Opinion ID: 785935
Heading Depth: 2
Heading Rank: 3

Heading: The Underwriters' Petition

Text: 30 In contrast to the Citigroup Defendants' petition, the Underwriters' petition does not present legal questions that meet the criteria for interlocutory review laid out in Sumitomo. Accordingly, the Underwriters will have to wait until there is an appealable final judgment before they can challenge the certification order. 31 The Underwriters' first argument is that the class cannot be certified because the additional named plaintiffs have not been subjected to lead plaintiff scrutiny under the PSLRA. That statute requires a district court to appoint a person or persons to serve as lead plaintiff before proceeding with the adjudication of a private suit under the federal securities laws. Two objective factors inform the district court's appointment decision: the plaintiffs' respective financial stakes in the relief sought by the class, and their ability to satisfy the requirements of Rule 23. See 15 U.S.C. § 78u-4(a)(3)(B)(iii)(I). 11 According to the Underwriters, NYSCRF does not meet the typicality requirement of Rule 23(a) 12 because it did not purchase bonds in either the 2000 or the 2001 offering and therefore lacks standing to sue the petitioners under Sections 11 and 12 of the 1933 Act on behalf of WorldCom bondholders. Moreover, in the Underwriters' view, NYSCRF's deficiencies as a lead plaintiff cannot be cured through the appointment of three named plaintiffs who have not satisfied the rigors of the PSLRA's lead plaintiff scrutiny. 32 In rejecting these arguments, the District Court determined (1) that the participation of FCERA, Fresno, and HGK as named plaintiffs and proposed class representatives ensures that the litigation will continue to focus on the claims raised by bondholders, and that there are representatives of the Class with claims typical of purchasers of both types of securities, and (2) that NYSCRF is a suitable lead plaintiff because its claims are based on misrepresentations in the Registration Statements and on the same core course of conduct at issue in the Sections 11 and 12 claims. Class Opinion, 219 F.R.D. at 281. These determinations, which are part and parcel of the District Court's management of the consolidated class action, are not proper subjects for Rule 23(f) review. Cf. Fed.R.Civ.P. 23(f), advisory committee's notes (explaining that [p]ermission [to appeal under Rule 23(f)] is most likely to be granted when the certification decision turns on a novel or unsettled question of law  (emphasis added)). 33 In an attempt to fit their arguments into one of the categories identified in Sumitomo, the Underwriters propose that we adopt a per se rule that a class may not be certified where a lead plaintiff does not have standing to bring every available claim and none of the named plaintiffs who have standing to bring the additional claims has been vetted under the PSLRA. This per se rule has little to recommend it. Nothing in the PSLRA indicates that district courts must choose a lead plaintiff with standing to sue on every available cause of action. Rather, because the PSLRA mandates that courts must choose a party who has, among other things, the largest financial stake in the outcome of the case, it is inevitable that, in some cases, the lead plaintiff will not have standing to sue on every claim. See In re Initial Pub. Offering Sec. Litig., 214 F.R.D. 117, 123 (S.D.N.Y.2002) ([T]he fact that the lead plaintiff is to be selected in accordance with objective criteria that have nothing to do with the nature of the claims ... strongly suggests the need for named plaintiffs in addition to any lead plaintiff.). 13 In those cases, just as a class representative can establish the requisite typicality under Rule 23 if the defendants committed the same wrongful acts in the same manner against all members of the class, In re Prudential Sec. Inc. Ltd. P'ships Litig., 163 F.R.D. 200, 208 (S.D.N.Y.1995) (internal quotation marks omitted), so too can lead plaintiffs. 34 Moreover, the PSLRA does not in any way prohibit the addition of named plaintiffs to aid the lead plaintiff in representing a class. See Class Opinion, 219 F.R.D. at 286 (Although the lead plaintiff must `otherwise satisfy the requirements of Rule 23,' nothing in the text of the PSLRA indicates that every named plaintiff who satisfies the requirements of Rule 23 must also satisfy the criteria established under the PSLRA for appointment as lead plaintiff and actually be appointed as a lead plaintiff.); In re Oxford Health Plans, Inc. Sec. Litig., 191 F.R.D. 369, 380-81 (S.D.N.Y.2000) (The Court believes on reflection that it probably has the power to designate a Class Representative under Rule 23 who is not a Lead Plaintiff, simply because there is nothing in the statute which prevents it.). Based on this silence in the text of the statute, along with the statement in the Conference Report on the PSLRA that [t]he provisions of the bill relating to the appointment of a lead plaintiff are not intended to affect current law with regard to challenges to the adequacy of the class representative or typicality of the claims among the class, Conf. Rep. No. 104-369, at 34, reprinted in 1995 U.S.C.C.A.N. 730, 733, there is no reason to believe that the PSLRA altered the preexisting standard by which class representatives are evaluated under Rule 23. 35 For all of these reasons, the Underwriters have not made a substantial showing that the district court's decision to name HGK, Fresno, and FCERA as class representatives is questionable. Sumitomo, 262 F.3d at 139. They also have not shown that the District Court's decision implicates a legal question about which there is a compelling need for immediate resolution. Id. First, as noted above, the District Court's determination that the addition of three named plaintiffs would help the lead plaintiff represent the interests of the class as a whole was not a legal decision that we review de novo; instead, it was a managerial judgment that is entitled to deference. See Fed.R.Civ.P. 23(d) (granting broad discretion to district courts to make appropriate orders in order to facilitate management of class actions); Parker v. Time Warner Entm't Co., 331 F.3d 13, 28 (2d Cir.2003) (Newman, J., concurring) (discussing district courts' broad discretion to adopt procedural innovations in order to facilitate management of class actions). Moreover, even if the Underwriters have managed to contrive a legal question by proposing that we announce a per se rule against named plaintiffs such as HGK, Fresno, and FCERA, that question is not of fundamental importance to the development of the law of class actions, Sumitomo, 262 F.3d at 140, because, among other things, we perceive no substantial legal argument in support of such a per se rule. 36 The other determinations of the District Court challenged by the Underwriters also do not meet the criteria for an interlocutory appeal under Rule 23(f). The Underwriters argue that the three additional named plaintiffs are inadequate class representatives because they have not agreed to assume ultimate responsibility for a portion of the litigation costs incurred in prosecuting this class action, in alleged violation of Disciplinary Rule 5-103 of the New York Lawyer's Code of Professional Responsibility. That Rule provides that an attorney may only advance or guarantee the expenses of litigation provided the client remains ultimately liable for such expenses. N.Y. Comp.Codes R. & Regs. tit. 22, § 1200.22(b)(1). In rejecting this argument, the District Court noted that, in managing class actions, strong federal interests require that the repayment of expenses provision in DR 5-103 be disregarded and that the underlying goal of DR 5-103 — that litigation be controlled by the client, not the attorney — remains fully protected by the procedures established by Rule 23. Class Opinion, 219 F.R.D. at 284. The Court also found that [t]here is no indication that the assumption by their attorneys of the financial risk of litigation has diminished NYSCRF's diligence in supervising the lawsuit. Id. at 286. We are not well positioned to second-guess these largely managerial decisions of the District Court, and we decline to use Rule 23(f) for that purpose. 37 Finally, the Underwriters argue that, under the 1933 Act, some of the bondholders asserting claims with respect to WorldCom's 2000 Offering will have to show individualized reliance on the registration statement in question, because these plaintiffs purchased their securities after the issuer ... made generally available to its security holders an earning statement covering a period of at least twelve months beginning after the effective date of the registration statement. 15 U.S.C. § 77k(a). According to the Underwriters, if some of the plaintiffs will have to prove individual reliance with respect to even one of the bond offerings, common questions do not predominate. 38 The District Court rejected this argument on several grounds: First, the Court explained that any `earning statement' under Section 11 must comply with the governing SEC regulations. It must include, for instance, such `material information as is necessary to make the required statements, in the light of the circumstances under which they are made, not misleading,' and be prepared `in accordance with generally accepted accounting principles.' Class Opinion, 219 F.R.D. at 293 (quoting 17 C.F.R. § 210.4-01(a)). The Court went on to conclude that because WorldCom admitted that its financial statements for the years 1999 through the first quarter of 2002 grossly overstated the company's income, these statements could not be considered earning statements for the purposes of Section 11. See id. at 294 (It would be illogical indeed if any filing — no matter how inaccurate or misleading, and despite its perpetuation of the very misrepresentations at stake in the Section 11 claim — were sufficient to shift the burden to the plaintiffs to establish reliance on the Registration Statement.). 39 As an alternative basis for rejecting the Underwriters' predominance argument, the District Court concluded that even if an admittedly flawed WorldCom SEC filing were considered an `earning statement' for purposes of Section 11 ..., issues common to the class would continue to predominate. Id. The Court concluded first that [t]he fraud on the market presumption should apply to the plaintiffs' Section 11 claims, just as it does to the Section 10(b) claims. Id. The Court then found that, regardless of whether the fraud-on-the-market presumption were applied to Section 11 claims, common questions would [still] predominate. Id. 40 In light of Judge Cote's last determination — namely, that common issues would predominate even if some of the plaintiffs could not benefit from the Basic presumption with respect to one of the registrations statements at issue, Class Opinion, 219 F.R.D. at 294 — we decline to consider the reliance issue presented by the Underwriters on an interlocutory basis. Like the reliance issue presented in Sumitomo, the reliance issue presented by the Underwriters in the instant case is insufficiently connected to the district court's certification order. Sumitomo, 262 F.3d at 143. In Sumitomo, the reliance issue was insufficiently connected to the certification order because most of the plaintiffs' claims did not require proof of reliance and, moreover, imposing the burden of proof on plaintiffs arguably would not have altered the grant of certification even with respect to the plaintiffs' common law fraud claim. Id. Here, the District Court found that common issues would continue to predominate even if some of the plaintiffs need to prove individualized reliance, and that determination is entitled to deference. See Sumitomo, 262 F.3d at 139 (noting our longstanding view that the district court is often in the best position to assess the propriety of the class and has the ability, pursuant to Rule 23(c)(4)(B), to alter or modify the class, create subclasses, and decertify the class whenever warranted). Accordingly, it is more than arguable that imposing the burden of proof on some of the plaintiffs with respect to reliance on the 2000 Offering would not alter the District Court's grant of certification. 14