Opinion
Civ. No. 94-5343 (DRD)
May 20, 1999
Paul J. Dillon, Esq., Bloom, Rubenstein, Karinja Dillon, P.C., Plaintiffs' Liaison Counsel
Irving Morris, Esq., Karen L. Morris, Esq., Seth D. Rigrodsky, Esq., James A. McShane, Esq., Morris and Morris
Brian F. Amery, Esq., Bressler, Amery Ross
David A. Brownlee, Esq., Kirkpatrick Lockhart LLP, Counsel for Merrill Lynch, Pierce, Fenner Smith Incorporated
Robert B. McCaw, Esq., Robert F. Hoyt, Esq., Wilmer, Cutler Pickering, Counsel for PaineWebber Incorporated
William H. Pratt, Esq., Frank Holozubiec, Esq., Kirkland Ellis, Citicorp Center, Counsel for Dean Witter Reynolds, Inc.
O P I N I O N
Defendants Merrill Lynch, Pierce, Fenner Smith Incorporated, PaineWebber Incorporated and Dean Witter Reynolds, Inc. jointly appeal the Letter-Order and Opinion of Magistrate Judge Ronald J. Hedges dated July 21, 1998 (the "Order") granting Plaintiffs' Motion for Leave to File a Supplemented and Second Amended and Consolidated Complaint (the "Second Amended Complaint"). For the reasons set forth below, the order will be affirmed.
STANDARD OF REVIEW
A party may file objections to the decision of a magistrate judge on a pretrial matter not dispositive of a claim or defense within 10 days after being served with a copy of the order. 28 U.S.C. § 636(b)(1)(A); Fed.R.Civ.P. 72(a); Local Civil Rule 72.1. "The district judge to whom the case is assigned shall consider such objections and shall modify or set aside any portion of the magistrate judge's order found to be clearly erroneous or contrary to law." Fed.R.Civ.P. 72(a). In determining whether a decision is clearly erroneous, the court must evaluate whether it is "left with the definite and firm conviction that a mistake has been committed." United States v. United States Gypsum Co., 333 U.S. 364, 395 (1948).
When a magistrate judge has ruled on a discovery motion, the ruling "is entitled to great deference and is reversible only for abuse of discretion." Kresefky v. Panasonic Communications and Sys. Co., 169 F.R.D. 54, 64 (D.N.J. 1996). A magistrate judge has wide discretion, but his or her decision must be based on clearly articulated principles.Schroeder v. Boeing Commercial Airplane Co., 123 F.R.D. 166, 169 (D.N.J. 1988).
BACKGROUND AND DISCUSSION
The background of this action was fully described in my December 15, 1995 opinion granting Defendants' motion for summary judgment on Plaintiffs' federal claims and dismissing their state claims without prejudice. In re Merrill Lynch, et al. Securities Litigation, 911 F. Supp. 754 (D.N.J. 1995). On January 30, 1998 the Third Circuit reversed the December 15, 1995 decision and remanded the case. Newton v. Merrill Lynch, Pierce, Fenner Smith Inc., 135 F.3d 266 (3d Cir.) (en banc), cert. denied, U.S., 1998 WL 221287 (Oct. 5, 1998). On June 12, 1998 Plaintiffs moved to file the Second Amended Complaint, which adds no new substantive allegations but extends the end of the class period from November 4, 1994 to August 28, 1996 — the date the SEC adopted new NASDAQ order handling rules — and adds eighteen named class representatives.
In the Order Magistrate Judge Hedges granted Plaintiffs' motion:
Rule 15 embodies the liberal pleading philosophy of the federal rules. Adams v. Gould Inc., 739 F.2d 858, 864 (3d Cir. 1984), cert. denied, 469 U.S. 1122 (1985). Rule 15(c)(2) provides: "An amendment of a pleading relates back to the date of the original pleading when the claim or defense asserted in the amended pleading arose out of the conduct, transaction, or occurrence set forth or attempted to be set forth in the original pleading." Rule 15(d) provides: "Upon motion of a party the court may, upon reasonable notice and upon such terms as are just, permit the party to serve a supplemental pleading setting forth transactions or occurrences or events which have happened since the date of the pleading sought to be supplemented."
Under Rule 15(c)(2), the amendment must come from the same core event or transaction that was set forth in the original Complaint. E.E.O.C. v. Westinghouse Electric Corp., 632 F. Supp. 343, 364 (E.D.Pa. 1986),aff'd, 869 F.2d 696 (3d Cir. 1989). When the original pleading places a defendant on notice that the disputed conduct was of a continuous nature, the defendant is expected to defend against all claims arising out of that course of conduct, whether the claims came from before or after the original Complaint was filed. Chesapeake Ohio Ry. v. United States Steel Corp., 878 F.2d 686, 691 (3d Cir. 1989). The Amended Complaint alleges that defendants continued the same course of conduct complained of in the original pleading after November 4, 1994 and to August 28, 1996.
Rule 21 provides: "Parties may be dropped or added by order of the court on motion of any party or of its own initiative at any stage of the action and on such terms as are just." Rule 24(b)(2) provides: "Upon timely application anyone may be permitted to intervene in an action when an applicant's claim or defense and the main action have a question of law or fact in common." Pursuant to Rule 24(b)(2), plaintiffs may add additional class representatives to ensure the class is adequately represented. Bromley v. Michigan Educ. Assoc., 178 F.R.D. 148, 159 (E.D.Mich. 1998).
Defendants now appeal the Order on the grounds that the proposed claims are barred by the statute of limitations and the proposed amendment does not relate back to the filing of the original complaint because the relation back doctrine does not apply in situations such as this where the proposed claims are new securities claims arising from transactions not referenced in the original complaint. Plaintiffs respond that the Order properly granted them leave to amend because their proposed claims relate back to the filing of the Amended and Consolidated Class Action Complaint ("Amended Complaint") regardless of the statute of limitations. They contend that because they have always challenged a continuing course of conduct, Defendants have known at all times that as long as their firm-wide NASDAQ stock order execution practices continued unchanged, they would be subject to subsequent class claims.
Relation back of a Rule 15(d) supplemental pleading is permitted regardless of the applicable statute of limitations because:
"if defendant is given sufficient notice of the nature of the claim being asserted at the outset of the action, the policy underlying the statute of limitations is in no way compromised by allowing a supplemental pleading to relate back."Bromley, 178 F.R.D. at 156 (quoting 6A Charles Alan Wright, Arthur R. Miller Mary Kay Kane, Federal Practice and Procedure § 1508 at 201-02 (1986)). The relevant inquiry for notice is:
whether the adverse party, viewed as a reasonably prudent person, ought to have been able to anticipate or should have expected that the character of the originally pleaded claim might be altered or that other aspects of the conduct, transaction, or occurrence set forth in the original pleading might be called into question.
6A Charles Alan Wright, Arthur R. Miller Mary Kay Kane, Federal Practice and Procedure § 1497 at 93 (1990). Supplemental claims relate back to an original complaint where they "seek to identify additional sources of damages that were caused by the same pattern of conduct identified in the original complaint." F.D.I.C. v. Conner, 20 F.3d 1376, 1386 (5th Cir. 1994).
As alleged in the Amended Complaint, this action is about Defendants' continuing common scheme to defraud their customers. It alleged that Defendants purposefully used their superior knowledge of the NASDAQ national best bid and offer ("NBBO") even though better prices were reasonably available from other sources of liquidity, id. ¶¶ 30-38, and that when they traded for their own accounts they used sources of superior prices like Instinet and SelectNet. Id. ¶ 29.
In addition, in the Amended Complaint Plaintiffs requested a declaration that Defendants' practices "violated Section 10(b) and Rule 10(b)(5)" and sought to enjoin Defendants "to fulfill their duties of best execution in executing customer orders to buy or sell shares of stock," id. at p. 21, prayers for relief which put Defendants on notice of Plaintiffs' intention to assert class claims on behalf of all investors damaged by Defendants' continuing misconduct. See Soler v. G U, Inc., 103 F.R.D. 69, 75 (S.D.N.Y. 1984) (finding that original complaint's prayer "that the defendants be enjoined from any further violations" put the defendants "on notice that the alleged wrongful conduct was of a continuing nature . . .").
Moreover, in Newton the Third Circuit's analysis focused not on a limited series of individual securities transaction violations but rather on Defendants' course of conduct in implementing the scheme alleged by Plaintiffs. For instance, before it ultimately concluded that Plaintiffs had demonstrated the existence of genuine material disputed issues, the court examined evidence of Defendants' execution and order handling policies and practices, the existence of a hidden two-tiered market, Defendants' disclosures and the feasibility of systematically providing prices superior to the NBBO from alternative sources of liquidity.
In light of the foregoing, it cannot be said that Magistrate Judge Hedges's conclusion that Plaintiffs may file the Second Amended Complaint is clearly erroneous or contrary to law. In the Order Magistrate Judge Hedges articulated the standard for the supplementation of pleadings and the relation back of amendments under Rule 15. He found that the Second Amended Complaint "allege[d] that defendants continued the same course of conduct complained of in the original pleading after November 4, 1994 and to August 28, 1996" and held that under Chesapeake Ohio Ry., 878 F.2d at 691, the original pleading put the defendants on notice of the plaintiffs' proposed claims. He also determined that pursuant to Rules 21 and 24(b)(2) Plaintiffs may add additional class representatives. Thus, the Order will be affirmed.
CONCLUSION
For the reasons stated above, Magistrate Judge Hedges's order will be affirmed. An appropriate order follows.
O R D E R
This matter having been opened to the Court by the attorneys for Defendants Merrill Lynch, Pierce, Fenner Smith Incorporated, PaineWebber Incorporated and Dean Witter Reynolds, Inc., on a joint appeal from the Letter-Order and Opinion of Magistrate Judge Ronald J. Hedges dated July 21, 1998 granting Plaintiffs' Motion for Leave to File a Supplemented and Second Amended and Consolidated Complaint, and notice having been given to all parties, in consideration of the papers submitted and for good cause shown, and for the reasons set forth in an opinion of even date,
IT IS, this day of May, 1999 ORDERED that Magistrate Judge Hedges's July 21, 1998 Order is affirmed.