CITY OF STERLING HEIGHTS GENERAL EMPLOYEES' RETIREMENT SYSTEM v. PRUDENTIAL FINANCIAL, INC. et al
OPINION. Signed by Judge Madeline C. Arleo on 8/31/15. (jr)
NOT FOR PUBLICATION
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
CITY OF STERLING HEIGHTS
Individually and on Behalf of All Others
Civil Action No. 12-5275
August 31, 2015
PRUDENTIAL FINANCIAL, INC., et al.,
ARLEO, UNITED STATES DISTRICT JUDGE
Before this Court are the following motions: (1) The motion of Lead Plaintiffs National
Shopmen Pension Fund (“National Shopmen”), Heavy & General Laborers’ Locals 472 & 172
Pension and Annuity Funds, and Roofers Local No. 149 Pension Fund (collectively, “Lead
Plaintiffs”) to certify a class, appoint National Shopmen as class representative, and appoint class
counsel pursuant to Federal Rule of Civil Procedure 23 [Dkt. No. 133]; and (2) the motion of
Defendants Prudential Financial, Inc. (“Prudential”), John R. Strangfeld, Richard J. Carbone, and
Mark B. Grier (collectively, “Defendants”) to exclude the expert testimony of Lead Plaintiffs’
expert [Dkt. No. 185]. No oral argument was heard pursuant to Federal Rule of Civil Procedure
78 and Local Civil Rule 78.1. In consideration of the parties’ submissions in connection with these
motions, and for the reasons set forth herein, Lead Plaintiffs’ motion is GRANTED and
Prudential’s motion is DENIED.
BACKGROUND AND PROCEDURAL HISTORY
This case is a putative securities class action in which Lead Plaintiffs allege that Prudential
violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”)
between May 5, 2010, and November 4, 2011 (the “Class Period”), by making false and misleading
statements that overstated Prudential’s income and understated its expenses. See generally Dkt.
No. 22, Am. Compl. Prudential is a public corporation headquartered in New Jersey. Id. ¶ 2. Its
common stock trades on the New York Stock Exchange (“NYSE”). Id. Defendants Strangfeld,
Carbone, and Grier are current and former high-level executives of Prudential against whom Lead
Plaintiffs allege direct liability under § 10(b) and control person liability under § 20(a). 1 Id. ¶¶ 34, 32-44. Lead Plaintiffs are purchasers of Prudential’s common stock during the Class Period.
Id. ¶ 29.
Prudential is principally engaged in the business of “life insurance, annuities and
retirement-related services.” Id. ¶ 5. 2 Lead Plaintiffs claim that Prudential knowingly or recklessly
failed to account for life insurance policies that were eligible for payment to a beneficiary or
escheatment to a state, which falsely inflated Prudential’s reported financial results during the
Class Period. Id. ¶¶ 11-12, 54, 57. At the heart of Lead Plaintiffs’ allegations are Prudential’s
historical use of the Social Security Administration’s Death Master File (the “DMF”) and various
The Amended Complaint also originally asserted a cause of action under § 20(b), but that claim
was dismissed in a February 6, 2014, order. Dkt. No. 34, Order on Mot. to Dismiss.
Prudential’s operations are comprised of two separate lines of business: the Financial Services
Businesses—the bulk of Prudential’s operations—and the Closed Block Business. See Am.
Compl. ¶ 5. The Financial Services Businesses are composed of four broad divisions: (1) U.S.
Retirement Solutions and Investment Management; (2) U.S. Individual Life and Group Insurance;
(3) International Insurance and International Investments; and (4) Corporate and Other. Id. The
Closed Block Business is essentially a legacy business composed of life insurance products that
Prudential ceased to offer following Prudential’s demutualization; accordingly, its assets and
liabilities have been segregated from the Financial Services Businesses. Id. Prudential
consistently represented during the Class Period that only the performance of the Financial
Services Businesses impacted the value of Prudential’s common stock. Id. ¶ 6.
states’ investigations into Prudential’s unclaimed property practices that began in 2009 and ended
with a global settlement in January 2012. See id. ¶¶ 8, 57(e), 101-07. The DMF is a database
maintained by the Social Security Administration that tracks deaths in the United States. Id. ¶ 8.
Lead Plaintiffs claim that for many years, Prudential regularly used the DMF to identify deceased
annuity policyholders in order to stop annuity payments, but only sometimes used the DMF to
identify deceased life insurance policyholders and locate their beneficiaries or, if there were no
beneficiaries under a given policy, inform the relevant state authorities that the policy was eligible
for escheatment. Id. ¶¶ 9-10, 57(c). As a result, Lead Plaintiffs allege, Prudential knowingly
retained monies that did not belong to it and understated its liabilities to policyholders. Id. ¶¶ 1011. Lead Plaintiffs allege that Defendants therefore materially overstated Prudential’s financial
strength in financial reports and other disclosures made during the Class Period. Id. ¶¶ 12, 16, 4556.
The Class Period begins on May 5, 2010, when Prudential issued a press release
announcing its financial results for the first quarter of 2010. Id. ¶ 45. Prudential reiterated its first
quarter results on May 7, 2010, when it filed its Form 10-Q for the first quarter of 2010. Id. ¶ 46.
Lead Plaintiffs allege that essentially all announcements of Prudential’s financial results during
the Class Period were materially false and misleading such that Prudential’s common stock traded
at inflated prices throughout the Class Period. Id. ¶¶ 47-56, 61-63, 66-68, 71-75, 80-85.
Prudential allegedly began to disclose the truth about its unclaimed property practices and
the ongoing state investigations on August 5, 2011, when it acknowledged the breadth of those
investigations and confirmed that they would “result in additional payments and impact claims
revenues.” Id. ¶ 86. S&P downgraded the United States’ credit rating on the same day. Id. ¶ 87.
At the close of trading on August 8, 2011—the next trading day—Prudential’s per-share stock
price stood at $48.14, down from a close of $53.99 on August 5. Id. ¶ 89. On November 2, 2011,
Prudential issued a press release announcing the company’s financial results for the third quarter
of 2011. Id. ¶ 91. In the press release, Prudential revealed that it would take a pre-tax $99 million
charge (the “DMF Charge”) to its reserves to account for additional payments expected to result
from the use of new DMF matching criteria. Id. Prudential also announced several other unrelated
charges in the press release, including a $435 million charge “to strengthen reserves for guaranteed
death and income benefits.” Id. Mr. Carbone reiterated the DMF Charge on a conference call the
next day. Id. ¶ 94. Prudential again acknowledged the DMF Charge when it filed its third quarter
2011 Form 10-Q (“3Q11 Form 10-Q”) on November 4, 2011. 3 Id. ¶ 97. Specifically, Mr. Carbone
noted on the conference call that the DMF Charge resulted in a $0.15 per share impact on
Prudential’s stock. Id. ¶ 94. The 3Q11 Form 10-Q provided additional detail regarding the state
investigations and the new DMF matching criteria that resulted therefrom. Id. ¶ 98. After closing
at $53.67 per share on November 2, 2011, Prudential’s stock price closed at $53.05 and $52.19 on
November 3 and November 4, respectively. Id. ¶ 99.
Plaintiff City of Sterling Heights General Employees’ Retirement Systems instituted this
action on August 22, 2012. Dkt. No. 1, Compl. Lead Plaintiffs and Lead Plaintiffs’ counsel were
appointed as lead plaintiffs and lead counsel on March 21, 2013. Dkt. No. 21. Lead Plaintiffs
filed the Amended Complaint on May 6, 2013. Dkt. No. 22, Am. Compl. Defendants thereafter
moved to dismiss the Amended Complaint, and the Honorable Susan D. Wigenton, U.S.D.J.,
issued an order on February 6, 2014, granting in part and denying in part Defendants’ motion. Dkt.
Lead Plaintiffs allege that the charge was actually increased to $139 million due to a $40 million
charge against the Closed Block Business. Am. Compl. ¶ 97. Lead Plaintiffs acknowledge,
however, that Prudential consistently represented that the Closed Block Business had no impact
on the value of Prudential’s common stock. Id. ¶ 6. Given that fact, the $40 million charge to the
Closed Block Business is not at issue here.
No. 34, Order on Mot. to Dismiss. Lead Plaintiffs now move for certification of a class consisting
of all purchasers of Prudential’s common stock during the Class Period, with the exception of
Defendants and various entities and persons connected to Defendants. Dkt. No. 133, Mot. for
Class Cert. Defendants oppose class certification and move to exclude the report and opinions of
Lead Plaintiffs’ expert, Professor Steven P. Feinstein (the “Feinstein Report”). Dkt. No. 185, Mot.
to Exclude Expert Report.
A. Class Certification Requirements
Federal Rule of Civil Procedure 23 sets forth the requirements that must be fulfilled before
a case may proceed as a class action. There are four basic prerequisites for class action treatment:
(1) the class is so numerous that joinder of all members is
(2) there are questions of law or fact common to the class;
(3) the claims or defenses of the representative parties are typical of
the claims or defenses of the class; and
(4) the representative parties will fairly and adequately protect the
interests of the class.
Fed. R. Civ. P. 23(a). These are known as the numerosity, commonality, typicality, and adequacy
requirements. See In re Constar Int’l Inc. Sec. Litig., 585 F.3d 774, 780 (3d Cir. 2009). Second,
plaintiffs must also meet the requirements of one of Rule 23(b)’s provisions. Id. Here, Lead
Plaintiffs seek certification under Rule 23(b)(3), which permits certification only if “the court finds
that the questions of law or fact common to class members predominate over any questions
affecting only individual members, and that a class action is superior to other available methods
for fairly and efficiently adjudicating the controversy.” Fed. R. Civ. P. 23(b)(3). “The twin
requirements of Rule 23(b)(3) are known as predominance and superiority.” In re Hydrogen
Peroxide Antitrust Litig., 552 F.3d 305, 310 (3d Cir. 2008).
In general, Rule 23(b)(3)’s
predominance requirement is the most crucial requirement in securities class actions. Halliburton
Co. v. Erica P. John Fund, Inc. (Halliburton II), 134 S. Ct. 2398, 2412 (2014). This case is no
A plaintiff “must affirmatively demonstrate” that Rule 23’s requirements are satisfied,
Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541, 2551 (2011), by providing actual evidentiary
proof that the requirements are met. Comcast Corp. v. Behrend, 133 S. Ct. 1426, 1432 (2013).
Therefore, a reviewing court must conduct a “rigorous analysis” of each of Rule 23’s requirements,
Dukes, 131 S. Ct. at 2551, and must be satisfied that each requirement is established by a
preponderance of the evidence. In re Blood Reagents Antitrust Litig., 783 F.3d 183, 187 (3d Cir.
2015). This analysis frequently overlaps with “the merits of the plaintiff’s underlying claim.”
Dukes, 131 S. Ct. at 2551. The merits may be considered, however, “only to the extent . . . that
they are relevant to determining whether the Rule 23 prerequisites for class certification are
satisfied.” Amgen Inc. v. Conn. Ret. Plans & Trust Funds, 133 S. Ct. 1184, 1194-95 (2013).
B. Admissibility of Expert Opinion
Courts are also frequently called upon to consider expert opinion offered to support or
oppose class certification. Hydrogen Peroxide, 552 F.3d at 323. Where an expert opinion is
critical to class certification and a party challenges the reliability of that opinion, the reviewing
court must engage in a two-step analysis before analyzing whether Rule 23’s requirements have
been met: (1) whether the party’s challenges bear upon “those aspects of [the] expert testimony
offered to satisfy Rule 23” and (2) if so, whether the opinion is admissible as to those aspects under
Federal Rule of Evidence 702 and Daubert v. Merrell Dow Pharms. Inc., 509 U.S. 579 (1993).
Blood Reagents, 783 F.3d at 188.
Federal Rule of Evidence 702 provides the general parameters of admissible expert
A witness who is qualified as an expert by knowledge, skill experience,
training, or education may testify in the form of an opinion or otherwise
(a) the expert’s scientific, technical, or other specialized knowledge will
help the trier of fact to understand the evidence or to determine a
fact in issue;
(b) the testimony is based on sufficient facts or data;
(c) the testimony is the product of reliable principles and methods; and
(d) the expert has reliably applied the principles and methods to the facts
of the case.
In deciding whether to admit expert testimony, the trial court serves as a “gatekeeper” tasked with
“ensuring that an expert’s testimony both rests on a reliable foundation and is relevant to the task
at hand.” Daubert, 509 U.S. at 597; see also Kumho Tire Co. v. Carmichael, 526 U.S. 137, 14748 (1999) (applying Daubert standard to all expert testimony). The Court considers whether: (1)
the expert is qualified; (2) the expert’s testimony is reliable; and (3) the expert’s testimony is
helpful to the trier of fact, i.e., it must “fit” the facts of the case. See United States v. Schiff, 602
F.3d 152, 172 (3d Cir. 2010). The proponent of the expert testimony must prove these three
requirements by a preponderance of the evidence. Mahmood v. Narciso, 549 F. App’x 99, 102
(3d Cir. 2013) (citing In re TMI Litig., 193 F.3d 613, 663 (3d Cir. 1999)).
In determining whether proposed expert testimony is reliable, the trial court should
(1) whether a method consists of a testable hypothesis; (2) whether
the method has been subject to peer review; (3) the known or
potential rate of error; (4) the existence and maintenance of
standards controlling the technique's operation; (5) whether the
method is generally accepted; (6) the relationship of the technique
to methods which have been established to be reliable; (7) the
qualifications of the expert witness testifying based on the
methodology; and (8) the non-judicial uses to which the method has
In re Paoli R.R. Yard PCB Litig., 35 F.3d 717, 742 n.8 (3d Cir. 1994); see also Schneider, 320
F.3d at 405. Each step of the expert’s analysis must be reliable, including “the methodology, the
facts underlying the expert’s opinion, and the link between the facts and the conclusion.” ZF
Meritor, LLC v. Eaton Corp., 696 F.3d 254, 291 (3d Cir. 2012). But proponents of expert
testimony need not “prove their case twice—they do not have to demonstrate to the judge by a
preponderance of the evidence that the assessments of their experts are correct, they only have to
demonstrate by a preponderance of the evidence that their opinions are reliable.” Oddi v. Ford
Motor Co., 234 F.3d 136, 145 (3d Cir. 2000).
C. Section 10b and Rule 10b-5
Section 10b and Rule 10b-5, see 15 U.S.C. § 78j and 17 C.F.R. 240.10b-5, prohibit
deception in relation to the sale of securities. In order to recover, a plaintiff must prove the
following elements: “(1) a material misrepresentation or omission, (2) scienter, (3) a connection
between the misrepresentation or omission and the purchase or sale of a security, (4) reliance upon
the misrepresentation or omission, (5) economic loss, and (6) loss causation.” City of Edinburgh
Council v. Pfizer, Inc., 754 F.3d 159, 167 (3d Cir. 2014).
At the class certification stage, materiality and loss causation need not be considered. See
Amgen, 133 S. Ct. at 1199 (materiality); Erica P. John Fund, Inc. v. Halliburton Co. (Halliburton
I), 131 S. Ct. 2179, 2185-86 (2011) (loss causation). Conversely, the element of reliance must be
considered at class certification. Halliburton II, 134 S. Ct. at 2407-08.
In order to establish reliance, the plaintiff may invoke the rebuttable presumption set forth
in Basic, Inc. v. Levinson, 485 U.S. 224 (1988), which presumes that all investors rely on the
integrity of the market price when deciding whether to buy or sell stock. Id. at 247. The
presumption is based on the “fraud-on-the-market” theory, which provides that where a company’s
stock trades on an efficient market, its stock price incorporates all material public information,
including misrepresentations. See id. at 246 (internal quotations and citation omitted). In order to
invoke the Basic presumption of reliance, the plaintiff must show: “(1) that the alleged
misrepresentations were publicly known, (2) that they were material, (3) that the stock traded in
an efficient market, and (4) that the plaintiff traded the stock between the time the
misrepresentations were made and when the truth was revealed.” Halliburton II, 134 S. Ct. at
Because market efficiency is so crucial to the invocation of the Basic presumption, “which
in turn is necessary to meet the Rule 23(b)(3) predominance requirement, a district court should
conduct a rigorous market efficiency analysis.” In re DVI, Inc. Sec. Litig., 639 F.3d 623, 638 (3d
Cir. 2011), abrogated on other grounds by Amgen v. Conn. Ret. Plans & Trust Funds, 133 S. Ct.
The defendant may rebut the presumption by proving that the alleged
misrepresentation(s) had no impact on the stock price, thereby precluding class certification under
Rule 23(b)(3). Halliburton II, 134 S. Ct. at 2414.
A. Defendants’ Motion to Exclude Lead Plaintiffs’ Expert Report
Here, Lead Plaintiffs use the Feinstein Report to establish market efficiency and invoke the
Basic presumption. Because the Feinstein Report bears directly on issues relevant to class
certification, the Court first analyzes the report’s admissibility to the extent it concerns matters
relevant to class certification.
1. Expert Qualifications
As mentioned above, the Supreme Court has ruled that materiality is not an inquiry for the class
certification stage. See Amgen, 133 S. Ct. at 1199.
Defendants do not challenge Professor Feinstein’s qualifications. His credentials and
experience qualify him to offer an expert opinion in this case. See Dkt. No. 133-7, Decl. & Report
of Steven P. Feinstein ¶¶ 6-16, Exhibit 2. Professor Feinstein holds a Ph.D. in Economics, a Master
of Philosophy in Economics, a Master of Arts in Economics, all from Yale University, and a
Bachelor of Arts in Economics from Pomona College. He is a chartered financial analyst and has
taught undergraduate and masters-level courses at Babson College in Valuation, Capital Markets,
Quantitative Methods, and Security Valuation, among others. Before his time at Babson College,
he taught finance at Boston University and worked as an Economist for the Federal Reserve Bank
of Atlanta. He has also been published extensively in the field of finance. The qualification
requirement is construed liberally; “a broad range of knowledge, skills, and training qualify an
expert.” Schneider ex rel. Estate of Schneider v. Fried, 320 F.3d 396, 404 (3d Cir. 2003). Professor
Feinstein is qualified.
Defendants dispute the reliability of Professor Feinstein’s testimony on two bases. First,
they argue that Professor Feinstein’s testimony fails to prove that the DMF Charge on November
2, 2011, affected the price of Prudential stock because, inter alia, there were other disclosures on
the same day for which Professor Feinstein does not account. Second, Defendants argue that Lead
Plaintiffs’ damages model is barebones and unimplemented, and so does not satisfy Daubert.
a. Market Efficiency Analysis
As an initial matter, Defendants do not challenge the reliability of the Feinstein Report’s
market efficiency analysis. The Court is satisfied that Professor Feinstein’s analysis on that point
Professor Feinstein’s market analysis is based on the factors set forth in Cammer v. Bloom,
711 F. Supp. 1264 (D.N.J. 1989); Krogman v. Sterritt, 202 F.R.D. 467 (N.D. Tex. 2001); and
Unger v. Amedisys, 401 F.3d 316 (5th Cir. 2005). Cammer identifies five relevant factors to
determine whether a company’s stock trades in an efficient market: (1) the company’s average
weekly trading volume; (2) the number of securities analysts following and reporting on the
company; (3) the number of market makers in the company’s stock; (4) whether the company is
eligible to file the Form S-3 Registration Statement with the SEC; and (5) whether there is a
demonstrable cause and effect relationship between the release of information about the company
and movements in the stock price. Cammer, 711 F. Supp. at 1286-87. Krogman and Unger
identify three additional factors that should be considered: (1) the magnitude of the company’s
market capitalization; (2) the size of the bid-ask spread for the company’s stock, i.e., the difference
between the price that potential buyers are willing to pay and the price at which potential sellers
are willing to sell; and (3) the company’s float, i.e., the percentage of shares that are publicly held.
Krogman, 202 F.R.D. at 478; Unger, 401 F.3d at 323. The use of these factors has been cited with
approval in a majority of circuits. See In re DVI, Inc. Sec. Litig., 639 F.3d 623, 634 n.16 (3d Cir.
2011) (collecting cases).
In his report, Professor Feinstein explores these factors and concludes that Prudential’s
stock trades in an efficient market. See Feinstein Report ¶¶ 29-153. He also conducts an event
study to analyze the fifth Cammer factor—i.e., whether there exists an empirically demonstrable
causal relationship between the release of Prudential-specific information and movement in
Prudential’s stock price. An event study includes “regression analyses that seek to show that the
market price of the defendant’s stock tends to respond to pertinent publicly reported events.”
Halliburton II, 134 S. Ct. at 2415. Defendants do not challenge the reliability of the event study
method, and there is no dispute that the method is widely accepted in the academic community
and in the courts. See Feinstein Report ¶¶ 91-92; see, e.g. In re DVI, Inc. Sec. Litig., No. 03-5336,
2010 WL 3522090, at *12 n.24 (E.D. Pa. Sept. 3, 2010).
The event study examines the movement of Prudential’s stock price on seven dates during
the Class Period immediately following earnings announcements or changes in earnings guidance.
See Feinstein Report ¶¶ 99-100. The first six dates concern earnings announcements during the
Class Period that Lead Plaintiffs allege were false and misleading, while the seventh date concerns
the disclosure of, inter alia, the DMF Charge.
The dates examined contained earnings
announcements and changes in earnings guidance—information virtually all economists agree is
important to investors. Id. ¶¶ 96-98. The event study then contains a detailed regression analysis
that sought to isolate the impact of Prudential’s earnings announcements from other potentially
confounding factors. Id. ¶¶ 102-14. Professor Feinstein’s analysis ultimately found statistically
significant changes in Prudential’s stock price attributable to the earnings announcements on six
of the seven days examined. Id. ¶¶ 115-22, Ex. 7. Based on this result, Professor Feinstein
concluded that Prudential’s stock traded in an efficient market during the Class Period. Id. ¶ 120.
Defendants do not dispute that Prudential’s stock trades on an efficient market. The Court is
therefore satisfied that Professor Feinstein’s opinion concerning market efficiency is reliable.
b. The DMF Charge
Defendants argue that Professor Feinstein does not provide a reliable basis from which to
conclude that the DMF Charge announced on November 2, 2011, caused the downward price
movement the following day. Lead Plaintiffs agree that Professor Feinstein does not offer such a
conclusion at this stage because such an opinion is not required for plaintiffs to invoke the
presumption of reliance at class certification. Dkt. No. 216, Pls.’ Opp. at 13. The parties, in effect,
agree on the scope of Professor Feinstein’s opinion. This dispute is therefore not a challenge to
admissibility, but a question of whether the Feinstein Report provides sufficient proof to certify
Professor Feinstein did not compartmentalize each disclosure made concurrently with the
DMF Charge, but he did not need to do so. Such an analysis would require the expert to wade into
questions of loss causation and materiality, issues that are not properly before the Court at the class
certification stage. See Amgen, 133 S. Ct. at 1199 (materiality not relevant at class certification);
Halliburton I, 131 S. Ct. 2184-87 (loss causation not relevant at class certification); see also Blood
Reagents, 783 F.3d at 188. Professor Feinstein’s event study does not seek to prove that the DMF
Charge caused Prudential’s stock price to drop, but that is not cause for exclusion under Rule 702.
c. Plaintiffs' Damages Model
Defendants also attack the reliability of Professor Feinstein’s damages model, arguing that
Professor Feinstein merely describes a framework for calculating damages without actually
applying it in this case. But as will be discussed in the context of Lead Plaintiffs’ motion for class
certification, class treatment would still be appropriate here even if damages were required to be
calculated on an individual basis. See Neale v. Volvo Cars of N. Am., LLC, --- F.3d ----, 2015
WL 4466919, at *17 (3d Cir. July 22, 2015) (denial of class certification solely because damages
require individual calculation would be abuse of discretion). The Court therefore need not consider
the reliability of Professor Feinstein’s damages model at this stage. Blood Reagents, 783 F.3d at
Defendants also do not challenge the helpfulness of Professor Feinstein’s report, so long
as it is reliable. To satisfy the third requirement, expert testimony must be “relevant for the
purposes of the case” and helpful to the factfinder. Schneider, 320 F.3d at 404. Professor
Feinstein’s opinion helps establish that Prudential’s stock traded in an efficient market. See
Feinstein Decl. & Report ¶ 2. It therefore bears directly upon reliance through a detailed empirical
analysis of market efficiency. See id. ¶¶ 29-157. Lead Plaintiffs have also satisfied the third
requirement of fit.
In light of the foregoing, Defendants’ motion to exclude Professor Feinstein’s expert report
is denied. The Court now turns to Lead Plaintiffs’ motion for class certification.
B. Lead Plaintiffs’ Motion for Class Certification
Defendants challenge adequacy and predominance. Under adequacy, they argue that
National Shopmen is insufficiently educated about the case to serve as class representative under
Under predominance, Defendants advance three arguments.
Defendants argue that (1) Plaintiffs cannot invoke the Basic presumption of fraud-on-the-market
because they have not shown that the DMF Charge was responsible for the subsequent drop in
stock price because of contemporaneous disclosures; (2) those same contemporaneous disclosures
rebut the Basic presumption, even if it is invoked, because they raise a triable issue as to price
impact; and (3) Lead Plaintiffs have failed to provide an adequate model for the calculation of
damages on a class-wide basis. 5 The Court first addresses the Rule 23(a) prerequisites before
reaching the Rule 23(b)(3) predominance inquiry.
1. Rule 23(a) Prerequisites
a. Numerosity, Commonality, and Typicality
Defendants also claim that Lead Plaintiffs are not entitled to the presumption in the first instance
because they have failed to identify a corrective disclosure. Their arguments under this point rely
on disputable interpretations of various facts and are inappropriate to reach at this stage.
Defendants do not challenge class certification on numerosity, commonality, or typicality
grounds. The Court is satisfied that those requirements are met here.
“Numerosity requires a finding that the putative class is ‘so numerous that joinder of all
members is impracticable.’” Newton v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 259 F.3d
154, 182 (3d Cir. 2001) (quoting Fed. R. Civ. P. 23(a)(1)). This requirement is readily met in
securities cases involving an issuer whose stock trades publicly on the NYSE. See, e.g., In re
Honeywell Int’l Inc. Sec. Litig., 211 F.R.D. 255, 260 (D.N.J. 2002). As Prudential stock trades
on the NYSE with significant daily volume, see Feinstein Report ¶ 47, it is clear that joinder would
be impracticable. The numerosity requirement is therefore easily met here.
“The commonality requirement will be satisfied if the named plaintiffs share at least one
question of fact or law with the grievances of the prospective class.” Newton, 259 F.3d at 183
(internal quotations and citations omitted). The standard for meeting this requirement is therefore
not particularly demanding, see id., and the Court finds that it is easily met here. For example, the
issues of materiality and loss causation both present common questions of law and fact and can be
proven with common evidence. See Amgen 133 S. Ct. at 1198; Halliburton I, 131 S. Ct. at 2185.
The standard for demonstrating typicality under Rule 23(a)(3) is similarly undemanding
and requires that “the claims of the named plaintiffs and putative class members involve the same
conduct by the defendant.” Newton, 259 F.3d at 183-84. Additionally, “the class representative
must not be subject to a defense that is both inapplicable to many members of the class and likely
to become a major focus of the litigation.” In re Schering Plough Corp. ERISA Litig., 589 F.3d
585, 599 (3d Cir. 2009). The factual and legal predicates of National Shopmen’s (the proposed
class representative) claims are the same as those for the class members. Defendants have not
identified any unique defense to which National Shopmen is exposed. Rule 23(a)(3)’s typicality
requirement is therefore met.
Defendants challenge National Shopmen’s adequacy as class representative, arguing that
deposition testimony of its corporate representative shows that National Shopmen is inadequately
informed about the details of this litigation and is therefore unfit to serve as class representative.
The Court disagrees.
Rule 23(a)(4) requires a showing that “the representative parties will fairly and adequately
protect the interests of the class.” In assessing adequacy, the Court first examines the qualifications
of proposed class counsel. Schering Plough, 589 F.3d at 602. Here, Defendants do not challenge
proposed class counsel’s qualifications. It is clear that proposed class counsel is highly qualified
to represent the class. See Dkt. No. 133-6, Ex. D to Williams Decl. Next, the Court determines
whether the proposed class representative has “interests antagonistic to those of the class.” New
Directions Treatment Servs. v. City of Reading, 490 F.3d 293, 313 (3d Cir. 2007) (internal
quotations and citations omitted). This inquiry principally focuses on whether there are “conflicts
of interest between named parties and the class they seek to represent.” Schering Plough, 589 F.3d
at 602 (internal quotations omitted). Where, as here, the proposed class representative has retained
adequate counsel, the class representative is not inadequate simply because it lacks “particularized
knowledge concerning the dispute at issue.” Szczubelek v. Cendant Mortg. Corp., 215 F.R.D. 107,
120 (D.N.J. 2003). Instead, a class representative may be adequate even when it possesses only
minimal knowledge regarding the litigation. New Directions, 409 F.3d at 313.
National Shopmen easily meets this standard. To be sure, National Shopmen’s corporate
representative inaccurately characterized certain facts regarding this litigation during his
deposition. But Lead Plaintiffs also point to his many accurate statements regarding the litigation
during the same deposition. The deposition testimony meets the threshold “minimal knowledge”
standard set forth above. The Court therefore rejects Defendants’ contention that National
Shopmen cannot adequately serve as class representative. The adequacy requirement of Rule
23(a)(4) is satisfied.
Lead Plaintiffs have therefore satisfied the Rule 23(a) prerequisites to class certification.
The Court now shifts its attention to Rule 23(b)(3)’s predominance requirement.
2. Predominance Under Rule 23(b)(3)
Class certification under Rule 23(b)(3) is appropriate only if “the court finds that the
questions of law or fact common to class members predominate over any questions affecting only
individual members.” Fed. R. Civ. P. 23(b)(3). The predominance inquiry “tests whether
proposed classes are sufficiently cohesive to warrant adjudication by representation.” Amchem
Prods., Inc. v. Windsor, 521 U.S. 591, 623 (1997). This requirement is considerably more
demanding than Rule 23(a)’s commonality prerequisite and “imposes a more rigorous obligation
upon a reviewing court to ensure that issues common to the class predominate over those affecting
only individual class members.” Sullivan v. DB Investments, Inc., 667 F.3d 273, 297 (3d Cir.
The Court’s predominance inquiry in this case focuses on the reliance element of Lead
Plaintiffs’ Rule 10b-5 claim. In particular, the Court must determine whether Lead Plaintiffs
establish entitlement to the Basic presumption of reliance and, if so, whether Defendants
successfully rebut that presumption by showing a lack of price impact.
a. Establishing the Basic Presumption: Market Efficiency
In order to establish entitlement to the Basic presumption, Lead Plaintiffs must prove that
Prudential stock trades in an efficient market. 6 Halliburton II, 134 S. Ct. at 2416. Defendants then
may rebut that presumption with evidence demonstrating a lack of price impact attributable to the
alleged misrepresentations. Id. at 2415. If the Court finds the Basic presumption does not apply,
either because market efficiency was not established or because Defendants proved there was no
price impact, then individual issues of reliance would predominate over common issues in this
case, “rendering class certification inappropriate.” Id. at 2416.
Lead Plaintiffs have proven that Prudential’s stock traded in an efficient market. For one,
Prudential’s stock trades on the NYSE. See In re DVI, Inc. Sec. Litig., 639 F.3d 623, 634 (3d Cir.
2011) (trading on the NYSE strongly supports a finding of market efficiency); see also In re Merck
& Co., Inc. Sec., Derivative & ERISA Litig., No. 05-1151, 2013 WL 396117, at *11 (D.N.J. Jan.
30, 2013) (no further market efficiency analysis necessary where the defendant’s stock traded on
the NYSE and was a component of the Dow Jones Industrial Average). Professor Feinstein’s
expert report also establishes that each of the widely-cited Cammer/Krogman factors weighs in
favor of a finding of market efficiency. See Feinstein Report ¶¶ 35-153. Defendants do not argue
to the contrary. See Dkt. No. 184-1, Decl. & Report of Daniel R. Fischel ¶¶ 5-30. The Court is
therefore convinced that Prudential’s stock trades in an efficient market.
Thus, the Basic
presumption affirms that the investors relied on the alleged misrepresentations unless Defendant
can prove an absence of price impact.
b. Loss Causation
The three other requirements to invoke the presumption are all easily met here. Materiality will
always rise or fall by common evidence, and publicity and market timing are not in dispute. Thus,
the Basic presumption will be invoked if market efficiency is shown.
Defendants argue that Lead Plaintiffs are not entitled to the Basic presumption because
Lead Plaintiffs have not proven that the DMF Charge affected the price of Prudential stock.
Defendants do not dispute that Prudential’s stock dropped following the DMF Charge. Instead,
they argue that this drop was caused by contemporaneous disclosures and Professor Feinstein
failed to isolate the price impact of the DMF Charge from the impact of other contemporaneous
This is loss causation, and loss causation need not be proven at this stage.
“The fact that a subsequent loss may have been caused by factors
other than the revelation of a misrepresentation has nothing to do
with whether an investor relied on the misrepresentation in the first
place, either directly or presumptively through the fraud-on-themarket theory. Loss causation has no logical connection to the facts
necessary to establish the efficient market predicate to the fraud-onthe-market theory.”
Halliburton I, 131 S. Ct. at 2186.
Price impact and loss causation are distinct. Price impact asks “whether the alleged
misrepresentations affected the market price” of the stock. Halliburton I, 131 S. Ct. at 2187. Loss
causation, on the other hand, asks whether the subsequent decline in the price of the stock was
caused by a correction of the prior misrepresentations or by other confounding factors. Id. at 2185
(citing Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 342 (2005)). The distinction is subtle: “whether
the alleged misrepresentations affected the market price in the first place”—i.e., whether there was
“price impact”—is a different inquiry than whether those same representations “also caused a
subsequent economic loss.” Id. at 2186. This is particularly important at class certification
because evidence of loss causation is irrelevant at that stage, see id. at 2187, while evidence of
price impact, or lack thereof, is highly relevant. See Halliburton II, 134 S. Ct. at 2415-16. Whether
the initial misrepresentations affected the stock price is price impact. Whether the final disclosure
later caused the stock price to drop is loss causation. Defendants’ argument here relies solely on
the latter, and is therefore inappropriate at this stage.
Defendants’ citations to authority for the contrary proposition are inapposite. In Sicav v.
James Jun Wang, the Southern District of New York rejected class certification which was
premised not on a theory of corrective disclosures, as in this case, but on a theory based in “the
mechanics by which shares of stock were priced during a protracted period of open-market
trading.” No. 12-6682, 2015 WL 268855, at *3 (S.D.N.Y. Jan. 21, 2015). The Court noted that
such claims “have almost always been held ill-suited to classwide resolution.” Id. Specifically,
“the need for a trade-by-trade inquiry into whether or not there was persistent price inflation”
prevented common issues from predominating. Id. The case also did not deal with or cite to Basic.
Defendants only other case decided at class certification, In re Xcelera.com Securities Litigation,
No. 00-11649, 2008 U.S. Dist. LEXIS 77807 (D. Mass. Apr. 25, 2008), was decided before Amgen
and Halliburton established that loss causation and materiality need not be proven at class
certification. Defendants’ remaining authority concern the plaintiffs’ proof requirements at
summary judgment and trial, not at class certification. See Schiff, 602 F.3d at 171-72, 174-76
(materiality immediately before trial); Bricklayers & Trowel Trades Int’l Pension Fund v. Credit
Suisse Sec. (USA) LLC, 752 F.3d 82, 96 (1st Cir. 2014) (loss causation at summary judgment); In
re Exec. Telecard Sec. Litig., 979 F. Supp. 1021, 1023-25 (S.D.N.Y. 1997) (damages at summary
judgment); In re Omnicom Grp., Inc. Sec. Litig., 541 F. Supp. 2d 546, 550-51 (S.D.N.Y. 2008)
(loss causation at summary judgment), aff’d, 597 F.3d 501 (2d Cir. 2010).
Defendants do not contest that Prudential’s stock price dropped significantly following the
DMF Charge. The argument that the drop may have been caused by other contemporaneous
disclosures, not the DMF Charge, goes to loss causation, an issue inappropriate for consideration
at class certification.
c. Rebutting the Basic Presumption: Price Impact
Defendants argue that rebutting the Basic presumption merely requires Defendants to
introduce evidence raising a triable issue of fact as to whether there was a price impact, citing
Federal Rule of Evidence 301. The Court disagrees.
A plaintiff is not required to prove price impact in order to rely on the Basic presumption.
See Halliburton II, 134 S. Ct. at 2414. Instead, the plaintiff can establish entitlement to the
presumption through evidence of publicity and market efficiency—“an indirect way of showing
price impact.” Id. at 2415. Once those prerequisites are established, the defendant bears the burden
to prove a lack of price impact through direct evidence. Id. at 2415-16; see also id. at 2417
(Ginsburg, J., concurring) (emphasizing that “it is incumbent upon the defendant to show the
absence of price impact”); Aranaz v. Catalyst Pharm. Partners, Inc., 302 F.R.D. 657, 673 (S.D.
Fla. 2014) (stating that the defendants’ burden to prove absence of price impact is “daunting”).
The Northern District of Texas considered and rejected the same argument Defendants advance
here. See Erica P. John Fund, Inc. v. Halliburton Co., No. 02-1152, --- F.R.D. ----, 2015 WL
4522863, at *4-7 (N.D. Tex. July 25, 2015) (finding that the defendant bore the burdens of both
production and persuasion to prove lack of price impact). Merely pointing to other potential causes
for a stock price change following a corrective disclosure is therefore not enough to rebut the Basic
Here, Professor Feinstein’s event study analysis establishes positive, statistically
significant price movements following five of six alleged misrepresentations. See Feinstein Report
¶¶ 96-122, Exhibit 7.7 Professor Feinstein chose those alleged misrepresentations for his event
study because they were initial announcements of financial results and earnings guidance—
information that is widely accepted to be important to investors. Id. ¶¶ 96-98. Defendants do not
challenge those findings or provide any evidence that those price movements were attributable to
something other than the alleged misrepresentations. See Fischel Report ¶¶ 5-30; Dkt. No. 23412, Rebuttal Report of Steven P. Feinstein ¶¶ 30-40. Instead, Professor Fischel criticizes the fact
that Professor Feinstein did not find statistically significant price impact following fourteen other
alleged misrepresentations and did not relate the statistically significant price impacts to the
alleged misrepresentations. Fischel Report ¶¶ 17-18, Ex. 1.
But virtually all of the fourteen other alleged misrepresentations were either: (1) repeat
announcements of the financial results to which Prudential’s stock price did react in a statistically
significant manner or (2) statements having nothing to do with Prudential’s financial results. See
Fischel Report Ex. 1; Am. Compl. ¶¶ 46, 50, 59-60, 66, 69, 72-74, 78, 90. Defendants provide no
rebuttal to Professor Feinstein’s justifications for choosing the dates that he did for his event study.
They also provide no reason why the absence of a statistically significant price impact following
some alleged misrepresentations should be given more weight than the presence of statistically
significant price impact following the five alleged misrepresentations of financial results. 8 Lead
Plaintiffs have produced evidence showing statistically significant changes in Prudential’s stock
The Report also finds a statistically significant movement following the disclosure of the DMF
Charge, as discussed above. Id.
Also, it also does not necessarily follow from the mere absence of a statistically significant
change in the stock price that there was no price impact. It is possible that those statements assisted
in maintaining an inflated price for Prudential’s stock—a possibility that Defendants do not rule
out. See, e.g., In re Bristol-Myers Squibb Sec. Litig., No. 00-1990, 2005 WL 2007004, at *17-18
(D.N.J. Aug. 17, 2005) (finding that “a misstatement could serve to maintain the stock price at an
artificially inflated level without also causing the price to increase further”).
price following important financial disclosures.
In the face of these, Defendants have not
successfully proven lack of price impact. The Basic presumption therefore stands unrebutted.
Reliance can be proven here through common evidence.
Defendants also argue that class certification must be denied because Lead Plaintiffs have
failed to demonstrate that damages are capable of measurement on a class-wide basis. Defendants
cite Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013), for the proposition that Lead Plaintiffs
must affirmatively establish at class certification that damages can be calculated class-wide in
order to satisfy the Rule 23(b)(3) predominance requirement.
But Comcast was an antitrust case in which there was only one viable theory of antitrust
impact and the plaintiffs’ damages model did not measure damages in accordance with that theory.
Id. at 1433. Based on the particular facts of that case, issues common to the proposed class would
have been overwhelmed by individual damage calculations. See id. The Court therefore required
an inquiry into the merits of the plaintiffs’ damages model at the class certification stage. See id.
at 1432-35. The case did not stand for the general proposition that in all class actions, a plaintiff
must prove that damages are calculable on a class-wide basis before class certification can be
Class certification will not necessarily be defeated where there are individual issues with
respect to the calculation of damages. See Neale v. Volvo Cars of N. Am., LLC, --- F.3d ----, 2015
WL 4466919, at *16-17, *17 n.10 (3d Cir. July 22, 2015) (holding that the predominance analysis
in Comcast “was specific to the antitrust claim at issue” and reiterating the well-established
proposition that class certification is not necessarily defeated because of individual damages
calculations). Indeed, in securities cases such as this one where all other issues are provable by
common evidence, denial of class certification solely on the basis of individual damages
calculations would be “an abuse of discretion.”
See id. at *17.
Because common issues
predominate on all other issues of law and fact presented to the Court, the Court need not assess
the validity of Plaintiff’s damages model at this stage.
In light of the foregoing, the Court finds that common issues of law and fact predominate
over individual issues. Rule 23(b)(3)’s predominance requirement is satisfied.
3. Superiority Under Rule 23(b)(3)
Finally, the Court is satisfied that “a class action is superior to other available methods for
fairly and efficiently adjudicating” this case. Fed. R. Civ. P. 23(b)(3). In determining superiority,
the Court should weigh the following non-exhaustive list of factors:
(A) the class members’ interests in individually controlling the
prosecution or defense of separate actions;
(B) the extent and nature of any litigation concerning the
controversy already begun by or against class members;
(C) the desirability or undesirability of concentrating the litigation
of the claims in the particular forum; and
(D) the likely difficulties in managing a class action.
Id.; Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 615-16 (1997); Garcia v. Freedom Mortg.
Corp., 274 F.R.D. 513, 516 (D.N.J. 2011). Consideration of those factors makes clear that the
class action is superior to any other method of adjudicating this case. Perhaps most importantly,
the class likely consists of a significant number of investors with relatively small losses who would
have decreased motivation to pursue their cases individually. See Krangel v. Golden Rule Res.,
Ltd., 194 F.R.D. 501, 506 (E.D. Pa. 2000). The remaining three factors also weigh in favor of
class treatment. The Court is not aware of any pending cases by or against class members, and
concentration of the litigation here is desirable to ensure consistency in adjudication. There is also
no indication that there will be any particular difficulties in managing this case as a class action.
Indeed, it is well-settled that the class action is a particularly appropriate vehicle for adjudication
of federal securities cases. See In re NYSE Specialists Sec. Litig., 260 F.R.D. 55, 80 (S.D.N.Y.
2009). The superiority requirement is met.
In light of the foregoing, Defendants’ motion to exclude Lead Plaintiffs’ expert report is
DENIED and Lead Plaintiffs’ motion for class certification is GRANTED. An appropriate order
/s Madeline Cox Arleo
MADELINE COX ARLEO
UNITED STATES DISTRICT JUDGE
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