In re Certain Underwriter

• Decision Date: 01 April 2002
• Docket Number: Docket No. 01-3092.
• Citation: 294 F.3d 297
• Parties: In re CERTAIN UNDERWRITER, Defendants, In re INITIAL PUBLIC OFFERING SECURITIES LITIGATION, Petitioners-Appellants.
• Court: U.S. Court of Appeals — Second Circuit

294 F.3d 297

In re CERTAIN UNDERWRITER, Defendants In re INITIAL PUBLIC OFFERING SECURITIES LITIGATION, Petitioners-Appellants.

Docket No. 01-3092.

United States Court of Appeals, Second Circuit.

Submitted: February 8, 2002.

Decided: April 1, 2002.

Harold R. Tyler, Jr., Patterson Belknap Webb & Tyler, LLP, New York, NY, Special

Counsel for Petitioners-Appellants.^**

Before: POOLER and SOTOMAYOR, Circuit Judges, and GARAUFIS, District Judge.^*

POOLER, Circuit Judge.

Determined to recover losses sustained in the initial public offering ("IPO") market which flourished during the stock market boom of the late 1990s, investor-plaintiffs brought more than 1,000 class action lawsuits (the "Securities Actions") against issuers, underwriters, and brokers, all alleging widespread manipulation of both the IPO market and IPO aftermarket. In re Initial Pub. Offering Secs. Litig., 174 F.Supp.2d 70, 75 (S.D.N.Y.2001). On August 8, 2001, Chief Judge Michael B. Mukasey signed an order transferring all of the Securities Actions for pre-trial purposes to the Hon. Shira A. Scheindlin, district judge for the United States District Court for the Southern District of New York. Certain defendants asked Judge Scheindlin to recuse herself from the Securities Actions. She refused. Thirty-nine of the defendant underwriting firms (the "Moving Defendants") now petition for a writ of mandamus reversing the November 28, 2001, opinion and order of the district court (Scheindlin, J.) denying their motion for recusal under 28 U.S.C. § 455. In seeking the district judge's removal, the Moving Defendants primarily argue that (1) the district court judge's financial and legal interests, as well as knowledge acquired during her participation as a private investor in several IPOs, mandate recusal under 28 U.S.C. § 455(b)(1), (4) and (5); (2) 28 U.S.C. § 455 does not permit a district court judge to cure a conflict by divesting the offending interest unless substantial judicial time has been invested; (3) substantial judicial time has not been invested here because the Securities Actions were not consolidated and transferred until August 2001; and (4) comments made by the district court judge, along with her divestment of certain stocks to retain jurisdiction, create an appearance of partiality requiring her recusal under 28 U.S.C. § 455(a). Because we find the district court expended substantial judicial time in the Securities Actions before the recusal motion was made, and because we do not believe an appearance of bias exists, we deny the writ.

BACKGROUND

The underlying actions

The Securities Actions allege defendants manipulated the IPO and IPO aftermarkets in a variety of ways, including nondisclosure of commissions and other compensation, undisclosed pre-arranged tie-in arrangements wherein purchasers who participated in an IPO were required to buy stock in the IPO's aftermarket, and the issuance of misleading analysts' reports.¹ The putative class includes all investors who bought the stocks at issue from the date of the IPO through December 2000. In re Initial Pub. Secs. Litig., 174 F.Supp.2d at 75. Complaints were originally assigned randomly to judges in the Southern District of New York, but were transferred to Judge Scheindlin for pre-trial purposes on August 8, 2001, by order of Chief Judge Mukasey.

In addition, nine separate antitrust actions were filed in the Southern District, consolidated under the caption In re Initial Public Offering Antitrust Litigation, 01 Civ.2014 (S.D.N.Y.), (the "Antitrust Actions") and assigned to the Hon. William H. Pauley, III. In re Initial Pub. Offering Secs. Litig., 174 F.Supp.2d at 75-76 and n. 3. The Antitrust Actions also allege "[d]efendants manipulated the prices of securities brought to market in the IPOs traded in the aftermarkets" and include in their putative class "all persons who purchased any of the Manipulated Securities in the aftermarket of IPOs conducted by the [d]efendants from March 1997 through the present."²

The district judge's alleged conflicts

Prior to consolidation of the Securities Actions, Judge Scheindlin presided over eight cases involving an IPO for Internet Capital Group. In re Initial Pub. Offering Sec. Litig., 174 F.Supp.2d at 77. The district judge notified parties that she had purchased and sold the stock at a small profit, and she opted out of membership in any class action involving that IPO. Id. None of the parties sought her recusal. Id. A similar divestment occurred in two actions involving the IPO for Breakaway Solutions. Id. Judge Scheindlin informed the parties that she purchased that stock in July 2000 and sold it in August 2001 at a loss. Id. Again, the district court judge opted out of any class action involving that IPO. Id. Again, none of the parties sought her recusal. Id.

After the transfer of the Securities Actions, and following the issuance of the first case management order and case management conference, several defendants asked to meet with the district court judge regarding potential conflicts. In re Initial Pub. Offering Sec. Litig., 174 F.Supp.2d at 77. Following that inquiry, Judge Scheindlin asked the parties to perform a conflicts check, due to what she termed "the extraordinarily large number of disclosure statements filed pursuant to Rule 1.9 of the Joint Local Civil Rules for the Southern and Eastern Districts of New York."³ Id. at 77. That check revealed a number of previously undisclosed conflicts. Id. at 78. The district court judge held stock in Infospace.com and Kana Communications. Id. Kana Communications is a defendant in the Securities Actions. While Infospace.com is not a defendant in any of the Securities Actions, the Moving Defendants argue Infospace.com is implicated in one of the Securities Actions, Klein v. Merrill Lynch, 01 Civ. 7654 (S.D.N.Y.) (SAS). In re Initial Pub. Offering Sec. Litig., 174 F.Supp.2d at 78. The allegations in Klein involve an IPO for Internet Infrastructure Holdrs, a "basket security" which "represent[s] an undivided beneficial ownership interest in 20 specified internet infrastructure companies." Id. (internal quotation marks omitted). Infospace.com, along with Kana Communications, is one of the specified companies included in the basket, although the Klein complaint did not include purchasers of the constituent stocks as plaintiffs. Id. The district court judge informed parties she was unaware of the conflicts at the time of the reassignments in August, immediately sold both stocks, and waived any interest in pursuing claims involving those purchases. Id. at 79.

In addition, the Moving Defendants identified a number of stocks deemed troublesome because the stocks were sold through IPOs from 1997 through 2000, and thus may be implicated in the Antitrust Actions. Of the ten stocks not previously discussed, seven were sold by Judge Scheindlin prior to any of the Securities Actions being filed. In re Initial Pub. Offering Secs. Litig., 174 F.Supp.2d at 79. The district court judge continues to hold two of the stocks, while the remaining stock merged with Hewlett-Packard, Co., which did not issue an IPO during the relevant time period. Id. The district judge also waived any interests she may have held as a putative class member in the Securities Actions and Antitrust Actions. The Moving Defendants also identified as a conflict a stock owned by Judge Scheindlin's adult son in one of the issuer defendants. Id. The district judge never learned the identity of the stock, and her son sold the stock at issue and waived any interest in participating in any action arising from that investment. Id. at 80.

The district judge's comments

The Moving Defendants also rely on comments made by the district judge to support their recusal motion. The first of the comments at issue were made at a July 18, 2001, conference regarding the Internet Capital cases:

All I know is the broker called and said this a good stock [to] buy and I said sure, then the next day she called and said this is a good stock [to] sell and I said sure. That's it. Sad to say, very sad to say, I don't read anything I should read. And that's the end of it. So I know nothing.... I think I probably am not in the class by definition anyway, because I made money, and if I was in it, I don't want to be in it, I opt out, and I don't know anything other than there is that name on the list of things that were bought and sold that year — who has a problem? ... I know nothing. I read nothing. Nobody tells me anything. I am really one of those sad investors. The brokers call, I say yes, goodbye; they say sell, I say yes, goodbye. I regret all of my yeses for all these past few years. Every one was a mistake. But that is what I know.

The district judge expanded on those comments during a September 26, 2001, conference:

And to get specific[,] to discuss that it would be everything that has gone down, which as far as I can tell is techs and everything else that I bought some of my worst losers were REITs. I was absolutely creamed in REITs from the broker, KMart, Elder Trust, corporate office properties, there was a whole slew of that. I apparently just am not talented at this in general and would not pick a stock ever again of any variety. So, I say that again and I say broadly, whether it was REITS, whether it was techs, whether it was blue chips, I regret every yes.

Work done on the Securities Actions from the consolidation through the recusal motion

More than 2,000 entries have been docketed in the consolidated action, which involves at least 1,000 class action lawsuits against 263 issuers, 42 underwriters and hundreds of individuals. In re Initial Pub. Offering Secs. Litig., 174 F.Supp.2d at 75. According to the district judge, "[w]hile a great deal of organizational time and effort has been expended, this Court has not made any substantive decisions." Id. at 76. Judge Scheindlin has "supervised administrative staff in organizing the...