under Rule 26(b)(4) of the Federal Rules of Civil Procedure. See id. at *2-3.

Defendants’ arguments to the contrary, and the cases they rely upon, do not persuade the
court otherwise.’ For example, although defendants seem to concede (at least for purposes of
this motion) that determination of damages can be a mechanical task if there is a “formula
determined on a common basis for the class,” defendants point out that plaintiffs have not yet
provided a formula. Relying on Newton v. Merrill Lynch, 259 F.3d 154, 187-190 (3d Cir. 2001)
and Wilcox Dev. Co. v. First Interstate Bank of Oregon, 97 F.R.D. 440, 447 (D. Oregon 1983),
defendants argue that without proof that such a formula exists, class certification is improper.
Neither Newton nor Wilcox, however, held that a class cannot be certified if plaintiffs have not
disclosed a damages formula.

In Newton, plaintiffs alleged that their broker-dealers failed to execute trades under “the
most favorable terms reasonably available” by failing to investigate whether there were better
prices than those offered on the central National Best Bid and Offer (“NBBO”) system. Newton,
259 F.3d at 162. The issue that prevented class certification was not related to calculation of

damages. Rather, the Third Circuit affirmed the district court’s decision to deny class

‘Defendants argue that plaintiffs’ reliance on the allegations in their Complaint in
outlining their theory of damages and in their opening brief on class certification was improper.
In ruling on the motion for class certification, the court need not accept the allegations in the
complaint as true and may find it necessary to make a preliminary inquiry into the merits. See
Szabo v. Bridgeport Machines, Inc., 249 F.3d 672, 677 (7" Cir. 2001); Rahim v, Sheahan, No. 99
0395, 2001 WL 1263493, at *10 (N.D. Ill. Oct. 19, 2001) (preliminary inquiry under Szabo does
not evaluate “the substantive strength or weakness of plaintiffs’ claims but rather the merits of
those allegations that bear on the suitability of the case for class treatment”). The implication of
Szabo, as relevant here, is that defendants need not accept plaintiffs’ allegations as true in
opposing class certification. It does not render plaintiffs’ reliance on those allegations
necessarily improper. Moreover, defendants’ argument on this issue strikes the court as more
relevant to the briefing on the motion for class certification than to the pending motion to
compel.



written explanation of their damages theory.’

ENTERED:

Vow hy fern

NAN R. NOLAN

United States Magistrate Judge

Dated: September 20, 2004

‘Lead Plaintiffs’ Motion to Strike the Response of Defendants to Lead Plaintiffs’
Submission Pursuant to the Court's Order of August 30, 2004 is denied as moot.

7



Actions § 10.8 (4 Ed. 2002) (explaining that “these necessary mechanics do not bar
certification”). As for their Section 11 claim, plaintiffs stated that the measure of damages will
be the statutory formula set forth in Section 11(e). In addition to providing a written submission
of their general damages theory, plaintiffs have also produced documents that provide
information regarding the lead plaintiffs’ purchases and sales of Household securities.

Defendants argue that plaintiffs’ explanation of their damages theory is insufficient, and
that defendants are entitled to know plaintiffs’ specific methodology for computing damages. In
other words, defendants now seek the damages formula plaintiffs intend to use in this litigation.
Specifically, defendants ask the court to “order plaintiffs to disclose their methodology for
calculating damages or, in the alternative, {to] preclude plaintiffs from saying anything else with
respect to damages in their reply briefs on the motion for class certification.” (Defs.’ Resp. to
Pls.’s Submission at 2.) Defendants’ position is overreaching. It is unreasonable for defendants
to expect the exact damages formula from initial disclosures in a securities fraud action where
expert analysis is undoubtedly necessary. A primary purpose of Rule 26(a)(1) “is to accelerate
the exchange of basic information about the case and to eliminate the paper work involved in
requesting such information, and the rule should be applied in a manner to achieve those
objectives.” Crouse Cartage Co. v. Nat'l Warehouse Inv. Co., No. IP02-071CTK, 2003 WL
23142182, at * 1 (S.D. Ind. Jan. 13, 2003) (citation omitted). Defendants have received the basic
information—they know plaintiffs’ general theory of damages (and likely should have known the
theory without a written submission) and have documents demonstrating plaintiffs’ purchases
and sales of the Household securities. To the extent plaintiffs have preliminary damages

calculations, those are the calculations of non-testifying experts, and thus need not be disclosed



certification because it was not clear whether each of the plaintiffs actually suffered economic
injury. Id. at 190. The issue in Newton was not “the calculation of damages but whether or not
class members have any claims at all.” Jd. at 189; The court explained that in securities fraud
cases involving excessive price markups or fraud-on-the-market, “injury necessarily flow[s] from
defendant’s conduct and reliance and injury [can] be presumed. In those cases, if defendant’s
conduct was held fraudulent, a claim of loss necessarily followed.” Jd. at 190. In contrast,
economic loss could not be presumed for the Newton plaintiffs because the defendants’
“execution of plaintiffs’ trades at the NBBO listed price did not necessarily injure each class
member.” Jd. at 180. (In other words, for some trades, the NBBO price may have been the best
price.) As a result, the court found that “ascertaining which class members have sustained injury
mean{t] individual issues predominate over common ones.” Jd. at 190. Proof of damage is a
different issue than the “mere calculation of damages.” Jd. at 188, “While obstacles to
calculating damages may not preclude class certification, the putative class must first
demonstrate economic loss on a common basis.” Id. at 189, Defendants here have not
challenged plaintiffs’ ability to establish a common economic loss; defendants focus solely on
calculation of damages. Given that the facts in Newton differ from those in a typical securities
action,” id. at 173, the court finds defendants’ reliance on that decision misplaced.

Plaintiff's reliance on Wilcox is similarly unpersuasive. In Wilcox, a case involving

7In Newton, the Third Circuit expressly noted that “[i]t is important to recognize that the
facts of this case do not resonate with those typical of securities violations under Rule 10b-5.
Customarily those claims involve a fraudulent material misrepresentation or omission that affects
a security’s value.” Newton, 259 F.3d at 173. Unlike the Newton plaintiffs who raised an
atypical securities fraud claim, the plaintiffs’ claims in the case at bar are typical of other
securities violations claims.



a
Minute Order Form (08/97)

United States District Court, Northern District of Illinois

ql) x

sesamin | Ronald A. Guzman | Suiuegcaae | _Nan Nolan
CASE NUMBER 02 C 5893 DATE 9/20/2004
CASE Lawrence Jaffe vs. Household International
TITLE
{In the following box (a) indicate the party filing the motion, e.g., plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature
MOTION: of the motion being presented.]
DOCKET ENTRY: til
(1) oO Filed motion of [ use listing in “Motion” bax above.
(2) i Brief in support of motiondue ub
(3) Oo Answer brief to motion due___. Reply to answer brief due__.
(4) Oo Ruling/Hearing on set for at
(5) oO Status hearing[held/continued to] [set for/re-set for]}on____set for at
(6) im} Pretrial conference(held/continued to] [set for/re-set for] on setfor_ ss at__.
(7) oO Trial[set for/re-set for] on at
(8) Qa [Bench/Jury trial} [Hearing] held/continuedto__—_at
(9) i This case is dismissed (with/without] prejudice and without costs[by/agreement/pursuant to]
OFRCP4(m) O Local Rule 41.1 O)FRCP41(a)(1) O FRCP41(a)(2).
(0) =f [Other docket entry]

For the reasons explained in the attached order, the court denies Defendants’ Motion to Compel Lead Plaintiffs to
Comply with their Initial Disclosure Obligations under Federal Rule of Civil Procedure 26(a)(1)[170-1] in part and
grants the motion solely to the extent that the court previously ordered plaintiffs to submit a written explanation of
their damages theory.
Pursuant to the Court's Order of August 30, 2004is denied as moot.

Lead Plaintiffs’ Motion to Strike the Response of Defendants to Lead Plaintiffs’ Submission

(For further detail see order (on reverse side of/attached to) the original minute order.]

No notices required.

Mail AO 450 form.

No notices required, advised in open court

Notices mailed by judge’s staff.
Notified counsel by telephone.

Docketing to mail notices.

Copy to judge/magistrate judge.

Document
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central Clerk's Office mailing deputy initials



claims under RICO and the Sherman Act, the court found that individual issues of class
membership, injury in fact, and damages predominated, making class certification inappropriate.
Wilcox, 97 F.R.D. at 447. Specifically, the court found it unlikely that plaintiffs would ever be
able to develop a damages formula that would permit mechanical calculation of damages. Id.
Here, on the other hand, defendants have offered the court no reason to be concerned about
plaintiffs’ ability to develop a damages formula. Moreover, in Wilcox, as in Newton, there was
no presumption of economic injury available for the plaintiffs, so proof of injury had to be
established on an individual basis. Jd. Conversely, in many securities fraud cases, there is a
presumption of economic injury. Newton, 259 F.3d at 179-180.

As for defendants’ request to bar plaintiffs “from saying anything else with respect to
damages in their reply briefs,” (Defs.’ Resp. at 2), the court declines to issue such a broad order.
In opposing class certification, if defendants argue that individual damages issues dominate or
create manageability problems, for example, plaintiffs have a right to respond. Defendants’ real
concern seems to be that plaintiffs will respond with a common formula or methodology that
they are currently withholding. That strikes the court as unlikely, but the court will address the
situation if and when it happens.

Conclusion
For the reasons explained above, the court denies defendants’ motion to compel in part

and grants the motion solely to the extent that the court previously ordered plaintiffs to submit a

3Additionally, assuming the class is certified, when it is time for plaintiffs to reveal their
damages formula/methodology, if defendants believe individual damages issues predominate
based on the disclosed methodology, defendants can move to decertify the class.

6



IN THE UNITED STATES DISTRICT COURT DOvKETEI,
FOR THE NORTHERN DISTRICT OF ILLINOIS

HOUSEHOLD INTERNATIONAL, INC,
etal,

EASTERN DIVISION SEP 2 3 2004

LAWRENCE E. JAFFE PENSION PLAN, )
on behalf of itself and all others } Lead Case No. 02 C 5893
similarly situated, ) (Consolidated)

)

Plaintiff, )
)
vs. ) Judge Ronald A. Guzman

) Magistrate Judge Nan R. Nolan

)

)

)

)

Defendants,

MEMORANDUM OPINION AND ORDER

In this proposed class action, plaintiffs, who purchased or otherwise acquired defendant
Household International, Inc.’s (“Household”) equity and debt securities, allege that defendants
made materially false representations and omissions concerning Household, its operations and its
financial condition, and in doing so violated Section 10(b) of the Securities Act of 1934 and
Section 11 of the Securities Act of 1933. This matter is before the court for ruling on
Defendants’ Motion to Compel Lead Plaintiffs to Comply with their Initial Disclosure
Obligations under Federal Rule of Civil Procedure 26(a)(1) (“motion to compel”). For the
reasons explained below, the court grants the motion to compel in part and denies it in part.

In their motion, defendants ask the court to compel plaintiffs to provide the amount of
their claimed damages, a computation on which their damages claims are based, and all evidence
on which their damages claim is based. (Mot. at 4.) Plaintiffs oppose the motion, arguing that

defendants’ motion is premature because (i) damages in securities fraud cases is a matter for

(30


expert analysis and opinion, so plaintiffs’ damages need not be disclosed until the expert phase of
discovery, and (ii) any computation of damages plaintiffs currently have is the work product of
non-testifying experts that is protected from disclosure. At the hearing on August 30, 2004, the
court ruled that at this stage in the litigation, defendants were not entitled to the breadth of
damages information they were seeking. The court’s ruling was based partially on the fact that
damages in securities fraud cases are generally an issue addressed by experts. The ruling was
also based on the fact that discovery in this matter is bifurcated, with class discovery preceding
merits discovery. The court, however, also ruled that defendants were entitled to some
information relating to the class certification issue. Specifically, the court agreed that defendants
were entitled to plaintiffs’ underlying theory of damage liability. (Tr. of 8.30.04 hearing at
17:13-21.) Accordingly, the court directed plaintiffs to submit a brief explaining their damages
theory, and gave defendants the opportunity to file a written response to plaintiffs’ submission to
identify whatever other information defendants thought they needed for the class certification
issue.

In plaintiffs’ submission, they explained that their measure of damages for their Section
10(b) claim is the same as the standard measure of damages for securities fraud, namely “the
difference between the price of the stock and its value on the date of the transaction if the full
truth were known.” Assoc. Randall Bank y. Griffin, Kubik, Stephens & Thompson, Inc., 3 F.3d
208, 214 (7" Cir. 1993). Moreover, the value of the stock if the full truth were known, or the fair
value of the stock, is the subject of expert analysis. “The determination of damages sustained by
individual class members in securities class action suits is often a mechanical task involving the

administration of a formula determined on a common basis for the class[.]” Newberg on Class