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Partners v. Blumenthal

United States District Court, S.D. New York
Feb 9, 2007
02 Civ. 7377 (LAK) (AJP) (S.D.N.Y. Feb. 9, 2007)

Opinion

02 Civ. 7377 (LAK) (AJP).

February 9, 2007


REPORT AND RECOMMENDATION


Plaintiffs Frederick L. Gordon, Sam D. Gordon, and Gordon Partners (collectively, the "Gordon plaintiffs") bring this securities action against defendants NTL, Inc. ("NTL"), and George S. Blumenthal, Barclay Knapp, and John F. Gregg (collectively, the "individual defendants"), pursuant to, inter alia. Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) 78t(a), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. (Dkt. No. 16: Second Amended Complaint ["2d Am. Compl."].) Presently before the Court is defendants' summary judgment motion. (Dkt. No. 59.) The Court heard oral argument on February 9, 2007.

For the reasons set forth below, defendants' summary judgment motion should be GRANTED and plaintiffs' complaint dismissed.

FACTS

The Gordon plaintiffs' action is based upon the same basic underlying facts as those alleged by the class action plaintiffs against NTL and the individual defendants in In re NTL, Inc. Sec. Litig.. (See Dkt. No. 16: 2d Am. Compl. ¶¶ 1-155.) Indeed, the Gordon plaintiffs' complaint adopts by reference in its entirety the September 23, 2002 Consolidated Class Action Complaint filed in In re NTL, Inc. Sec. Litig., (2d Am. Compl. ¶ 50; Dkt. Nos. 59 67: Defs. Pls. Rule 56.1 Stmts. ¶ 47; see also 02 Civ. 3013, Dkt. No. 21: Consolidated Am. Class Action Compl.; 02 Civ. 3013, Dkt. No. 28: Am. Class Action Compl.) The facts in the Consolidated Class Action Complaint, and in the Gordon plaintiffs' second amended complaint, are summarized in Judge Kaplan's decision on defendants' motion to dismiss, In re NTL, Inc. Sec. Litig., 347 F. Supp. 2d 15 (S.D.N.Y. 2004), and my Report and Recommendation on the class certification motion, In re NTL, Inc. Sec. Litig., 02 Civ. 3013, 2006 WL 330113 at *1-3 (S.D.N.Y. Feb. 14, 2006) (Peck, M.J.), report rec. adopted, 2006 WL 568225 (S.D.N.Y. Mar. 9, 2006), familiarity with both of which is assumed.

The Gordon plaintiffs' action differs from that of the class action plaintiffs in that plaintiff Frederick Gordon was close friends with the individual defendants, particularly George Blumenthal, and therefore enjoyed a greater degree of access to NTL's management than the average investor. (See 2d Am. Compl. ¶¶ 27-33; Dkt. No. 67: Gordon Aff. ¶¶ 18-34.) As Frederick Gordon explained: "My relationship with NTL and the individual defendants was long-standing. I was a fraternity brother of George Blumenthal in the 1960's, a social friend for decades and an investor in his business ventures. I stayed at his London apartment. I went to all three of George's weddings." (Gordon Aff. ¶¶ 18-19, citations omitted; see also Dkt. No. 67: Pls. Rule 56.1 Stmt. ¶ 87.)

Frederick Gordon was the founder of Gordon Partners, a hedge fund that concentrated in long-term investments in a handful of select companies. (Defs. Pls. Rule 56.1 Stmts. ¶ 1; Gordon Aff. ¶ 4; Dkt. No. 68: Pls. Br. at 4; Dkt. No. 63: Burdette Aff. Ex. 2: Gordon Dep. 11.) Frederick Gordon was the single largest investor in Gordon Partners and made all of the investment decisions for Gordon Partners. (Defs. Pls. Rule 56.1 Stmts. ¶¶ 2-3; Gordon Dep. 12.) Frederick Gordon also made all personal investment decisions for his son, plaintiff Sam Gordon. (Defs. Pls. Rule 56.1 Stmts. ¶ 4; Gordon Aff. ¶ 4; Gordon Dep. 13-14.) Most of the value of the Gordon plaintiffs' assets consisted of NTL stock, which as of January 12, 2000 was worth approximately $30 million. (Gordon Dep. 14-15.)

The Gordon plaintiffs allege that Frederick Gordon "was one of the substantial investors the defendants called on to vouch for their ability and honesty to other Wall Street professionals assessing the company's strategy and finances." (Gordon Aff. ¶ 8.) The Gordon plaintiffs explain:

At times, NTL investor relations staff asked [Frederick] Gordon to do tasks for the company, such as contact researchers at investment firms about analysts' reports NTL was unhappy with, which Gordon did. Gordon performed other services for the company, of which it was aware. Gordon vouched for NTL's top management, with its knowledge and a[t] times at its request, to investment professionals.

(Pls. Rule 56.1 Stmt. ¶ 91, record citations omitted.) The Gordon plaintiffs contend that "[i]f Gordon had sold his stock and told people he had done so, it would have called into question the credibility of Blumenthal and Knapp as managers." (Pls. Rule 56.1 Stmt. ¶ 101.) The Gordon plaintiffs suggest that Frederick Gordon's close involvement with NTL and its managers was a motivating factor behind defendants' alleged attempts to mislead him about the true state of the company. (See Pls. Rule 56.1 Stmt. ¶¶ 97-112.)

Defendants' Alleged Misstatements Between May 8, 2001 and April 16, 2002

The Gordon plaintiffs allege that were it not for defendants' fraudulent and misleading statements to the investing public in general and to Frederick Gordon specifically, the Gordon plaintiffs would not have continued to hold the NTL shares that they already owned prior January 12, 2000 and would not have purchased additional NTL shares between January 12, 2000 and April 16, 2002. (Dkt. No. 67: Gordon Aff. ¶ 10-12.) Frederick Gordon stated: "I am prepared to accept that the decline from the $100+ share price in early January 2000 to not only the $44 price in early August 2000 but also the $31 share price in early May 2001 was not attributable to perceived misstatements or omissions by defendants." (Gordon Aff. ¶ 12.) The Gordon plaintiffs claim that Frederick Gordon "would have sold all of plaintiffs' holdings by no later than the three trading days between May 8 and May 11, 2001, had the defendants not made material misstatements and omissions up to and at that time." (Dkt. No. 68: Gordon Aff. Ex. 3: Pls. Am. Interrog. Ans. at 5; Gordon Aff. ¶ 11.)

Frederick Gordon also conceded that "there was zero inflation in NTL's stock price" after November 28, 2001. (Dkt. No. 63: Burdette Aff. Ex. 2: Gordon Dep. 142.)

On May 8, 2001, NTL's stock was selling for approximately $31 per share on the New York Stock Exchange. (Dkt. No. 67: Pls. Rule 56.1 Stmt. ¶ 81.) If Frederick Gordon would have sold all the Gordon plaintiffs' NTL stock in the days after May 8, 2001, he would have sold it for an average price of $27.50 per share. (Pls. Rule 56.1 Stmt. ¶ 83.) The Gordon plaintiffs state that "[t]here was no inflation in the share price of $27.50 attributable to the misrepresentations and omissions, because in 1999, before the material misstatements and omissions, the stock had always traded above that amount." (Pls. Rule 56.1 Stmt. ¶ 84; Pls. Am. Interrog. Ans. at 5-6.)

On May 8, 2001, NTL announced a 32% increase in quarterly EBITDA from the fourth quarter of 2000, and defendant Barclay Knapp, NTL's president and chief executive officer, stated in a press release that: "'We are very proud of this quarter's financial results. Revenue and EBITDA for the quarter have exceeded our previously stated expectations and we are on track to meet or exceed our 2001 financial targets for Revenue (£2,600 million) and EBITDA (£385 million).'" (Gordon Aff. ¶ 59 Ex. 19.) A May 10, 2001 publication quoted defendant Knapp as stating: "'We are very pleased with our strong performance this quarter and believe that we have made an excellent start to achieve our goals for the year. We are improving customer service and choice, enhancing revenue, cutting costs and increasing liquidity faster than anticipated.'" (Gordon Aff. Ex. 20 at 2.)

The Gordon plaintiffs allege that NTL made similar statements from the time it acquired "ConsumerCo" in May 2000 up until it announced the restructuring in January 2002. (Gordon Aff. ¶ 62 Exs. 1, 21, 22.) The Gordon plaintiffs allege that these statements

were false and misleading because the defendants knew by May 2001, and partially admitted in filings made in 2002 and 2003, that (i) ConsumerCo continued to be plagued by high rates of churn caused by non-paying customers, multiple billing systems, and intractable difficulties in meshing the separate companies' customer service and support; (ii) in order to mask these problems, NTL was employing deceptive practices, such as ignoring non-payers and extending disconnect times; and (iii), NTL would not have "excess funding through 2002," "financing into 2003" or "available" bank lines unless it continued to meet its EBITDA targets into 2002, which it could not do without employing deceptive practices.

(Gordon Aff. ¶ 63.) The Gordon plaintiffs claim, for example, that NTL never disclosed that on May 23, 2001, defendant Knapp directed NTL "'to run low balance customers . . . a further 30 days out,' rather than disconnect them for nonpayment, which in turn lowered reported churn." (Gordon Aff. ¶ 65 Ex. 7: Knapp Dep. 468-71.)

During a breakfast on September 21, 2001, defendant Knapp told Frederick Gordon that "between the time NTL had agreed to acquire ConsumerCo in 1999 and the time the transaction closed in May 2000, ConsumerCo had gone from having a positive to a negative cash flow." (Gordon Aff. ¶ 80; Pls. Rule 56.1 Stmt. ¶ 103.) The Gordon plaintiffs allege that this had never been disclosed to the public or to Frederick Gordon himself. (Gordon Aff. ¶ 80.) A September 24, 2001 news report regarding NTL stated: "Perceptions that the company may not be fully funded fuelled the drop in share price to an all time low of $1.50 last week." (Gordon Aff. Ex. 24.)

Around the end of November 2001, Frederick Gordon visited NTL's offices in New York, and defendant Blumenthal told him that NTL was going to have to restructure. (Gordon Aff. ¶ 92; Gordon Dep. 73-76; Defs. Pls. Rule 56.1 Stmts. ¶ 27.) NTL's stock was trading at approximately $3 per share at that time. (Gordon Aff. ¶ 92.) In December 2001 and January 2002, NTL issued a series of press releases stating that "[i]t was fully able to meet all of its current trade obligations and interest payments" (Gordon Aff. Ex. 27), it was "introducing a series of cost cutting initiatives" (Gordon Aff. Ex. 28), "[t]he company has sufficient liquidity to approach the [planned] recapitalization process in a considered manner" (Gordon Aff. Ex. 30), and "[t]he company expects to be able to pay its bills, including interest payments" (Gordon Aff. Ex. 31).

Frederick Gordon stated that:

The clearest proof that I believed what the defendants were assuring me and others during the latter part of 2001 is that, as the stock price then dropped, I bought on fifteen separate occasions a total of more than $800,000 of NTL stock for Gordon Partners, and on ten separate occasions I bought a total of more than $300,000 of NTL stock for myself. That included several purchases in December 2001, even after I had heard that the company was going to restructure, when the stock was below $1. I did so because the defendants continued to affirm that NTL would meet its EBITDA guidance and loan payments.

(Gordon Aff. ¶ 101.) Frederick Gordon continued:

The notion that I would never have sold NTL stock, no matter what was revealed about the company, makes no sense. The defendants claim that, however, for three reasons. First, even after Barclay [Knapp] told me in September 2001 that ConsumerCo had negative cash flow when acquired in May 2000, I did not sell any NTL stock. Barclay [Knapp]'s disclosure, however, came a year and a half after the fact, and he at the same time claimed to me, and to others, as he had in 2001, that, as the "GM of London," he had fixed the problems that caused the lack of cash flow, and NTL was fully funded into 2003. Second, even after George [Blumenthal] told me in November 2001 that NTL would have to restructure, I did not sell NTL stock (which in December was selling for less than $1). George [Blumenthal], however, did not know what the restructuring might amount to, and NTL, as I noted, continued to claim to me and to the world that its EBITDA projections were on target, it could make its interest payments and it had ample liquidity. Third, of course I knew in December 2001 that the stock could go to zero; it was quite close to that then. There was, however, little point by December 2001 in not continuing to believe the defendants. A better plan at year-end 2001, I thought, was to hang on, in the belief that a restructuring, with Barclay [Knapp] at the helm, would not necessarily wipe out plaintiffs' equity position. Barclay [Knapp] told a reporter on or about December 9, 2001 that NTL was determined to avoid a major restructuring that would transfer equity to the bondholders. That was very welcome and important news to me, and confirmed my decision not to sell shares that had lost more than 99% of their value in two years.

(Gordon Aff. ¶ 102, citations omitted.)

On December 11, 2001, Frederick Gordon e-mailed Aizad Hussain, NTL's head of corporate finance, expressing the hope that Hussain's confidence about the company was "grounded in the numbers." (Gordon Aff. ¶ 103 Ex. 33.) Hussain replied, "They've all given up — helps turn the business around since it gives me and the rest of George a I [sic] more leverage to get the changes we need done. Can't say more." (Gordon Aff. ¶ 103 Ex. 33.)

On January 31, 2002, NTL announced the restructuring that defendant Blumenthal had told Gordon in late November 2001 was coming. (Gordon Aff. ¶ 105.) An NTL press release stated that NTL had "appointed Credit Suisse First Boston, JP Morgan and Morgan Stanley to advise on strategic and recapitalization alternatives to strengthen the company's balance sheet and reduce debt." (Gordon Aff. ¶ 105 Ex. 30.)

On March 28, 2002, NTL announced that its stock would be de-listed from the New York Stock Exchange, but that the de-listing would have no effect on business operations or customer service. (Gordon Aff. Ex. 38.) On April 10, 2002, Bloomberg News reported that Barclay Knapp was facing calls to resign as CEO, stating that he "turned NTL into a $30 billion company, and then saw its market value evaporate as he racked up $17.5 billion of debt and failed to turn a profit." (Gordon Aff. Ex. 39.) On April 11, 2002, Bloomberg News published an update entitled "NTL Is Losing Disgruntled Customers as Well as Money." (Gordon Aff. Ex. 40.)

On April 16, 2002, before the securities market opened, NTL announced that it was entering into Chapter 11 bankruptcy. (2d Am. Compl. ¶ 4.) The Bankruptcy Court confirmed a plan of reorganization for NTL on September 5, 2002. (2d Am. Compl. ¶ 4.) As part of the bankruptcy, the Gordon plaintiffs' equity was eliminated. (Gordon Aff. ¶ 106.)

In January 2003, Frederick Gordon received 3,470 warrants, which he sold for $21,036 in 2004; Gordon Partners received 5,638 warrants, which it sold for $39,990 in 2004; and Sam Gordon received and owns 260 warrants. (Gordon Aff. 171; Pls. Am. Interrog. Ans. at 2.) In addition, Frederick Gordon received 2,972 NTL Europe shares, liquidated by the company for $29.72; Gordon Partners received 4,382 shares, liquidated by the company for $43.82; and Sam Gordon received 250 shares, liquidated by the company for $2.50. (Gordon Aff. ¶ 172; Pls. Am. Interrog. Ans. at 2.)

The Gordon Plaintiffs' NTL Holdings

The Gordon plaintiffs' claims are based on a period of time between January 12, 2000 through and inclusive of April 16, 2002 (the "Applicable Period"), during which they "acquired or were induced to retain NTL securities." (Dkt. No. 16: 2d Am. Compl. ¶ 1.) The Gordon plaintiffs divide their claims based on three time periods: (1) Period 1 Claims, which relate to NTL securities that the Gordon plaintiffs owned before January 12, 2000, specifically, 234,375 NTL shares owned by Gordon Partners, 46,875 NTL shares owned by Frederick Gordon, and 17, 188 NTL shares owned by Sam Gordon (Dkt. No. 68: Gordon Aff. Ex. 3: Pls. Am. Interrog. Ans. at 7; Dkt. Nos. 59 67: Defs. Pls. Rule 56.1 Stmts. ¶¶ 12-16); (2) Period 2 Claims, which relate to 30,625 NTL shares that Gordon Partners purchased during the second half of 2000 and up to May 8, 2001 (Pls. Am. Interrog. Ans. at 7); and (3) Period 3 Claims, which relate to NTL securities that the Gordon plaintiffs purchased between May 8, 2001 and the end of the Applicable Period, April 16, 2002 (Pls. Am. Interrog. Ans. at 8). The Period 3 Claims relate to 390,000 NTL shares purchased by Frederick Gordon in June and July 2001 and 427,000 NTL shares purchased by Gordon Partners after May 8, 2001. (Pls. Am. Interrog. Ans. at 8; Dkt. No. 67: Gordon Aff. ¶ 15.) The Period 3 purchases include purchases on fifteen separate occasions of more than $800,000 of NTL stock for Gordon Partners, and on ten separate occasions, more than $300,000 of NTL stock for Frederick Gordon. (Pls. Rule 56.1 Stmt. ¶ 113; Defs. Pls. Rule 56.1 Stmts. ¶ 21.) "That included several purchases in December 2001, even after [Frederick] Gordon had heard that the company was going to restructure, when the stock was below $1" per share. (Pls. Rule 56.1 Stmt. ¶ 113.) During Period 3, Frederick Gordon also sold 36,000 of the 46,875 NTL shares that he had purchased during Period 1. (Pls. Am. Interrog. Ans. at 8; Gordon Aff. ¶ 15; Defs. Pls. Rule 56.1 Stmts. ¶ 21.)

The Gordon plaintiffs claim that their net damages are $9,206,800 and that their net loss of invested capital is $7,533,000. (Pls. Rule 56.1 Stmt. ¶ 85; Pls. Am. Interrog. Ans. at 9.) Their damage calculations assume that for all previously-owned stock that plaintiffs did not sell during the Applicable Period, the damages consist of the entire price they paid for that stock because the stock's value eventually became zero as NTL went through the bankruptcy reorganization. (Pls. Am. Interrog. Ans. at 7.) The NTL shares that Frederick Gordon purchased prior to 2000 were priced at an average of less than $17 per share, and eventually traded as high as $100 per share. (Pls. Rule 56.1 Stmt. ¶ 96; Gordon Aff. ¶ 4.)

The Gordon Plaintiffs' Alternative Theory of Damages

In addition to their claim that Frederick Gordon would have sold all of the Gordon plaintiffs' NTL holdings directly following May 8, 2001, the Gordon plaintiffs argue in the alternative that as the value of NTL stock sank lower and lower during the Applicable Period, their investment plan "was to ride things out," but that a large part of their damages arise because they "were forced under the [bankruptcy] reorganization plan to give up their common stock and receive in exchange for it nearly worthless warrants and stock." (Dkt. No. 67: Gordon Aff. ¶ 14;see also Dkt. No. 68: Gordon Aff. Ex. 3: Pls. Am. Interrog. Ans. at 2.)

Defendants' Expert Reports and Gordon's Response

The Gordon plaintiffs did not submit an expert report. (Dkt. Nos. 59 67: Defs. Pls. Rule 56.1 Stmts. ¶ 6; Dkt. No. 67: Gordon Aff. ¶ 107.)

Defendants submitted an expert report regarding damage calculations by Dr. Denise Neumann Martin dated July 31, 2006. (Dkt. No. 63: Burdette Aff. ¶ 20 Ex. 16: Martin Rep.; see Dkt. Nos. 59 67: Defs. Pls. Rule 56.1 Stmts. ¶ 24.) Dr. Martin is a Senior Vice President at National Economic Research Associates, Inc., the securities practice of which employs approximately 150 professionals with degrees in economics, finance and mathematics. (Martin Rep. at 2.) Dr. Martin has been retained as an expert in over 200 securities lawsuits, in which she has opined on such issues as loss causation, materiality and damages. (Martin Rep. at 2.) Dr. Martin reviewed the Gordon plaintiffs' Second Amended Complaint and Frederick Gordon's deposition in order to comment on the Gordon plaintiffs' damage calculation method. (Martin Rep. at 1.) Dr. Martin's report summarized her conclusions, as follows:

We concluded that the [Gordon's] proposed method, which assumes that the Gordon Plaintiffs are entitled to recover the full value of their investments as of August 3, 2000 or sometime shortly thereafter, lacks any reliable basis. More specifically, the method makes no adjustment for market, industry or company-specific factors that were affecting NTL's price during the relevant period but were unrelated to the alleged fraud. This failure is demonstrated by an analysis of the stock prices of other companies in the telecommunication industry, in combination with contemporaneous comments by analysts. These sources document that a marked industry decline — necessarily unrelated to the alleged fraud — occurred over this period. According to Mr. Gordon's own deposition testimony, a myriad of such unrelated forces drove NTL's price down during 2000 and 2001. Reliable principles and methods, adopted in numerous judicial decisions, require that this type of unrelated price decline be removed from any estimate of alleged damages. The Gordon Plaintiffs' proposed approach, however, would book all such declines into their measure of alleged damages.
Separately, we were asked to review the three alleged categories of misrepresentations enumerated in the Gordon Complaint, and to assess whether, using a reliable approach, any alleged damages could stem from these allegations. To conduct this assessment, we prepared and reviewed a comprehensive chronology of information that was publicly-available about NTL during the relevant period. We then used regression analysis to conduct an event study on the materiality of each announcement. We reached two conclusions: (1) many of the announcements related to the alleged misrepresentations were not associated with a material, negative price reaction, so these announcements cannot be the source of any alleged damages; and (2) because the market was, in fact, provided with frequent updates regarding the allegedly withheld or misrepresented information, the few significant price reactions that are observed should be viewed as the timely reaction to the realization of a known risk. On the basis of this analysis, we concluded that the Gordon Plaintiffs did not suffer any damages as a result of the alleged misrepresentations and omissions.

(Martin Rep. 1-2.)

The Gordon plaintiffs respond to Dr. Martin that decline in the telecommunications sector cannot explain the ninety percent decline in NTL's stock price between May 2001 and September 2001 because "the relevant sectors did not decline anywhere near that much." (Dkt. No. 67: Gordon Aff. ¶ 168; Dkt. No. 68: Martin Aff. Ex. 3: Pls. Am. Interrog. Ans. at 3-5.) A Bloomberg index of telecommunications stocks showed a nineteen percent decline during that period, and a Bloomberg index of cable stocks showed a thirty-three percent decline. (Gordon Aff. ¶ 168 Ex. 58.) The Gordon plaintiffs submit that sector decline "cannot explain why NTL's stock went to zero," and state that when their stock was converted into warrants during the bankruptcy reorganization, they were stripped of their opportunity to benefit from the subsequent rise in the telecommunications and cable sectors. (Gordon Aff. ¶ 169.) The Gordon plaintiffs claim that, had they been able to keep their shares through the bankruptcy reorganization, "plaintiffs' shares would today have value in the once-again prosperous, growing NTL." (Gordon Aff. ¶ 170.)

The Gordon plaintiffs also appear to disagree with any attempt to quantify their damages as a percentage of inflation in NTL's stock. Frederick Gordon noted that he believed that any attempt to calculate the percentage of inflation in NTL's stock price caused by defendants' alleged misstatements and omissions was "an academic exercise," and "nonsense." (Dkt. No. 63: Burdette Aff. Ex. 2: Gordon Dep. 138; see also id. at 139-43.) In Frederick Gordon's opinion, based on his "39 years of experience in Wall Street," "[y]ou can't determine" the percentage of inflation in a stock, and an expert's report that attempted to do so "was based on a whole bunch of . . . academic assumptions that are not related to the real world, to the real market." (Gordon. Dep. 139.) Frederick Gordon stated that the "real world" determines causation of a drop in the price of stock by "a combination of facts, rumors, euphoria, fear, psychology, all of these things contribute to[o]. They are not quantifiable in some precise way." (Gordon Dep. 139-40.)

The Causes of Action Asserted in the Gordon Plaintiffs' Second Amended Complaint

The Gordon plaintiffs' Second Amended Complaint alleges seven causes of action: (1) violation of Section 10(b) of the Exchange Act and Rule 10b-5 against all defendants (Dkt. No. 16: 2d Am. Compl. ¶¶ 156-67); (2) violation of 17 C.F.R. § 229.303 against all defendants (2d Am. Compl. ¶¶ 168-73); (3) violation of Section 20(a) of the Exchange Act against all defendants (2d Am. Compl. ¶¶ 174-77); (4) common law fraud against all defendants (2d Am. Compl. ¶¶ 178-81); (5) common law fraud against defendant Gregg (2d Am. Compl. ¶¶ 182-86); (6) common law fraud against defendant Knapp (2d Am. Compl. ¶¶ 187-91); and (7) common law fraud against defendant Blumenthal (2d Am. Compl. ¶¶ 192-200).

Judge Kaplan dismissed the Gordon plaintiffs' 17 C.F.R. § 229.303 claim. In re NTL, Inc. Sec. Litig., 347 F. Supp. 2d 15, 37-38 (S.D.N.Y. Dec. 6, 2004) (Kaplan, D.J.).

ANALYSIS

I. SUMMARY JUDGMENT STANDARD

Rule 56(c) of the Federal Rules of Civil Procedure provides that summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c); see also, e.g., Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S. Ct. 2548, 2552 (1986); Anderson v.Liberty Lobby, Inc., 477 U.S. 242, 247, 106 S. Ct. 2505, 2509-10 (1986); Lang v. Retirement Living Pub. Co., 949 F.2d 576, 580 (2d Cir. 1991).

The burden of showing that no genuine factual dispute exists rests on the party seeking summary judgment. See, e.g., Adickes v. S.H. Kress Co., 398 U.S. 144, 157, 90 S. Ct. 1598, 1608 (1970); Chambers v. TRM Copy Ctrs. Corp., 43 F.3d 29, 36 (2d Cir. 1994); Gallo v. Prudential Residential Servs., Ltd. P'ship, 22 F.3d 1219, 1223 (2d Cir. 1994). The movant may discharge this burden by demonstrating to the Court that there is an absence of evidence to support the non-moving party's case on an issue on which the non-movant has the burden of proof. See, e.g., Celotex Corp. v. Catrett, 477 U.S. at 323, 106 S. Ct. at 2552-53.

To defeat a summary judgment motion, the non-moving party must do "more than simply show that there is some metaphysical doubt as to material facts." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S. Ct. 1348, 1356 (1986). Instead, the non-moving party must "set forth specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e); accord, e.g., Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. at 587, 106 S. Ct. at 1356; Weinstock v. Columbia Univ., 224 F.3d 33, 41 (2d Cir. 2000) (At summary judgment, "[t]he time has come . . . 'to put up or shut up.'") (citations omitted), cert. denied, 540 U.S. 811, 124 S. Ct. 53 (2003).

In evaluating the record to determine whether there is a genuine issue as to any material fact, "[t]he evidence of the non-movant is to be believed, and all justifiable inferences are to be drawn in his favor." Anderson v. Liberty Lobby, Inc., 477 U.S. at 255, 106 S. Ct. at 2513. The Court draws all inferences in favor of the nonmoving party only after determining that such inferences are reasonable, considering all the evidence presented. See, e.g., Apex Oil Co. v. DiMauro, 822 F.2d 246, 252 (2d Cir.), cert. denied, 484 U.S. 977, 108 S. Ct. 489 (1987). "If, as to the issue on which summary judgment is sought, there is any evidence in the record from any source from which a reasonable inference could be drawn in favor of the nonmoving party, summary judgment is improper." Chambers v. TRM Copy Ctrs. Corp., 43 F.3d at 37.

See also, e.g., Feingold v. New York, 366 F.3d 138, 148 (2d Cir. 2004); Chambers v. TRM Copy Ctrs. Corp., 43 F.3d at 36;Gallo v. Prudential Residential Servs., Ltd. P'ship, 22 F.3d at 1223.

In considering a motion for summary judgment, the Court is not to resolve contested issues of fact, but rather is to determine whether there exists any disputed issue of material fact. See,e.g., Donahue v. Windsor Locks Bd. of Fire Comm'rs, 834 F.2d 54, 58 (2d Cir. 1987); Knight v. United States Fire Ins. Co., 804 F.2d 9, 11 (2d Cir. 1986), cert. denied, 480 U.S. 932, 107 S. Ct. 1570 (1987). To evaluate a fact's materiality, the substantive law determines which facts are critical and which facts are irrelevant. See, e.g., Anderson v. Liberty Lobby, Inc., 477 U.S. at 248, 106 S. Ct. at 2510. While "disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment[,] [f]actual disputes that are irrelevant or unnecessary will not be counted." Id. at 248, 106 S. Ct. at 2510 (citations omitted); see also, e.g., Knight v.United States Fire Ins. Co., 804 F.2d at 11-12.

II. THE GORDON PLAINTIFFS' SECTION 10(B) AND RULE 10B-5 CLAIMS SHOULD BE DISMISSED

A. The Standard for Section 10(b) and Rule 10b-5 Claims

"To state a claim for relief under § 10(b) and Rule 10b-5, plaintiffs must allege that [defendants] '(1) made misstatements or omissions of material fact; (2) with scienter; (3) in connection with the purchase or sale of securities; (4) upon which plaintiffs relied; and (5) that plaintiffs' reliance was the proximate cause of their injury.'" Lentell v. Merrill Lynch Co., 396 F.3d 161, 172 (2d Cir.) (quoting In re IBM Corp. Sec. Litig., 163 F.3d 102, 106 (2d Cir. 1998)), cert. denied, 126 S. Ct. 421 (2005); see also, e.g., Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341-42, 125 S. Ct. 1627, 1631 (2005); Lattanzio v.Deloitte Touche LLP, No. 05-5805-CV, ___ F.3d ___, 2007 WL 259877 at *3 (2d Cir. Jan. 31, 2007).

B. The Gordon Plaintiffs' Holder Claims Under Section 10(b) and Rule 10b-5 Should Be Dismissed

"Section 10(b) and Rule 10b-5 prohibit securities fraud 'in connection with the purchase or sale' of securities. Accordingly, to state a claim thereunder, a plaintiff must allege that he was an actual purchaser or seller of securities. Among the potential plaintiffs barred by this rule are persons injured by 'decisions to hold or refrain from trading.'" Fraternity Fund Ltd. v. Beacon Hill Asset Mgmt. LLC, 376 F. Supp. 2d 385, 402 (S.D.N.Y. 2005) (Kaplan, D.J.) (fns. citing cases omitted); see also, e.g.,Merrill Lynch, Pierce, Fenner Smith, Inc. v. Dabit, ___ U.S. ___, 126 S. Ct. 1503, 1509-10 (2006); Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 749, 95 S. Ct. 1917, 1931-32 (1975);Caiola v. Citibank, N.A., 295 F.3d 312, 322 (2d Cir. 2002) ("Under the first element — fraud committed 'in connection with the purchase or sale of any security' — standing is limited to actual purchasers or sellers of securities."); Gurary v.Winehouse, 235 F.3d 792, 799 (2d Cir. 2000); First Equity Corp. v. Standard Poor's Corp., 869 F.2d 175, 180 n. 2 (2d Cir. 1989) ("Under Blue Chip, plaintiffs suing under Section 10(b) of the Securities Exchange Act of 1934 may recover only for losses that result from decisions to buy or sell, not from decisions to hold or refrain from trading."); Pension Comm. of the Univ. of Montreal Pension Plan v. Banc of America Sec., LLC, 446 F. Supp. 2d 163, 189-90 (S.D.N.Y. 2006) ("Defendants argue that plaintiffs may only bring a section 10(b) claim with respect to actual purchases or sales of securities, and may not bring any claims that relate to the retention of securities. Defendants are correct." Court dismissed plaintiffs' claims that they "were damaged by the decision to 'purchase and hold . . . and/or retain . . . shares'" purchased before defendants' alleged fraud.)

Although the Gordon plaintiffs originally claimed that defendants' alleged misstatements or omissions occurred between January 12, 2000 and April 12, 2002, Frederick Gordon conceded that none of the declines in NTL's share price prior to May 8, 2001 were attributable to any omissions or misstatements by defendants. (Dkt. No. 67: Gordon Aff. ¶ 12; see page 4 above.) It follows, then, that the Gordon plaintiffs' Section 10(b) and Rule 10b-5 claims must relate only to purchases and sales of NTL stock during the period between May 8, 2001 and April 12, 2002. All of the Gordon plaintiffs' Period 1 and Period 2 NTL share purchases occurred prior to May 8, 2001. (See page 10 above.) Therefore, to the extent that the Gordon plaintiffs still owned any Period 1 or Period 2 NTL shares as of April 12, 2002, any Section 10(b) and Rule 10b-5 claims relating to those shares should be dismissed because they do not relate to the purchase or sale of securities. See, e.g., Gurary v. Winehouse, 235 F.3d at 799 ("Gurary's complaint alleges a violation of 10b-5 with respect to his first purchase on October 31, 1996, although Gurary concedes that the alleged manipulation of Nu-Tech's stock did not begin until at least November 6, 1996. Based on the plain language of section 10(b) and well-settled case law, Gurary's October 31, 1996 purchase could not under any circumstances give rise to a Rule 10b-5 cause of action because that purchase occurred before any alleged deception began, and therefore could not be in connection with the purchase or sale of a security."); Pension Comm. of the Univ. of Montreal Pension Plan v. Banc of America Sec., LLC, 446 F. Supp. 2d at 189-90 (dismissing plaintiffs' claims to the extent that they bought the shares prior to the start of defendants' alleged omissions and misstatements);Fraternity Fund Ltd. v. Beacon Hill Asset Mgmt. LLC, 376 F. Supp. 2d at 402 n. 101 (dismissing plaintiffs' claims relating to shares purchased prior to the start of defendants' alleged omissions and misstatements, and noting that "[i]ndeed, plaintiffs who purchased before the alleged fraud and sold during it would have benefitted from the inflated prices."); Nairobi Holdings Ltd. v.Brown Bros. Harriman Co., 02 Civ. 1230, 2002 WL 31027550 at *3-4 (S.D.N.Y. Sept. 10, 2002) (dismissing plaintiff's claims where plaintiff conceded that its investments were "'made prior to the first of defendants' misrepresentations and omissions'").

According to the Gordon plaintiffs' submissions, their Period 1 claims relate to 234,375 NTL shares owned by Gordon Partners, 46,875 NTL shares owned by Frederick Gordon, and 17, 188 NTL shares owned by Sam Gordon. (See page 10 above.) The only Period 1 shares that the Gordon plaintiffs sold prior to April 12, 2002 were 36,000 shares owned by Frederick Gordon that he sold during Period 3. (See page 10 above.) Therefore, all claims relating to the Gordon plaintiffs' claims relating to Period 1 purchases should be dismissed, with the exception of the 36,000 shares sold during Period 3. The Gordon plaintiffs' only purchase of NTL shares during Period 2 was of 30,625 shares purchased by Gordon Partners previous to May 8, 2001. (See page 10 above.) These shares were not sold prior to April 12, 2002. Therefore, all of the Gordon plaintiffs' claims relating to Period 2 purchases should be dismissed.

C. The "Forced Sale" Doctrine On Which The Gordon Plaintiffs Rely Is Not Applicable To Bankruptcy Proceedings

The Gordon plaintiffs argue in the alternative that their claims, particularly their claims relating to NTL shares purchased in Period 1 or Period 2, are not "holder" claims because they were forced to sell their NTL shares (in return for warrants and shares in New NTL) as part of the bankruptcy reorganization. (Dkt. No. 68: Pls. Opp. Br. at 4-7.) However, the conversion of their shares when NTL entered into bankruptcy did not constitute a "forced sale." As the Ninth Circuit has explained:

The forced sale doctrine provides a cause of action under the securities laws to plaintiffs who are forced to convert their shares for money or other consideration, or forced to fundamentally change the nature of plaintiffs' investments as the result of a fraudulent scheme. . . .
. . . .
The forced sale doctrine relaxes the requirement that only traditional purchasers or sellers of securities have standing to bring a Section 10(b) claim. A shareholder who is forced to sell or alter her securities as the result of a fraudulent scheme is deemed a seller for purposes of the securities laws. The forced sale doctrine also eliminates the reliance requirement. Since a fraudulent scheme forced the sale or alteration of securities, a shareholder bringing an action under the forced sale doctrine need not prove reliance because she made no investment decision to participate in the transaction — the sale was forced by the operation of some rule (e.g., a short-form merger)
. . . .
But the forced sale doctrine does not cut a wide swath. Although recognized by the Ninth Circuit, we have rarely encountered instances where it applies. . . .
. . . .
Inasmuch as Chapter 11 [bankruptcy] gives shareholders the right to participate strategically and effectively in shaping the plan of reorganization, a judicially supervised Chapter 11 reorganization, as we have in this case, presents us with a very different scenario than those presented by the forced sale cases wherein the investors had no opportunity to participate.
Jacobson v. AEG Capital Corp., 50 F.3d 1493, 1498-500 (9th Cir. 1995) (emphasis added). The Ninth Circuit, relying on Second Circuit precedent, therefore declined to apply the forced sale doctrine to a bankruptcy reorganization. Id. at 1501-02 ("A forced sale involves no communication with and no volitional acts by the plaintiff shareholder before the shares are eliminated or altered. A properly conducted Chapter 11 reorganization requires both. Chapter 11 clearly provides equity security interests an opportunity to participate in the reorganization process. . . . Were the forced sale doctrine made applicable to Chapter 11 it is conceivable that nearly every confirmed Chapter 11 reorganization could be converted into a securities fraud suit by understandably unhappy shareholders simply by alleging a predicate of fraud.").

The Second Circuit also explicitly held that the conversion of stockholders' shares during a bankruptcy proceeding is not a forced sale that triggers Section 10(b) coverage. Rand v. Anaconda-Ericsson, Inc., 794 F.2d 843, 847-48 (2d Cir.), cert. denied, 479 U.S. 987, 107 S. Ct. 579 (1986). In Rand, the Second Circuit held that "[t]he 'forced sale' doctrine is of no aid to appellants, however, because its application has been limited to securities transactions resulting in an intra-firm freeze-out of one group of investors by another. These cases involve conventional transactions in the capital market where the transaction allegedly involves fraud, and some securities holders are forced by other investors in the same firm to trade their investments for cash." 794 F.2d at 847-48 (citations omitted). In rejecting application of the forced sale doctrine to a bankruptcy reorganization, the Second Circuit explained that plaintiffs' argument was "based upon a virtually limitless legal theory that would convert any fraudulent conduct resulting in a corporate bankruptcy into securities fraud. . . . The artificiality of the theory is further demonstrated by the fact that the securities laws would come into play only when a bankruptcy occurs. Shareholders injured by the very same conduct but whose company was merely diminished in value rather than destroyed would have no right of action." Id. at 848.

Accordingly, conversion of the Gordon plaintiffs' NTL shares into warrants or shares in New NTL during the bankruptcy reorganization did not constitute a "forced sale." Therefore, the Gordon plaintiffs' Period 1 and Period 2 shares that were not sold prior to April 12, 2002 are "holder" shares, not "in connection with the purchase or sale of securities," and thus the Gordon plaintiffs' Period 1 and Period 2 share claims are not actionable under Section 10(b) or Rule 10b-5. Those claims should be dismissed. D. The Gordon Plaintiffs' Remaining Section 10(b) and Rule 10b-5 Claims Should Be Dismissed For Failure to Demonstrate Loss Causation

Defendants argue that the Gordon plaintiffs' claims regarding Period 3 NTL sales and purchases are deficient because they have not clearly delineated their losses, and thus have not adequately demonstrated loss causation. (See Dkt. No. 62: Defs. SJ Br. at 11-21.) The Court agrees.

To prove that their reliance on defendants' misstatements or omissions was the proximate cause of their injury, the Gordon plaintiffs "'must prove both transaction and loss causation.'"Lentell v. Merrill Lynch Co., 396 F.3d 161, 172 (2d Cir.) (quoting First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763, 769 (2d Cir. 1994), cert. denied, 513 U.S. 1079, 115 S. Ct. 728 (1995)), cert. denied, 126 S. Ct. 421 (2005). Loss causation "is the causal link between the alleged misconduct and the economic harm ultimately suffered by the plaintiff." Emergent Capital Inv. Mgmt., LLC v. Stonepath Group, Inc., 343 F.3d at 197.

Accord, e.g., Lattanzio v. Deloitte Touche LLP, No. 05-5805-CV, ___ F.3d ___, 2007 WL 259877 at *7 n. 2 (2d Cir. Jan. 31, 2007); Emergent Capital Inv. Mgmt., LLC v. Stonepath Group, Inc., 343 F.3d 189, 196-97 (2d Cir. 2003); Suez Equity Investors, L.P. v. Toronto-Dominion Bank, 250 F.3d 87, 95 (2d Cir. 2001);Citibank, N.A. v. K-H Corp., 968 F.2d 1489, 1495 (2d Cir. 1992);In re NTL, Inc. Sec. Litig., 02 Civ. 3013, 2006 WL 330113 at *8 (S.D.N.Y. Feb. 14, 2006) (Peck, M.J.), report rec. adopted, 2006 WL 568225 (S.D.N.Y. Mar. 9, 2006).

Accord, e.g., Lattanzio v. Deloitte Touche LLP, 2007 WL 259877 at *7; Lentell v. Merrill Lynch Co., 396 F.3d at 172;Suez Equity Investors, L.P. v. Toronto-Dominion Bank, 250 F.3d at 95-96; In re NTL, Inc. Sec. Litig., 2006 WL 330113 at *9; 15 U.S.C. § 78u-4(b)(4).

To establish loss causation in a case involving allegations of material misrepresentations and omissions, "a plaintiff must allege . . . that the subject of the fraudulent statement or omission was the cause of the actual loss suffered." Suez Equity Investors, L.P. v. Toronto-Dominion Bank, 250 F.3d at 95; accord, e.g., Lentell v. Merril Lynch Co., 396 F.3d at 173; In re NTL, Inc. Sec. Litig., 2006 WL 330113 at *9;see also, e.g., Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 346, 125 S. Ct. 1627, 1633-34 (2005). It is not enough for a plaintiff to merely allege that, at the time of plaintiff's purchase of a security, the price of that security was artificially inflated as a result of a defendant's misrepresentation. Dura Pharm., Inc. v.Broudo, 544 U.S. at 346, 125 S. Ct. at 1633-34; Lentell v. Merril Lynch Co., 396 F.3d at 174; Emergent Capital Inv. Mgmt., LLC v.Stonepath Group, Inc., 343 F.3d at 198; In re NTL, Inc. Sec. Litig., 2006 WL 330113 at *9. Instead, a plaintiff "may do one of two things to sufficiently allege loss causation. 'Where the alleged misstatement conceals a condition or event which then occurs and causes the plaintiff's loss,' a plaintiff may plead that it is 'the materialization of the undisclosed condition or event that causes the loss.' Alternatively, a plaintiff may identify particular 'disclosing event[s]' that reveal the false information, and tie dissipation of artificial price inflation to those events." Catton v. Def. Tech. Sys., Inc., 05 Civ. 6954, 2006 WL 27470 at *5 (S.D.N.Y. Jan. 3, 2006) (quoting In re Initial Pub. Offering Sec. Litig., 399 F. Supp. 2d 298, 307 (S.D.N.Y. 2005), aff'd, 2006 WL 1423785 (2d Cir. May 19, 2006),cert. denied, 127 S. Ct. 733 (2006)); accord, e.g., In re NTL, Inc. Sec. Litig., 2006 WL 330113 at *9 n. 12 (citing cases).

Proving actual loss is crucial to a plaintiff's case: "it should not prove burdensome for a plaintiff who has suffered an economic loss to provide a defendant with some indication of the loss and the causal connection that the plaintiff has in mind."Dura Pharm., Inc. v. Broudo, 544 U.S. at 347, 125 S. Ct. at 1634. "For example, [to show loss causation] the plaintiff would have to prove that the price at which the plaintiff bought the stock was artificially inflated as the result of the misstatement or omission." In re Initial Pub. Offering Sec. Litig., 241 F. Supp. 2d 281, 373 n. 134 (S.D.N.Y. 2003) (quoting H.R. Conf. Rep. No. 104-369 at 41, alteration in original). However, "if the loss was caused by an intervening event, like a general fall in the price of Internet stocks, the chain of causation will not have been established." Emergent Capital Inv. Mgmt., LLC v. Stonepath Group, Inc., 343 F.3d at 197; accord, e.g., Lentell v. Merril Lynch Co., 396 F.3d at 174; In re NTL, Inc. Sec. Litig., 2006 WL 330113 at *9 n. 11; see also, e.g., Dura Pharm., Inc. v. Broudo, 125 S. Ct. at 1631-32. If the Gordon plaintiffs cannot provide evidence showing what their losses are as a result of an inflation in NTL's stock price caused by defendants' misstatements or omissions, then summary judgment is appropriate. See In re N. Telecom Ltd. Sec. Litig., 116 F. Supp. 2d 446, 456 (S.D.N.Y. 2000).

Here, the Gordon plaintiffs have not demonstrated what their Period 3 losses were in relation to the alleged inflation in NTL's share price. The Gordon plaintiffs have not submitted an expert report on damages in opposing defendants' summary judgment motion. (See page 11 above.) Frederick Gordon has conceded that there was no inflation in NTL's stock price as a result of defendants' misstatements or omissions prior to May 8, 2001. (See page 4 above.) Frederick Gordon also conceded that "there was zero inflation in NTL's stock price" after November 28, 2001. (See page 4 n. 2 above.) As to the remainder of the applicable period, i.e., May 8, 2001 through November 28, 2001, the Gordon plaintiffs have not provided this Court with any evidence of their damages, other than that their damages consist of the entire price they paid for NTL stock because the stock's price eventually became zero as NTL went through the bankruptcy reorganization. (See page 11 above.) Indeed, Frederick Gordon testified at his deposition that he believes it is "nonsense" to try to calculate the percentage of inflation in NTL's stock price caused by defendants' alleged misstatements and omissions. (See pages 13-14 above.)

It is improper, however, for the Gordon plaintiffs to seek the entire price they paid for NTL stock between May 8, 2001 and November 28, 2001. "[D]amages in a securities fraud case are measured by the difference between the price at which a stock sold and the price at which the stock would have sold absent the alleged misrepresentations or omissions." In re Executive Telecard, Ltd. Sec. Litig., 979 F.Supp. 1021, 1025 (S.D.N.Y. 1997.) Determining the difference between those prices typically requires "elimination of that portion of the price decline that is the result of forces unrelated to the wrong." Id. "Such forces can be broadly categorized into: (1) company risk — the unique risk that is peculiar to the particular stock at issue, and (2) market risk — the risk associated with market wide variations generally." Id. An accepted method for calculating damages based on these principles is an "event study" which "uses regression analysis and other statistical techniques to model the effect that public statements have on a particular company's trading experience and normalizes that experience to factor out performance of the stock market generally or of stocks in relevant related indices." In re N. Telecom Ltd. Sec. Litig., 116 F. Supp. 2d at 456-57; see, e.g., Carpe v. Aquila, Inc., No. 02-0388-CV, 2005 WL 1138833 at *3-4 (W.D. Mo. Mar. 23, 2005) ("[T]he accepted means of dinstinguishing between fraud-related and non-fraud-related changes in a stock's behavior is an 'event study.'"); In re Oracle Sec. Litig., 829 F.Supp. 1176, 1181 (N.D. Cal. 1993) ("Use of an event study or similar analysis is necessary more accurately to isolate the influences of information specific to Oracle which defendants allegedly have distorted.") The Gordon plaintiffs have not provided the Court with an event study or any similar analysis of their damages. (See pages 11-14 above.)

Because the Gordon plaintiffs have not provided this Court with any evidence as to what their true damages are and therefore cannot show loss causation, defendants are entitled to summary judgment as to the remaining Period 3 claims. See, e.g., JSMS Rural LP v. GMG Capital Partners III, LP, 04 Civ. 8591, 2006 WL 1867482 at *3, *4 (S.D.N.Y. July 6, 2006) ("plaintiff has neglected to indicate exactly how it suffered a loss. . . . Thus, plaintiff's Rule 10b-5 claim fails as a matter of law." "Plaintiff has provided no evidence concerning the extent to which its partnership interest has lost value, nor has it provided any method by which a factfinder could determine what portion of such loss is attributable to defendants' fraud." Summary judgment granted for defendants.), aff'd on reconsideration, 2006 WL 2239681 (S.D.N.Y. Aug. 4, 2006); Carpe v. Aquila, Inc., 2005 WL 1138833 at *3-4, *7-9 (Where plaintiffs' expert did not take any market forces into account in his calculation of plaintiffs' loss, the court excluded plaintiffs' expert and ruled that: "In a Section 10(b) and Rule 10b-5 case, expert testimony is required in order for plaintiffs to meet their burden of proof in establishing the fact of damages and the means of calculation of same. Therefore, summary judgment should be granted in defendants' favor as to plaintiffs' Section 10(b) and Rule 10b-5 claims.") (citations omitted); In re Imperial Credit Indus., Inc. Sec. Litig., 252 F. Supp. 2d 1005, 1014-16 (C.D. Cal. 2003) (defendants were entitled to summary judgment because plaintiffs did not provide any reliable evidence regarding their loss, indeed, "even if [plaintiff] could properly assume that SPFC's stock had zero value during the Class Period, the question would still arise as to the extent to which the difference between the true value and the market value of SPFC's stock during the Class Period was fraud-related or non-fraud related. By failing to provide an event study or similar analysis, Plaintiffs cannot carry their burden of proof on this issue."), aff'd, 145 Fed. Appx. 218 (9th Cir. 2005); In re N. Telecom. Ltd. Sec. Litig., 116 F. Supp. 2d at 460-62 (plaintiffs' expert's "testimony is fatally deficient in that he did not perform an event study or similar analysis to remove the effects on stock price of market and industry information and he did not challenge the event study performed by defendants' expert. . . . Plaintiffs' expert is not prepared to rule out such alternative causes or attack the opposing conclusions of defendants' expert. Accordingly, plaintiffs have not met their burden of coming forward with evidence creating a triable issue of fact on whether the statements or omissions at issue inflated or manipulated Nortel's stock price.").

Summary judgment is the time to "'put up or shut up.'" (See page 16 above.) The Gordon plaintiffs have offered no event study or similar analysis to show whether any loss (and if so how much) was caused by defendants' conduct as opposed to other market factors. In the absence of proof of loss causation, defendants are entitled to summary judgment dismissing the Gordon plaintiffs' § 10(b) and Rule 10b-5 claims.

As discussed above, this Court issued an Opinion granting the Gordon plaintiffs an adverse inference as a spoliation sanction, and stated that such an inference would be applied to the analysis of this summary judgment motion. (See page 2 n. 1 above.) While in some instances it is appropriate to deny summary judgment based on an adverse inference, there must be "some showing indicating that the destroyed evidence would have been relevant to the contested issue." Kronisch v. United States, 150 F.3d 112, 127 (2d Cir. 1998). Here, the adverse inference relates to defendants' knowledge about the company's financial and business operations between May 8, 2001 and April 16, 2002. The adverse inference thus goes to issues of whether defendants made material misstatements or ommisions and if so whether they acted with scienter. Those issues are not before the Court on defendants' present summary judgment motion. The adverse inference as to those facts is irrelevant to the separate element of loss causation. Thus, the adverse inference is moot as to the Court's summary judgment loss causation analysis. See Kronisch v.United States, 150 F.3d at 128 ("[T]he destruction of evidence, standing alone, is [not] enough to allow a party who has produced no evidence — or utterly inadequate evidence — in support of a given claim to survive summary judgment on that claim."); see also, e.g., Jeffreys v. Rossi, 275 F. Supp. 2d 463, 478 n. 24 (S.D.N.Y. 2003), aff'd, 426 F.3d 549 (2d Cir. 2005); A.I.A. Holdings, S.A. v. Lehman Bros., Inc., 97 Civ. 4978, 2002 WL 987297 at *1 (S.D.N.Y. May 10, 2002).

III. THE GORDON PLAINTIFF'S SECTION 20(A) CLAIM SHOULD BE DISMISSED

In addition to their Section 10(b) and Rule 10b-5 claims, the Gordon plaintiffs also allege control person violations against defendants under Section 20(a) of the Exchange Act. (See page 14 above.) Section 20(a) provides that "[e]very person who, directly or indirectly, controls any person liable under any provision of this chapter or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action." 15 U.S.C. § 78t(a). "In order to establish a prima facie case of controlling-person liability, a plaintiff must show a primary violation by the controlled person and control of the primary violator by the targeted defendant." SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1472 (2d Cir. 1996), cert. denied, 522 U.S. 812, 118 S. Ct. 57 (1997); accord, e.g., Rombach v.Chang, 355 F.3d 164, 177-78 (2d Cir. 2004). Here, since the Court should grant defendants summary judgment dismissing the Gordon plaintiffs' primary Section 10(b) and Rule 10b-5 claim, the Gordon plaintiffs therefore have not successfully alleged a Section 20(a) claim. See, e.g., Rombach v. Chang, 355 F.3d at 178 ("Because we have already determined that the district court properly dismissed the primary securities claim against the individual defendants, these [§ 20(a)] secondary claims must also be dismissed."); Nadoff v. Duane Reade, Inc., 107 Fed. Appx. 250, 253 (2d Cir. 2004) ("Having concluded that the consolidated amended complaint fails to set forth a primary violation of the securities laws, the plaintiffs claims of secondary liability under Section 20(a) must be dismissed as well."); In re Yukos Oil Co. Sec. Litig., 04 Civ. 5243, 2006 WL 3026024 at *23 (S.D.N.Y. 2006) ("[T]he Complaint fails to state a claim for primary liability on either the Political Activity Allegations or the Tax Scheme Allegations. As such, no defendant can be subject to [§ 20(a)] control person liability on those claims."); In re Axis Capital Holdings Ltd. Sec. Litig., 456 F. Supp. 2d 576, 596 (S.D.N.Y. 2006) ("Because plaintiffs have not sufficiently alleged primary liability here under Section 10(b), plaintiffs have not alleged control person liability under Section 20 of the Exchange Act."); In re GlaxoSmithKline PLC Sec. Litig., 05 Civ. 3751, 2006 WL 2871968 at *14 (S.D.N.Y. Oct. 6, 2006) ("Plaintiff has failed to state a primary violation of the securities laws under section 10(b). Without a primary violation, there can be no secondary, or derivative, violation under Section 20(a). Accordingly, Plaintiff's Section 20(a) claim is also dismissed.").

Accordingly, the Gordon plaintiffs' Section 20(a) claim should be dismissed.

IV. THE GORDON PLAINTIFFS' COMMON LAW FRAUD CLAIMS ARE PREEMPTED BY SLUSA AND SHOULD BE DISMISSED

Defendants argue that the Gordon plaintiffs' remaining New York state common law fraud claims are preempted by SLUSA and should be dismissed. (See Dkt. No. 62: Defs. SJ Br. at 26-31.)

A. Statutory Interpretation Principles

"Statutory construction begins with the plain text, and, 'where the statutory language provides a clear answer, it ends there as well.'" Raila v. United States, 355 F.3d 118, 120 (2d Cir. 2004) (quoting Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 438, 119 S. Ct. 755, 760 (1999)). "The plainness or ambiguity of statutory language is determined by reference to the language itself, the specific context in which that language is used, and the broader context of the statute as a whole." Robinson v. Shell Oil Co., 519 U.S. 337, 341, 117 S. Ct. 843, 846 (1997); accord, e.g., Saks v. Franklin Covey Co., 316 F.3d 337, 345 (2d Cir. 2003).

B. Preemption under SLUSA

The Securities Litigation Uniform Standards Act, known as SLUSA, provides that:

No covered class action based upon the statutory or common law of any State or subdivision thereof may be maintained in any State or Federal court by any private party alleging —
(A) a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security; or
(B) that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security.
15 U.S.C. § 78bb(f)(1). Thus, "[u]nder the statutory scheme, four conditions must be satisfied to trigger SLUSA's removal and preemption provisions: (1) the underling suit must be a 'covered class action'; (2) the action must be based on state or local law; (3) the action must concern a 'covered security'; and (4) the defendant must have misrepresented or omitted a material fact or employed a manipulative device or contrivance 'in connection with the purchase or sale' of that security." Felton v. Morgan Stanley Dean Witter Co., 429 F. Supp. 2d 684, 690-91 (S.D.N.Y. 2006) (fns. omitted); accord, e.g., In re Worldcom, Inc. Sec. Litig., 308 F. Supp. 2d 236, 243 (S.D.N.Y. 2004).

C. The Gordon Plaintiffs' Action is a "Covered Class Action"

The term "covered class action" means —

(i) any single lawsuit in which —
(I) damages are sought on behalf of more than 50 persons or prospective class members, and questions of law or fact common to those persons or members of the prospective class, without reference to issues of individualized reliance on an alleged misstatement or omission, predominate over any questions affecting only individual persons or members; or
(II) one or more named parties seek to recover damages on a representative basis on behalf of themselves and other unnamed parties similarly situated, and questions of law or fact common to those persons or members of the prospective class predominate over any questions affecting only individual persons or members; or
(ii) any group of lawsuits filed in or pending in the same court and involving common questions of law or fact, in which —
(I) damages are sought on behalf of more than 50 persons; and
(II) the lawsuits are joined, consolidated, or otherwise proceed as a single action for any purpose.
15 U.S.C. § 78bb(f)(5)(B).

The Gordon plaintiffs' action fulfills the second definition of "covered class action." Both the Gordon plaintiffs' action and the class action were filed in the Southern District of New York and both were assigned to Judge Kaplan and myself, and therefore it is obvious that both cases are "pending in the same court." The Gordon plaintiffs' complaint adopts by reference in its entirety the September 23, 2002 Consolidated Class Action Complaint (see page 2 above), and both generally asserted fraud claims relating to the period leading up to NTL's bankruptcy in April 2002. (See pages 2, 4-9 above.) Therefore, it is clear that the Gordon plaintiffs' action and the class action involve common questions of law and fact. It is uncontested that the class action was brought on behalf of more than fifty people. Indeed, the class action was brought on behalf of "thousands of [NTL] shareholders geographically located throughout the United States and abroad." In re NTL, Inc. Sec. Litig., 02 Civ. 3013, 2006 WL 330113 at *6 (S.D.N.Y. Feb. 14, 2006) (quoting 02 Civ. 3013, Dkt. No. 69: 9/7/05 Pls. Class Cert. Br. at 8), report rec. adopted, 2006 WL 568225 (S.D.N.Y. Mar. 9, 2006). (See also 02 Civ. 3013, Dkt. No. 21: Consol. Am. Class Action Compl. ¶ 15(a).)

Indeed, in seeking consolidation for discovery, the Gordon plaintiffs stated that "[i]nsofar as Gordon's claims overlap those of the class, we believe consolidation for discovery purposes is warranted. . . ." (Dkt. No. 9: Gordon Pls. Consolidation Br. at 11.)

The remaining issue, therefore, is whether the two lawsuits were "joined, consolidated, or otherwise proceed[ed] as a single action for any purpose." 15 U.S.C. § 78bb(f)(5)(B)(ii)(II). The Court finds that condition satisfied.

The Gordon plaintiffs moved for "conditional consolidation of [their] action with the consolidated class actions." (Dkt. No. 9: Gordon Pls. Consolidation Br. at 1; see also Dkt. No. 8: Gordon Pls. Consolidation Motion.) Specifically, the Gordon plaintiffs informed the Court that "[o]ur position is, in brief, that consolidation of this case with the Consolidated [Class] Action for discovery purposes, with certain common-sense conditions, is appropriate . . . [but] that consolidation for motion and/or trial purposes is not warranted or necessary at this juncture." (Gordon Pls. Consolidation Br. at 2.) As a result of the Gordon plaintiffs' consolidation motion and the parties' stipulation, on October 30, 2002, Judge Kaplan ordered that the Gordon plaintiffs' action be "consolidated with the Consolidated [Class] Action for pre-trial purposes." (02 Civ. 3013, Dkt. No. 27.) Since that date, the Gordon plaintiffs' action and the class action have proceeded as a single action for pre-trial purposes. (See generally Status Conf. Trs.) Indeed, counsel for the Gordon plaintiffs has asserted that he is entitled to attorneys' fees from the class because of his efforts in discovery that he asserts benefitted the class. (02 Civ. 3013, Dkt. Nos. 117-18.)

SLUSA does not require that the group of lawsuits be consolidated for trial, or for "all" purposes; rather, it refers to the cases proceeding "as a single action for any purpose." 15 U.S.C. § 77bb(f)(5)(B)(ii)(II) (emphasis added). Consolidation for discovery satisfies the "any purpose" language. Therefore, based on SLUSA's plain language, the Gordon plaintiffs' action is a "covered class action" for SLUSA purposes. See In re Enron Corp. Sec., Derivative "ERISA" Litig., No. H-01-3624, 2006 WL 3716669 at *7 (S.D. Tex. Dec. 12, 2006) (holding SLUSA preemption proper where there were "identical complaints of exclusively Texas state-law claims by fewer than fifty plaintiffs filed in various Texas jurisdictions, removed on 'related to' bankruptcy jurisdiction, consolidated or coordinated with Newby [class action] without objection from the Plaintiffs for pretrial purposes, and prosecuted 'in unison' in the filing of identical motions and briefs"); In re Worldcom, Inc. Sec. Litig., 308 F. Supp. 2d 236, 245-46 (S.D.N.Y. 2004) (where ten non-class actions were transferred to the same court in which the main class action was pending, and consolidated "for pretrial purposes," the non-class actions were a covered group of lawsuits for purposes of SLUSA preemption); but cf. Ventura v. AT T Corp., 05 Civ. 5718, 2006 WL 2627979 at*1 (S.D.N.Y. Sept. 13, 2006) (declining to apply SLUSA preemption to state law claims in individual action that was not formally consolidated with the related class action, and operated "on a separate procedural track").

D. The Gordon Plaintiffs' Action is Based on New York State Law

The second condition is that the actions must be based on state law. (See pages 31-32 above.) All of the Gordon plaintiffs' common law fraud claims are based on New York state common law. (See Dkt. No. 16: 2d Am. Compl. ¶¶ 178-200.) Therefore, the Gordon plaintiffs' action is based on state law for SLUSA preemption purposes.

E. The Gordon Plaintiffs' Action Concerns a "Covered Security"

The third condition is that the action concerns a "covered security." (See pages 31-32 above.) "A 'covered security' is one traded nationally and listed on a regulated national exchange." Merrill Lynch, Pierce, Fenner Smith, Inc. v. Dabit, 126 S. Ct. 1503, 1512 (2006). "NTL's common stock successively traded in two efficient markets: (i) the Nasdaq National Market System ('NASDAQ'), until October 27, 2000, at which time NTL's common stock was delisted from that exchange; and (ii) the New York Stock Exchange ('NYSE'), until March 28, 2002, at which time NTL's common stock was delisted from that exchange." (02 Civ. 3013, Dkt. No. 21: Consol. Am. Class Action Compl. ¶ 15(a); Dkt. No. 16: 2d Am. Compl. ¶ 152(a).) NTL's stock therefore is a "covered security" for SLUSA purposes.

Formally under SLUSA, a "covered security" is "a security that satisfies the standards for a covered security specified in paragraph (1) or (2) of section 18(b) of the Securities Act of 1933 [ 15 U.S.C.A. § 77r(b)], at the time during which it is alleged that the misrepresentation, omission, or manipulative or deceptive conduct occurred." 15 U.S.C. § 78bb(f)(5)(E). Under Section 18(b) of the Securities Act, "covered securities" include securities listed on the New York Stock Exchange or the Nasdaq Exchange. 15 U.S.C. § 77r(b).

F. The Gordon Plaintiffs' Action Concerns the "Purchase or Sale" of a Security for SLUSA Purposes

The Gordon plaintiffs suggest that because holder claims are not cognizable under federal law, their state common law fraud claims against defendants are not eligible for SLUSA preemption to the extent that their claims do not involve the direct purchase or sale of covered securities. (See Dkt. No. 68: Gordon Pls. Opp. Br. at 30-31.) However, the Supreme Court recently clarified that state holder claims are included within SLUSA preemption: "The holder class action that respondent tried to plead . . . is distinguishable from a typical Rule 10b-5 class action in only one respect: It is brought by holders instead of purchasers or sellers. For purposes of SLUSA preemption, that distinction is irrelevant; the identity of the plaintiffs does not determine whether the complaint alleges fraud 'in connection with the purchase or sale' of securities." Merrill Lynch, Pierce, Fenner Smith, Inc. v. Dabit, 126 S. Ct. 1503, 1515 (2006). Therefore, the Gordon plaintiffs' state common law fraud holder claims (as well as their other common law fraud claims) are preempted by SLUSA and should be dismissed. See In re Salomon Smith Barney Mut. Fund Fees Litig., 441 F. Supp. 2d 579, 603-04 (S.D.N.Y. 2006) (after Dabit, dismissing state holder claims as preempted by SLUSA); Felton v. Morgan Stanley Dean Witter Co., 429 F. Supp. 2d 684, 691-92, 695 (S.D.N.Y. 2006) (after Dabit, dismissing state holder claims as preempted by SLUSA); In re Edward Jones Holders Litig., 453 F. Supp. 2d 1210, 1215-17 (C.D. Cal. 2006) (after Dabit, dismissing state holder claims as preempted by SLUSA); In re Hollinger Int'l, Inc. Sec. Litig., No. 04C 0834, 2006 WL 1806382 at *17 (N.D. Ill. June 28, 2006) (afterDabit, dismissing state holder claims as preempted by SLUSA).

New York recognizes "holder" claims. See, e.g., Fraternity Fund, Ltd. v. Beacon Hill Asset Mgmt. LLC, 376 F. Supp. 2d 385, 407 n. 133 (S.D.N.Y. 2005) (Kaplan, D.J.) (citing New York cases).

The Gordon plaintiffs' state law claims are preempted by SLUSA.

CONCLUSION

For the reasons set forth above, defendants' summary judgment motion should be GRANTED and the Gordon plaintiffs' complaint dismissed with prejudice.

FILING OF OBJECTIONS TO THIS REPORT AND RECOMMENDATION

Pursuant to 28 U.S.C. § 636(b)(1) and Rule 72(b) of the Federal Rules of Civil Procedure, the parties shall have ten (10) days from service of this Report to file written objections. See also Fed.R.Civ.P. 6. Such objections (and any responses to objections) shall be filed with the Clerk of the Court, with courtesy copies delivered to the chambers of the Honorable Lewis A. Kaplan, 500 Pearl Street, Room 1310, and to my chambers, 500 Pearl Street, Room 1370. Any requests for an extension of time for filing objections must be directed to Judge Kaplan (with a courtesy copy to my chambers). Failure to file objections will result in a waiver of those objections for purposes of appeal.Thomas v. Arn, 474 U.S. 140, 106 S. Ct. 466 (1985); IUE AFL-CIO Pension Fund v. Herrmann, 9 F.3d 1049, 1054 (2d Cir. 1993), cert. denied, 513 U.S. 822, 115 S. Ct. 86 (1994); Roldan v. Racette, 984 F.2d 85, 89 (2d Cir. 1993); Frank v. Johnson, 968 F.2d 298, 300 (2d Cir.), cert. denied, 506 U.S. 1038, 113 S. Ct. 825 (1992); Small v. Sec'y of Health Human Servs., 892 F.2d 15, 16 (2d Cir. 1989); Wesolek v. Canadair Ltd., 838 F.2d 55, 57-59 (2d Cir. 1988); McCarthy v. Manson, 714 F.2d 234, 237-38 (2d Cir. 1983); 28 U.S.C. § 636(b)(1); Fed.R.Civ.P. 72, 6(a), 6(e).


Summaries of

Partners v. Blumenthal

United States District Court, S.D. New York
Feb 9, 2007
02 Civ. 7377 (LAK) (AJP) (S.D.N.Y. Feb. 9, 2007)
Case details for

Partners v. Blumenthal

Case Details

Full title:GORDON PARTNERS, FREDERICK L. GORDON, and SAM D. GORDON, Plaintiffs, v…

Court:United States District Court, S.D. New York

Date published: Feb 9, 2007

Citations

02 Civ. 7377 (LAK) (AJP) (S.D.N.Y. Feb. 9, 2007)