Premium Plus Partners v. Goldman Sachs & Company, Incor, et al
Filing
Filed opinion of the court by Judge Easterbrook. AFFIRMED, except with respect to the calculation of interest. That subject is returned to the district court for further proceedings consistent with this opinion. Frank H. Easterbrook, Chief Judge; Diane S. Sykes, Circuit Judge and John Daniel Tinder, Circuit Judge. [6327977-3] [6327977] [09-4010, 10-1118, 10-1119]
Case: 09-4010
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In the
United States Court of Appeals
For the Seventh Circuit
Nos. 09-4010, 10-1118 & 10-1119
P REMIUM P LUS P ARTNERS, L.P.,
Plaintiff-Appellant,
and
G EORGE M. T OMLINSON, et al.,
Plaintiffs-Appellants and
Proposed Intervenors-Appellants,
v.
G OLDMAN, S ACHS & C O . and
C ATHERINE C. Y OUNGDAHL,
personal representative of the
Estate of John M. Youngdahl,
Defendants-Appellees.
Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
Nos. 04 C 1851 & 09 C 1543—Elaine E. Bucklo &
Samuel Der-Yeghiayan, Judges.
A RGUED S EPTEMBER 28, 2010—D ECIDED A UGUST 5, 2011
Before E ASTERBROOK, Chief Judge, and SYKES and T INDER,
Circuit Judges.
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E ASTERBROOK, Chief Judge. Attending a meeting at the
Treasury Department on October 31, 2001, Peter J.
Davis, Jr., learned that the government was suspending
the sale of new 30-year bonds. The meeting ended at
9:25 AM; attendees were told that the information was
embargoed until 10 AM, when the news would be announced to the public. Defying the embargo, Davis
swiftly passed the information to some of his clients,
including John M. Youngdahl, an economist who worked
for Goldman Sachs. Youngdahl relayed the information
to Goldman Sachs’s traders, who at 9:35 AM began to
buy futures contracts for 30-year Treasury securities,
which they expected would rise in price. (There is no
perfect substitute for their risk-return combination.) At
9:43 AM the Treasury posted the news on its web site,
and word spread among traders. Goldman Sachs had an
eight-minute head start and reaped substantial profits.
It had been right: the price did rise, the largest one-day
increase in 14 years. The Treasury did not issue 30-year
bonds again until February 2006.
Abnormal trading in the minutes before the news was
generally available led the SEC to open an investigation
a few days later. Davis, Youngdahl, and Goldman Sachs
received formal notices (known as Wells notices), and
the investigation became public knowledge. On September 4, 2003, the agency filed a civil complaint against
Davis, Youngdahl, and a third person. See SEC Litigation
Release No. 18322. Goldman Sachs settled with the Commission to avoid litigation; Release 18322 describes that
settlement. Goldman Sachs denied that its traders knew
that the information was embargoed, but Davis and
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Youngdahl had no such defense. Youngdahl was indicted
for fraud, on the theory that he misappropriated the
value of information he did not have a right to use. See
United States v. O’Hagan, 521 U.S. 642 (1997). He pleaded
guilty and was sentenced to 33 months’ imprisonment;
Davis, who cooperated with the prosecutors, avoided
indictment but was barred from the securities industry.
In March 2004 Premium Plus Partners filed a suit
against Goldman Sachs and Youngdahl seeking to represent a class of all traders who held short positions in
futures contracts when Goldman Sachs took the long
side. Shorts lose when the price rises. Premium Plus
had taken its short position before October 31, 2001.
Economists would say that the reason for the price
increase was the fact that a desirable asset, the 30-year
Treasury bond, had become scarcer. But Premium
Plus blamed the increase on Goldman Sachs’s trading,
which it described as giving Goldman Sachs market
power through an excessively large position. As far as
the record reveals, Goldman Sachs never exceeded the
maximum holdings allowed by regulators and the
futures exchanges. Contrast Kohen v. Pacific Investment
Management Co., 571 F.3d 672 (7th Cir. 2009). But the
district court never reached the merits of the dispute.
Resolution of the litigation was delayed by the fact
that the judge initially assigned to the case resigned, and
it took a while for Judge Der-Yeghiayan, to whom the
case came next, to get up to speed. Premium Plus
proposed a class of all investors who held short positions on October 31, 2001, no matter when they sold or
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closed those positions—a time that could be as long as
nine months from the date of Goldman Sachs’s trading.
Judge Der-Yeghiayan concluded that such a class would
be almost entirely unrelated to the trading that occurred
during eight minutes of October 31, 2001. Any losses
suffered during the next nine months by investors who
had held short positions before trading began on
October 31, 2001, would be the result of general market
movements, not the fact that one trader got valuable
news ahead of others. 2008 U.S. Dist. L EXIS 83799 (N.D.
Ill. August 22, 2008).
Once the district court’s decision denying the motion
for class certification was released, the statute of limitations resumed running. (It had been suspended by the
class allegations of the complaint. See American Pipe &
Construction Co. v. Utah, 414 U.S. 538 (1974); Sawyer v. Atlas
Heating & Sheet Metal Works, Inc., 642 F.3d 560 (7th Cir.
2011).) George Tomlinson and four other investors (collectively Tomlinson), all of whom held short positions
during the eight minutes, then filed their own suit, which
was assigned to Judge Bucklo. She dismissed it on the
pleadings, 682 F. Supp. 2d 845 (N.D. Ill. 2009), after concluding that the two-year statute of limitations, see
7 U.S.C. §25(c), had expired before Tomlinson sued—
indeed, had expired before Premium Plus sued. Judge
Bucklo observed that the time starts with injury, which
all shorts suffered on October 31, 2001. She rejected
Tomlinson’s argument that investors’ claims did not
accrue until September 2003, when the SEC filed its
complaint.
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Meanwhile Premium Plus tried again before Judge DerYeghiayan. It proposed a class limited to investors who
held short positions on October 31, 2001. One problem
with that class was that it would have been composed
entirely of non-traders, creating a serious obstacle under
the purchaser-seller rule that applies to implied private
rights of action for securities and commodities fraud. See
Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975).
Once again Judge Der-Yeghiayan declined to reach the
merits. He denied Goldman Sachs’s motion for summary judgment, 653 F. Supp. 2d 855 (N.D. Ill. 2009), but
also denied the renewed motion to certify a class. That
left Premium Plus as the only remaining plaintiff.
In response to an interrogatory, Premium Plus estimated its loss at approximately $200,000, plus interest
since October 31, 2001. Goldman Sachs made an offer
of judgment under Fed. R. Civ. P. 68 for the amount
Premium Plus wanted, plus interest. Premium Plus accepted the offer—and it also proposed to carry on with the
suit in order to have a class certified. It contends that a
certified class would allow it to spread the costs of litigation to other investors. The district court was unimpressed and entered judgment on the Rule 68 offer.
Tomlinson then sought to intervene in the Premium Plus
suit in order to carry on as the class representative
now that Premium Plus has settled its own suit. The
district court denied that motion.
These decisions have led to three appeals: (1) by Premium Plus, seeking to have itself certified as representative of a class of investors who held short positions on
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October 31, 2001; (2) by Tomlinson, seeking to overturn
Judge Der-Yeghiayan’s order denying his motion to
intervene in the Premium Plus suit; and (3) by Tomlinson,
contesting Judge Bucklo’s order dismissing his own suit
as untimely. We start with appeal #3, because it effectively resolves the second as well. Tomlinson cannot be
an effective representative of the class of investors who
held short positions on October 31, 2001, if he has
already filed and lost his own suit; he would then not
even be a member of the certified class, let alone its
appropriate champion. See Fed. R. Civ. P. 23(a)(3) (representative’s claim must be typical of the class’s), 23(a)(4)
(representative must “fairly and adequately protect the
interests of the class”). See also Wal-Mart Stores, Inc. v.
Dukes, 131 S. Ct. 2541, 2550–57 (2011) (discussing the
common-question requirement of Rule 23(b)(2)).
Merck & Co. v. Reynolds, 130 S. Ct. 1784 (2010), holds
that a claim for federal securities fraud accrues, and the
period of limitations begins to run, when the plaintiff
has discovered, or in the exercise of reasonable diligence could have discovered, the facts that constitute
the violations. For this purpose, Merck added, the essential “facts” include the defendant’s mental state—for
scienter is an element of securities fraud. We shall
assume, for the sake of argument, that Merck applies to
statutes of limitations governing commodities fraud.
(Futures contracts are governed by the Commodity Exchange Act, and thus 7 U.S.C. §25(c), rather than the
Securities Exchange Act of 1934.) This assumption is
favorable to Tomlinson, perhaps unduly so. The reason
Merck asked when the “facts constituting the violation”
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had been discovered is that 28 U.S.C. §1658(b) adopts
this rule for securities-fraud suits. Section 1658(b) says
that it concerns only provisions of “the securities laws,
as defined in section 3(a)(47) of the Securities Exchange
Act of 1934 (15 U.S.C. 78c(a)(47))”. Section 25(c) of the
Commodity Exchange Act, by contrast, says that suit
must be filed within two years of “the date the cause of
action arises.” We have understood this to mean the
date on which the investor discovers that he has been
injured. The Cancer Foundation, Inc. v. Cerberus Capital
Management, LP, 559 F.3d 671, 674 (7th Cir. 2009). The
language of §1658(b) that postpones accrual until the
victim discovers (or using diligence could have discovered) that the defendant acted with scienter is hard to
impute to §25(c). But if Tomlinson loses under Merck,
he loses under any possible understanding of §25(c).
That’s why we have indulged this assumption.
Tomlinson concedes that he knew of his injury on
October 31, 2001, and that he learned during November 2001 that Goldman Sachs had traded on the basis
of material nonpublic information. The investment bank
said so itself when its trading was questioned. But
scienter was in doubt; Goldman Sachs has consistently
denied that its traders understood the information
came from someone under a duty of silence. If Goldman
Sachs itself denied acting with a forbidden intent,
Tomlinson asks, how was he supposed to know of the
forbidden state of mind?
Tomlinson’s argument amounts to a contention that
a claim for securities or commodities fraud does not
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accrue until the defendant has confessed or a court has
adjudicated its liability. That’s not the law—nor can the
same result be achieved by saying that the period of
limitations is tolled until the defendant confesses, or
that denial of liability equitably estops the defendant to
plead the statute of limitations. This circuit has rejected
all of these variants. See, e.g., In re Copper Antitrust Litigation, 436 F.3d 782, 791 (7th Cir. 2006); Mitchell v. Donchin,
286 F.3d 447, 451 (7th Cir. 2002); Chapple v. National Starch
& Chemical Co., 178 F.3d 501, 507 (7th Cir. 1999). Merck
does not call these decisions into question. It says that
a securities-fraud claim accrues when the plaintiff discovers, or a reasonably diligent person could have discovered, the facts constituting the violation. This focuses
attention on what the plaintiff knows or could
have found out, not on what the defendant admits or
denies—or for that matter on what a federal agency
such as the SEC believes.
There’s no magic in the filing date of the Commission’s
complaint, which did not reveal to the public any facts
previously unknown. It tells us what the Commission
believed about defendants’ mental states, but not when a
reasonably diligent person would have reached that
conclusion. It would be silly to conclude that, because the
SEC did not file its complaint until September 2003, no
reasonably diligent person could have inferred scienter
earlier. Obviously the Commission’s investigators drew
that inference long before September 2003; it takes
months (if not years) for a proposed complaint to wend
its way through the agency’s labyrinthine processes.
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Premium Plus filed its complaint in April 2004. That
tolled the time for all members of the proposed class, so
the controlling question under Merck is whether Tomlinson, or another reasonably diligent investor, could
have discovered before April 2002 that Goldman Sachs
acted with scienter—that is, whether “it” knew that
the information was confidential. We put “it” in scare
quotes because corporations do not have brains
and cannot know things the way natural persons do.
Corporations know things when responsible employees
know them. Well before April 2002 Tomlinson, and any
other interested member of the investing public, could
have learned that the Treasury conveyed information to
Davis subject to a 10 AM embargo, so that Davis not
only had a duty of confidentiality, see Dirks v. SEC, 463
U.S. 646 (1983), but also knew that trading before
then would be unlawful; that Youngdahl (on behalf of
Goldman Sachs) had hired Davis as a consultant; and
that Youngdahl as a financial economist almost surely
knew that the Treasury customarily made its announcements at 10 AM and therefore that a valuable piece of
news relayed by Davis earlier probably was non-public
even if Davis did not say this in so many words. And
what Youngdahl knew, on a subject within his professional responsibilities, Goldman Sachs knew.
We can imagine a dispute about whether Youngdahl
was sufficiently senior that his knowledge should be
imputed to the corporation. Cf. Prime Eagle Group Ltd. v.
Steel Dynamics, Inc., 614 F.3d 375 (7th Cir. 2010) (Indiana
law). But whether a particular employee’s knowledge is
imputed to the employer is a question of law, not of fact.
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By April 2002 all of the facts needed to make out a claim
of fraud under O’Hagan’s property-rights approach were
in the public domain. It follows that the claim accrued
before April 2002, even on the assumption that Merck
applies to commodities-fraud claims. Judge Bucklo properly dismissed Tomlinson’s suit, which also means that
Judge Der-Yeghiayan did not abuse his discretion
in denying Tomlinson’s motion to intervene in Premium
Plus Partners’ suit. Having litigated and lost, Tomlinson
cannot start over as the representative of other investors.
Tomlinson would be a bad representative for the class
because he litigated and lost; Premium Plus Partners is a
bad representative because it litigated and won. Once
the district court entered judgment on the Rule 68
offer, Premium Plus’s claim was extinguished. It doesn’t
matter whether the would-be representative has litigated and lost, or litigated and won; both situations
extinguish any live claim similar to the one held by the
remaining members of the class. It takes a representative
with a live claim to carry on with a class action. See, e.g.,
Wrightsell v. Cook County, 599 F.3d 781 (7th Cir. 2010);
Muro v. Target Corp., 580 F.3d 485 (7th Cir. 2009).
Deposit Guaranty National Bank v. Roper, 445 U.S. 326
(1980), would have allowed Premium Plus to reject the
Rule 68 offer and go on litigating, but it did not do that.
The only thing Premium Plus could do, when its own
claim became moot as a result of the settlement, was keep
the case warm so that someone with a live claim could
intervene. See United States Parole Commission v. Geraghty,
445 U.S. 388 (1980) (holding this where the district court
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denied class certification, and the original representative
filed an appeal for the sole purpose of buying time to
find an intervenor); Wiesmueller v. Kosobucki, 513 F.3d
784, 785–86 (7th Cir. 2008) (holding this where the
district court had certified a class, and the original representative appealed in order to correct an erroneous decision by the district judge that accepting a Rule 68
offer meant instant dismissal; time must be allowed for
intervention). But Premium Plus does not want to keep
the case going long enough for someone else to intervene; the only “someone” who stepped forward was
Tomlinson. Premium Plus proposes to be the representative itself, even though its claim has been resolved. No
decision of which we are aware allows that. (Pastor v.
State Farm Mutual Automobile Insurance Co., 487 F.3d 1042
(7th Cir. 2007), permits a plaintiff who has accepted a
Rule 68 offer to appeal from the denial of class certification but does not hold that such a person could continue
to represent the class; the court affirmed the denial of
class certification and therefore did not decide whether
some other representative would have to be substituted
in remand.)
As Premium Plus sees things, its claim hasn’t been
fully resolved because if the class litigates, and wins,
some of the expenses that Premium Plus has incurred
along the way could be allocated to the class, and its net
recovery therefore would be larger. The logical implication of this position is that a person whose claim is
moot still can file suit seeking attorneys’ fees. That position was advanced, and flopped, in Diamond v. Charles,
476 U.S. 54, 70–71 (1986), and again in Lewis v. Continental
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Bank Corp., 494 U.S. 472, 480 (1990); it fares no better
when advanced by a would-be class representative. The
Court said flatly in Lewis that an “interest in attorney’s
fees is . . . insufficient to create an Article III case
or controversy where none exists on the merits of the
underlying claim”; that’s equally true of costs and the
other expenses that Premium Plus hopes to offload to
the class.
We’ve said that Premium Plus’s own claim has been
resolved, but that’s not quite right. Goldman Sachs
offered the sum that Premium Plus demanded as
damages, plus prejudgment interest to be determined
by the judge. Judge Der-Yeghiayan awarded simple
interest from the date suit was filed, rather than compound interest from the date of the injury. He did not say
why. The norm in federal litigation, when prejudgment
interest is authorized, is compound interest from the
date of the injury. See, e.g., In re Oil Spill by the Amoco
Cadiz, 954 F.2d 1279, 1331 (7th Cir. 1992); American
National Fire Insurance Co. v. Yellow Freight System, Inc., 325
F.3d 924, 937–38 (7th Cir. 2003). Whether Premium Plus
tarried needlessly before suing is neither here nor there.
Goldman Sachs has had the money in the interim. The
longer Premium Plus waited, the longer Goldman Sachs
had the money, which could be invested profitably. An
award of interest dating back to October 31, 2001, simply
returns both the money, and the time value of its use, to
Premium Plus. That the interest comes to more than 50%
of the principal reflects the length of time that Goldman
Sachs has had the money. This does not imply that compound interest would afford Premium Plus a windfall;
the full time value of money is no windfall.
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Goldman Sachs contends that Premium Plus waived
appellate review of this subject by accepting the Rule 68
offer, which leaves interest to the district judge’s discretion. Yet a litigant’s recognition that a district judge has
discretion to resolve a particular issue does not imply
assent to every possible use (or misuse) of that discretion. “[A] motion to [a court’s] discretion is a motion,
not to its inclination, but to its judgment; and its
judgment is to be guided by sound legal principles.”
United States v. Burr, 25 F. Cas. 30, 35 (No. 14692d) (C.C.
Va. 1807) (Marshall, C.J.). See also United States v.
Corner, 598 F.3d 411, 415 (7th Cir. 2010) (en banc).
Premium Plus has not waived its entitlement to contest
the district judge’s exercise of discretion.
The judgments and decisions appealed from are
affirmed, except with respect to the calculation of interest.
That subject is returned to the district court for further
proceedings consistent with this opinion.
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