Hevesi v. Citigroup Inc.
| Citation | 366 F.3d 70 |
| Decision Date | 07 May 2004 |
| Docket Number | No. 03-8044.,No. 03-8045.,03-8044.,03-8045. |
| Parties | Alan G. HEVESI, Comptroller of the State of New York, as Administrative Head of the New York State and Local Retirement Systems and as Trustee of the New York State Common Retirement Fund, The Fresno County Employees' Retirement Association, The County of Fresno, and HGK Asset Management, Inc., on behalf of purchasers and acquirers of all WorldCom, Inc. publicly traded securities during the period beginning April 29, 1999 through and including June 25, 2002, Plaintiffs-Respondents, v. CITIGROUP INC., Citigroup Global Markets Inc. f/k/a/ Salomon Smith Barney Inc., and Jack Grubman, Defendants-Petitioners, ABN Amro, Inc., Banc of America Securities LLC, Blaylock & Partners, L.P., BNP Paribas Securities Corp., Caboto Sim S.P.A. (f/k/a/ Caboto Holding Sim S.P.A.), Chase Securities Inc. LLC (n/k/a/ J.P. Morgan Securities Inc.), Credit Suisse First Boston LLC (f/k/a/ Credit Suisse First Boston Corporation), Deutsche Banc Alex. Brown, Inc. (n/k/a/ Deutsche Bank Securities, Inc.), Fleet Securities, Inc., Goldman, Sachs & Co., J.P. Morgan Chase & Co., Lehman Brothers Inc., Mizuho International PLC, Tokyo-Mitsubishi International PLC, UBS Warburg LLC, Utendahl Capital Partners, L.P., and WestLB AG (f/k/a/ Westdeutsche Landesbank Girozentrale), Underwriter-Related Defendants-Petitioners, Bernard Ebbers, Scott Sullivan, David Myers, Buford Yates, Jr., James C. Allen, Judith Areen, Carl J. Aycock, Max E. Bobbitt, Francesco Galesi, Clifford Alexander, Stiles A. Kellett, Jr., Gordon S. Macklin, John A. Porter, Bert C. Roberts, Jr., John W. Sidgmore, Lawrence C. Tucker, Arthur Andersen LLP, Defendants. |
| Court | United States Courts of Appeals. United States Court of Appeals (2nd Circuit) |
Jay B. Kasner (Susan L. Saltzstein, Cyrus Amir-Mokri, Steven J. Kolleeny, of counsel), Skadden, Arps, Slate, Meagher & Flom LLP, New York, NY, for Underwriter-Related Defendants-Petitioners.
Martin London (Richard A. Rosen, Brad S. Karp, Eric S. Goldstein, Walter Rieman, Marc Falcone, Joyce S. Huang, of counsel), Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, N.Y. (Louis R. Cohen, Robert B. McCaw, Seth P. Waxman, Peter K. Vigeland, of counsel, Wilmer, Cutler & Pickering, New York, NY), for Defendants-Petitioners Citigroup Inc., Citigroup Global Markets Inc. f/k/a Salomon Smith Barney Inc., and Jack Grubman.
Leonard Barrack (Gerald J. Rodos, Jeffrey W. Golan, Mark R. Rosen, Jeffrey A. Barrack, Pearlette V. Toussant, of counsel), Barrack, Rodos & Bacine, Philadelphia, PA, (Max W. Berger, John P. Coffee, Steven B. Singer, C. Chad Johnson, Beata Gocyk-Farber, Jennifer L. Edlind, John Browne, of counsel, Bernstein Litowitz Berger & Grossman LLP, New York, NY) for Plaintiffs-Respondents.
Before: OAKES, CABRANES, and SACK, Circuit Judges.
These petitions ask us to decide whether two groups of defendants should be permitted, pursuant to Federal Rule of Civil Procedure 23(f), to file an interlocutory appeal from an order of the United States District Court for the Southern District of New York (Denise Cote, Judge) certifying a plaintiff class. One group of defendants — Citigroup, its affiliate Salomon Smith Barney ("SSB"), and SSB research analyst Jack Grubman (collectively, "Citigroup Defendants") — argue that an interlocutory appeal should be permitted because the District Court, for the first time in the class certification context, extended the fraud-on-the-market doctrine of Basic Inc. v. Levinson, 485 U.S. 224, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988), to opinions expressed by a research analyst. A second group defendants — underwriters of WorldCom, Inc. ("WorldCom") bonds (collectively, the "Underwriters") — argue that an interlocutory appeal should be permitted because, inter alia, the District Court certified a class of stockholders and bondholders even though the only class representatives who have standing to bring an action on behalf of the bondholders have not been subjected to the lead plaintiff scrutiny of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u-4 (2000).
On December 31, 2003, we entered an order granting the Citigroup Defendants' petition and denying the Underwriters' petition. This opinion explains that ruling.
The following basic facts are drawn principally from the District Court's Opinion and Order of October 24, 2003. See In re Worldcom, Inc. Sec. Litig., 219 F.R.D. 267 (S.D.N.Y.2003) ("Class Opinion"). Further detail is provided in that opinion and in other opinions of the District Court.
On June 25, 2002, WorldCom issued the first of several announcements that its certified financial results had to be restated. By late July 2002, WorldCom had filed the largest bankruptcy in United States history. Id. at 273-74.
On April 30, 2002, even before the restatement announcements, the first securities class action against WorldCom and numerous other defendants had been filed in the United States District Court for the Southern District of New York. Subsequent securities actions related to WorldCom's collapse were assigned to the Southern District of New York by the Judicial Panel on Multi-District Litigation, and transferred to that District for pre-trial proceedings.1 By order dated August 15, 2002, the securities class actions in the Southern District were consolidated under the caption In re Worldcom, Inc. Securities Litigation ("Securities Litigation"). See Albert Fadem Trust v. Worldcom, Inc., No. 02 Civ. 3288, 2002 WL 31059859, at *1 (S.D.N.Y. Aug 15, 2002). In the same order, the District Court appointed the New York State Common Retirement Fund ("NYSCRF") as lead plaintiff in the Securities Litigation. Id. at *3. NYSCRF had purchased WorldCom stock, WorldCom MCI tracking stock, and WorldCom debt securities, and lost over $300 million from those investments. On October 11, 2002, NYSCRF filed a Consolidated Amended Complaint (the "Complaint"). The Complaint added HGK Asset Management, Inc. ("HGK"), the County of Fresno, California ("Fresno"), and the Fresno County Employees' Retirement Association ("FCERA") as named plaintiffs in the putative class action. Each of these additional named plaintiffs, unlike NYSCRF, purchased bonds in massive WorldCom bond offerings on May 24, 2000 and May 15, 2001 (the "2000 and 2001 Offerings").
In the Complaint, the plaintiffs asserted claims under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 ("1933 Act"), 15 U.S.C. § 77a et seq., on behalf of purchasers of WorldCom bonds who relied on registration statements for the 2000 and 2001 Offerings. The plaintiffs also asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. § 78a et seq., on behalf of purchasers of publicly traded securities of WorldCom from April 29, 1999 to June 25, 2002 (the "Class Period"). The Complaint named numerous defendants, including former WorldCom executive officers, WorldCom's former directors, the Underwriters, WorldCom's former accountants, and the Citigroup Defendants.
The Complaint alleges that the Underwriters failed to conduct proper due diligence in connection with the 2000 and 2001 Offerings. The Complaint alleges further that the Citigroup Defendants had a close and self-serving relationship with WorldCom and its executives from which both sides derived substantial benefit. Specifically, plaintiffs allege that WorldCom benefitted from Jack Grubman's relentlessly positive, but materially false, research reports about the company while SSB and Grubman were well remunerated for their support of WorldCom with investment banking business. By Opinion and Order dated May 19, 2003, the defendants' motions to dismiss the claims in the Complaint were largely denied. See In re WorldCom, Inc. Sec. Litig., 294 F.Supp.2d 392 (S.D.N.Y.2003).
On June 4, 2003, NYSCRF and the three additional named plaintiffs moved for certification of a plaintiff class consisting of all persons and entities who purchased or otherwise acquired publicly traded debt or equity securities of WorldCom during the Class Period and who were injured thereby. On October 24, 2003, the District Court granted the class motion, and certified NYSCRF, HGK, Fresno, and FCERA as class representatives.
On November 12, 2003, the Citigroup Defendants and the Underwriters petitioned this Court for permission to appeal the District Court's order granting class certification. The Citigroup Defendants argued that the District Court erred in applying the "fraud-on-the-market" doctrine of Basic Inc. v. Levinson, 485 U.S. 224, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988), under which the element of reliance on alleged misrepresentations is presumed, to expressions of opinion by a research analyst. According to the Citigroup Defendants, because reliance must be proved individually if the "fraud-on-the-market" doctrine is not applied, class issues do not predominate, and a class may not be certified under Federal Rule of Civil Procedure 23(b)(3).2
The Underwriters offered three separate arguments in support of their petition: First, they contended that the District Court erred when it certified a class that includes bondholders even though NYSCRF, the sole lead plaintiff under the PSLRA, did not purchase any bonds in the 2000 or 2001 Offerings. Second, they asserted that the three additional named plaintiffs are inadequate class representatives because their fee arrangements with counsel do not require them to pay their pro rata share of the total litigation costs. Third, they argued that because some of the bondholders asserting claims against the Underwriters with respect to the 2000 Offering purchased their securities more than one year after that offering, these bondholders will bear the burden of proving reliance on the registration statement that accompanied the offering,3 and class issues...
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