Youngers v. Virtus Inv. Partners Inc.

• Citation: 228 F.Supp.3d 295
• Decision Date: 06 January 2017
• Docket Number: 15cv8262
• Parties: Mark YOUNGERS, et al., individually and on behalf of all others similarly situated, Plaintiffs, v. VIRTUS INVESTMENT PARTNERS INC., et al., Defendants.
• Court: U.S. District Court — Southern District of New York

228 F.Supp.3d 295

Mark YOUNGERS, et al., individually and on behalf of all others similarly situated, Plaintiffs,

v.VIRTUS INVESTMENT PARTNERS INC., et al., Defendants.

15cv8262

United States District Court, S.D. New York.

Signed January 6, 2017

Laurence M. Rosen, The Rosen Law Firm PA, Los Angeles, CA, Gonen Haklay, The Rosen Law Firm, P.A., Jenkintown, PA, Jonathan Stern, Laurence Matthew Rosen, The Rosen Law Firm, P.A., New York, NY, for Plaintiffs.

George S. Wang, Joseph Michael McLaughlin, Daniel Joseph Stujenske, Meredith Dawn Karp, Shannon Kyle McGovern, Simpson Thacher & Bartlett LLP, Aric Hugo Wu, Gibson, Dunn & Crutcher, LLP, Beth Kressel Itkin, Paul W. Ryan, Serpe Ryan LLC, New York, NY, Michael David Kibler, Simpson Thacher & Bartlett LLP, Michael R. Matthias, Baker Hostetler LLP, Los Angeles, CA, Geoffrey Hunter Coll, Baker & Hostetler LLP, New York City, NY, Alexandra G. Watson, Anthony E. Fuller, Justin P. O'Brien, Collora LLP, Boston, MA, for Defendants.

OPINION & ORDER

WILLIAM H. PAULEY III, District Judge:

Defendants Virtus Investment Parters, Inc., VP Distributors, LLC, and George R. Aylward (collectively, "Defendants") move to certify an interlocutory appeal from this Court's Opinion & Order granting in part and denying in part Defendants' motion to dismiss. Specifically, they contend that this case presents an "opportunity to obtain appellate clarity" on the threshold question of pleading loss causation in the context of mutual funds. For the reasons that follow, Defendants' motion is denied.

BACKGROUND

The allegations undergirding this action are recounted at length in Youngers v. Virtus Inv. Partners Inc. , 195 F.Supp.3d 499, 511–12, 2016 WL 3647960, at *4 (S.D.N.Y. July 1, 2016) and not repeated here. In sum, Plaintiffs allege that appendices to Virtus Trust registration statements and prospectuses were false and misleading because indices contained performance data that did not reflect trades with live assets. Concluding that Plaintiffs adequately pled loss causation, this Court declined to dismiss certain Exchange Act claims.

Mutual fund shares are bought and sold at net asset value ("NAV") based on the underlying asset values pursuant to a statutory formula prescribed by the Investment Company Act of 1940. See 17 C.F.R. § 270.22c–1(a). The absence of a secondary market for a mutual fund's shares raises the question of whether any misstatement in a prospectus (or the revelation of that misstatement) can directly affect the funds' share price. See Youngers , 195 F.Supp.3d at 511–12, 2016 WL 3647960, at *4. Defendants argue on this motion for certification, just as they did on their motion to dismiss, that the statement in the prospectus did not affect the NAV and therefore, as a matter of law, Plaintiffs failed to plead loss causation.

But this Court concluded that Plaintiffs alleged two separate theories of loss causation. First, a loss of "value" in the mutual fund shares resulting from Defendants' alleged misrepresentation, irrespective of any effect on the funds' NAV. Youngers , 195 F.Supp.3d at 512–13, 2016 WL 3647960, at *5. Specifically, this Court observed that "[e]quating price and value for securities traded on an open market makes sense where ‘the value of the stock is worth the market price.’ " Youngers , ––– F.Supp.3d at ––––, 2016 WL 3647960, at *5(quoting Basic Inc. v. Levinson , 485 U.S. 224, 244, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988) ). But because the price of mutual fund shares is set according to a statutory formula, "the price of the [mutual fund] shares does not necessarily reflect their value ." Youngers , 195 F.Supp.3d at 512, 2016 WL 3647960, at *5. This Court determined that it "must shift its focus to something other than price in determining whether a misstatement ‘negatively affected the value of the security.’ " Youngers , 195 F.Supp.3d at 512, 2016 WL 3647960, at *5 (quoting Lentell v. Merrill Lynch & Co. , 396 F.3d 161, 173 (2d Cir. 2005) ).

Plaintiffs' second theory of loss causation is that the misstatements caused a direct loss to the mutual funds' value because investors paid higher fees than they would have if they were informed of the true performance history of the AlphaSector Indices. Youngers , 195 F.Supp.3d at 513–14, 2016 WL 3647960, at *6. These fees were deducted directly from the funds' assets, diminishing the NAV. Youngers , 195 F.Supp.3d at 513–14, 2016 WL 3647960, at *6.

LEGAL STANDARD

"Interlocutory appeals are presumptively disfavored." Garber v. Office of the Com'r of Baseball , 120 F.Supp.3d 334, 337 (S.D.N.Y. 2014). "[O]nly exceptional circumstances [will] justify a departure from the basic policy of postponing appellate review until after the entry of a final judgment." In re Facebook, Inc., IPO Sec. & Derivative Litig. , 986 F.Supp.2d 524, 529–30 (S.D.N.Y. 2014) (quoting McNeil v. Aguilos , 820 F.Supp. 77, 79 (S.D.N.Y. 1993) (alteration in original)). An interlocutory appeal should only be certified where the proposed appeal (1) "involves a controlling question of law," (2) "as to which there is substantial ground for difference of opinion," and (3) "that an immediate appeal from the order may materially advance the ultimate termination of the litigation." 28 U.S.C. § 1292. "The moving party has the burden of establishing all three elements." Segedie v. The Hain Celestial Grp., Inc. , 2015 WL 5916002, at *1 (S.D.N.Y. Oct. 7, 2015). But "even when the elements of section 1292(b) are satisfied, the district court retains ‘unfettered discretion’ to deny certification." Garber , 120 F.Supp.3d at 337.

DISCUSSION

I. Controlling Question of Law

A " ‘question of law’ must refer to a ‘pure’ question of law that the reviewing court could decide quickly and cleanly without having to study the record." Capitol Records, LLC v. Vimeo, LLC , 972 F.Supp.2d 537, 551 (S.D.N.Y. 2013). "[A] question of law is ‘controlling’ if reversal of the district court's order would terminate the action." Klinghoffer v. S.N.C. Achille Lauro Ed Altri–Gestione Motonave Achille Lauro in Amministrazione Straordinaria , 921 F.2d 21, 24 (2d Cir. 1990).

Where there is "at least one alternative basis" for a district court's ruling, the party seeking appeal cannot "raise[ ] a ‘controlling question’ that should be reviewed on an interlocutory basis." Cal. Pub. Employees' Ret. Sys. v. WorldCom, Inc. , 368 F.3d 86, 95 (2d Cir. 2004). The issue Defendants wish to appeal is not a "controlling" issue because this Court identified "an alternative theory of loss causation pertaining to a direct loss in NAV." Youngers , ––– F.Supp.3d at ––––, 2016 WL 3647960, at *6. To dispose of this action, the Second Circuit would have to consider not only the issue raised by Defendants—whether there can be loss causation where the statements at issue did not affect the NAV—but also the issue of whether the alternative theory of loss causation was adequate. The alternative theory of loss causation is not subject to reversal on the same grounds as the theory Defendants wish to appeal because the alternative theory rests on an alleged actual decline in NAV, while the other does not.

Moreover, the alternative theory has previously been recognized by the Second Circuit. In Operating Local 649 Annuity Trust Fund v. Smith Barney Fund Mgmt. LLC , 595 F.3d 86, 96 (2d Cir. 2010), the Court of Appeals found loss causation adequately pled where, in violation of SEC disclosure requirements, certain fund expenses were categorized as transfer agent fees when they were actually kickbacks. Like the Plaintiffs here, the Smith Barney plaintiffs "alleged that the defendants' misrepresentations proximately resulted in the regular deduction of identifiable amounts that would not have been deducted had defendants conformed their conduct to what the law required." Smith Barney , 595 F.3d at 96. The Court of Appeals determined that the misstatements related directly to the NAV, noting that the complaint "allege[d] that the defendants' misrepresentations caused investors to make and maintain investments in Funds that were subject to excessive fees and expenses, and that the periodic deduction of those fees and expenses reduced the value of the investments over time." Smith Barney , 595 F.3d at 96. Thus, the alternate theory of loss causation requires an application of the law to the facts to determine whether the fees would have been lower if the Indices complied with disclosure requirements.¹

II. Substantial Ground for a Difference of Opinion

"A substantial ground for difference of opinion exists where ‘(1) there is conflicting authority on the issue, or (2) the issue is particularly difficult and of first impression for the Second Circuit." Segedie , 2015 WL 5916002, at *3. The issue Defendants seek to certify for interlocutory appeal would be an issue of first impression for the Second Circuit and represents a divergence of opinion among district judges within the Circuit. Thus, it is the type of conflict that may be ripe for interlocutory appeal. See Klinghoffer , 921 F.2d at 25 (finding certification appropriate where issue is one of first impression).

a. Second Circuit Precedent

Defendants argue that this Court's Opinion & Order is inconsistent with Second Circuit precedent. But if that were true there would be no "substantial ground for difference of opinion" and a motion for reconsideration would have been more appropriate. In any event, this Court's Opinion & Order is consistent with Second Circuit precedent.

i. Definition of "Value" as an Issue of First Impression

"[T]o establish loss causation, a plaintiff must allege ... that the subject of the fraudulent statement or omission was the cause of the actual loss suffered, i.e. , that the misstatement or omission concealed something from the market that, when disclosed, negatively affected the value of the security." Lentell v. Merrill Lynch & Co. , 396 F.3d 161, 173 (2d Cir. 2005). The Second Circuit has previously equated "value" with "market value," i.e. , price. For instance,...