Opinion
No. 01 Civ. 11814 (LAP).
December 20, 2004
OPINION AND ORDER
Lead Plaintiff, Teachers' Retirement System of Louisiana ("Lead Plaintiff"), has moved for certification of this action ("the Action") as a class action against BDO Seidman, LLP ("Seidman") pursuant to Rule 23 of the Federal Rules of Civil Procedure. Lead Plaintiff alleges that Seidman was an accountant of A.C.L.N., Ltd. ("ACLN" or the "Company") responsible for issuing allegedly false audit reports for the years ended December 31, 1999 and December 31, 2000. Lead Plaintiff's claims arise under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated by thereunder by the Securities Exchange Commission, 17 C.F.R. § 240.10b-5. For the reasons set forth herein, I certify the Action as a class action against Seidman.
PROCEDURAL HISTORY OF THE MOTION
I was assigned this case from the Honorable Milton Pollack on August 26, 2004, following Judge Pollack's passing after nearly forty years of distinguished service on this Court.By Order entered November 13, 2002, Judge Pollack certified the Action to proceed as a class action and certified Lead Plaintiff as the class representative ("November 2002 Certification Order"). The Action was certified against, among others, the accounting firm BDO International. On December 19, 2002, Lead Plaintiff filed the Second Consolidated Amended Class Action Complaint. In addition to again naming BDO International, the global entity in whose name the audit reports at issue in the Action were signed, the Second Consolidated Amended Complaint separately named the specific BDO International entities that allegedly issued the audit reports, that is, BDO Global Coordination B.V. (formerly BDO International B.V.), BDO International Accountants and Consultants (CYPRUS) ("BDO Cyprus"), and Seidman. The Complaint was further amended on June 13, 2003, August 8, 2003, and February 25, 2004.
Seidman believed that it was not "bound" by the November 2002 Certification Order and thus argued that while the Action had been certified as a class action against BDO International, it had not been certified as a class action against Seidman. Seidman also argued that if the Court believed the November 2002 Certification Order bound Seidman, then Judge Pollack should decertify the class. Accordingly, on April 9, 2004, Seidman made a Motion for Clarification or, in the Alternative, Class Decertification ("Clarification Motion"). On May 18, 2004, Judge Pollack denied both of Seidman's motions ("May 18 Order"). Seidman applied, pursuant to Federal Rule of Civil Procedure 23(f), to the Court of Appeals for interlocutory review of the May 18 Order. Seidman also made a motion to the District Court for a stay pending appeal pursuant to Rule 23(f). Judge Pollack's Order, entered June 3, 2004, denying Seidman's motion for a stay, made clear that there was no decision with respect to class certification as applied to Seidman. Accordingly, by mandate issued September 24, 2004, the Court of Appeals denied Seidman's interlocutory appeal as premature.
On June 15, 2004, Lead Plaintiff, pursuant to Rule 23, moved for certification of the Action as a class action against Seidman.
DISCUSSION
In reviewing a motion for class certification, "the question is not whether the plaintiff has stated a cause of action or will prevail on the merits, but rather whether the requirements of Rule 23 are met." Eisen v. Carlisle Jacquelin, 417 U.S. 156, 178 (1974) (citation omitted). The party seeking to certify a class bears the burden of demonstrating that the requirements of Rule 23 are satisfied. Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 614 (1997); In re Industrial Diamonds Antitrust Litig., 167 F.R.D. 374, 378 (S.D.N.Y. 1996). However, "under the prevailing view in this Circuit, the Court may not consider on a class certification motion . . . the contrary evidence offered by defendants. . . ." DeMarco v. Lehman Bros, Inc., 222 F.R.D. 243, 247 (S.D.N.Y. 2004) (citing Caridad v. Metro-North Commuter Railroad, 191 F.3d 283 (2d Cir. 1999)):
The Court must nevertheless conduct "a rigorous analysis" before concluding "that the prerequisites of Rule 23(a) have been satisfied." Caridad, 191 F.3d at 291 (quoting Gen. Tel. Co. of the Southwest v. Falcon, 457 U.S. 147, 161 (1982)). Additionally, the Court may require a plaintiff seeking class certification to "adduce admissible evidence that, taken most favorably to the plaintiff, establishes a prima facie entitlement to such certification." Demarco, 222 F.R.D. at 247. To this end, "a court may consider material outside the pleadings in determining the appropriateness of class certification."Robertson v. Sikorsky Aircraft Corp., No. 397 CV 1216 (GLG), 2000 WL 33381019, at *16 (D.Conn. July 5, 2001); see also Falcon, 457 U.S. at 160 ("[T]he class determination generally involves considerations that are enmeshed in the factual and legal issues comprising the plaintiff's cause of action'. . . . [S]ometimes it may be necessary for the court to probe behind the pleadings before coming to rest on the certification question.") (citations omitted).
Rule 23(a) lists four threshold requirements applicable to all class actions:
(1) the class is so numerous that joinder is impracticable, (2) there are questions of law or fact common to the class, (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class, and (4) the representative parties will fairly and adequately protect the interests of the class.
Fed.R.Civ.P. 26(a). In other words: numerosity, commonality, typicality, and adequate representation are required. "In light of the importance of the class action device in securities fraud suits, these factors are to be construed liberally." Gary Plastic Packing Corp. v. Merrill, Lynch, Pierce, Fenner, Smith, Inc., 903 F.2d 176, 179 (2d Cir. 1990). If an action satisfies the four prerequisites of Rule 23(a), it may be certified as a class action provided that is maintainable under Rule 23(b)(1), (2), or (3).
Here, Lead Plaintiff requests certification of the class under Rule 23(b)(3), which requires the court to "find" that (1) "questions of law or fact common to the members of the class predominate over any questions affecting only individual members," and (2) "a class action is superior to other available methods for the fair and efficient adjudication of the controversy." Fed.R.Civ.P. 23(b)(3). Courts must "take a `close look' at each of the criteria for a Rule 23(b) (3) action." Cromer Fin. Ltd. v. Berger, 205 F.R.D. 113, 120 (S.D.N.Y. 2001) (citing Amchem Products, 521 U.S. at 615).
Lead Plaintiff contends that Rule 23(a)'s requirements of numerosity, commonality, typicality, and adequate representation are satisfied here and that the predominance and superiority requirements of 23(b)(3) are also satisfied.
With respect to Rule 23(a), Seidman does not dispute that Lead Plaintiff has satisfied the numerosity requirement or that questions of law or fact common the class exist. However, Seidman argues that without discovery it is unable to determine whether Lead Plaintiff's claims are typical of the class and whether Lead Plaintiff will adequately represent the interests of the class.
Regarding Rule 23(b)(3), Seidman argues that the Class is not entitled to the fraud-on-the-market presumption and thus that the class members will have to prove the Section 10(b) element of reliance on an individual-by-individual basis. If reliance must be proved in this manner, Seidman contends common questions of law or fact do not predominate and the Action cannot be maintained as a class action against Seidman. Seidman also argues that if the Court is persuaded there might be a basis for a presumption of market-wide reliance, then the Court should allow Seidman to depose a subset of absent class members in order to test that presumption.
I. The Requirements of Rule 23(a) Are Satisfied
A. The Class Is So Numerous That Joinder Is Impracticable
"Plaintiffs are not obligated to prove the exact class size to satisfy numerosity." Cross v. 21st Century Holding Co., No. 00 Civ. 4333 (MBM), 2004 WL 307306, at *1 (S.D.N.Y. Feb. 18, 2004) (citing Robidoux v. Celani, 987 F.2d 931, 935 (2d Cir. 1993)). In securities fraud class actions relating to publicly owned and nationally listed corporations, "the numerosity requirement may be satisfied by a showing that a large number of shares were outstanding and traded during the relevant period." Garfinkel v. Memory Metals, Inc., 695 F. Supp. 1397, 1401 (D. Conn. 1988).
During the Class Period, there were approximately fourteen million shares of ACLN common stock issued and outstanding, of which approximately seven million traded actively first on the NASDAQ and then the New York Stock Exchange until the stock was delisted on March 18, 2002. Approximately 15,000 potential class members were identified for purposes of providing notice of the pendency of the action and the settlement achieved with the ACLN defendants. The proposed Class consists of a sufficient number of persons to make joinder impracticable, thus satisfying the numerosity requirement of Rule 23(a)(1).
B. There Are Questions of Law and Fact Common To The Class
The commonality requirement "has been applied permissively by courts in the context of securities fraud litigation." In re Blech Sec. Litig., 187 F.R.D. 97, 104 (S.D.N.Y. 1999). Factual variations among class members' claims will not defeat the commonality requirement so long as the claims arise from a common nucleus of operative facts. See Green v. Wolf Corp., 406 F.2d 291, 299-300 (2d Cir. 1968); In re Avon Sec. Litig., No. 91 Civ. 2287 (LMM), 1998 WL 834366, at **5-6 (S.D.N.Y. Nov. 19, 1998).
The allegedly false and misleading statements that are the basis of the claims were made in two audit reports disseminated in documents filed with the SEC. Where, as here, Lead Plaintiff has alleged a common course of fraudulent conduct, which has allegedly caused all members of the Class to suffer damages, commonality is satisfied.
C. The Claims of The Representative Parties Are Typical of The Claims of The Class
Typicality "does not require that the factual background of each named plaintiff's claim be identical to that of all class members." Caridad, 191 F.3d at 293. Rather, typicality "requires that the disputed issue of law or fact occupy essentially the same degree of centrality to the named plaintiff's claim as to that of other members of the proposed class." Id. (internal citation and quotation marks omitted).
Where, as here, the lead plaintiff alleges a common pattern of wrongdoing and will present the same evidence, based on the same legal theories, to support its claim as other members of the proposed class, courts have held the typicality requirement to be satisfied, notwithstanding factual variances in the position of each member. See Green, 406 F.2d at 299. "When inquiring into the typicality requirement under Rule 23(a)(3), the focus must be on the defendants' behavior and not that of the plaintiffs."Forman v. Data Transfer, 164 F.R.D. 400, 404 (E.D. Pa. 1995).
Lead Plaintiff purchased ACLN Common stock during the Class Period. If Lead Plaintiff and other members of the Class were harmed by Seidman's conduct — that is, Seidman's alleged involvement with the allegedly false audit reports — then Lead Plaintiff and other members of the class were harmed by the same acts.
D. The Representative Party Will Fairly and Adequately Protect The Interests of The Class
The adequate representation requirement of Rule 23(a) has two elements: "(1) the representative party's attorney must be qualified, experienced and generally able to conduct the litigation; and (2) the plaintiff's interests must not be antagonistic to those of the remainder of the class." In re Prudential Sec. Inc. Ltd. P'ships Litig., 163 F.R.D. 200, 208 (S.D.N.Y. 1995) (citing In re Drexel Burnham Lambert Group, Inc., 960 F.2d 285, 291 (2d Cir. 1992)).
Lead Counsel has extensive experience in the specialized field of shareholder securities litigation, and in this action there are no disabling conflicts of interest between Lead Plaintiff and the other members of the Class. As Lead Plaintiff offers evidence to prove its claims against Seidman, it simultaneously will advance the interests of the Class. Accordingly, this requirement is satisfied.
E. Additional Discovery to Determine Typicality and Adequate Representation Is Not Warranted
The Action has been styled as a class action from its inception, and Seidman has been aware of the claims against it from at least December of 2002. Pursuant to this Court's order, fact discovery concluded on April 30, 2004. Prior to that date, Seidman had the opportunity to inquire into the typicality of Lead Plaintiff's claim, and into Lead Plaintiff's adequacy to serve as a class representative. That Seidman was unable to unearth any basis to challenge Lead Plaintiff on those grounds in the discovery it undertook does not provide a basis for reopening fact discovery.
II. The Action May be Maintained As a Class Action Pursuant to Rule 23(b)(3)
Rule 23 (b) (3) allows for class certification only where common questions of law or fact predominate over questions solely affecting individual members of the class. "A common course of conduct by the defendant is not enough to show predominance."Moore v. PaineWebber, Inc., 306 F.3d 1247, 1255 (2d Cir. 2002). A plaintiff must demonstrate that "the issues in the class action that are subject to generalized proof, and thus applicable to the class as a whole, . . . predominate over those issues that are subject only to individualized proof." In re Visa Check/MasterMoney Antitrust Litig., 280 F.3d 124, 136 (2d Cir. 2001) (citation omitted).
To state a claim for securities fraud under Section 10(b) and Rule 10b-5, a plaintiff "must plead that in connection with the purchase or sale of securities, the defendant, acting with scienter, made a false material representation or omitted to disclose material information and that the plaintiff's reliance on defendant's action caused plaintiff injury." Rothman v. Gregor, 220 F.3d 81, 89 (2d Cir. 2000) (citation omitted). In this action the proof of the elements of misrepresentation or omission, materiality, and Seidman's alleged scienter are all based on a common nucleus of facts and a common course of conduct. For example, the alleged misrepresentations are uniform and are contained in the two auditor's reports publicly disseminated in required filings with the SEC.
Seidman, however, argues that individualized issues of reliance predominate. Specifically, Seidman argues that the fraud-on-the-market theory, under which class members' reliance on alleged misrepresentations is presumed, does not apply. Thus, Seidman contends class members will have to prove the Section 10(b) element of reliance on an individual-by-individual basis.
Under the fraud-on-the-market theory, an individual plaintiff need not show that he actually read or heard a misrepresentation. Instead, he is presumed to have relied on the misrepresentation by virtue of his reliance on a market that fully digests all publicly available information about a security and incorporates that information into the security's price. Basic Inc. v. Levinson, 485 U.S. 224 (1988). In a fraud-on-the-market case a plaintiff is presumed to have relied on an "efficient" market. The fraud-on-the-market presumption of reliance is not, however, automatically applied in all federal securities fraud actions. For example, if the plaintiff has not adduced admissible evidence that, taken most favorably to the plaintiff, establishes aprima facie entitlement to the presumption that the market for the securities at issue was efficient, then the presumption of reliance will not apply. Or, as the Supreme Court noted inBasic, "[a]ny showing that severs the link between the alleged misrepresentation and either the price received (or paid) by the plaintiff, or his decision to trade at a fair market price, will be sufficient to rebut the presumption of reliance." 485 U.S. at 248.
Here, Lead Plaintiff has adduced evidence that the market for ACLN securities was efficient. Throughout the class period ACLN traded on either the NASDAQ or the NYSE and reported significant trading volume. There were numerous news stories about ACLN in leading financial publications, and institutional investors were interested in and owned ACLN stock.
Seidman makes a different sort of objection. The Class is not entitled to the fraud-on-the-market presumption, Seidman argues, because Seidman's two alleged misrepresentations — the two audit reports — were signed in the name "BDO International" and not "BDO Seidman" and thus "can be attributed (if at all) to Seidman only by piecing together disparate bits of highly circumstantial evidence." (Reply Mem. in Supp. of Clarification Mot., 4.) For this reason Seidman suggests there is "simply no basis forpresuming that the entire market attributed the allegedly false statements to Seidman." Id. at 7 (emphasis in the original).
This argument conflates reliance with attribution. The fraud-on-the-market theory merely relieves plaintiffs of proving the reliance element individually; it does not speak to attribution of the alleged misrepresentations to a specific defendant.
The starting point for the attribution analysis in this case isWright v. Ernst Young, 152 F.3d 169 (2d Cir. 1998). In Wright, the plaintiffs sued accountants Ernst Young, LLP for approving false and misleading information contained in the press release of a client. The press release included "a notation that the information [was] unaudited" and did not mention the identity of the client's outside auditor. Wright, 152 F.3d at 171. The Court of Appeals held that a secondary actor (such as an accounting firm) cannot incur primary liability under the Securities Exchange Act of 1934 for a statement not attributed to that actor "in advance of the investment decision." Id. at 175. Accordingly, the Court of Appeals affirmed the district court's dismissal of the complaint.
Attribution can be "indirect" in some cases. A plaintiff may state a claim for primary liability under Section 10(b) for a false statement (or omission), even where the statement is not directly attributed to the defendant, where the defendant's participation is substantial enough that it may be deemed to have made the statement and where investors are sufficiently aware of the defendant's participation that they can be found to have relied on it as if the statement had been directly attributed to the defendant. See In re Global Crossing, Ltd. Sec. Litig., 322 F. Supp. 2d 319, 332-35 (S.D.N.Y. 2004); In re Lernout Hauspie Sec. Litig., 230 F. Supp. 2d 152, 161, 166-67 (D. Mass. 2002).
In Lernout, as in the present case, the alleged misstatements at issue were contained in an audit report, not, as in Wright, in a press release expressly declaring that the information it contains is unaudited. The principal auditor in Lernout was KPMG Belgium, but it was assisted by other KPMG affiliates that did not sign the audit reports at issue. The Lernout court held that KPMG's Singapore affiliate could not be held liable under Section 10(b) where it "did not prepare, draft, edit or provide numbers for the audit" and instead was alleged to have played a role "more akin to the `review and approval' allegations which no court has found sufficient to trigger liability after Central Bank." Lernout, 230 F.Supp. 2d at 171 (referring to Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994), in which the Supreme Court held that aiding-and-abetting claims do not exist under Section 10(b)). However, because KPMG's U.S. affiliate was alleged to have "played a significant role in drafting the financial statements and in conducting the audit" and because the role of KPMG's United States affiliate had been widely made known in the company's annual reports, the Lernout court found that "it was appropriate to infer that . . . investors reasonably attributed the statements contained in the quarterly and annual reports to [the United States affiliate]." Id. at 166-67. Accordingly, the district court denied the motion of KPMG US to dismiss.
Following the persuasive reasoning in Lernout, the Court inGlobal Crossing noted that "[a] strict requirement of public attribution would allow those primarily responsible for making false statements to avoid liability by remaining anonymous, and thus `would place a premium on concealment and subterfuge rather than on compliance with the federal securities laws.'" 322 F. Supp. 2d at 333 (quoting In re Enron Corp. Sec., Deriv. ERISA Litig., 235 F. Supp. 2d 549, 587 (S.D. Tex. 2002)). Judge Lynch went on to hold that plaintiff had sufficiently alleged that Arthur Andersen's role as Global Crossing's auditor was widely known even without particular statements expressly attributed to it. Id. at 335. When combined with allegations that Arthur Andersen's participation in the audit process was substantial enough that it may be deemed to have made the statements at issue, plaintiff's allegations were sufficient to state a claim for primary liability under Section 10(b). Id. at 333-35. Judge Lynch concluded that "Andersen may thus be liable for any statement it is shown to have made and that investors attributed to it" and that "[e]stablishing the actual extent of Andersen's participation in making the statements will, of course, await summary judgment or trial." Id. at 335.
I note that under my reading of cases addressing the issue, such as Global Crossing, the question of attribution is a related but distinct concept from the Section 10(b) element of reliance. Here, Lead Plaintiff has made out a prima facie entitlement to the fraud-on-the-market presumption of reliance, which Seidman has not rebutted. That presumption is distinct from the relevant questions with respect to attribution that ask whether the market, and not individual investors, attributed the audit reports to Seidman. Thus, the questions presented here are whether Lead Plaintiff has adduced admissible evidence that, taken most favorably to Lead Plaintiff, supports findings that (1) as a result of Seidman's participation in the audit process Seidman can be deemed to have made the statements at issue in this action, and (2) the market was, in advance of the class members' investment decisions, sufficiently aware of Seidman's participation in the audit process that the market can be presumed to have attributed to Seidman the audit reports for the years ended December 31, 1999 and December 31, 2000.
A. Lead Plaintiff Has Proffered Evidence that Seidman May Be Deemed to Have Made the Statements in the Audit Reports
In its brief, Lead Plaintiff cites to evidence that Seidman could be deemed to have made the statements contained in the audit reports at issue. For example, Lead Plaintiff submits that Lee Dewey, the Seidman partner in New York, worked extensively on the ACLN audits for the calendar years ending December 31, 1999 and December 31, 2000. In support of this position, Lead Plaintiff cites to invoices suggesting that Seidman was actively involved in reviewing and preparing the allegedly false and misleading financial statements issued by ACLN.
The audit report for calendar year 1999 was included in ACLN's Form 20-F filed with the SEC on June 29, 2000. The audit report for calendar year 2000 was included in ACLN's Form 20-F filed with the SEC on June 28, 2001.
With respect to ACLN's financial statements for the year ended December 31, 1999, Lead Plaintiff also proffers evidence that suggests Dewey changed and inserted numbers used in calculating basic and diluted earnings per share. With respect to ACLN's consolidated financial statements for the year ended December 31, 2000, Lead Plaintiff has proffered evidence which tends to show that Dewey made significant changes, and with respect to ACLN's 20-Fs for the years ended December 31, 1999 and December 31, 2000, Lead Plaintiff has submitted evidence to support the contention that Dewey made significant alterations. Lead Plaintiff also has proffered evidence to support the assertion that Dewey considered himself to be ACLN's auditor.
Evidence also suggests that ACLN considered its auditor to be "BDO", which it understood to be both BDO Cyprus and Seidman, and an ACLN internal memo states "[o]ur auditors are BDO Seidman, an international accounting firm with offices in Cyprus, New York, and around the world." Members of ACLN's Board of Directors and Officers apparently stated that ACLN's primary contact at BDO was Dewey and that Dewey determined what type of audit opinion would be rendered on ACLN's financial statements, that is, whether an opinion would be in the form of "a clean opinion" or a "going concern opinion".
B. Lead Plaintiff Has Proffered Evidence that the Market Was, in Advance of Class Members' Investment Decisions, Sufficiently Aware of Seidman's Participation in the Audit Process
Lead Plaintiff also proffers evidence suggesting that the market was aware that Seidman was acting as ACLN's auditor. The evidence, if believed, proffered shows that Dewey held himself out as a representative of "BDO International" at an annual shareholders meeting and thus that the market may have connected Seidman to BDO International. For example, there is evidence to the effect that Dewey identified himself at the annual meeting by declaring "I am Lee Dewey from BDO Seidman," and in the proxy statement sent to shareholders with the notice of the annual meeting to be held July 23, 2001, ACLN told its shareholders that its auditor was "BDO International" and that representatives of BDO International were expected to attend the annual meeting. The proxy statement also said that representatives of BDO International are "expected to respond to appropriate questions," and there is evidence that Dewey answered questions at the annual meeting. Dewey also acknowledges that he was the only person from BDO at the July 2001 annual shareholders meeting, that no one from BDO Cyprus or any other BDO entity spoke at the meeting via telephone, and that "whoever opened the meeting said that there was someone from BDO" present at the meeting. The July 2001 meeting was attended not only by shareholders but also by brokers representing shareholders.
The class period stretches from June 29, 2000 to March 18, 2002. Thus the shareholder meeting in 1999 preceded the entire class period, and the 2001 shareholder meeting precedes a large portion of the class period, and therefore, presumably, the decision of many class members to invest in ACLN.
Lead Plaintiff also submits evidence that Seidman was presented as ACLN's auditor in contexts other than the annual shareholders meetings. The evidence tends to show that bankers and individual investors who wanted to speak with ACLN's auditor were told that Seidman was the auditor, and investors were directed to contact Dewey and a representative from BDO Cyprus.
Based upon this evidence Lead Plaintiff contends that the market had reason to believe that BDO Seidman might sign its name to an audit report as "BDO International". Additionally, Seidman maintains "International" letterhead with the same address, telephone number, and fax number as Seidman's New York office, and Seidman has issued audit reports in the name of Seidman on its "International" letterhead. See, e.g., Berger Declaration Exhibit 49, Audit Report for Michael Anthony Jewelers, Inc., dated April 6, 2001, issued by Seidman on its "International" letterhead. (This audit report was included in the company's Form 10-K/A for the year ended January 2001, which also was included in its annual report to shareholders.) Based on the above, Lead Plaintiff has proffered sufficient evidence to, if believed by a jury, support a verdict against Seidman as a primary violator. As in Global Crossing, evaluation of the factual question of attribution will await summary judgment or trial.
C. A Class Action Is Superior To Other Available Methods for The Fair and Efficient Adjudication of the Controversy
Under Rule 23(b)(3), plaintiffs are also required to demonstrate that "a class action is superior to other available methods for the fair and efficient adjudication of the controversy." Among the factors that a court should consider are "the difficulties likely to be encountered in the management of a class action."
The cost and expense of bringing individual suits in this matter would, in many instances, far exceed most individual recoveries. Moreover, even if an individual plaintiff chose to pursue the action, multiple lawsuits would be inefficient. The prosecution of this action as a class action will "achieve economies of time, effort, and expense, and promote uniformity of decision as to persons similarly situated." Dolgow v. Anderson, 43 F.R.D. 472, 488 (E.D.N.Y. 1968) (quoting Advisory Committee Notes to Rule 23, 39 F.R.D. 69, 102-03 (1966)). See also In re Blech, 187 F.R.D. at 107:
In general, securities suits such as this easily satisfy the superiority requirement of Rule 23. Most violations of the federal securities laws, such as those alleged in the Complaint, inflict economic injury on large numbers of geographically dispersed persons such that the cost of pursuing individual litigation to seek recovery is often not feasible. Multiple lawsuits would be costly and inefficient, and the exclusion of class members who cannot afford separate representation would neither be "fair" nor an adjudication of their claims. Moreover, although a large number of individuals may have been injured, no one person may have been damaged to a degree which would induce him to institute litigation solely on his own behalf.
A class action is the superior way to litigate the claims alleged in this action.
D. Seidman's Request to Depose a Subset of Absent Class Members is Without Merit
Seidman asserts that it should be allowed to test Lead Plaintiff's assertion that the "market" attributed the audit reports to Seidman by deposing a subset of absent class members. However, the fraud-on-the-market theory is predicated on the understanding that individual investors in an impersonal market may be unaware of particular information. See Basic, 485 U.S. at 241-42 ("`The fraud on the market theory is based on the hypothesis that, in an open and developed securities market, the price of a company's stock is determined by the available material information regarding the company and its business. . . . Misleading statements will therefore defraud purchasers of stock even if the purchasers do not directly rely on the misstatements. . . .'") (quoting Peil v. Speiser, 806 F.2d 1154, 1160-1161 (3d Cir. 1986)). Additionally, while the Federal Rules of Civil Procedure do not specifically address discovery of absent class members, courts are extremely reluctant to permit discovery of absent class members. See Kline v. First Western Govt. Sec., Inc., No. Civ. 83-1076, 1996 WL 122717, at *2 (E.D. Pa. March 11, 1996) ("[U]pon survey of the cases, it is safe to state that discovery of absent class members is disfavored."); 8 Charles A. Wright, et al., Federal Practice and Procedure § 2171 (2d ed. 1994) ("If discovery from absent class members is permitted at all, it should be sharply limited and allowed only on strong showing of justification."); In re Worlds of Wonder Sec. Litig, No. C-87-5491 SC (FSL), 1992 WL 330411, at *2 (N.D. Cal. July 9, 1992) ("`Absent a strong showing of necessity, discovery [of absent class members] generally will be denied.'") (quoting 3 Newberg on Class Actions, § 16.03, at 278 n. 57 (2d ed. 1985)).
Here, as to rebutting the presumption of reliance based upon the fraud-on-the-market theory, Seidman has not explained how the discovery sought of the absent class members will "sever the link between the alleged misrepresentation and either the price received (or paid) by the plaintiff, or his decision to trade at a fair market price." Basic, 485 U.S. at 248. As to the question of whether the audit reports ought to be attributed to Seidman, I see nothing in the current record to suggest that the general prohibition against discovery of absent class members ought to be relaxed. Discovery of the Lead Plaintiff appears to be sufficient, and to the extent that Seidman has not had adequate discovery of Lead Plaintiff on these issues, it may request that discovery. See In re Worlds of Wonder, 1992 WL 330411, at *6 ("Evidence to rebut the presumption primarily would come from underwriters, market makers and corporate insiders rather than individual investors, even large institutional investors."). If, after discovery of the Lead Plaintiff is complete, Seidman contends that discovery of Lead Plaintiff has been insufficient, Seidman may reapply for discovery of absent class members on these issues.
CONCLUSIONS
Having satisfied the Rule 23(a) requirements of numerosity, commonality, typicality and adequate representation and having qualified under Rule 23(b)(3), the Action is hereby certified as a class action against Seidman, and the following class definition is adopted:
All persons who purchased ACLN common stock on the NYSE or other U.S. Exchanges during the period from June 29, 2000 through March 18, 2002 (the "Class Period") and who were damaged thereby (the "Class") excluding (i) the Company, its officers and directors, employees, affiliates, legal representatives, heirs, predecessors, successors and assigns, and any entity in which the Company has a controlling interest or of which the Company is a parent or subsidiary; (ii) BDO International, its officers and directors, employees, affiliates, legal representatives, heirs, predecessors, successors and assigns, and any entity in which BDO International has a controlling interest or of which BDO International is a parent or subsidiary; (iii) the Individual Defendants, their employees, affiliates, legal representatives, heirs, predecessors, successors and assigns, and any entity in which they have a controlling interest.
Lead Plaintiff is hereby certified to act as the representative of the Class with respect to Seidman.
To the extent that Seidman contends that additional discovery is required of Lead Plaintiff in order to rebut the presumption of reliance that follows from the fraud-on-the-market theory, it may apply to take such discovery of Lead Plaintiff.
Seidman's request for discovery from a subset of the absent class members in order to determine whether the market attributed the alleged misstatements to Seidman is hereby denied without prejudice to renewal if discovery of Lead Plaintiff, as set out above, proves insufficient.
So Ordered.