In re Salomon Analyst Metromedia Litigation

Citation544 F.3d 474
Decision Date30 September 2008
Docket NumberDocket No. 06-3225-cv.
PartiesIn re SALOMON ANALYST METROMEDIA LITIGATION. Douglas Millowitz, on behalf of himself and all others similarly situated, Plaintiff-Appellee, v. Citigroup Global Markets, Inc., f/k/a Salomon Smith Barney Inc., f/k/a Salomon Smith Barney Holdings Inc., Citigroup Inc., Citicorp USA, Inc. and Jack Grubman, Defendants-Appellants.
CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)

S. Fox, Donald R. Hall, Christine M. Fox, Kaplan Fox & Kilsheimer, LLP, New York, NY; Sean F. Rommel, Patton, Roberts, McWilliams & Capshaw, LLP, Texarkana, TX; on the brief) for Plaintiff-Appellee.

Robert McCaw (Louis R. Cohen, Christopher J. Meade, Wilmer Cutler Pickering Hale and Dorr LLP; Brad S. Karp, Mark F. Pomerantz, Richard A. Rosen, Eric S. Goldstein, Paul, Weiss, Rifkind, Wharton & Garrison LLP, on the brief) New York, NY, for Defendants-Appellants.

Before: WALKER, CALABRESI, and POOLER, Circuit Judges.

POOLER, Circuit Judge:

In this appeal, we address whether plaintiffs alleging securities fraud against research analysts must make a heightened evidentiary showing in order to benefit from the fraud-on-the-market presumption of Basic Inc. v. Levinson, 485 U.S. 224, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988). In Hevesi v. Citigroup, Inc., we granted the defendants leave to appeal a class certification order under Federal Rule of Civil Procedure 23(f) in order to resolve the important question of whether the Basic presumption may "be extended to analyst research reports without a specific finding by the District Court that the analysts' misrepresentations actually affected the price of securities traded in the open market." 366 F.3d 70, 79 (2d Cir.2004). That appeal was never heard on the merits. We now reach these issues.

This case concerns allegations that defendants Citicorp USA, Inc., Salomon Smith Barney, Inc. ("SSB"), their ultimate parent, Citigroup, Inc. ("Citigroup"), and SSB research analyst Jack Grubman engaged in a scheme to defraud investors in Metromedia Fiber Network, Inc. ("Metromedia"), in violation of Section 10(b) of the Securities Exchange Act of 1934, as amended, 15 U.S.C. §§ 78a et seq., and the Securities and Exchange Commission's Rule 10b-5, 17 C.F.R § 240.10b-5, by issuing and disseminating research analyst reports on Metromedia that contained materially false and misleading statements and omissions of material facts. According to the complaint, the purpose of the allegedly false and misleading analyst reports was to attract business from Metromedia for the investment banking division of SSB, which would then increase Grubman's personal compensation.

The district court dismissed many of plaintiffs' claims in an opinion and order dated January 5, 2005. See In re Salomon Analyst Metromedia Litig. ("Salomon Analyst I"), 373 F.Supp.2d 235 (S.D.N.Y. 2005). The court held, however, that with respect to certain research reports issued between March 8 and July 25, 2001, the complaint pleaded fraud with sufficient particularity to withstand defendants' motion to dismiss under Federal Rules of Civil Procedure 9(b) and 12(b)(6). On June 20, 2006, Judge Gerard E. Lynch certified the class of plaintiffs who purchased Metromedia stock between March 8 and July 25, 2001, under Federal Rule of Civil Procedure 23. See In re Salomon Analyst Metromedia Litig. ("Salomon Analyst II"), 236 F.R.D. 208 (S.D.N.Y.2006). The decision to certify the class is the sole subject of this appeal.

BACKGROUND
I. Motion to Dismiss

We begin with a discussion of the motion to dismiss to provide background for the surviving claims. In the original complaint, plaintiffs proposed a class of purchasers of Metromedia securities between November 25, 1997 and July 25, 2001. The district court dismissed the complaint insofar as it related to the pre-March 8, 2001 reports, because the allegations based on these reports were "insufficient to state a claim for securities fraud." Salomon Analyst I, 373 F.Supp.2d at 238. Plaintiffs allege that Grubman was an extremely influential research analyst in the telecommunications sector, who could drive up share prices with positive recommendations. Prior to March 8, 2001, Grubman's public reports expressed the view that Metromedia, as a telecom company building fiber-optic infrastructure, was poised for explosive growth. Id. However, Grubman emphasized that the company faced risks and that its success depended in large part on its ability to obtain "additional funding to complete the planned build-out of its network." Id. "In short, plaintiffs plead[ed] no specific facts or allegations, beyond conclusory assertions, that would indicate that Grubman's pre-March 8, 2001, Metromedia reports did not present his actual opinion as to the future prospects and investment quality of Metromedia equity securities." Id.

The district court concluded, however, that the allegations relating to the reports issued between March 8 and July 25, 2001, were sufficient to state a claim for securities fraud. Id. at 240. Specifically, plaintiffs alleged that Grubman's reports during this time period omitted or misstated material facts regarding a credit facility that Citicorp USA was to provide Metromedia. Id. at 239. "Metromedia and Citicorp USA signed a commitment letter for a $350 million credit facility in December 2000; the facility was to be underwritten by Citicorp USA, which committed to providing $75 million of the credit and syndicating the remainder of the facility to other lenders...." Id. "As alleged by plaintiffs, and not seriously contested by defendants, the proposed facility suffered numerous problems and delays over the next seven months...." Id. However, beginning on March 8, 2001, Grubman's Metromedia reports did not reveal that the credit facility was having trouble, but rather touted that Metromedia had "`obtained a commitment for a fully underwritten credit facility for $350 million from Citicorp USA, Inc., which it expects will fully fund its current business plan.'" Id. (quoting Grubman's March 8, 2001, Analyst Report on Metromedia).

Although the touted credit facility was pledged by the investment banking division of Citicorp, defendants insisted that Grubman had no access to any information suggesting that the plans for the credit facility were deteriorating, because SSB's internal policies created a "Chinese Wall" to shield equity investors from the non-public information held by investment bankers. Id. "However, notwithstanding the many dubious leaps of logic made by plaintiffs," the court determined that the complaint contained "sufficient concrete allegations to support an inference that Grubman breached the `wall' on numerous occasions, with the apparent knowledge and support of SSB management." Id. at 240.

Although Grubman, as an external analyst, had no free-standing obligation to reveal this information, the court determined that he became obligated to reveal it once he "chose to provide some information about the credit facility...." Id. Thus, "particularly in the context of Grubman's previous emphasis on the importance of funding to the future prospects of ... Metromedia," plaintiffs adequately pleaded that Grubman's alleged failure to disclose the restrictions and risks related to the credit facility rendered the reports from March 8 to July 25, 2001, "materially misleading and thus actionable under section 10(b) and Rule 10b-5." Id.

II. Motion for Class Certification

On May 2, 2005, plaintiffs moved for class certification pursuant to Federal Rule of Civil Procedure 23 with respect to the surviving claims. On June 20, 2006 Judge Lynch certified a class of plaintiffs who purchased Metromedia equity securities between March 8 and July 25, 2001. See Salomon Analyst II, 236 F.R.D. at 224.

Class certification is warranted under Rule 23 where the proposed class representative meets the standards of Rule 23(a)—numerosity, commonality, typicality, and adequacy—and the proposed class action meets the requirements of one of the subsections of Rule 23(b). Fed. R.Civ.P. 23.

The district court concluded that one of plaintiffs' proposed class representatives met the Rule 23(a) requirements. Salomon Analyst II, 236 F.R.D. at 212-17; see Fed.R.Civ.P. 23(a). This determination is not contested on appeal.

The district court next considered whether the proposed class met the requirements of Rule 23(b). Plaintiffs' motion for class certification was brought under Rule 23(b)(3), which requires that "the questions of law or fact common to the members of the class predominate over any questions affecting only individual members...." Fed.R.Civ.P. 23(b)(3) (2006). Drawing on the fact that a basic element of a securities fraud claim is reliance, defendants argued that individual questions will predominate over common questions, in violation of Rule 23(b)(3), with respect to whether each member of the proposed class relied on defendants' alleged misrepresentations. Salomon Analyst II, 236 F.R.D. at 218.1 Plaintiffs responded that reliance by all class members may be presumed under the fraud-on-the-market doctrine of Basic. "[U]nder the fraud-on-the-market doctrine, reliance is presumed when the statements at issue become public. The public information is reflected in the market price of the security. Then it can be assumed that an investor who buys or sells stock at the market price relies upon the statement." Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, ___ U.S. ___, 128 S.Ct. 761, 769, 169 L.Ed.2d 627 (2008) (citing Basic, 485 U.S. at 247, 108 S.Ct. 978). Defendants argued that the presumption does not apply to statements by research analysts.

To resolve this argument, the district court began by considering the evidentiary standards that govern the adjudication...

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