United States District Court, N.D. Illinois, Eastern Division
August 17, 2004.
IN RE NEOPHARM, INC. SECURITIES LITIGATION.
The opinion of the court was delivered by: JOAN H. LEFKOW, District Judge
MEMORANDUM OPINION AND ORDER
This case is a putative class action brought against
defendants, NeoPharm, Inc. ("NeoPharm"), James M. Huffey
("Huffey"), and Inram Ahmad ("Ahmad") (collectively
"defendants"), alleging violations of § 10(b) of the Securities
Exchange Act of 1934 (the "Act"), 15 U.S.C. § 78j(b), Rule 10b-5
promulgated under § 78j(b), and § 20(a) of the Act,
18 U.S.C. § 78t(a). Before the court is the renewed motion for class
certification brought by lead plaintiff Operating Engineers
Construction Industry and Miscellaneous Pension Fund, Local
66-Pittsburgh ("Operating Engineers"). Operating Engineers seeks
an order certifying a class consisting of "all persons who
purchased or otherwise acquired NeoPharm common stock between
October 31, 2001 and April 19, 2002 and appointing Operating
Engineers as class representative."*fn1 For the reasons set
forth below, the motion is granted.
"The Federal Rules of Civil Procedure ("the Rules") provide the
federal district courts with `broad discretion' to determine
whether certification of a class-action lawsuit is appropriate."
Keele v. Wexler, 149 F.3d 589, 592 (7th Cir. 1998). Under the
Rules, a determination of class certification requires a two-step
analysis. First, the named plaintiff must demonstrate that the
action satisfies the four threshold requirements of Rule 23(a):
(1) numerosity (the class must be so large `that
joinder of all members is impracticable'); (2)
commonality (there must exist `questions of law or
fact common to the class'); (3) typicality (named
parties' claims or defenses `are typical . . . of the
class'); and (4) adequacy of representation (the
representative must be able to `fairly and adequately
protect the interests of the class').
Id. at 594; Fed.R. Civ. P. 23(a). Additionally, the action
must "qualify under one of the three subsections of Rule 23(b)."
Hardin v. Harshbarger, 814 F. Supp. 703, 706 (N.D. Ill. 1993).
In this case, Operating Engineers seeks certification under
subsection 23(b)(3). Rule 23(b)(3) provides that an action may be
maintained as a class action if "the court finds that questions
of law or fact common to the members of the class predominate
over any questions affecting only individual members, and that a
class action is superior to other available methods for the fair
and efficient adjudication of the controversy." When evaluating a
motion for class certification, the court accepts as true the
allegations made in support of certification, and does not
examine the merits of the case. Hardin, 814 F. Supp. at 706
(citing, inter alia, Eisen v. Carlisle & Jacquelin,
417 U.S. 156
, 177-78 (1974)). The party seeking class certification bears
the burden of showing that the requirements for class
certification have been met. Id. (citing, inter alia, Gen.
Tel. Co. of Southwest v. Falcon, 457 U.S. 147
, 161 (1982)).
Failure to establish any one of the requirements precludes class
certification. Retired Chicago Police Ass'n v. City of
Chicago, 7 F.3d 584
, 596 (7th Cir. 1993).
The court previously gave extensive treatment to the factual
allegations of this case in its opinion denying in part
defendants' motion to dismiss. See In re NeoPharm Sec. Litig.,
No. 02 C 2976, 2003 WL 262369 (N.D. Ill. Feb. 7, 2003). The factual
background, therefore, will not be repeated again here.
A. Rule 23(a)
1. Numerosity-Rule 23(a)(1)
To meet the numerosity requirement, the class must be so large
"that joinder of all members is impracticable." Keele,
149 F.3d at 594; Fed.R. Civ. P. 23(a)(1). In order to establish
numerosity, a plaintiff need not allege the exact number of
members of the proposed class. Johnson v. Rohr-Ville Motors,
Inc., 189 F.R.D. 363, 368 (N.D. Ill. 1999). Generally, where the
membership of the proposed class is at least 40, joinder is
impracticable and the numerosity requirement is met. Id.
(citing Swanson v. American Consumer Indus., Inc.,
415 F.2d 1326, 1333 (7th Cir. 1969)). The court is entitled to make
"common-sense assumptions that support a finding of numerosity."
Gaspar v. Linvatec Corp., 167 F.R.D. 51, 56 (N.D. Ill. 1996).
Defendants do not contest numerosity. Although Operating
Engineers does not specify the exact number of proposed class
members, the court is satisfied that the numerosity requirement
is met. As Operating Engineers points out, NeoPharm stock trades
on NASDAQ and more than 16 million shares are outstanding. It can
be reasonably inferred that hundreds, if not thousands, of
persons would be included in the proposed class. Because of this
number of persons, it would be impracticable to join all
individual class members in one suit. Accordingly, the court
finds that the numerosity requirement has been satisfied. 2. Commonality-Rule 23(a)(2)
To meet the commonality requirement, "there must exist
`questions of law or fact' common to the class.'" Keele,
149 F.3d at 594; Fed.R. Civ. P. 23(a)(2); see also, Tylka v.
Gerber Prods. Co., 178 F.R.D. 493, 496 (N.D. Ill. 1998) (noting
that if at least one question of law or fact is common to the
class, then commonality is satisfied). "A common nucleus of
operative fact is usually enough to satisfy the commonality
requirement of Rule 23(a)(2)." Keele, 149 F.3d at 594
(quotation omitted). A common nucleus of operative fact exists
where "defendants have engaged in standardized conduct toward
members of the proposed class." Id. "[T]he commonality
requirement has been characterized as a `low hurdle' easily
surmounted." Scholes v. Stone, McGuire & Benjamin,
143 F.R.D. 181, 185 (N.D. Ill. 1992).
Defendants do not contest commonality. Operating Engineers
points to several common questions of law and fact that exist as
to all members of the proposed class, including (1) whether the
defendants violated the Act; (2) whether the defendants omitted
and/or misrepresented material facts; (3) whether defendants'
statements omitted material facts necessary to make the
statements made, in light of the circumstances under which they
were made, not misleading; (iv) whether defendants knew or
recklessly disregarded that their statements were false and
misleading; (v) whether the price of NeoPharm's publicly traded
securities were artificially inflated; and (vi) the extent of
damage sustained by members of the putative class and the
appropriate measure of damages. Based on these common questions
of law and fact, the court finds that the commonality factor has
been met. 3. Typicality-Rule 23(a)(3)
To meet the typicality requirement, the named plaintiff's
claims or defenses must be "typical . . . of the class." Keele,
149 F.3d at 594; Fed.R. Civ. P. 23(a)(3). The typicality
requirement, although closely related to the commonality
question, focuses on the class representative. "A plaintiff's
claim is typical if it arises from the same event or practice or
course of conduct that gives rise to the claims of other class
members and his or her claims are based on the same legal
theory." Id. at 595 (citing De La Fuente v. Stoekly-Van Camp,
Inc., 713 F.2d 225, 232 (7th Cir. 1983)). "Typical does not mean
identical, and the typicality requirement is liberally
construed." Gaspar, 167 F.R.D. at 57.
Operating Engineers argues that its claims against defendants
are typical with those of the putative class members insofar as
it purchased NeoPharm stock during the class period when
defendants were alleged to have been misleading the market.
Operating Engineers states that, like other class members, it was
damaged when it purchased NeoPharm stock at artificially inflated
prices. In response, defendants argue that Operating Engineers
may be subject to certain unique defenses because it was not
involved in the decision to purchase or sell NeoPharm stock, and
instead delegated that decision to an investment advisor or
"money manager." This argument overlaps with defendants'
objections to Operating Engineers' adequacy to serve as class
representative and will be addressed below. Outside of this
objection, the court sees no reason to question Operating
Engineers' typicality and finds this factor satisfied.
4. Adequacy of representation 23(a)(4)
To meet the adequacy of representation requirement, "the
representative must be able to fairly and adequately protect the
interests of the class." Keele, 149 F.3d at 594; Fed.R. Civ.
P. 23(a)(4). Under Rule 23(a)(4), the adequacy of representation
determination "is composed of two parts: the adequacy of the
named plaintiff's counsel, and the adequacy of protecting the
different, separate, and distinct interest of the class members."
Retired Chicago Police Ass'n, 7 F.3d at 598 (quotation
omitted). Defendants attack only the second part of the adequacy
determination by arguing that Operating Engineers is an
inadequate class representative because it (1) did not produce a
qualified representative to testify on its own behalf and (2) was
not involved in the decision to purchase or sell NeoPharm stock.
Defendants' argument number (1) focuses on the Rule 30(b)(6)
deposition taken of Operating Engineers' representative, Dennis
Manown. Defendants argue that Manown's deposition revealed that
he has no knowledge about Operating Engineers' transactions in
NeoPharm securities because such investment decisions were made
by a money manager named Columbus Circle, which Operating
Engineers engaged "to choose, monitor, and execute its securities
trades." These facts also form the basis for defendants' argument
(2), which, in essence, states that because Operating Engineers
was not involved in the decision to purchase or sell NeoPharm
stock and delegated the authority to make stock purchases with
little input in those decisions, it should not serve as class
Defendants rely principally on two cases to support their
theory. In Fry v. UAL Corp., 136 F.R.D. 626 (N.D. Ill. 1991),
the court found an individual to be an inadequate class
representative where he allowed another person to have "complete
discretionary authority" over his securities, never followed the
affairs of the corporation and was not even aware that his funds
had been invested in the corporation. Id. at 635-36. By
contrast, the court in Fry allowed other individuals to serve
as class representatives where third-parties gave investment
advice or made investment decisions because the individuals had at least a
minimal level of participation in the relevant stock transaction.
Id. at 635. The class representatives that the court allowed in
Fry either had discussions with the third-party advisor prior
to the purchase of the stock at issue or had discussed the
investments with the third-party advisor regularly. Id. Relying
on Fry, the court in In Re Caremark Int'l Inc., No. 94 C
4751, 1996 WL 351182 (N.D. Ill. June 24, 1996), went one step
further and barred an individual from serving as a class
representative because the decision to purchase the stock in
question was made by investment managers and not by the
individual himself. Id. at *5-6. The court noted that the
individual had "no input" into the decision to purchase the stock
and learned of it only after it had occurred. Id. at *6.
In response, Operating Engineers points to several cases, most
notably Retsky Family Limited P'ship v. Price Waterhouse LLP,
No. 97 C 7694, 1999 WL 543209 (N.D. Ill. July 23, 1999), which
declined to follow the Caremark decision. The court in Retsky
noted that the plaintiff at issue "was unaware of what types of
securities were traded by the money managers and did not know
what criteria the managers followed in making investment
decisions." Id. at *5. The plaintiff also "did not have any
input in the decision to buy or sell" the stock at issue. Id.
Despite these failings, the Retsky court noted that the
plaintiff was not "uninvolved" in the investments and had ongoing
discussions with the investment advisor about the investments
and, unlike the plaintiff in Fry, was not "completely unaware"
of the relevant financial affairs of the stock at issue. Id. at
*6. The court declined to follow Caremark's broader holding
that those who rely on others to make investment decisions are
The court finds persuasive the analysis in the Retsky case.
To the extent Caremark can be read to hold that those who rely
on others to make investment decisions are unfit to serve as
class representatives, this court would disagree. Contrary to both
Fry and Caremark, which dealt with individuals, in this case
Operating Engineers is an institutional investor, specifically a
pension fund. Under the Private Securities Litigation Reform Act
("PSLRA"), 15 U.S.C. §§ 78u-4 et seq., Congress "anticipated
and intended" large institutional investors to oversee securities
cases. See e.g., In re Cendant Corp. Litig., 264 F.3d 201,
243-44 (3d Cir. 2001). Because Operating Engineers is a pension
fund, it lacks investment expertise and, more likely than not,
its fiduciary duties would preclude it from making investment
decisions on behalf of its beneficiaries. Thus, to prohibit such
an institutional investor from serving as a class representative
merely because it delegated investment responsibilities to a
money manager would appear be in tension with the PSLRA. See,
e.g., In re WorldCom, Inc. Sec. Litig., 219 F.R.D. 267, 282
(S.D.N.Y. 2003) (noting that institutional investors "are likely
to use advisors . . . to invest conservatively in securities they
consider undervalued by the market" and a rule barring
institutions from participating in securities class actions would
be in conflict with the PSLRA's purpose to "increase the
likelihood that institutional investors will serve as lead
Moreover, this is not a situation like Fry and Caremark in
which the proposed class representative is "completely unaware"
of the financial affairs at issue. Operating Engineers (1)
promulgated detailed investment guidelines which its money
managers followed when making investments on its behalf (Manown
Dep. Exs. 3 & 5); (2) conducted periodic reviews of its money
managers' investments so as to monitor and control their activity
(Manown Dep. at 21:12-22:17.); (3) used an investment advisor to
monitor the money managers, compare their performance and
regularly report directly to the trustees of the Fund (Id. at
20:9-22:21.); and (4) retained counsel on an on-going basis to
monitor its investment portfolio in order to gain advice as to any potential securities laws violations. (Id. at
76:22-25, 78:14-23.) The court finds this similar enough to
Retsky and more than sufficient in the case of a institutional
investor to illustrate involvement in and awareness of the
financial affairs at issue.
Finally, to the extent the above discussion did not fully
address defendants' argument concerning the witness Operating
Engineers' made available to testify, the court concludes that
such arguments do not preclude class certification in this case.
The court is satisfied that Operating Engineers (1) has no claims
that are antagonistic to or conflict with claims of other members
of the class; (2) has sufficient interest in the outcome to
ensure vigorous advocacy; and (3) its counsel is competent,
experienced, qualified and generally able to conduct the proposed
litigation vigorously. See Gammon v. GC Servs. Ltd. P'ship,
162 F.R.D. 313, 317 (N.D. Ill. 1995) (citations omitted).
Accordingly, defendants' arguments are rejected.
B. Rule 23(b)
Operating Engineers seeks certification under Rule 23(b)(3).
That section provides that a class action can be maintained if
"questions of law or fact common to the members of the class
predominate over any questions affecting only individual members,
and . . . a class action is superior to other available methods
for the fair and efficient adjudication of the controversy."
Defendants do not argue that this action may not be brought under
Rule 23(b)(3). The court is persuaded that questions common to
the members of the class predominate over individual concerns. As
Operating Engineers points out, the main question involved in
this case is whether defendants' alleged false and misleading
statements and material omissions violated §§ 10(b) and (20)(a)
of the Act. This will be the focus of the litigation. Moreover,
the court also finds that the class action method is superior to
other methods for resolving this controversy. As with many securities law cases, this case involves a large number of
investors who are likely to be geographically dispersed. Many of
these investors are also likely to have relatively small claims
making it expensive to seek recovery through individual
litigation. A class action would be the most efficient use of
judicial resources in resolving the common issues alleged in this
action. Thus, the court finds that both the predominance and
superiority factors under Rule 23(b)(3) are satisfied.
Because the necessary elements of Rule 23(a) and Rule 23(b)(3)
have been satisfied, the court grants Operating Engineers'
renewed motion for class certification [#87]. Enter attached
order. [PROPOSED] ORDER GRANTING LEAD PLAINTIFF'S RENEWED MOTION FOR
CLASS CERTIFICATION Having duly considered Lead Plaintiff's Renewed Motion for
Class Certification (the "Motion") and the papers and argument
submitted in connection therewith, and for good cause shown, the
Court hereby GRANTS the motion as follows:
1. This action shall be certified as a class action. The
plaintiff class shall include:
All persons who purchased or otherwise acquired
NeoPharm, Inc. ("NeoPharm" or the "Company") publicly
traded securities between October 31, 2001 and April
19, 2002 (the "Class"). Excluded from the Class are
defendants, members of the immediate family of each
of the defendants, any person, firm, trust,
corporation, officer, director or other individual or
entity in which any defendant has a controlling
interest or which is related to or affiliated with
any of the defendants, and the legal representatives,
agents, affiliates, heirs, successors-in-interest or
assigns of any excluded party.
2. Lead Plaintiff Operating Engineers Construction Industry and
Miscellaneous Pension Fund (Local 66 Pittsburgh) is appointed
IT IS SO ORDERED.