McKenna et al v. Smart Technologies, Inc. et al
OPINION AND ORDER: For the aforementioned reasons, plaintiffs motion for class certification is GRANTED to the extent that the Court finds class certification appropriate.The Court certifies the following class: All persons or entities who purchased or otherwise acquired (and did not sell) SMART common stock in the United States prior to November 10, 2010, pursuant or traceable to the Offering Materials. With respect to claims brought under Section 12(a)(2), the class is limited to U.S. purchasers of SMART stock in the July 14, 2010, initial public offering." The Clerk of the Court is directed to terminate the motion at ECF No. 131. (Signed by Judge Katherine B. Forrest on 1/11/2013) (js)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
IN RE SMART TECHNOLOGIES, INC.
DOC #: _________________
DATE FILED: January 11, 2013
11 Civ. 7673 (KBF)
OPINION & ORDER
KATHERINE B. FORREST, District Judge:
Before the Court is Lead Plaintiff City of Miami General Employees’ and
Sanitation Employees’ Retirement Trust’s (“plaintiff”) motion for class certification
pursuant to Rules 23(a) and 23(b)(3) of the Federal Rules of Civil Procedure. 1
Plaintiff seeks certification of the following class: “All persons or entities who
purchased or otherwise acquired SMART common stock pursuant or traceable to
the Offering Materials, and who were damaged thereby.” 2
Recognizing that putative class actions brought under the Securities Act of
1933 (the “Securities Act”), like this one, are “especially amenable” to class
treatment, see In re IndyMac Mortgage-Backed Secs. Litig., --- F.R.D. ---, 2012 WL
3553083, at *2 (S.D.N.Y. Apr. 17, 2012), defendants 3 do not dispute that
certification of a class is proper here. 4 Rather, they contest the scope of the class
Plaintiff moved for class certification on October 16, 2012. The motion was fully submitted as of
December 13, 2012, and the Court heard oral argument on the motion on December 14, 2012.
Excluded from the Class are defendants and their respective officers, affiliates and directors at all
relevant times, members of their immediate families and their legal representatives, heirs,
successors or assigns, and any entity in which defendants have or had a control interest.
“Defendants” collectively refers to SMART Technologies, Inc., Nancy L. Knowlton, G.A. (Drew)
Fitch, David A. Martin, Salim Nathoo Arvind Sodhani, Michael J. Mueller, Robert C. Hagerty, Apax
Partners L.P., Apax Partners Europe Managers Ltd., and Intel Corporation.
See Oral Arg. Tr. (“Tr.”) 45:11-12, Dec. 14, 2012 (“[T]he defendants actually have conceded there is
a class here. We haven’t argued otherwise.”).
and argue that the Court should exclude: (1) investors who purchased after the
purported November 9, 2010, “corrective disclosure”; (2) “in-and-out” traders;
(3) investors who purchased their shares outside of the United States, based upon
Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010); and (4) with
respect to plaintiff’s section 12(a)(2) claim, secondary market purchasers. In
addition, defendants argue that the class cannot include purchasers who bought
shares of defendant SMART Technologies, Inc. (“SMART”) in the secondary market
because those investors are unable to “trace” their shares to the registration
statement filed by SMART in connection with its July 14, 2010, initial public
For the reasons set forth below, the Court certifies the following class: “All
persons or entities who purchased or otherwise acquired (and did not sell) SMART
common stock in the United States prior to November 10, 2010, pursuant or
traceable to the Offering Materials. With respect to claims brought under section
12(a)(2), the class is limited to U.S. purchasers of SMART stock in the July 14,
2010, initial public offering.”
The Court set forth the facts underlying this action in its prior decisions on
defendants’ motions to dismiss the Amended and Second Amended Complaints,
respectively. See McKenna v. SMART Techs., Inc., No. 11 Civ. 7673, 2012 WL
113195, at *2-6 (S.D.N.Y. Apr. 3, 2012) (“McKenna I”); McKenna v. SMART Techs.,
Inc., No. 11 Civ. 7673, 2012 WL 3589655, at *1-2 (S.D.N.Y. Aug. 21, 2012)
(“McKenna II”). Familiarity with both is presumed, and the Court recounts only
those facts relevant to disposition of the instant motion.
After McKenna I and McKenna II, plaintiffs’ remaining Securities Act claims
relate to defendants’ purported misrepresentations and omissions regarding
(a) demand for SMART’s “core” whiteboards; and (b) demand for products related to
SMART’s then-recently-acquired NextWindow business.
On July 14, 2010, SMART commenced an initial public offering (the “IPO”) of
38.83 million shares of its Class A Subordinate Voting stocks in both the United
States and Canada.
In the United States, SMART conducted the IPO pursuant to (i) a
registration statement, filed with the Securities Exchange Commissions (“SEC”) on
June 24, 2010, as amended on June 28, 2010, and July 12, 2010, and made effective
on July 14, 2010 (the “Registration Statement”); and (ii) a prospectus dated on or
about July 14, 2010, and incorporated into the Registration Statement, and filed
with the SEC on July 15, 2010 (the “Prospectus” and with the Registration
Statement, the “Offering Documents”).
In Canada, SMART conducted the IPO pursuant to a separate prospectus
filed with the relevant Canadian securities commission as required by the Ontario
Securities Act (the “Canadian prospectus”). In other words, the shares sold in
Canada were not sold pursuant to the Offering Documents. 5
There is a parallel putative class action pending in Canada under the Canadian securities laws
seeking the precise redress that plaintiff seeks in this putative class action.
SMART registered all 38.83 million offered shares with the SEC. SMART
filed with the SEC both the Prospectus and the Canadian prospectus, as part of the
Registration Statement, confirming that all shares were indeed registered with the
SEC--regardless of where SMART issued the shares (i.e., the U.S. or Canada).
All shares, regardless of where they were issued, share the same CUSIP. 6
Subsequent to the IPO, SMART cross-listed the shares on the NASDAQ and
the Toronto Stock Exchange (“TMX”). All shares were (and are) cross-tradeable:
they can be sold either on the NASDAQ or the TMX.
The Alleged “Corrective” Disclosure
On November 9, 2010, SMART announced its 2011 second-quarter results
(the “November 9 corrective disclosure”). It disclosed that “SMART continued to
generate solid revenue growth . . . driven by adoption of our core interactive and
collaborative solutions,” but had “seen slower than anticipated sales in our recently
acquired NextWindow business” and “a more conservative growth assumption for
the North American market in the second half of our fiscal year.” (Corrected Second
Am. Class Action Compl. (“SAC”) ¶ 10, ECF No. 111; see also id. ¶¶ 71-72; Decl. of
Jackie A. Lu (“Lu Decl.”) Ex. B at 1, ECF No. 142.)
Plaintiff alleges that the November 9 corrective disclosure caused the price of
SMART common stock to “plummet[ ].” (SAC ¶ 11; see also id. ¶ 74.)
CUSIP is an alphanumeric code which identifies a North American financial security for purposes
of facilitating clearing and settlement of trades. Dictionary of Fin. and Inv. Terms 157 (6th ed.
The SAC does not plead that any other disclosure “corrected” the alleged
misstatements and omissions in the Offering Documents regarding demand for
SMART’s core whiteboards and/or NextWindow.
Before certifying a class, a district court must conduct a “rigorous analysis” to
determine whether the plaintiff has satisfied the four prerequisites of Rule 23(a)-numerosity, commonality, typicality, and adequacy, Fed. R. Civ. P. 23(a) --and the
requirements of at least one prong of Rule 23(b). See Wal-Mart Stores, Inc. v.
Dukes, 131 S. Ct. 2541, 2551 (2011); Teamsters Local 445 Freight Division Pension
Fund v. Bombardier, Inc., 546 F.3d 196, 202 (2d Cir. 2008); In re Initial Pub.
Offerings Sec. Litig., 471 F.2d 24, 41 (2d Cir. 2006) (“In re IPO”). The plaintiff must
prove the Rule 23 prerequisites by a preponderance of the evidence. Myers v. Hertz
Corp., 624 F.3d 537, 547 (2d Cir. 2010).
Class certification is appropriate after the district court “resolves factual
disputes relevant to each Rule 23 requirement and finds that whatever underlying
facts are relevant to a particular Rule 23 requirement have been established and is
persuaded to rule, based on the relevant facts and the applicable legal standard,
that the requirement is met.” Teamsters Local 445, 546 F.3d at 202 (quoting In re
IPO, 471 F.2d at 41); see also Wal-Mart Stores, Inc., 131 S. Ct. at 2551-52
(“[S]ometimes it may be necessary for the court to probe behind the pleadings before
coming to rest on the certification question.”; “The class determination generally
involves considerations that are enmeshed in the factual and legal issues
comprising the plaintiff’s cause of action.” (quotation marks and citations omitted)).
However, class certification should not “become a pretext for a partial trial of the
merits.” Teamsters Local 445, 546 F.3d at 204 (quotation marks omitted); see also
In re IPO, 471 F.3d at 41 (“[A] district judge should not assess any aspect of the
merits unrelated to a Rule 23 requirement.”).
Under Rule 23(a),
[o]ne or more members of a class may sue or be sued as representative
parties on behalf of all members only if: (1) the class is so numerous
that joinder of all members is impracticable; (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). The commonality, typicality, and adequacy requirements are
“closely related.” In re IndyMac, 2012 WL 3553083, at *3. Indeed, the
“commonality and typicality requirements of Rule 23(a) tend to merge.” Wal-Mart
Stores, Inc., 131 S. Ct. at 2551 n.5.
In addition, in order to certify a Rule 23(b)(3) class--as plaintiff seeks to do
here--the court must determine that “questions of law or fact common to the class
predominate over any questions affecting only individual members,” and that a
class action is the superior method of resolving the question of liability. Fed. R. Civ.
P. 23(b)(3). Although Rule 23(b)(3)’s “predominance” requirement is more exacting
that Rule 23(a)’s “commonality” prerequisite, the “court’s [Rule 23(b)(3)] inquiry is
directed primarily toward whether the issue of liability is common to members of
the class.” In re IndyMac, 2012 WL 3553083, at *5 (quotation marks omitted).
Defendants do not contest that plaintiff has established numerosity,
commonality, or adequacy under Rule 23(a). And although defendants concede that
certification of a class is appropriate, they contest certification of the class proposed
by plaintiff. Defendants seek exclusion from the class of certain categories of
investors on the basis that inclusion of those purchasers either will render plaintiff
atypical, see Fed. R. Civ. P. 23(a)(3), or will cause individualized issues to
predominate over common ones, see Fed. R. Civ. P. 23(b)(3).
After conducting the required “rigorous analysis,” the Court finds that
plaintiff has satisfied its burden as to numerosity, commonality, and adequacy
(including adequacy of class counsel). However, as discussed below, the Court finds
that certain putative class members must be excluded in order for the class certified
to meet all of Rule 23(a)’s and Rule 23(b)(3)’s requirements.
Putative Class Members Who Claims Cannot Succeed
As a threshold matter, two categories of investors--non-U.S. purchasers and
aftermarket purchasers with respect to the section 12(a)(2) claim--must be excluded
from the class because they could not prevail on their claims. See In re Flag
Telecom Holdings, Ltd. Sec. Litig., 574 F.3d 29, 39 (2d Cir. 2009) (“[W]hen a claim
cannot succeed as a matter of law, the Court should not certify a class on that
Based upon the Supreme Court’s ruling in Morrison v. National Australia
Bank Ltd., 130 S. Ct. 2869 (2010), defendants seek to exclude purchasers of SMART
stock whose purchase(s) occurred extraterritorially--i.e., investors who purchased
SMART shares either in the Canadian offering or on the TMX. The Court finds, as
discussed below, that Morrison’s prohibition on extraterritoriality applies equally to
Securities Act claims and thus, that non-U.S. purchasers of SMART stock may not
be included in the class.
In Morrison, the Supreme Court repudiated the “conduct” and “effects” tests
applied by the Second Circuit (and others) and held that section 10(b) of the
Securities Exchange Act of 1934 (the “Exchange Act”) does not apply
extraterritorially. The Supreme Court made clear that the “purchase or sale of [a]
security” that provides the basis for a section 10(b) claim must be a domestic one-that is, “transactions in securities listed on domestic exchanges, and domestic
transactions in other securities.” Morrison, 130 S. Ct. at 2884; see also id. at 2881.
In its analysis, the Supreme Court stated (in dicta) that
[t]he same focus on domestic transactions is evident in the Securities
Act of 1933, enacted by the same Congress as the Exchange Act, and
forming part of the same comprehensive regulation of securities
trading. That legislation makes it unlawful to sell a security, through
a prospectus or otherwise, making use of “any means or instruments of
transportation or communication in interstate commerce or of the
mails,” unless a registration statement is in effect. 15 U.S.C.
§ 77e(a)(1). The Commission has interpreted that requirement “not to
include . . . sales that occur outside the United States.” 17 C.F.R.
§ 230.901 (2009).
Morrison, 130 S. Ct. at 2885 (citations omitted) (emphases added). Courts in this
District uniformly concur that Morrison’s prohibition on extraterritoriality applies
to Securities Act claims. See S.E.C. v. ICP Asset Mgmt., LLC, No. 10 Civ. 4791,
2012 WL 2359830, at *2 (S.D.N.Y. June 21, 2012); In re Vivendi Universal, S.A.,
Secs. Litig., 842 F. Supp. 2d 522, 529 (S.D.N.Y. 2012); S.E.C. v. Goldman Sachs &
Co., 790 F. Supp. 2d 147, 164-65 (S.D.N.Y. 2011); In re Royal Bank of Scotland Grp.
PLC Secs. Litig., 765 F. Supp. 2d 327, 338-39 (S.D.N.Y. 2011). This Court agrees.
Plaintiff contends that section 11 “does not define conduct subject to
regulation by reference to transactions,” but rather regulates the making of untrue
statements of material fact in registration statements alone and thus, because the
filing of a defective registration statement with the SEC by itself “occurs entirely
within the United States . . . neither Morrison’s holding nor rationale applies to
Section 11.” (Pl.’s Reply Mem. Law Further Supp. Mot. Class Cert. (“Pl. Reply”) 5-6,
ECF No. 149.) A review of sections 11 and 12(a)(2)’s respective texts confirms the
error of this premise: Morrison’s prohibition on extraterritoriality for section 10(b)
claims applies equally to the Securities Act claims here. Cf. FAA v. Cooper, 132 S.
Ct. 1441, 1457 (2012) (“In a statutory construction case, the beginning point must
be the language of the statute itself . . . .” (quotation marks omitted)). 7
Section 11 provides a cause of action for “any person acquiring such security
(unless it is proved that at the time of such acquisition he knew of such untruth or
omission)” where “[i]n case any part of the registration statement, when such part
Plaintiff itself urged this Court to examine the question of whether Morrison applies to Securities
Act claims as one of “statutory interpretation” rather than to use Morrison as “a blanket policy
decision about how all the securities laws should be interpreted.” (Tr. 15:11-13.)
became effective, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading.” 15 U.S.C. § 77k(a) (emphasis added).
Section 12(a)(2) imposes liability upon
[a]ny person who . . . offers or sells a security . . . by means of a
prospectus or oral communication, which includes an untrue statement
of a material fact or omits to state a material fact necessary in order to
make the statements, in the light of the circumstances under which
they were made, not misleading (the purchaser not knowing of such
untruth or omission),
where the plaintiff is “the person purchasing such security from him.” 15 U.S.C.
§ 77l(a)(2) (emphasis added). 8
The language of both statues makes clear that a cause of action lies under
sections 11 and 12(a)(2) only where the plaintiff has “acquir[ed]” or “purchas[ed]” a
security. That language is legally equivalent to section 10(b)’s “purchase or sale of
any security” requirement. See 15 U.S.C. 78j(b). And, as the Supreme Court found
in Morrison, “we think that the focus of the Exchange Act is not upon the place
where the deception originated, but upon purchases and sales of securities in the
United States.” Morrison, 130 S. Ct. at 2884 (emphasis added). That finding
underscores the flaw in plaintiff’s theory that the filing of a defective registration
statement or prospectus on its own constitutes sufficient “domestic conduct.” Just
as section 10(b) “does not punish deceptive conduct, but only deceptive conduct ‘in
connection with the purchase or sale of any security,’” Morrison, 130 S. Ct. at 2884,
As with section 10(b), nothing on the face of either section 11 or 12(a)(2) suggests that they apply
abroad--and the use of the term “interstate commerce” in section 12(a)(2) does nothing to change
that. See Morrison, 130 S. Ct. at 2881, 2882.
sections 11 and 12(a)(2) do not punish the making of misrepresentations or
omissions in a registration statement or prospectus alone, but making such
misrepresentations and omissions to an individual who “purchas[es]” or “acquir[es]”
a security based upon them, see 15 U.SC. §§ 77k(a), 77l(a)(2). Accordingly, to the
extent that a plaintiff seeks to impose liability under sections 11 or 12(a)(2), that
individual must have purchased a security listed on a domestic exchange or
engaged in a “domestic transaction in other securities.” See Morrison, 130 S. Ct. at
2884; accord ICP Asset Mgmt., 2012 WL 2359830, at *2; In re Vivendi Universal,
842 F. Supp. 2d at 529.
Pasquitino v. United States, 544 U.S. 349 (2004)--and Morrison’s discussion
of it--does not persuade the Court otherwise. (See Pl. Reply 5-6.) In Pasquitino, the
petitioners challenged whether a scheme to smuggle liquor into Canada--part of
which included a telephone call from New York to Maryland to order the liquor-violated 18 U.S.C. § 1343 (a criminal wire fraud statute). Pasquitino, 544 U.S. at
353-54. The Supreme Court concluded that its interpretation of section 1343 (which
the Court need not review at length here) did not “give [the statute] extraterritorial
effect” because the defendants’ “offense was complete the moment they executed the
scheme inside the United States; the wire fraud statute punishes the scheme, not
its success.” Id. at 371 (quotation marks omitted).
Analogizing the filing of a registration statement in the United States to the
domestic telephone call in Pasquitino (as plaintiff does) does not work because a
private plaintiff only has standing to bring a claim under section 11 or 12(a)(2) of
the Securities Act if that plaintiff “purchase[d]” or “acquir[ed]” the security
pursuant to a registration statement or prospectus containing misstatements or
omissions. See 15 U.S.C. §§ 77k(a), 77l(a)(2). As the Supreme Court recognized in
Morrison, “[s]ection 1343 prohibits ‘any scheme or artifice to defraud,’--fraud
simpliciter, without any requirement that it be ‘in connection with’ any particular
transaction or event.” Morrison, 130 S. Ct. at 2887 (emphasis added). 9 In other
words, contrary to plaintiff’s contention (see Pl. Reply 6), sections 11 and 12(a)(2)
are not focused on “deception alone,” but rather deception upon individuals who
purchase or acquire securities pursuant to a defective registration statement or
Thus, to the extent that putative class members purchased, incurred
“irrevocable liability,” or obtained “title” to securities, see Absolute Activist Value
Master Fund Ltd. v. Ficeto, 677 F.3d 60, 69 (2d Cir. 2012), in Canada 11--or
anywhere else outside the United States--they do not have a viable cause of action
under the Securities Act, and may not be included in the class certified here.
It is notable that 18 U.S.C. § 1343 “punishes frauds executed ‘in interstate or foreign commerce.’”
Pasquitino, 544 U.S. at 371-72 (quoting 18 U.S.C. § 1343). For that reason, the Supreme Court
concluded that section 1343 “is surely not a statute in which Congress had only domestic concerns in
mind.” Id. at 372 (quotation marks omitted).
Taking that reasoning to its logical conclusion, if a foreign issuer registered shares in the United
States pursuant to section 6 of the Securities Act, 15 U.S.C. § 77f(a), and the registration statement
for those shares contained misstatements or omissions, a private section 11 claim would not lie
unless brought by an individual who “acquire[d]” a security pursuant to the registration statement.
See 15 U.S.C. § 77k(a).
The fact that SMART cross-listed its shares on the NASDAQ and TMX does not change the
conclusion because the “purchase” or “acqui[sition]” of shares on the TMX occurred
extraterritorially. See In re UBS Secs. Litig., No. 07 Civ. 11225, 2011 WL 4059356, at *5-6 (S.D.N.Y.
Sept. 13, 2011).
Section 12(a)(2): Secondary Market Purchasers
Defendants also seek exclusion of any investors who purchased SMART
shares in the aftermarket from the section 12(a)(2) class.
It is well-settled that a plaintiff may maintain a section 12(a)(2) claim only
where the plaintiff purchased securities directly in the initial public offering;
so-called “aftermarket” or “secondary market” purchasers do not have standing to
maintain a section 12(a)(2) claim. In re IndyMac, 2012 WL 3553083, at *4; In re
Fuwei Films Sec. Litig., 634 F. Supp. 2d 419, 445 (S.D.N.Y. 2009) (citing Gustafson
v. Alloyd Co., Inc., 513 U.S. 561, 578 (1995)). Such a principle likely derives from
section 12(a)(2)’s requirement that the sale be made “by means of a prospectus or
oral communication.” See 15 U.S.C. § 77l(a)(2).
Accordingly, the Court finds it proper to exclude any aftermarket purchasers
from the section 12(a)(2) class. 12
The Court now turns to defendants’ arguments regarding those investors who
must be excluded from the class on grounds of typicality.
Rule 23(a) requires, among other things, that the “claims or defenses of the
representative parties are typical of the claims or defenses of the class.” Fed. R.
Civ. P. 23(a)(3). Typicality is satisfied where “each class member’s claim arises
from the same course of events and each class member makes similar legal
arguments to prove the defendant’s liability.” In re Flag Telecom, 574 F.3d at 35;
see also In re NASDAQ Market-Makers Antitrust Litig., 172 F.R.D. 119, 126
Plaintiff does not address defendants’ assertion in this regard.
(S.D.N.Y. 1997) (“Typicality under Rule 23 requires that a class representative have
the incentive to prove all the elements of the cause of action which would be
presented by individual members of the class were they initiating individualized
Defendants argue that the claims of (i) investors who purchased SMART
stock after the November 9 corrective disclosure; and (ii) investors who purchased
SMART shares and sold them prior to the November 9 corrective disclosure
(so-called “in-and-out purchasers”) are atypical and thus, both types of investors
should be excluded from the proposed class. The Court agrees.
Post-November 9, 2010 Purchasers
Section 11 provides a cause of action where the plaintiff can establish that it
“acquired” a registered security, either directly from the issuer or in the
aftermarket pursuant to a registration statement that “contained an untrue
statement of a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading.” 15 U.S.C.
§ 77k(a). Where “the plaintiff knew of the untruth or omissions at the time of his or
her acquisition of the security,” however, the plaintiff may not maintain a section 11
(or 12(a)(2)) claim. In re Initial Pub. Offering Sec. Litig., 483 F.3d 70, 73 n.1 (2d
Any investor who purchased after the November 9 corrective disclosure
would have known of the alleged “untruth or omission at the time of his or her
acquisition of the security,” and thus, that his or her claims would be incongruous
with plaintiff’s (who purchased prior to the November 9 corrective disclosure--i.e.,
without such knowledge). Because “a section 11 and 12[a](2) claim, which is based
upon a lack of information, could not be typical of such a claim made by persons
who possessed additional information,” plaintiff’s section 11 and 12(a)(2) claims
here “are not typical of the proposed class.” See Klein v. A.G. Becker Paribas Inc.,
109 F.R.D. 646, 652 (S.D.N.Y. 1986); cf. New Jersey Carpenters Health Fund v.
Residential Capital, LLC, 272 F.R.D. 160, 170 (S.D.N.Y. 2011), aff’d 477 F. App’x
809 (2d Cir. 2012). 13
Plaintiff does not dispute that point. Instead, plaintiff argues that there is
“no need” to clarify that the class period ends on November 9, 2010, because the
SAC “alleges November 9, 2010 as the only corrective disclosure”--meaning that,
“the claims period effectively ends as of that date.” (Pl.’s Reply Mem. Law Further
Supp. Mot. Class Cert. (“Pl. Reply”) 15-16, ECF No. 149.)
Given (a) the parties’ agreement that the class does not include
post-November 9, 2010, purchasers of SMART stock, (b) potential class members’
right to understand the scope of the class (and thus, whether they are covered by
this action), and (c) defendants’ right to have the class clearly defined, the Court
Defendants further argue that inclusion of post-November 9, 2010, purchasers would create
individualized issues on knowledge that would predominate over common ones. (Defs. Mem. 11.) As
discussed below, predominance is a balance of individualized issues against common ones (namely,
establishing liability). Defendants have not submitted any evidence of the differing levels of
knowledge as between pre- and post-November 9, 2010, purchasers and thus, the Court does not find
that inclusion of such purchasers would necessarily defeat Rule 23(b)(3)’s predominance
requirement. See In re IndyMac, 2012 WL 3553083, at *8-9.
Defendants briefly mention that inclusion of post-November 9, 2010, purchasers would render
plaintiff an inadequate representative. (Defs. Mem. 1.) They do not, however, address this point and
the Court finds that such brief mention does not amount to contesting adequacy of plaintiff.
finds that the class definition should affirmatively exclude those individuals who
purchased SMART stock after November 9, 2010.
Defendants argue that in-and-out purchasers should be excluded from the
class because defendants’ “negative loss causation” defense as to those purchasers
would be atypical of their defense(s) against plaintiff.
Under sections 11 and 12(a)(2), “if the defendant proves that any portion or
all of such damages represents [something] other than the depreciation in value of
such security resulting from” the alleged misstatements or omissions, the defendant
will not be liable for “such portion of or all such damages.” 15 U.S.C. §§ 77k(e),
77l(b). The plain language of the statutes requires a causal connection between the
alleged misstatement or omission and a diminution in the security’s value--i.e., that
the revelation of the prior misstatement or omission caused the value of the security
to drop. See Lentell v. Merrill Lynch & Co., 396 F.3d 161, 173 (2d Cir. 2005) (loss
causation is proved by demonstrating that “the misstatement or omission concealed
something from the market that, when disclosed, negatively affected the value of
the security”). Thus, where something other than the alleged misstatement or
omission caused a decline in the value of the security, the defendant has a “negative
loss causation” defense. In re Flag Telecom, 574 F.3d at 35-36.
Here, defendants argue that in-and-out purchasers will be subject to a unique
defense in that any loss they may have suffered in selling their SMART shares
cannot be attributable to the November 9 corrective disclosure. 14 Plaintiff alleges
that the loss it sustained on its SMART shares was attributable only to the
November 9 disclosure (see SAC ¶¶ 10-11, 71-74, 77), and concedes as much on this
motion (Pl. Reply 15 (the SAC “alleges November 9, 2010 as the only corrective
disclosure”)). Thus, to the extent that purchasers who sold their SMART shares
prior to November 10, 2010 (the alleged date SMART’s stock dropped due to the
corrective disclosure) suffered losses, those losses are not attributable to any
misstatement or omission in the Offering Documents because (under plaintiff’s own
allegations) no such “truth” was known prior to November 9, 2010. In other words,
something other than the November 9 corrective disclosure caused any loss
sustained by purchasers who sold their SMART shares prior to November 10, 2010.
That fact provides defendants with a “negative causation” defense as to the in-andout purchasers that would be atypical of any defense they could assert against
That determination is not, as plaintiff contends (see Pl. Reply 18-19), an
examination of the merits of defendants’ “negative loss causation” defense. 15
Defendants also note that including in-and-out purchasers in the class could require potentially
broad discovery. (See Tr. 40:21-41:10.) Although that does not drive the Court’s endpoint, it is
relevant to whether a determination is best made now versus later.
Plaintiff argues that making a finding in this regard on class certification contravenes the
Supreme Court’s recent decision in Erica P. John Fund, Inc. v. Halliburton Co., 131 S. Ct. 2179
(2011). (Pl. Reply 17.) In Halliburton, the Supreme Court held that a plaintiff need not prove loss
causation for certification of a class pursuing claims under section 10(b) of the Securities Exchange
Act of 1934. Halliburton, 131 S. Ct. at 2187. Overturning the Ninth Circuit Court of Appeals, the
Court held that at the certification stage, a putative class representative need not demonstrate
whether the alleged “misrepresentation that affected the integrity of the market price also caused a
subsequent economic loss.” Id. at 2186. As discussed below, a finding on typicality (or lack thereof)
as between in-and-out purchasers and plaintiff does not go to the merits of defendants’ “negative loss
causation” defense, but rather construes the SAC’s allegations against the language of the statute.
Rather, this Court’s finding on typicality--or the lack thereof between plaintiff and
in-and-out purchasers--measures the SAC’s allegations against the plain language
of sections 11 and 12(a)(2). As discussed, the SAC specifically alleges that the
purported “truth” became known for the first time on November 9, 2010, and that
the price of SMART shares fell immediately thereafter. Thus, any losses on sales
prior to November 9, 2010, necessarily would be attributable to something other
than the alleged misstatements or omissions in the Offering Documents. See In re
Flag Telecom Holdings, 574 F.3d at 35-36.
Citing certain documents exchanged in discovery, plaintiff attempts to show
that in-and-out purchasers sustained losses “for reasons directly related to the
misstatements and omissions alleged in the complaint”--that is, that SMART
“leaked” the truth prior to November 9, 2010. (Pl. Reply 19; see also Oral Arg. Tr.
(“Tr.”) 12:6-12:14, Dec. 14, 2012.) That argument belies plaintiff’s theory of this
case as articulated in the SAC (and as alleged from the inception of this action).
(See SAC ¶¶ 10-11, 71-74, 77.) Further, the two documents plaintiff submitted to
show the purported “leakage” (see Decl. of Hannah G. Ross Exs. 3, 4, ECF No. 150)
do not, by a preponderance of the evidence, undermine plaintiff’s long-standing
premise that the November 9 disclosures caused putative class members’ damage. 16
Indeed, those two documents convince the Court that including in-and-out
purchasers would require significant individualized inquiries (not common ones, as
It is notable that plaintiff has not made any application to this Court to amend the complaint
further to include the “leakage” theory (which they asserted for the first time in their class
certification reply, filed December 13, 2012).
plaintiff asserts (see Pl. Reply 17-18)) 17 into what caused those purchasers’ losses-e.g., supposed “leakage,” other market factors, etc.
In undertaking its “obligation” to resolve factual disputes relevant to the Rule
23 requirements, the Court finds that adjudicating a “negative loss causation
defense” would create an unnecessary “sideshow.” Because the Court finds that
defendants’ “negative loss causation” defense against in-and-out purchasers would
be atypical of their defenses against plaintiff, the Court excludes in-and-out
purchasers from the class. See Fed. R. Civ. P. 23(a)(3) (requiring that the claims or
defenses of the class representative be typical of the claims or defenses of the
putative class members). 18
Rule 23(b)(3): Predominance
Defendants argue for exclusion of any putative class member who purchased
SMART securities in the secondary market on the basis that those investors
necessarily cannot “trace” their shares to the Registration Statement. (See
generally Opp’n Def. Intel Corp. Pl.’s Mot. Class Cert. (“Intel Opp’n”), ECF No. 140;
see also Mem. Law Opp’n Lead Pl.’s Mot. Class Cert. (“Defs. Mem.”) 1 n.1, ECF No.
Plaintiff’s reference to In re Constar International Inc. Securities Litigation, 585 F.3d 774 (3d Cir.
2009) (cited in Pl. Reply 17-18) does not convince the Court otherwise. There, the question was not
whether in-and-out purchasers and a plaintiff who sold after the purported correct disclosures were
typical. Rather, the Third Circuit--examining the question of commonality (not typicality as
defendants argue here)--found that to the extent that “[i]f something other than the alleged
misrepresentations produced a drop in stock price, be it the weather, market conditions, or any other
factor, class members would be affected uniformly. If for example, Investors X, Y, and Z all purchase
Security A, and Security A’s price happens to fall dramatically in the ensuing months, the cause of
that decline would not differ as to each investor.” Id. at 785 (emphases added). Here, however,
plaintiff argues that the cause of losses for in-and-out purchasers may vary--e.g., purported “leakage”
of the truth, etc. Thus, Constar is not persuasive.
Defendants briefly mention to catch-phrases “predominance” and “adequacy” in this regard as
well, but do not address it in full. The Court’s finding on those prongs as set forth in n.13 supra
applies with equal force here.
141.) According to defendants, questions of “traceability” raise individualized issues
that defeat Rule 23(b)(3)’s predominance requirement. (Intel Opp’n 14-15.)
As stated above, a plaintiff has established “predominance” under Rule
23(b)(3) where “questions of law or fact common to the class predominate over any
questions affecting only individual members.” Fed. R. Civ. P. 23(b)(3). “Class wide
issues predominate if resolution of some of the legal or factual questions that
qualify each member’s case as a genuine controversy can be achieved through
generalized proof, and if these particular issues are more substantial than the
issues subject to only individualized proof.” New Jersey Carpenters Health Fund,
477 F. App’x at 812 (quoting UFCW Local 1776 v. Eli Lilly & Co., 620 F.3d 121, 131
(2d Cir. 2010)).
With respect to the “tracing” requirement, the Second Circuit has held that
“[section] 11’s plain language . . . state[s] unambiguously that a cause of action
exists for any person who purchased a security that was originally registered under
the allegedly defective registration statement--so long as the security was indeed
issued under that registration statement and not another.” DeMaria v. Andersen,
318 F.3d 170, 176 (2d Cir. 2003). Put simply, any individual who can show that his
or her shares were issued under/registered to the allegedly defective registration
statement--regardless of whether the shares were acquired directly from the issuer
or in the aftermarket--has standing to pursue a section 11 claim. “Tracing may be
established either through proof of a direct chain of title from the original offering to
the [plaintiff] . . . or through proof that the [plaintiff] bought her shares in a market
containing only shares issued pursuant to the allegedly defective registration
statement.” In re IPO, 471 F.3d at 31 n.1 (alteration and ellipses in original)
(quotation marks omitted).
Here, defendants argue that although SMART registered all shares with the
SEC pursuant to the Registration Statement, any SMART shares purchased after
the IPO cannot be “traced” back to a sale pursuant to the Registration Statement
because: (1) all shares share the same CUSIP; and (2) some shares were sold in
Canada pursuant to the Canadian prospectus. According to defendants, those two
facts necessarily mean that failing to exclude post-IPO purchasers would
inappropriately capture within the class U.S. purchasers whose shares were
initially sold in Canada (not pursuant to the Registration Statement). As plaintiff
puts it, defendants argue “that there must have been a continuous ‘chain of custody’
by U.S. purchasers of SMART shares in order to establish traceability [to the
Registration Statement].” (Pl. Reply 13 (quoting Intel Opp’n 12).) Under this
theory, the class should exclude all U.S. aftermarket purchasers.
As far as this Court is aware, defendants’ argument is one of first impression.
And, as discussed below, certain aspects of the argument are compelling. It is based
upon an inarguably correct premise that traceability to a misleading registration
statement is required prior to a showing that a putative class member was in fact
damaged. However, this is the class certification stage, and the Court is unwilling
to go as far as defendants suggest at this time.
Although determining traceability may require individualized inquiries, the
potential for such inquiries alone does not defeat predominance. The predominance
inquiry requires this Court to analyze whether common questions regarding
liability exceed those which are individualized. See New Jersey Carpenters Health
Fund, 477 F. App’x at 812; In re IndyMac, 2012 WL 3553083, at *5 (noting that the
predominance inquiry “is directed primarily toward whether the issue of liability is
common to members of the class”). Here, they do. Liability will turn first and
primarily on whether the Offering Documents contained misstatements and
omissions as plaintiff alleges--an issue clearly subject to “generalized proof.” In re
IndyMac, 2012 WL 3553083, at *8. It is also true that for those class members who
purchased in the secondary market, there will also be a question of whether their
purchases can traced back to the Registration Statement. However, the liability
issue clearly predominates over individualized tracing inquiries. See United Food
& Commercial Workers Union v. Chesapeake Energy Corp., 281 F.R.D. 641, 656
(W.D. Okla. 2012) (“UFCWU”) (“With respect to the impact of tracing on the
predominance requirement of Rule 23(b)(3), the common question of whether the
registration statement was materially misleading predominates over any secondary
tracing issues that might be encountered.” (quotation marks omitted)).
Second, accepting this argument at this stage would require the Court to
“assess an[ ] aspect of the merits unrelated to a Rule 23 requirement.” See In re
IPO, 471 F.3d at 41; see also UFCWU, 281 F.R.D. at 656 (“[T]he issue of tracing is a
merits issue, not appropriate for consideration at the class certification stage.”
(quotation marks omitted)), id. at 657 (collecting cases). Defendants’ argument also
would require the Court to assume that no aftermarket purchaser of SMART shares
has “proof” of a “direct chain of title” from the IPO. See In re IPO, 471 F.3d at 31
n.1. But it is arguably possible that some putative class member who purchased in
the secondary market indeed has “proof” of traceability. For example, a stockbroker
could have purchased a large block of SMART shares in the IPO and then sold those
shares to two or three of his clients. Thus, those investors may have access to
evidence allowing them to trace their shares back to the IPO. It is likewise possible
that the same broker bought that same large block of SMART shares, sold them to a
client, repurchased them from that client, and then brokered a subsequent sale to
another client. 19 The second client may also be able to produce evidence tracing
his/her SMART shares back to the IPO through the stockbroker. Thus, making an
assumption now that an aftermarket purchaser cannot show traceability would be
inappropriate. 20 Such a conclusion would preemptively preclude class members,
without providing an opportunity to develop the factual issues on which resolution
The same hypothetical works even if the initial client was located in Canada and the second, in the
That plaintiff’s investment advisor’s 30(b)(6) representative was unable, at his deposition, to state
whether plaintiff’s shares were first offered in the U.S. or Canada (Dep. Jonathan Ruch (“Ruch Tr.”)
83:16-22, 8:23-84:4 (Decl. of Jonathan C. Dickey Supp. Def. Intel Corp.’s Opp’n Pl. Mot. Class Cert.
Ex. 8, ECF 140-1)), and did not know whether there was a way to determine where plaintiff’s shares
were first offered (Ruch Tr. 84:12-14) falls far short of the preponderance of the evidence needed to
demonstrate that no secondary-market purchaser could prove traceability. Indeed, one reading of
the testimony is that plaintiff’s investment advisor had not conducted an investigation or analysis on
that point at the time of his deposition. The Court will not preclude all secondary-marker
purchasers on that scant evidence alone.
of the tracing question may turn. 21 See In re Dynegy, Inc. Secs. Litig., 226 F.R.D.
263, 282 (S.D. Tex. 2005) (“Defendants’ argument that aftermarket purchasers will
be unable to trace their purchases to the December 20, 2001, stock offering is an
argument best addressed after a factual record has been developed.”).
Accordingly, the Court will not exclude all aftermarket purchasers from the
Section 11 class at this time.
For the aforementioned reasons, plaintiff’s motion for class certification is
GRANTED to the extent that the Court finds class certification appropriate.
The Court certifies the following class:
“All persons or entities who purchased or otherwise acquired (and did not
sell) SMART common stock in the United States prior to November 10, 2010,
pursuant or traceable to the Offering Materials. With respect to claims brought
under Section 12(a)(2), the class is limited to U.S. purchasers of SMART stock in the
Allowing the development of those legal and factual issues during discovery will not render the
Court’s overseeing of this action unmanageable. See Fed. R. Civ. P. 23(b)(3)(D); In re LILCO Secs.
Litig., 111 F.R.D. 663, 671 (E.D.N.Y. 1983) (“With respect to the manageability issue [in Rule
23(b)(3)’s superiority prong], however, it is apparent that tracing will not pose insurmountable
obstacles warranting denial of class status.”).
July 14, 2010, initial public offering."
The Clerk of the Court is directed to terminate the motion at ECF No. 131.
Dated: New York, New York
January jL, 2013
KATHERINE B. FORREST
United States District Judge
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