Bennett v. Sprint Nextel Corporation et al
Filing
221
MEMORANDUM AND ORDER granting # 116 Motion to Certify Class. Signed by District Judge Eric F. Melgren on 3/27/2014. (cm)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS
CORA E. BENNETT, Individually and On
Behalf of All Others Similarly Situated,
Plaintiff,
vs.
Case No. 09-CV-2122-EFM-KMH
SPRINT NEXTEL CORPORATION,
GARY D. FORSEE, PAUL N. SALEH,
and WILLIAM G. ARENDT,
Defendant.
MEMORANDUM AND ORDER
This is a securities class action against Defendant Sprint Nextel Corporation (“Sprint” or
the “Company”) and certain former Sprint officers and directors—Defendants Gary D. Forsee,
Paul N. Saleh, and William G. Arendt. Lead Plaintiffs PACE Industry Union-Management
Pension Fund (“PACE”), Skandia Life Insurance Company (“Skandia”), and the West Virginia
Investment Management Board (“WVIMB”), on behalf of themselves and others similarly
situated, assert that Defendants violated §§ 10(b) and 20(a) of the Securities Exchange Act of
1934 as a result of false and misleading statements and omissions made by Defendants regarding
Sprint’s business performance and financial results. This matter comes before the Court on Lead
Plaintiffs’ Motion for Class Certification (Doc. 116). For the reasons set forth below, the Court
grants Lead Plaintiffs’ motion.
I.
Factual and Procedural Background1
Sprint is a wireless and wireline communications services company with its headquarters
in Overland Park, Kansas. In August 2005, Sprint, the country’s then third largest wireless
carrier, acquired Nextel, the country’s fifth largest carrier, for $37.8 billion. Sprint allocated
$15.6 billion of the purchase price to goodwill.2
Defendant Forsee became CEO of the
combined Company and Defendant Saleh became the CFO.
According to Plaintiffs, problems arose almost immediately after Sprint’s acquisition of
Nextel. Plaintiffs contend that cultural differences divided legacy Sprint and Nextel personnel
and technological differences eliminated the possibility of integrating the two companies’
wireless networks. Plaintiffs claim that the combination of these difficulties, among others, led
to the deterioration of the Company’s customer base. Plaintiffs allege that to cover up the
Company’s worsening condition, Defendants made repeated false and misleading statements
about the Company’s business metrics and financials. Specifically, Plaintiffs contend that from
October 26, 2006, through February 27, 2008, through press releases, conference calls, and SEC
filings, Defendants falsely represented that Sprint received billions of dollars in benefits from
merger synergies, that Sprint improved its customer mix as a result of tightening credit standards,
that the integration of the Sprint and Nextel cellular platforms was progressing as planned, and
that the goodwill associated with the Nextel purchase was not impaired.
Plaintiffs claim that Sprint’s true condition was not revealed until after Dan Hesse was
named CEO of Sprint on December 18, 2007. This was two months after Sprint’s board of
1
The facts are presented as set forth Lead Plaintiffs’ Consolidated Complaint (Doc. 33).
2
“Goodwill is an intangible asset that represents the amount paid for a business over and above the
value of the actual assets acquired and liabilities assumed.” See Statement of Financial Accounting Standards No.
142 (“SFAS 142”), at Appendix F1, available at http://www.fasb.org/pdf/fas142.pdf.
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directors forced Defendant Forsee to resign as the Company’s CEO and Chairman.3 On January
18, 2008, Sprint disclosed that it suffered a net loss of 683,000 post-paid subscribers in the fourth
quarter of 2007 and that it was evaluating a charge in the fourth quarter related to a goodwill
write-down. That day, the Company’s stock price dropped 24.8% or $2.87 per share. On
February 28, 2008, Sprint issued a press release disclosing the Company’s fourth quarter and
fiscal year 2007 results, which stated that “the company recorded a non-cash goodwill
impairment charge of $29.7 billion” contributing to a “net loss for the quarter [of] $29.5 billion
or $10.36 diluted loss per share.”4 The next day, on February 29, 2008, Sprint filed its 4Q and
FY 2007 results with the SEC, which Plaintiffs claim further disclosed the scope of problems
resulting from Defendants’ reliance on subprime customers and the failure to integrate Sprint and
Nextel systems and operations. On February 28 and 29, 2008, the Company’s stock price
dropped a cumulative 20.5% or $1.84 per share. Overall, in a little more than six months,
Sprint’s stock price dropped almost 70% from its class period high of $23.25 per share to less
than $7.15 per share.
There are currently three Lead Plaintiffs: PACE, Skandia, and WVIMB. PACE is a
defined benefit plan based in Nashville, Tennesee, that is jointly administered by labor and
management. PACE alleges that during the class period, it purchased over 180,000 shares of
Sprint common stock, expending $3.6 million.
Skandia is a life insurance company
headquartered in Stockholm, Sweden, that provides financial and insurance services, with assets
under management as of the end of fiscal year 2010 of approximately $44.8 billion. Skandia
3
Between the time that Forsee resigned and Hesse was named CEO, Defendant Saleh was the
Company’s acting CEO. Saleh left the Company on January 24, 2008.
4
Plaintiffs’ Memo. in Support of Mtn. for Class Certification, Doc. 117, p. 15.
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alleges that during the class period, it purchased over 448,000 shares of Sprint common stock,
expending over $5.6 million. WVIMB is an institutional investor based in Charleston, West
Virginia, that provides fiscal administration and investment management services to twenty-two
participant plans. WVIMB alleges that during the class period, it purchased: (1) over 405,000
shares of Sprint stock, expending $7.5 million, (2) 3.3 million units of Sprint’s 6.0% bonds, due
December 1, 2016, (3) 120,000 units of Sprint’s 6.9% bonds, due May 1, 2019, and (4)
3,070,000 units of Sprint’s 8.75% bonds, due March 15, 2032. Lead Plaintiffs now move the
Court for an order certifying this action as a class action under Fed. R. Civ. P. 23(a) and
23(b)(3).
III.
A.
Analysis
Class Certification Under Rule 23
1.
General Standards Governing Class Certification
Whether to certify a class is committed to the broad discretion of the trial court.5 In
exercising this discretion, the Court should err on the side of class certification because it has the
authority to later redefine or even decertify the class if necessary.6 In deciding whether to
certify, the Court must perform a “rigorous analysis” as to whether the proposed class satisfies
the requirements of Rule 23 of the Federal Rules of Civil Procedure.7 Rule 23 does not provide
the Court with the authority to conduct a preliminary inquiry into the merits of the lawsuit to
5
Shook v. El Paso County, 386 F.3d 963, 967 (10th Cir. 2004).
6
Sibley v. Sprint Nextel Corp., et al., 254 F.R.D. 662, 670 (D. Kan. 2008) (citing Esplin v. Hirschi, 402
F.2d 94, 99 (10th Cir. 1968)); Heartland Commc’ns, Inc. v. Sprint Corp., 161 F.R.D. 111, 115 (D. Kan. 1995)); see
also Fed. R. Civ. P. 23(c)(1)(C) (“An order that grants or denies class certification may be altered or amended before
final judgment.”).
7
Gen. Tel. Co. v. Falcon, 457 U.S. 147, 155 (1982); see Nat’l Union Fire Ins. Co. v. Midland Bancor,
Inc., 158 F.R.D. 681, 685 (D. Kan. 1994).
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determine whether it may be maintained as a class action.8 The Tenth Circuit, however, has
emphasized that the question of class certification involves considerations that are “enmeshed in
the factual and legal issues comprising the plaintiff's cause of action.”9 Although the Court may
not evaluate the strength of a cause of action at the class certification stage, it must consider,
“without passing judgment on whether plaintiffs will prevail on the merits,” whether the
requirements of Rule 23 are met.10
As the parties seeking class certification, Plaintiffs have the burden to demonstrate under
a strict burden of proof that the requirements of Rule 23 are clearly satisfied.11 In doing so,
Plaintiffs must establish that the prerequisites of Rule 23(a) are satisfied and that the proposed
class falls under one of the categories described in Rule 23(b).
2.
Class Definition
In determining whether to certify a class, the Court first addresses the proposed class
definition.12 “Defining the class is of critical importance because it identifies the persons (1)
entitled to relief, (2) bound by a final judgment, and (3) entitled under Rule 23(c)(2) to the best
notice practicable in a Rule 23(b)(3) action.”13 Therefore, the definition must be “precise,
8
Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 177 (1974); Adamson v. Bowen, 855 F.2d 668, 676 (10th
Cir. 1988); Anderson v. City Of Albuquerque, 690 F.2d 796, 799 (10th Cir.1982).
9
Shook, 543 F.3d at 612 (quoting Falcon, 457 U.S. at 160); see also J.B. ex rel. Hart v. Valdez, 186
F.3d 1280, 1289 (10th Cir. 1999); Reed v. Bowen, 849 F.2d 1307, 1309 (10th Cir. 1988).
10
Shook, 543 F.3d at 612; see Eisen, 417 U.S. at 178 (stating that in determining propriety of a class
action, the question is not whether plaintiffs state a cause of action or will prevail on merits, but whether the
requirements of Rule 23 are met).
11
Trevizo v. Adams, 455 F.3d 1155, 1162 (10th Cir. 2006).
12
Eatinger v. BP Am. Prod. Co., 271 F.R.D. 253, 257-58 (D. Kan. 2010).
13
In re Urethane Antitrust Litig., 237 F.R.D. 440, 444 (D. Kan. 2006) (citing Manual for Complex
Litigation § 21.222, at 270 (4th ed. 2005)).
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objective, and presently ascertainable.”14
Here, Lead Plaintiffs seek certification of the
following class:
All persons and entities who purchased or otherwise acquired the publicly-traded
common stock of Sprint Nextel Corporation . . . from October 26, 2006, through
February 27, 2008, inclusive . . . and who were damaged thereby. Included in the
Class are purchasers of Sprint common stock [“Sprint Stock”] and the following
Sprint debt securities [“Sprint Bonds”]: (i) 6.0% bonds, due December 1, 2016;
(ii) 6.9% bonds, due May 1, 2019; (iii) 8.75% bonds, due March 15, 2032; (iv)
8.375% bonds, due March 15, 2012; (v) 7.625% bonds, due January 30, 2011; (vi)
6.375% bonds, due May 1, 2009; (vii) 6.875% bonds, due November 15, 2028;
(viii) 6.875% bonds, due October 31, 2013; (ix) 5.95% bonds, due March 15,
2014; and (x) 7.375% bonds, due August 1, 2015. Excluded from the Class are
Defendants herein, members of each Defendant’s immediate family, any entity in
which any Defendant has or had a controlling interest, officers and directors of
Sprint, and Defendants’ legal representatives, heirs, successors, or assigns of any
such excluded party.
Defendants do not object to Lead Plaintiffs’ proposed class definition. Furthermore, the Court
finds that the proposed class is sufficiently defined to allow potential class members to be
identified.
3.
Rule 23(a) Requirements
Rule 23(a) provides the following prerequisites for class certification: “(1) Numerosity:
the class is so numerous that joinder of all members is impracticable; (2) Commonality: there are
questions of law or fact that are common to the class; (3) Typicality: the claims or defenses of
the representative parties are typical of the claims or defenses of the class; and (4) Adequacy of
Representation: the representative parties will fairly and adequately represent the interests of the
class.”15 Of the four requirements listed above, Defendants only contend that Lead Plaintiffs
14
Id.
15
Trevizo, 455 F.3d at 1161-62 (citing Fed. R. Civ. P. 23(a)).
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have not met the requirement of typicality.16 Nonetheless, the Court will briefly analyze whether
Plaintiffs have met all of the Rule 23(a) requirements for class certification.
a.
Numerosity
To satisfy the numerosity requirement of Rule 23(a)(1), Plaintiffs must establish that the
class is so numerous so as to make joinder impracticable.17 Plaintiffs must produce some
evidence or otherwise establish by reasonable estimate the number of class members who may be
involved.18
Courts have found that classes as small as twenty members can satisfy the
numerosity requirement, and a “good faith estimate of at least 50 members is a sufficient size to
maintain a class action.”19 Here, there were, on average, 645 institutional investors holding
Sprint common stock and 224 holding Sprint bonds during the class period. The Court therefore
finds that Plaintiffs have established the numerosity required to maintain a class action.
b.
Commonality
Rule 23(a)(2) requires Plaintiffs to show that questions of law or fact are common to the
class, that is, members of the putative class “possess the same interest and suffer the same
injury.”20 This inquiry requires the Court to find only whether common questions of law or fact
16
In their response to Plaintiffs’ Motion for Class Certification, Defendants assert that Plaintiffs’ motion
was the first time Plaintiffs revealed that they sought to certify a class containing purchasers of Sprint Bonds.
Defendants, however, do not cite any authority as to how this affects the Court’s certification analysis. Further, the
Court notes that Plaintiffs’ Amended Complaint states that Plaintiffs bring this action “on behalf of a class
consisting of purchasers and acquirers of Sprint securities.” Consolidated Complaint, Doc. 33, p. 91. The term
“securities” typically includes stocks and bonds. See Collins English Dictionary-Complete & Unabridged 10th
Edition, available at http://dictionary.reference.com/browse/security. Therefore, the Court does not see this as a
basis to deny Plaintiffs’ motion.
17
Id. at 1162; Fed. R. Civ. P. 23(a)(1).
18
Rex v. Owens ex rel. State of Okla., 585 F.2d 432, 436 (10th Cir. 1978).
19
Id.; In re Aluminum Phosphide Antitrust Litig., 160 F.R.D. 609, 613 (D. Kan. 1995).
20
Gen. Tel. Co. of Sw. v. Falcon, 457 U.S. 147, 156 (1982).
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exist. Unlike the Court’s analysis under Rule 23(b)(3), this inquiry does not require a finding
that such questions predominate.21
Plaintiffs have identified the following three questions of law and fact that they claim are
common to all class members: (1) whether Defendants’ alleged acts violated federal securities
laws; (2) whether Defendants’ statements during the class period were materially false and
misleading when issued or whether Defendants’ statements omitted material facts necessary to
make the statements not misleading; and (3) the extent and measure of damages sustained by
class members. Plaintiffs assert that common questions of law and fact are present where “the
alleged fraud involves material misrepresentations and omissions in documents circulated to the
investing public, press releases and statements provided to the investment community and the
media, and investor conference calls.”22 The Court agrees. The alleged misrepresentations and
omissions leading to inflated securities prices relate to all investors of Sprint securities and the
materiality of these statements and omissions are important common issues.23 Thus, the Court
finds that the commonality requirement is satisfied.
21
Olenhouse v. Commodity Credit Corp., 136 F.R.D. 672, 679 (D. Kan. 1991).
22
Plaintiffs’ Memo. in Support of Motion for Class Certification, Doc. 117, p. 23.
23
See, e.g., Lane v. Page, 272 F.R.D. 558, 570 (D.N.M. 2011) (“Where the facts as alleged show that
Defendants’ course of conduct concealed material information from an entire putative class, the commonality
requirement is met.”); see also id. (“Securities cases often involve allegations of common courses of fraudulent
conduct, which can be sufficient to satisfy the commonality requirement.”); Darquea v. Jarden Corp., 2008 WL
622811, at *2 (S.D.N.Y. Mar. 6, 2008) (“The alleged misrepresentation leading to artificially inflated stock prices
relate to all investors and the existence and materiality of such misstatements or omissions present important
common issues.”).
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c.
Typicality
Rule 23(a)(3) requires that the representative plaintiff possess the same interests and
suffer the same injuries as the proposed class members.24 “It is well established that differing
fact situations of class members do not defeat typicality under Rule 23(a)(3) so long as the
claims of the class representative[s] and class members are based on the same legal or remedial
theory.”25 The representative plaintiffs’ interests need not be identical to those of the class
members,26 but they must not be “significantly antagonistic” to the claims of the proposed
class.27 Here, the class members’ claims rise and fall on the same facts and legal theories as
alleged by the representatives. Both Plaintiffs and proposed class members purchased Sprint
securities. Furthermore, both Plaintiffs and class members seek to prove that Defendants made
materially false and misleading statements during the class period and failed to disclose material
adverse facts about Sprint’s financial results.
And, both Plaintiffs and the class members
suffered a loss when the price of Sprint’s securities fell.
Defendants generally argue that class certification is not appropriate as to the Sprint
Bonds because Lead Plaintiff WVIMB is the only proposed representative that purchased the
Sprint Bonds, and WVIMB only purchased three of the ten bonds at issue. Defendants, however,
do not cite any authority as to how or why this affects the Court’s certification analysis. Nor do
24
Fed. R. Civ. P. 23(a)(3); see also DG ex rel. Stricklin v. Devaughn, 594 F.3d 1188, 1198 (10th Cir.
2010).
25
Garcia v. Tyson Foods, Inc., 255 F.R.D. 678, 689 (D. Kan. 2009) (citing Adamson v. Bowen, 855 F.2d
668, 676 (10th Cir. 1988)).
26
Stricklin, 594 F.3d at 1198 (citing Anderson v. City of Albuquerque, 690 F.2d 796, 800 (10th Cir.
1982)).
27
Olenhouse, 136 F.R.D. at 680; see also Stricklin, 594 F.3d at 1198–99 (“Provided the claims of Named
Plaintiffs and class members are based on the same legal or remedial theory, differing fact situations of the class
members do not defeat typicality.”).
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Defendants provide any evidence as to how the bonds differ from each other such that the claims
of two potential plaintiffs, each holding different bonds, would not be similar. Accordingly, the
Court finds that the typicality requirement has been met.
d.
Adequacy of Representation
Pursuant to Rule 23(a)(4), a representative plaintiff must show that he or she will fairly
and adequately protect the interests of the class.28 To satisfy this requirement, the representative
plaintiff must be a member of the class he or she seeks to represent and must show that (1) the
plaintiff’s interests do not conflict with those of the class members and (2) that the plaintiff will
be able to prosecute the action vigorously through qualified counsel.29
To defeat class
certification, a conflict must be fundamental and go to specific issues in controversy.30 A
fundamental conflict exists where some members of the class claim harm through a
representative plaintiff's conduct that resulted in benefit to other class members.31
Minor
conflicts will not defeat class certification.32 Here, there is no evidence that Lead Plaintiffs have
any potential conflict with other members of the class. Therefore, the Court finds that this
requirement has been satisfied.
4.
Requirements under Rule 23(b)(3)
After satisfying the prerequisites under Rule 23(a), Plaintiffs must demonstrate that the
proposed class action fits within one of the three categories described in Rule 23(b). In this case,
28
Fed. R. Civ. P. 23(a)(4).
29
E. Tex. Motor Freight Sys., Inc., v. Rodriguez, 431 U.S. 395, 403 (1977); Rutter & Wilbanks Corp. v.
Shell Oil Co., 314 F.3d 1180, 1187–88 (10th Cir. 2002).
30
Eatinger v. BP Am. Prod. Co., 271 F.R.D. 253, 260 (D. Kan. 2010).
31
Id.
32
Id.
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Plaintiffs seek to proceed under Rule 23(b)(3), which addresses situations where “class action
treatment is not as clearly called for as it is in Rule 23(b)(1) and (b)(2) situation, [but] may
nevertheless be convenient and desirable.”33 Accordingly, Rule 23(b)(3) “invites a close look at
the case before it is accepted as a class action.”34
Rule 23(b)(3) provides that a class action may be maintained if “questions of law or fact
common to the members of the class predominate over any questions affecting individual
members” and a class action “is superior to other available methods for the fair and efficient
adjudication of the controversy.”35 This requirement is often “readily met in certain cases
alleging consumer or securities fraud.”36
“Considering whether questions of law or fact common to class members predominate
begins, of course, with the elements of the underlying cause of action.”37 One of the elements
Plaintiffs must prove to succeed on their § 10(b) claim, is reliance. Reliance “provides the
requisite causal connection between defendant’s misrepresentation and a plaintiff’s injury.”38
Here, Plaintiffs seek to establish reliance on a class-wide basis through the fraud-on-the-market
theory. This theory allows plaintiffs to invoke a rebuttable presumption of reliance on material
misrepresentations aired to the general public.39 The theory rests on the notion that “certain well
33
Amchem Prods., Inc., v. Windsor, 521 U.S. 591, 615 (1997).
34
Id.
35
Fed. R. Civ. P. 23(b)(3).
36
Amchen, 521 U.S. at 625.
37
Erica P. John Fund, Inc. v. Halliburton Co., 131 S. Ct. 2179, 2184 (2011).
38
Joseph v. Wiles, 223 F.3d 1155, 1161 (10th Cir. 2000) (quotation omitted).
39
Amgen Inc. v. Conn. Retirement Plans and Trust Funds, -- U.S. --, 133 S. Ct. 1184, 1192 (2013)
(citation omitted).
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developed markets are efficient processors of public information,” and that the market price of
shares reflects all publicly available information.40
To trigger the rebuttable presumption under the fraud-on-the-market theory, Plaintiffs
must first show that the security traded in an efficient market.41 Plaintiffs bear the burden “of
making a preliminary showing of market efficiency at the class certification stage.”42 Here,
Defendants concede that Sprint stock traded in an efficient market during the class period. Their
only contention with regard to this Rule 23(b) requirement is that Plaintiffs have failed to show
that the Sprint Bonds traded in an efficient market during the class period.
Therefore, if
Plaintiffs cannot demonstrate that the Sprint bond market was efficient by a preponderance of the
evidence, then Plaintiffs cannot avail themselves of the fraud-on-the-market presumption, and
certification of a class that includes bondholders would be inappropriate.43
a.
The Sprint Bonds Traded in an Efficient Market.
“An efficient market is one which rapidly reflects new information in the price of the
stock. It is almost always ‘developed,’ in the sense that the market is characterized by a
relatively high level of activity and frequency, and for which trading information is widely
40
Id.
41
Basic, Inc. v. Levinson, 485 U.S. 224, 248 n.27 (1988).
42
Bell v. Ascendant Solutions, Inc., 422 F.3d 307, 313 (5th Cir. 2005); see also Teamsters Local 445
Freight Div. Pension Fund v. Bombardier, Inc., 546 F.3d 196, 210 (2nd Cir. 2008) (applying a “preponderance of
the evidence” standard to the determination of market efficiency).
43
See In re Winstar Commnc’ns Sec. Litig., 290 F.R.D. 437, 445 (S.D.N.Y. 2013) (stating that the
plaintiffs must demonstrate that the bond market was efficient by a preponderance of the evidence).
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available.”44 Courts generally consider the following factors, known as the “Cammer factors,” in
evaluating an efficiently traded security:
(1) whether the security has a large weekly trading volume; (2) whether a
significant number of securities analysts followed and reported on the company’s
stock during the applicable period; (3) whether the stock had numerous market
makers; (4) whether the company was entitled to file an S-3 Registration
Statement in connection with public offerings; and (5) whether the security
experienced an historical showing of immediate price response to unexpected
corporate events or financial releases. 45
Courts have also considered the following additional factors when evaluating market efficiency:
“(6) the company’s market capitalization; (7) the bid-ask spread and (8) the float, or issue
amount outstanding excluding insider-owned securities; and (9) the percentage of institutional
ownership.”46
The Cammer factors were created in the context of evaluating the efficiency of stock
markets, not bond markets. Although these factors “ ‘are admittedly not well-suited for the
analysis of debt securities,’ ” courts generally apply these factors to the efficiency question for
bonds.47 The Tenth Circuit has yet to adopt a standard to determine whether the fraud-on-themarket applies to stocks or bonds, but some district courts in the Circuit have applied the
Cammer factors in the context of stocks.48 In the absence of any guidance from the Circuit, the
44
Stat-Tech Liquidating Trust v. Fenster, 981 F. Supp. 1325, 1346 (D. Colo. 1997) (citing Freeman v.
Laventhol & Horvath, 915 F.2d 193, 198 (6th Cir. 1990)).
45
In re Healthsouth Corp. Sec. Litig., 261 F.R.D. 616, 635 (N.D. Ala. 2009); Unger v. Amedisys, Inc.,
401. F.3d 316, 323 (5th Cir. 2005) (quoting Cammer v. Bloom, 711 F. Supp. 1264, 1286-87 (D. N.J. 1989)); see also
In re Nature’s Sunshine Prod.’s Inc., Sec. Litig., 251 F.R.D. 656, 662-64 (D. Utah 2008) (applying Cammer
factors).
46
Healthsouth, 261 F.R.D. at 632; see Unger, 401 F.3d at 323; Bell, 422 F.3d at 313; Krogman v.
Sterritt, 202 F.R.D. 467, 474, 478 (N.D. Tex. 2001).
47
Healthsouth, 261 F.R.D. at 632.
48
See Nature’s Sunshine, 251 F.R.D. at 662; see also Serfaty v. Int’l Automated Sys., Inc., 180 F.R.D.
418, 421-23 (D. Utah 1998) (examining Cammer factors).
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Court will apply the Cammer factors to the Sprint Bonds at issue in this case and will address
each factor below.
i.
Weekly Trading Volume
The first Cammer factor concerns whether “ ‘there existed an average weekly trading
volume during the class period in excess of a certain number of shares.’ ”49 “The higher the
trading volume, the stronger the showing of significant investor interest in the company and,
therefore, likelihood that many investors are executing trades on the basis of newly available or
disseminated corporation information.”50 In evaluating weekly trading volume, “average weekly
trading of two percent or more of the outstanding shares would justify a strong presumption that
the market for the security is an efficient one; one percent would justify a substantial
presumption.”51
Lead Plaintiffs rely on the Declaration of their attorney, Brian O’Mara (the “O’Mara
Declaration”) in support of their contention that the Sprint Bonds traded in an efficient market.
With regard to the first Cammer factor, the O’Mara Declaration provides that during the class
period, Sprint had $17 billion debt securities outstanding and the aggregate weekly trading
volume for the Sprint Bonds was in excess of $477 million. Further, the average weekly trading
volume during the class period as a percentage of Sprint Bonds outstanding was 2.76%. Because
this percentage is greater than two percent, it warrants a strong presumption of efficiency under
Cammer. Thus, this factor weighs toward a finding that the market for the Sprint Bonds was
efficient.
49
Nature’s Sunshine, 251 F.R.D. at 662 (quoting Cammer, 711 F. Supp. at 1286).
50
In re Countrywide Fin. Corp. Sec. Litig., 273 F.R.D. 586, 613 (C.D. Cal. 2009).
51
In re DVI Secs. Litig., 249 F.R.D. 196, 209 (E.D. Pa. 2008) (citing Cammer, 711 F. Supp. at 1286).
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ii.
Analyst Coverage
The second Cammer factor that courts look to is the number of securities analysts that
follow the company or the security.52 “The existence of a number of analysts who report on a
security supports a finding of market efficiency because it permits an inference that financial
statements relating to a security are closely watched by investment professionals, who in turn
inject their views on the company and the security into the market.”53
The O’Mara Declaration states that, on average, twenty-five analyst firms provided
coverage of Sprint during the class period. Additionally, Nelson’s Directory of Investment
Research identified twenty-four separate investment banks that provided analyst coverage of
Sprint, issuing more than 340 analyst reports. With respect to the Sprint Bonds, the O’Mara
Declaration states that there were eight credit analysts who provided coverage of Sprint Bonds
during the class period.54 Accordingly, the Court finds that this factor militates toward a finding
of market efficiency.
iii.
Market Makers and Arbitrageurs
The third factor addresses the number of market makers that deal in the security at issue.
“The presence of Market Makers supports the efficiency of a market because they ‘react swiftly
to company news and reported financial results by buying or selling stock and driving it to a
changed price level.’ ”55 The SEC defines a “market maker” as
52
Winstar, 290 F.R.D. at 446 (citing Cammer, 711 F. Supp. at 1286).
53
Id. (citing Bombardier, 546 F.3d at 205).
54
See Nature’s Sunshine, 251 F.R.D. at 662 (noting that “[c]ourts have . . . applied the fraud on the
market theory where at least six securities analysts issued reports . . . during the class period”).
55
Healthsouth, 261 F.R.D. at 635 (quoting Cammer, 711 F. Supp. at 1287).
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a dealer who, with respect to a particular security, (i) regularly publishes bona
fide, competitive bid and offer quotations in a recognized interdealer quotation
system; or (ii) furnishes bona fide competitive bid and offer quotations on request;
and (iii) is ready, willing and able to effect transactions in reasonable quantities at
his quoted prices with other brokers or dealers.56
The O’Mara Declaration states that, on average, 141 dealers reported prices for the Sprint
Bonds in 2008. It also states that at least 224 large institutional investors reported purchases and
holdings of Sprint Bonds during the class period. The Declaration does not state, however,
whether these dealers and institutional investors were “ready, willing and able” to trade the
Sprint Bonds. Accordingly, this factor does not support a finding of market efficiency.
iv.
S-3 Registration Statement
The fourth Cammer factor is the ability of a company to file a Form S-3 registration
statement. The ability to file a Form S-3 “creates a presumption that the securities trade in an
efficient market.”57 To file a Form S-3, a company must have filed SEC reports for twelve
consecutive months and possess a $75 million market capitalization level.58
Here, it is
undisputed that Sprint was eligible to and did file a Form S-3 during the class period. Thus, this
factors weighs in favor of a finding of market efficiency.
v.
Reaction to New Information
The fifth Cammer factor is whether there is a cause and effect relationship between
unexpected corporate events or disclosures and an immediate response in the security’s price.59
56
17 C.F.R. § 240.15c3-1[c][8] (2006).
57
Healthsouth, 261 F.R.D. at 635; see also Nature’s Sunshine, 251 F.R.D. at 663 (“the SEC permits
[Form S-3] registration only on the premise that the stock is already traded on an open and efficient market, such
that further disclosure is unnecessary.”).
58
See 17 C.F.R. § 239.13.
59
Cammer, 711 F. Supp. at 1287
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Some courts have considered this “the most important Cammer factor” because without a causal
relationship, it is “difficult to presume that the market will integrate the release of material
information about a security into its price.”60 When applying this factor in the context of
analyzing the market efficiency of debt securities, court have recognized that “[t]he price of
bonds reacts differently to unexpected new information than does the price of stocks.”61
“Information that may be material to a stock price, such as the announcement of a dividend, may
not be material for a bond investor whose fixed return would not be affected.”62 Accordingly,
when examining this factor in the context of debt securities, the Court should recognize that
“material new unexpected information concerning the creditworthiness of the issuer or the
prospect of default on bond obligations would be of interest to bondholders and affect the
price.”63
The O’Mara Declaration states that eight of the ten Sprint bonds dropped in price on
January 18, 2008, when a Sprint analyst issued a research report titled “Meltdown: 4Q07 Sub
Loss Worse Than Expected; Serious Restructuring Ahead.”64 Additionally, on February 28,
2008, when Sprint issued a press release announcing the Company’s 4Q and FY 2007 results and
a goodwill impairment charge of $29.7 billion, nine of ten Sprint bonds dropped in price, losing
9.44% to 12.5%. Plaintiffs assert that this is evidence of a cause and effect relationship between
new Sprint news and Sprint Bond prices.
60
Winstar, 290 F.R.D. at 448.
61
Healthsouth, 261 F.R.D. at 635.
62
Id.
63
Id. at 635-36.
64
Declaration of Brian O’Mara, Doc. 117-5, p. 6.
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Defendants contend that Lead Plaintiffs have not met their burden to show that the Sprint
Bonds traded in an efficient market because Plaintiffs did not present an event study through
expert testimony showing that the price of the Sprint Bonds reacted to new information. An
event study is “a term of art in the relevant economic literature that refers to a regression analysis
that examines the effect of an event on some dependent variable, such as a corporation’s stock
price.”65 An event study has been considered prima facie evidence of the existence of a causal
relationship.66 However, it may be rejected if it is methodologically unsound or unreliable.67
Defendants argue that the O’Mara Declaration does not qualify as an event study and does not
show that the price of the Sprint Bonds reacted to any of the alleged misstatements about Sprint.
The Court finds this argument unpersuasive. Lead Plaintiffs are not required to provide
an event study or expert testimony to show market efficiency.68 Nowhere in Cammer did the
court require an event study or expert opinion to prove the existence of an efficient market.69
The Supreme Court has even acknowledged that “there is more than one way to demonstrate the
causal connection.”70
Furthermore, at least one district court has found indicia of market
efficiency based on a showing that a company’s bonds reacted to news about the company on
two days during the class period, despite the lack of a formal event study.71 In Winstar, the
65
In re Williams Sec. Litig., 496 F. Supp. 2d 1195, 1272-73 (N.D. Okla. 2007) (citation omitted).
66
Winstar, 290 F.R.D. at 448 (citing Bombardier, 546 F.3d at 207).
67
Id. (citing Bell, 422 F.3d at 316).
68
Countrywide, 273 F.R.D. at 609 n. 74; accord Unger, 401 F.3d at 323 n. 6 (“There is no requirement
for expert testimony on the issue of market efficiency . . . .”).
69
Cammer, 711 F. Supp. at 1287 (“[I]t would be helpful to a plaintiff seeking to allege an efficient
market to allege empirical facts showing a cause and effect relationship”).
70
Basic Inc.v. Levinson, 485 U.S. 224, 243 (1988).
71
Winstar, 290 F.R.D. at 448-49.
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plaintiffs’ expert was not able to conduct a formal event study for Winstar’s bonds because she
did not have trading data for each day of the class period.72 Despite this, the court found that the
expert’s evidence showed that the price of the bonds reacted on two days during the class period
and thus was indicative of market efficiency.73
Here, the Court finds that Plaintiffs have submitted probative evidence of a cause and
effect relationship between the price of Sprint Bonds and the release of unexpected information.
Indeed, “the relationship between market price for bonds and public information may best be
demonstrated by the cause and effect relationship of disclosure of unexpected information.”74
The bond prices for the Sprint Bonds dropped dramatically to the unexpected disclosure of
adverse financial information on January 18, 2008, and February 28, 2008. The Court notes,
however, that Plaintiffs presented no expert testimony on this factor, as is typically done.
Although expert testimony is not strictly required, in its absence the Court must conclude that
Plaintiff’s evidence is not a conclusive indicator of market efficiency and weighs only slightly
toward a finding of market efficiency. The Court will consider it for its contribution to the
overall weighing of the nine relevant factors in assessing market efficiency.
vi.
Market Capitalization
In addition to the Cammer factors, some courts have also looked at market capitalization
when examining market efficiency.75 Here, Lead Plaintiffs have produced evidence showing that
the market value of the Sprint Bonds during the class period ranged from approximately $14.2
72
Id. at 448.
73
Id.
74
HealthSouth, 261 F.R.D. at 636.
75
Unger, 401 F.3d at 323.
-19-
billion to $18.1 billion. Defendants argue that this information is insufficient because Plaintiffs
have not provided information on how regularly these bonds traded. This information, however,
does not change the total value of the bonds. Furthermore, Plaintiffs have provided information
regarding the weekly trading volume of the Sprint Bonds.76 Given the large market value of the
Sprint Bonds, this factor indicates that the Sprint Bonds trade in an efficient market.77
vii.
Bid-Ask Spread
“The bid-ask spread is the difference between the price at which investors are willing to
buy stock and the price at which current stockholders are willing to sell their shares. A large bidask spread is indicative of an inefficient market, because it suggests that the stock is too
expensive to trade.”78
The O’Mara Declaration states that the bid-ask spread for the Sprint Bonds ranged from
0.13% to 0.44%, which is very small. Defendants claim that Plaintiffs’ data is inaccurate
because it relies on price quotes from Bloomberg, L.P., which are end of day quotes and not
transaction prices.79 In response, Plaintiffs assert that the Bloomberg price quotes are “matrix
pricing” which courts have approved the use of “as long as they are shown to be consistent and
reliable proxies for transaction prices.”80 Plaintiffs have not, however, provided any information
regarding whether the Bloomberg price quotes they used in calculating the bid-ask spreads are
76
See above in Section 4.a.i., titled “Weekly Trading Volume.”
77
See Healthsouth, 261 F.R.D. at 636 (finding that the market value of bonds ranging from $870 million
to $3.5 billion reflected an efficient market).
78
Krogman, 202 F.R.D. at 478.
79
See Teamsters Local 445 Freight Div. Pension Fund v. Bombardier, Inc., 2006 WL 2161887, at *11
(S.D.N.Y. Aug. 1, 2006) (noting that Bloomberg prices are not transaction prices) [hereafter “Bombardier II”].
80
In re Dynex Capital, Inc. Secs. Litig., 2011 WL 781215, at *5 (S.D.N.Y. Mar. 7, 2011).
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consistent and reliable proxies for transaction prices. Therefore, the Court finds that this factor
does not support a finding of market efficiency.
viii.
Float
This factor looks at the percentage of shares held by the public as opposed to corporate
insiders. Neither party has addressed this factor, as debt is not generally held by corporate
insiders.81 Thus, this factor is not relevant to the determination of the market efficiency of the
Sprint Bonds.
ix.
Institutional Ownership
During the class period, approximately 224 institutions purchased and held Sprint bonds.
Included in this number are insurance companies, investment banks, pension funds, and other
sophisticated traders. The fact that a large number of institutions actively traded Sprint Bonds
demonstrates an efficient market through the class period.
b.
Defendants’ Expert’s Report Does Not Undermine the Market Efficiency of
Sprint Bonds.
Defendants challenge Plaintiffs’ evidence that the Sprint Bonds traded in an efficient
market through the findings of their expert, Dr. Bajaj. Dr. Bajaj’s expert report concludes that
the Sprint Bonds traded in an inefficient market because (1) event studies show that the Sprint
Bonds did not react efficiently to new information about Sprint; (2) there is a potential for
arbitrage profits on the Sprint Bonds; and (3) the Sprint Bonds exhibit a predictable pricing
pattern irrespective of new information. In response to Dr. Bajaj’s expert report, Plaintiffs
submitted the expert report of Dr. Preston, which the Court finds adequately refutes Dr. Bajaj’s
conclusion that the Spring Bonds traded in an inefficient market.
81
HealthSouth, 261 F.R.D. at 637.
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First, Dr. Bajaj performed three event studies on the Sprint Bonds to determine whether
there is “a cause and effect relationship” between unexpected corporate events or financial
releases and a response in the security’s price. According to Dr. Bajaj’s expert report, these
studies show that the market for the Sprint Bonds is inefficient because (1) for the twenty-seven
days in the Complaint that Plaintiffs allege a misstatement or additional disclosure by
Defendants regarding Sprint, the prices of the Sprint Bonds did not, as expected, inflate on
positive news and decrease on negative news; (2) the prices of the Sprint Bonds and the Sprint
stocks reacted inconsistently to the same information; and (3) pairs of Sprint Bonds moved in
opposite directions in reaction to the same information. However, as Plaintiffs assert, these
event studies confuse the equity and debt markets and fail to properly assess the reaction of the
Sprint Bonds to new information about Sprint.
In his first and third event study, Dr. Bajaj examined the price of Sprint Bonds on certain
“news” days.82 Dr. Bajaj, however, did not look at the substance the information released on
these “news” days. This is important because, unless the statement disclosed information that
altered Sprint’s likelihood of default, the price of the Sprint Bonds would not be expected to
change in any meaningful way.
“The changes in market price of corporate bonds most
frequently reflect changes in risk-free interest rates (Treasury Bonds) and changes in the
company’s likelihood of default on its obligations, i.e., a company’ credit risk.”83 Furthermore,
neither stock nor bond prices would be expected to move in response to the omission of material
information. Because Dr. Bajaj failed to evaluate whether or not the substance of the news
82
For the first study, Dr. Bajaj looked at the twenty-seven days in the Complaint that Plaintiffs allege a
misstatement or other additional disclosure. For the third study, Dr. Bajaj evaluated 209 news days on which Sprintspecific information was released to the market.
83
HealthSouth, 261 F.R.D. at 631-32.
-22-
released would cause a Sprint bond to increase or decrease in price, his event studies are not
reliable evidence to evaluate the significance of a bond’s price movements against the alleged
misstatements.
In his second event study, Dr. Bajaj tried to prove inefficiency by pointing to the different
reactions to the Sprint stocks and bonds on certain news days.
This analysis ignores the
differences between stocks and bonds and assumes that bonds respond in the same manner to
events that would affect stock prices. “There seems to be little, if any, dispute that the nature of
news that would affect the markets for stock can be quite different [from] what would affect the
markets for bonds.”84 Even when equity and debt securities react to similar news, courts have
recognized that “their responses may diverge in degree.”85 Thus, Dr. Bajaj’s conclusion that the
market for Sprint Bonds is inefficient because the bonds did not exhibit similar statistically
significant price movement as the Sprint stocks on the same dates does not undermine Plaintiff’s
evidence of market efficiency of the Sprint Bonds.
Second, Dr. Bajaj’s expert report concludes that the market for the Sprint Bonds is
inefficient because there was the potential for arbitrage profits on the bonds due to information
discrepancies.
“Arbitrageurs are ‘professional investors who exploit price differences in
different markets by buying and selling identical securities in those markets.’ ”86 “Market
makers and arbitrageurs contribute to market efficiency by ‘reacting swiftly to company news
and reported financial results by buying or selling stock and driving it to a changed price
84
Newby v. Enron Corp., 539 F. Supp. 2d 644, 747 (S.D. Tex. 2006).
85
Countrywide, 273 F.R.D. at 615; see also HealthSouth, 261 F.R.D. at 632 (“[I]n efficient capital
markets, the price of the investment-grade bonds is not very sensitive to day-to-day stock price fluctuations, nor will
it always react to corporate announcements.”).
86
Bombardier II, 2006 WL 2161887, at *7 (quoting Stuebler v. Xcelera.com., 430 F.3d 503, 515 n. 13
(1st Cir. 2005)).
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level.’ ”87 According to Dr. Bajaj’s expert report, arbitrage profits arise when the “Law of One
Price” is violated, and an investor can buy from a market maker at a low ask price,
simultaneously sell to another market maker at a high bid price and make a profit in excess of
trading costs. Dr. Bajaj asserts that the three Sprint Bonds held by Plaintiff WVIMB violated the
Law of One Price because of price discrepancies between certain dealer’s bid quotes and other
dealer’s ask quotes at the end of certain trading days. Plaintiffs assert, and the Court agrees, that
this analysis is flawed. Bond prices are not the same as bond quotes. Indeed, dealer quotes are
not executable prices and may be stale. Furthermore, Dr. Bajaj admitted in his deposition that he
was not aware of any highly sophisticated investors and banks that generated profits from the
Sprint Bonds in this manner. Accordingly, the Court finds that Dr. Bajaj’s conclusions regarding
the “Law of One Price” and the Sprint Bonds do not support a finding of market inefficiency.
Finally, Dr. Bajaj concludes that economic evidence shows price reversals and negative
serial correlations such that the Sprint Bonds did not trade in an efficient market. However, the
Court is not persuaded that this is sufficient evidence of market inefficiency. “The presence of
serial correlation is not itself determinative of inefficiency.”88 Additionally, Dr. Preston’s expert
report states that “serial correlation in bonds is a well-documented phenomemon.”89 Her expert
report also shows that the benchmark bond index Dr. Bajaj measured, as a whole, “exhibited
significant serial correlation during the Class Period.”90 Therefore, the serial correlation in the
87
Id. (quoting Cammer, 711 F. Supp. at 1287).
88
Countrywide, 273 F.R.D. at 615.
89
Preston Expert Report, Doc. 171-6, p. 15.
90
Id.
-24-
Sprint Bonds was not unusual in the bond markets generally, and Dr. Bajaj’s conclusion that
such correlation demonstrates market inefficiency fails.
In considering the evidence before it and the totality of the Cammer factors, the Court
finds that Plaintiff has established by a preponderance of the evidence that the Sprint Bonds
traded in an efficient market during the class period. Therefore, Plaintiffs’ proposed class is
entitled to the presumption of reliance afforded by the fraud-on-the market theory. Plaintiffs
have thus satisfied the Rule 23(b) requirement of predominance.
Plaintiffs have also satisfied the Rule 23(b) requirement of superiority. Where individual
claims are similar, a class action may be superior to discrete actions that could be “grossly
inefficient, costly, and time consuming because the parties, witnesses, and courts would be
forced to endure unnecessarily duplicative litigation.”91 As discussed above, Plaintiffs’ claims
are substantially similar, rely upon much of the same evidence, and will require many of the
same witnesses. Therefore, the Court finds that a single class action is a preferable and superior
method to duplicative litigation by individual parties.
5.
Conclusion
Based on the foregoing, the Court concludes that Plaintiffs’ proposed class satisfies the
requirements of Rule 23. Accordingly, the class will be certified with respect to Plaintiffs’
claims, and Lead Plaintiffs are appointed as class representatives.
91
In re Universal Serv. Fund Tel. Billing Practices Litig., 219 F.R.D. 661, 679 (D. Kan. 2004).
-25-
B.
Appointment of Class Counsel Under Rule 23(g)
“An order certifying a class must also appoint class counsel that will adequately represent
the interests of the class.”92 In appointing class counsel, the court must consider (1) the work
counsel has done in identifying or investigating potential claims in the action; (2) counsel’s
experience in handling class actions, other complex litigation, and the types of claims asserted in
the action; (3) counsel’s knowledge of the applicable law; and (4) the resources that counsel will
commit to representing the class.93
Plaintiffs move to appoint Robbins Geller Rudman & Dowd LLP (“Robbins Geller”) and
Motley Rice LLC (“Motley Rice”) as class counsel for the class. Defendants do not oppose
Robbins Geller or Motley Rice as class counsel for this action. After reviewing the record, the
Court is satisfied that Plaintiffs’ attorneys meet the criteria of Rule 23(g) and will adequately
represent the interests of the class as counsel. Both firms have been substantially involved in this
litigation, and Robbins Geller has participated in the action since its inception. Therefore, the
Court appoints Robbins Geller and Motley Rice as co-lead class counsel for this action.
C.
Notice Pursuant to Rule 23(c)(2)(B)
Under Rule 23(c)(2)(B), when a court certifies a class under Rule 23(b)(3), the Court
“must direct to class members the best notice that is practicable under the circumstances,
including individual notice to all members who can be identified through reasonable effort.”94
The Court believes that the majority, if not all, of the class members can be identified through
92
Amchem Prod., 521 U.S. at 615.
93
Fed. R. Civ. P. 23(g)(1)(A).
94
Fed. R. Civ. P. 23(c)(2)(B).
-26-
reasonable efforts. Record owners of the Sprint securities may be identified from records
maintained by Sprint or its transfer agent. Therefore, Sprint is directed to provide Plaintiffs’
counsel with names, addresses, and if possible, telephone numbers for all owners of the Sprint
securities falling within the defined class on or before May 1, 2014. Also on or before May 1,
2014, Plaintiffs shall prepare and provide to the Court for approval an order regarding notice that
complies with the requirements of Rule 23(c) of the Federal Rules of Civil Procedure.
IT IS THEREFORE ORDERED that Plaintiffs’ Motion for Class Certification (Doc.
116) is GRANTED.
IT IS SO ORDERED.
Dated this 27th day of March, 2014.
ERIC F. MELGREN
UNITED STATES DISTRICT JUDGE
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