“Requiring proof of individualized reliance from each member of the proposed plaintiff class
effectively would have prevented respondents from proceeding with a class action, since individual
issues then would have overwhelmed the common ones.” Id. at 242.

The presumption may be rebutted by “[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... . . ” Basic, 485 U.S. at 248. Although it preceded Basic, Blackie v. Barrack,

524 F.2d 891, 906 (9" Cir, 1975), outlined four ways that a defendant can rebut the presumption of
reliance: (1) disproving materiality; (2) despite materiality, showing an insufficient number of traders
relied to inflate the price; (3) showing that an individual plaintiff purchased despite knowledge of
the falsity of a representation; or (4) showing that an individual plaintiff would have purchased
anyway had he known of the falsity of the representation.

The Household Defendants apparently contend that the discovery they seek regarding a single
class representative’s investment history is relevant to rebutting the fraud on the market theory as
to the class as a whole. The Household Defendants argue: “If PACE’s claim has a defect for want
of proving reliance, then not only does PACE’s claim fail, but defendants will argue that the class
that PACE represents cannot rely on the fraud on the market theory.” Defs’ Opp. at 10. The
Household Defendants cite one case, Easton & Co. v. Mut. Ben. Life Ins. Co., 1994 WL 248172, at
*4(D.N.J. May 18, 1994), in support of their argument that “courts have recognized that defendants
can defeat the fraud on the market theory of reliance on a class wide basis by showing that many of

the class members did not rely on the integrity of the market in purchasing and selling the securities

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in which individualized rebuttal proceedings may be pursued to determine whether a claimant may
recover, once the matter of liability has been adjudicated.”); Eisenberg v. Ganon, 766 F.2d 770, 786
(3d Cir. 1985) (recognizing that individual questions as to reliance exist in every 10b-5 action, and
rather than eliminate securities actions, “it would be more efficient to order separate trials, if
necessary, limited to the issue of reliance.”); In re Laser Arms Corp. Sec. Litig., 794 F.Supp. 475,
495 (S.D. N.Y. 1989) (after holding that individual issues of reliance did not predominate and defeat
class certification, the court stated that, “[i]f at a later stage of the proceedings the Court determines
that the fraud on the market theory is not applicable because [the company’s] securities did not trade
in an efficient market, the Court could simply order separate hearings on the reliance issue.”); Biben
v. Card, 789 F.Supp. 1001, 1003 (W.D. Mo. 1992) (holding first phase of the trial would address
liability, the true value of the share, and possibly issucs of class-wide rebuttal and the second
proceeding will determine individual class member’s damages and hear any evidence rebutting the

presumption of reliance as to each class member). The Biben court noted that discovery of

information for purposes of rebutting the fraud on the market theory as to individual class members

“need not occur until after liability is established.” Biden, 789 F.Supp. at 1004.n.1. This Court also

finds nothing prejudicial about the reservation of the reliance issue until after a determination of
class-wide liability, if necessary. Because the Household Defendants have not shown how
information regarding PACE’s investment history can rebut the class-wide presumption of reliance,
the Court concludes that their need for this discovery at this time is outweighed by the burden

imposed on the third-parties and the Class.

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history and background of all named plaintiffs was necessary to rebut the fraud on the market theory.
The Court rejected defendants’ argument and agreed with plaintiffs’ position that the investment
behavior ofa handful of plaintiffs “cannot shed any light on the overall issue of liability, in particular
on whether the entire class acted in reliance on the market price of Lucent stock.” Id., at *4. The
Lucent court held that “discovery as to the investment behavior of the 41 named, non-lead plaintiffs
is not . . . probative of the question of class-wide reliance on the market.” Id. Because
“{c]onclusions drawn from the experience of this handful of named parties cannot be extrapolated
to represent the experience of a class of hundreds of thousands of individuals of which the putative
class is comprised,” defendants’ motion was denied. Id. at 6. The court concluded that the discovery
sought by defendants “may be appropriate at a later stage in the case . . . once the matter of liability

has been adjudicated.” Id. The Lucent court explicitly distinguished Easton noting that in that case

“[t]he small class size established a strong possibility that discovery of individual class members

would be probative of the overall class experience,” but found that the 41 non-representative named

plaintiffs in Lucent could not fulfill the same purpose as to a class of thousands. In re Lucent, 2002
US. Dist. LEXIS 8799, at *5-6.4
Similarly, discovery of PACE’s investment history is irrelevant to any class-wide liability

issues and thus, not essential at this time.’ Given Plaintiffs’ reliance on the fraud on the market

* In addition, the Easton case is distinguished from the present case in that it involved a state
law claim for negligent misrepresentation which required a showing of actual reliance by the
plaintiffs. Easton, 1994 WL 248172, at *4. No state law claims have been alleged here.

* The Lead Plaintiffs recognize that discovery related to PACE’s investment decisions may
be relevant but contend that discovery should initially be limited to class-wide liability issues.
Sce Plaintiff's Mo. at 6-7 (stating “discovery of information related to PACE’s investment decisions
and those of its investment advisors might, in theory, give rise to a defense against PACE, such
discovery will not further any defense against the Class as a whole, and, if allowed, will only distract

-7-


in question.” Defs’ Opp. at 10.’ Although Easton held that the defendants were entitled to propound

written discovery seeking prior investment history, among other things, on all absent class members

in a securities fraud case, it is inapposite to the circumstances present here, The classes in Easton

consisted of only 160 members, in sharp contrast to the hundreds of thousands of class members
here.’ In an Easton situation, it might be possible that “if the discovery shows that a significant
number of class members who were purchasers in the market had information . . . , it would tend to
prove that the market was not defrauded, and thus the benefit of the ‘fraud on the market’

presumption would be unavailable on a common basis to any of the class members.” Easton, 1994

WL 248172, at *4.
Though there may be circumstances when discovery into a single plaintiff's investment
history is appropriate after class certification and before a determination of class-wide liability, the

Court believes this is not such a situation. The Court finds the In re Lucent Technologies Inc. Sec.

Litig,, 2002 U.S. Dist. LEXIS 8799 (D.N.J. May 7, 2002), decision cited by Lead Plaintiffs

persuasive. In Lucent, the defendants sought discovery of documents concerning the investment

history of the 41 named plaintiffs. The Lucent defendants argued that discovery of the investment

? The Household Defendants’ assertion that they can rebut the presumption on a class-wide
basis by showing that “many” of the class members did not rely on the integrity of the market in
purchasing and selling the securities at issue seems inconsistent with their assurance that they merely
seek discovery from the investment advisors of one of the plaintiffs and they will not seek discovery
from the hundreds of thousands of absent Class members. The Household Defendants do not
adequately explain how they can rebut the presumption of fraud on the market on a class-wide basis
without seeking discovery of investment histories from every single plaintiff or a sufficient number
of them.

* Plaintiffs’ Memorandum in Support of Their Motion for Class Certification states: “While
the exact number of Class members cannot be determined until after the completion of discovery,
there are in all likelihood hundreds of thousands, if not more, of members in the proposed Class .

.” Pis’ Memo. at 10-11.

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Finally, the Court finds that the most efficient and expeditious manner of managing this
litigation is to delay discovery into individualized issues until after class-wide liability has been
determined. The Federal Rules of Civil Procedure and the court’s inherent power provide the trial
court with broad authority to control the discovery process. See Federal Judicial Center, Manual for
Complex Litigation §11.422 (4" 2004); see also Cowen v. Bank United of Texas, 70 F.3d 937, 944
(7 Cir. 1995) (noting that controlling the pace and scope of discovery is a matter of case
management and is within the district judge’s discretion). Moreover, District Judge Guzman has
referred this case to this Court for discovery supervision.

Under the circumstances presented here, bifurcating discovery regarding class liability issues
and discovery regarding individualized reliance issues is the most orderly, efficient, and economical
way to proceed. See 7 Alba Conte and Herbert Newberg, Newberg on Class Actions § 22:61 (4% ed.
2002) (noting that in securities fraud action “rebuttal of individual reliance . .. may be resolved after
trial on common issues”). “[J]udicial economy is better served by a focus upon the materiality of
the challenged representations or omissions rather than on individual reliance, in a realm when the
harm to the shareholder is a product of the injury to the market by the defendant’s practices.” Id.
Moreover, numerous courts have recognized that individualized issues of reliance may be

adjudicated after class-wide issues have been determined. Lucent, 2002 U.S. Dist. LEXIS 8799, at

*6 (stating “[t]he discovery sought by Lucent instead may be appropriate at a later stage in the case,

Brace Jovanovich, Inc. Sec. Litig., 838 F. Supp. at 112. Grossman is also unhelpful because it was
rendered in the context of ruling on summary judgment motions as to the each of three named
plaintiffs in a securities fraud action and provides no insight into whether discovery of a single class
representative's investment history is relevant to rebutting the classwide presumption of reliance or
whether such discovery makes sense at this stage of the proceedings for purposes of efficiently
managing this litigation.

-9-


IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

LAWRENCE E. JAFFE PENSION PLAN,
on Behalf of Itself and All Others Similarly
Situated,

Plaintiff,

Case No. 02 C 5893
v. Magistrate Judge Nan R. Nolan
HOUSEHOLD INTERNATIONAL, INC., et al.

Defendants.

wee vy eS ee YH HY

MEMORANDUM OPINION AND ORDER

NAN R. NOLAN, Magistrate Judge:

This securities class action is before the Court on Lead Plaintiffs’ Motion for Protective
Order Quashing the Household Defendants’ Third-Party Subpoenas. The Household Defendants and
Defendant Arthur Andersen LLP (“Andersen”) oppose the motion. For the reasons that follow, the
Court finds that Lead Plaintiffs have shown good cause for the entry of the requested protective
order, and Lead Plaintiffs’ Motion is granted.

BACKGROUND

This class action is brought by plaintiffs on behalf of all persons who purchased or otherwise
acquired the securities of Household International, Inc. (“Household”) between October 23, 1997
and October 11, 2002 (“Class Period”). The [Corrected] Amended Consolidated Class Action
Complaint alleges violations of §§10(b) and 20(a) of the Securities Exchange Act of 1934 and §§
11, 12(a)(2), and/or 15 of the Securities Act of 1933. The class has been certified with respect to
claims brought pursuant to §§10 and 20 of the Securities Exchange Act of 1934 and the Securities

and Exchange Commission Rules promulgated thereunder. PACE Industry Union-Management


CONCLUSION
Lead Plaintiffs’ Motion for Protective Order Quashing the Household Defendants’ Third-
Party Subpoenas is granted. The third-party subpoenas are quashed without prejudice to reassertion,
if necessary, after a determination of class-wide liability. Defendants are prohibited from pursuing
discovery related to individual claims and defenses until after class-wide liability has been
determined. Because the Court has granted Lead Plaintiffs’ motion, it need not determine the proper

scope of the subpoenas at this time.

ENTER:

Nan R. Neblass

Nan R. Nolan
United States Magistrate Judge

Dated: April 18, 2005

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theory, resolution of individualized reliance issues is not necessary to establishing class-wide
liability. Significantly, the Household Defendants have failed to cite any case indicating that even
if reliance is rebutted as to a single plaintiff, it necessarily invalidates the class-wide presumption.
See 7 Alba Conte and Herbert B. Newberg, Newberg on Class Actions, §22.61, at 285 (4" ed. 2002)
(stating “a rebuttal of reliance by a particular class member must necessarily be on an individual
basis because there can be no class presumption of nonreliance.”).

The remainder of the cases cited by the Household Defendants do not compel the conclusion
that discovery into PACE’s investment history and decision-making is appropriate or necessary at

this stage of the proceedings. Except the In re Grossman v. Waste Mgmt., Inc., 589 F.Supp. 395

(N.D. Ill 1984) case, all of the cases cited by the Household Defendants are pre-class certification
cases focusing in part on the use of a plaintiff's investment history to challenge the adequacy or
typicality to represent the class. See In re SciMed Life Sec. Litig.,1992 WL 413867 (D. Minn. Nov.

20, 1992); In re Grand Casinos, Inc. Sec. Litig., 181 F.R-D. 615 (D. Minn. 1988); Roseman Profit

Sharing Plan vy. Sports & Recreation, 165 F.R.D. 108 (M.D. Fla. 1996); In re Harcourt Brace

Jovanovich, Inc. Sec. Litig., 838 F. Supp. 109 (S.D.N.Y. 1993); Feldman v. Motorola, Inc., 1992 WL
137163 (N.D. Ill. June 10, 1992). The Court finds these pre-class certification cases not particularly
helpful because a class has been stipulated to and certified by the district court in this case.

Adequacy and typicality for class certification purposes are not at issue."

from litigation on the primary issues in this case.”’).

® Additionally, In re SciMed Life Sec. Litig. and In re Harcourt Brach Jovanovich, Inc. Sec.
Litig, are distinguishable from the present case because the former case involved state law claims
of fraud and negligent misrepresentation which required a showing of actual reliance and the later
case involved a claim of direct reliance on the defendants’ misrepresentations and omissions as well
as fraud on the market theory. In re SciMed Life Sec. Litig., 1992 WL 413867, at *3; In re Harcourt

-8-


The Household Defendants argue that the information they seek regarding PACE’s
investment history is relevant to the merits of Plaintiffs’ claims. To establish a violation of Section
10(b) and Rule 10b-5 promulgated thereunder, a plaintiff must show that (1) the defendant made a
false statement or omission (2) of material fact (3) with scienter (4) in connection with the purchase
or sale of securities (5) upon which the plaintiff justifiably relied (6) and that the false statement
proximately cause the plaintiff's damages. Jaffe v. Household, 2004 WL 574665, at *5 (N.D. Ill.
March 22, 2004). “[R]eliance is an element of a Rule 1 0b-5 cause of action. Reliance provides the
requisite casual connection between a defendant's misrepresentation and a plaintiff's injury.” Basic
Inc. v. Levinson, 485 U.S. 224, 243 (1988) (internal citations omitted).

Plaintiffs are pursuing a fraud on the market theory under which they can satisfy the reliance
clement of securities fraud without proving direct reliance on false representations. The fraud on
the market theory allows plaintiffs to establish a class-wide rebuttable presumption of reliance on
Household’s alleged misrepresentations. The Supreme Court has described the fraud on the market
theory as follows:

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 purchasers

do not rely on the misstatements . . .. The casual connection between the defendants’

fraud and the plaintiffs’ purchase of stock in such a case is no less significant than

in acase of direct reliance on misrepresentations.

Basic, 485 U.S. at 241-42. Basic held that "[b]ecause most publicly available information is

reflected in market price, an investor's reliance on any public material misrepresentations, therefore,
may be presumed for purposes of a Rule 10b-5 action." Id, at 247. Basic also recognized that the

fraud on the market theory is critical to the class certification issue in securities fraud class actions.

4.


December 31, 2003. Three of the subpoenas also requested deposition testimony. Household has
withdrawn the subpoenas for Shields Associates, Thompson Financial, and Highland Capital
Management. Eleven subpoenas remain outstanding. The Lead Plaintiffs object to the subpoena
requests as irrelevant to common issues concerning the class and seek a protective order quashing
the third-party subpoenas. A dispute has also arisen regarding the sequencing of discovery.
Plaintiffs seek to limit initia! discovery to class-wide liability issues until the liability stage has been
completed. The Household Defendants and Andersen oppose delaying the discovery sought by the
subpoenas. '

Federal Rule of Civil Procedure 26(b)(1) prescribes the scope of matters upon which a party
may seek discovery. “Parties may obtain discovery regarding any matter, not privileged, that is
relevant to the claim or defense of any party . .. Relevant information need not be admissible at trial
if the discovery appears reasonably calculated to lead to the discovery of admissible evidence.” Fed.
R. Civ. P. 26(b)(1). Rule 26(c) provides, however, “for good cause shown, the court in which the
action is pending . . . may make any order which justice requires to protect a party or person from
annoyance, embarrassment, oppression, or undue burden or expense, including . . . (1) that the
disclosure or discovery not be had [or] (2) that the disclosure or discovery may be had only on
specified terms and conditions . ...” Trial courts have broad discretion in resolving matters relating

to discovery. Patterson v. Avery Dennison Corp., 281 F.3d 676, 681 (7th Cir. 2002).

' Andersen complains that Lead Plaintiffs violated Local 37.2 by failing to confer with it prior
to seeking court intervention. Because the Court has considered the merits of Andersen’s Response
and it has suffered no prejudice from the alleged violation of the meet and confer obligation, the
Court exercises its discretion to excuse compliance with Local Rule 37.2. Little v. Cox's
Supermarkets, 71 F.3d 637, 641 (7th Cir.1995) (stating "decision whether to apply [a local] rule
strictly or to overlook any transgression is one left to the district court's discretion.").

-3-


Pension Fund (“PACE”) and two other institutions are Class Representatives.

Plaintiffs allege that during the Class Period, Household and its officers William Aldinger,
David Schoenholz and Gary Gilmer (i) engaged in the widespread abuse of their customers through
a variety of illegal sales practices and improper lending techniques; (ii) improperly “reaged” or
“restructured” delinquent accounts to manipulate Household’s publicly reported financial statistics
and give the appearance that the credit quality of Househo!d’s borrowers was more favorable than
it was in reality; and (iii) manipulated the manner in which Houschold accounted for costs associated
with its co-branding, affinity and marketing agreements resulting in a restatement of Household’s
financial results going back to 1994. Plaintiffs further allege that Household raised over $75 billion
during the Class Period through a series of debt offerings conducted through its wholly owned
subsidiary, Household Finance Corporation. Plaintiffs contend that the Debt Registration Statements
filed with the Securities and Exchange Commission in support of these offerings contained false
statements regarding Household’s financial results and operations. Plaintiffs additionally allege that
during the Class Period, Andersen, Household’s auditor, actively participated in the issuance of
Household’s false financial statements by performing audits of the financial statements and
reviewing interim financial information included in Household’s SEC filings as well as in
Reyistration Statements, and by reporting on those financial statements. The Household Defendants
and Andersen deny the allegations.

DISCUSSION

The Household Defendants served subpoenas on 14 current and former investment advisors

and administrators of PACE seeking documents related to investments in Household, Inc., Beneficial

Corporation, and HSBC Holdings, ple securities on behalf of PACE from January 1, 1997 to

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