligation that class members must independently police the claims of their lead plaintiffs — a position wholly at odds with the spirit of American Pipe.
American Pipe, 414 U.S. at 550 (quotation marks omitted).
Id. at 551.
Although defendants claim that "[t]he Underwriter Defendants do not suggest that unnamed class members have a responsibility to ensure that the original plaintiff is an adequate class representative," their arguments suggest precisely that. Essentially, defendants argue that because Cohen (and, for that matter, every other putative member of the Antigenics class) failed to investigate Baum's trading records independently and determine that Baum lacked standing, his rights to proceed as part of a class action are irretrievably lost. Such a policy would punish class members for relying on the very thing Rule 23 is intended to provide: an efficient method for resolving claims common to a class of individuals without the need for wasteful and duplicative litigation.
Reply Memorandum of Law in Further Support of the Underwriter Defendants' Motion to Dismiss ("Reply Mem.") at 6.
The motivating purposes of statutes of limitation, as recognized by the Supreme Court, are "to put defendants on notice of adverse claims and to prevent plaintiffs from sleeping on their rights." Here, neither concern warrants barring Cohen's claims. Defendants do not attempt to show that they were not on notice of plaintiffs' claims in Antigenics; indeed, they cannot make such a contention, because the replacement of Baum in no way affects plaintiffs' allegations that a class of investors was defrauded by an elaborate scheme of market manipulation, misrepresentation and material omission. Those allegations were made in the Antigenics complaint, and defendants have been constantly aware of that complaint, and hundreds of similar complaints, for the last three years. Similarly, defendants have provided no evidence to show that they knew that Baum's claims were inadequate before he moved to withdraw; rather, defendants presumably proceeded for more than two years under the assumption that the Antigenics lead plaintiff actually had purchased Antigenics shares. Defendants are thus as prepared to defend against a class led by Cohen as they were presumably prepared to defend again one led by Baum. Indeed, the only prejudice claimed by defendants is that "substitution at this late date would prejudice the defendants by exposing them to class actions piggybacked with placeholder plaintiffs." The Antigenics defendants, though, face nothing more than the prospect that the purported class action filed against them on November 5, 2001, will continue.
Crown Cork Seal Co. v. Parker, 462 U.S. 345, 352 (1983). See also American Pipe, 414 U.S. at 554-55 ("The policies of ensuring fairness to defendants and of barring a plaintiff who has slept on his rights are satisfied" by the tolling doctrine.) (quotation marks omitted).
Def. Mem. at 13.
Because the pendency of the Antigenics class action tolled the statute of limitations with respect to Cohen and the other absent class members, I need not decide whether the relation back doctrine of American Magnetics might independently operate to save plaintiffs' claims. I do, however, note that one of the factors used by the American Magnetics court to determine whether substitution would be fair to defendants is whether "the attempt to substitute . . . was made within a reasonable time." A delay of two and one-half years to determine a simple and easily ascertainable fact — that Baum had never purchased the securities he claimed to have purchased — is certainly not reasonable.
Advanced Magnetics, 106 F.3d at 21.
Indeed, a review of the trading documents Baum provided to plaintiffs' counsel after filing his lead plaintiff certification shows not a single entry that can even arguably be characterized as a purchase of Antigenics shares during the alleged class period. Class counsel attempt to justify their failure to provide a qualified Antigenics class representative, explaining that Baum did not "discover that he had not in fact purchased Antigenics stock during the class period" until June 2004. However, Baum's purchase records clearly show that he purchased shares of Aronex stock, not Antigenics, and that Antigenics' acquisition of Aronex left Baum with 1,000 "Contingent Value Rights" in Antigenics stock, which Baum converted to Antigenics shares and sold according to the terms of the acquisition. Plaintiffs attribute their error to provide a qualified lead plaintiff to the "confusion" caused by his trading records; however, such confusion would have been easily resolved by a moment's inquiry into the provenance and terms of "Contingent Value Rights" in Antigenics.
Unfortunately, plaintiffs have not disclosed precisely when they received Baum's trading records, except to state that Baum provided his records sometime after January 4, 2002. See 12/6/04 Supplemental Declaration of Rebecca Katz ("Katz Supp. Decl.") ¶¶ 4-6.
See Exs. A-C to Katz Supp. Decl.
Opp. Mem. at 3.
See Ex. B to Katz Supp. Decl.
For example, an Internet search (using the Google search engine) of the terms "Antigenics Contingent Value Rights" returns the following entry from the Antigenics Internet site:
I have Antigenics contingent value rights. What can I do with them?
In July 2000, Antigenics acquired Aronex Pharmaceuticals, Inc. In addition to 0.0594 shares of Antigenics stock, each shareholder of Aronex Pharmaceuticals received one contingent value right for each share of Aronex Pharmaceuticals they owned. The rights entitled the holders fractional shares of Antigenics stock upon final approval from the US Food and Drug Administration for ATRAGEN™ (now ATRA-IV) for treatment of a certain type of leukemia by July 6, 2002.
After meeting with the FDA, Antigenics made the decision not to file for leukemia. The contingent value rights expired on July 6, 2002 with no value. Please consult your tax advisor for advice on figuring the cost basis for these Antigenics shares.
http://www.antigenics.com/investors/faq/ (Dec. 17, 2004).
Plaintiffs' error — a failure to offer a lead plaintiff who purchased shares during the class period — is not an "inconsequential pleading error" of the type contemplated by Advanced Magnetics. However, although counsel's failure to investigate Baum's trading history cannot be condoned, outright dismissal is too harsh a penalty to levy on the absent Antigenics class members, who relied on counsel rather than conduct an independent investigation into the veracity of Baum's claims.
Advanced Magnetics, 106 F.3d at 19. ("The goal of relation-back principles is `to prevent parties against whom claims are made from taking unjust advantage of otherwise inconsequential pleading errors to sustain a limitations defense.'") (quoting Fed.R.Civ.P. 15 Advisory Committee Note (1991)).
See, e.g., Yang, 2004 WL 2902517, at *13 ("Allowing tolling to apply to subsequent class actions where the original class was denied because of the lead plaintiffs' deficiencies as class representatives will not lead to the piggybacking or stacking of class action suits `indefinitely' as Defendants argue. . . . Rather than arbitrarily eliminate the possibly meritorious claims of countless class members, we prefer to see careful case management employed to avoid the prospect of `indefinite' tolling.").
I do not impute conscious trickery to plaintiffs' counsel. Indeed, liaison counsel for the coordinated In re IPO litigation are responsible for more than 300 securities class actions, each of which must satisfy Rule 23, as well as all requirements of the federal securities laws. It is thus plausible that investigating Baum's qualifications merely `slipped through the cracks' in the context of the larger IPO litigation. But despite the efficiency gained by consolidation, each class action represents its own separate constellation of claims and class members. Here, counsel proceeded for two and one-half years before seeking to substitute a qualified lead plaintiff.
Nonetheless, despite the severity of class counsel's breach, defendants, who have indisputably been aware of the class allegations since the Antigenics complaint was first filed, will not be prejudiced by allowing that action to proceed. By contrast, stripping the absent Antigenics class members of the possibility of a class action would work a significant injustice on the members of that class, because the costs of individual litigation would, in many cases, overwhelm their expected recoveries. I decline to do so.
Indeed, because dismissal of the Antigenics case would deprive many plaintiffs of any chance of recovery while denial of defendants' motion would merely preserve the status quo, equitable tolling, which "permits courts to extend a statute of limitations on a case-by-case basis to prevent inequity," could also serve to render Cohen's claims timely. Chao, 291 F.3d at 223 (quotation marks and citation omitted).
V. CONCLUSION
Accordingly, defendants' motions to dismiss the Antigenics and Juniper cases are denied. Plaintiffs' pending motion to substitute lead plaintiffs in Antigenics and Juniper, Nos. 01 Civ. 9741 and 01 Civ. 10899, is granted.
SO ORDERED.