The opinion of the court was delivered by: Judge Robert W. Gettleman
MEMORANDUM OPINION AND ORDER
Co-lead plaintiffs Maurice Levie and H. Robert Monsky, individually and on behalf of all others similarly situated, brought a three count amended putative class action complaint against defendants Sears Roebuck & Co. and its CEO, President and Chairman of the Board, Alan J. Lacy (the "Sears defendants") and ESL Partners, L.P. and its controlling person Edward S. Lampert (the "ESL defendants") alleging violations of §§10(b) and 20(a) of the Exchange Act, 15 U.S.C. §§ 78(j)(b) and 78 (t)(a) and Rule 10b-5 promulgated thereunder by the SEC, 17 C.F.R. § 204.10b-5.*fn1 Plaintiffs have moved for class certification pursuant to Fed. R. Civ. P. 23. For the reasons set forth below plaintiffs' motion is granted in part.
Fed. R. Civ. P. 23, which governs class actions, requires a two-step analysis to determine if class certification is appropriate. First, plaintiffs must satisfy all four requirement of Rule 23(a): (1) numerosity, (2) commonality; (3) typicality; and (4) adequacy of representation.
These elements are prerequisites for certification, and failure to meet any one of them precludes certification of a class. Second, the action must also satisfy one of the conditions of Rule 23(b). Joncek v. Local 14 Int. Teamsters Health and Welfare Fund, 1999 WL 755051 at *2 (N.D. Ill. 1999) (and cases cited therein). In the instant case, plaintiffs seek certification under Rule 23(b)(3), which requires 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 effective adjudication of the controversy.
Defendants do not really contest the propriety of proceeding as a class action. Instead, defendants focus their attack on plaintiffs' proposed class definition and the lead plaintiffs' ability to adequately represent any class certified. Plaintiffs propose a class defined as:
All persons and entities who: (1) sold Sears common stock; (2) sold call options on Sears common stock and/or (3) bought put options on Sears common stock during the period from September 9, 2004 through the close of trading on November 16, 2004.
Defendants first attack the proposed class period, September 9, 2004, through November 16, 2004, arguing that plaintiffs have presented no evidence to support the contention that Sears and Lampert were in merger negotiations by September 9. Essentially, defendants argue that Szabo v. Bridgeport Machines, Inc., 249 F.3d 672 (7th Cir. 2001), requires the court to make a preliminary determination of when the merger negotiations became material and thus were required to be disclosed.
This court does not read Szabo so broadly as to require the court to reach the ultimate issue in the case on a Rule 23 motion. This court has already held that if and when the merger negotiations became material is a question of fact to be determined by the jury. Levie, 2006 WL 756063 at *5. Szabo requires only that the court make factual inquiries to determine if the requirements of Rule 23 are met. In interpreting the Supreme Court's opinion in Eisen v. Carlisle and Jacquelin, 417 U.S. 156, 177-78 (1974), the Seventh Circuit stated that it did not "foreclose inquiry into whether plaintiff is asserting a claim that, assuming its merit, will satisfy the requirements of Rule 23 as distinguished from an inquiry into the merits of plaintiff's particular individual claim." Szabo, 249 F.3d at 677 (emphasis added). Thus, the inquiry for the court is not whether plaintiffs can prove that the merger negotiations became material on September 9 but whether, if they can, class certification would then be appropriate under Rule 23.*fn2 When the merger negotiations became material affects the class period, which in turn could effect numerosity. Under Rule 23(a)(1), numerosity is met if joinder of all members is impracticable. Even if defendants are correct that the negotiations could not have become material until November 5, 2004, there can be no question that numerosity would nonetheless be met. Thus, there is no need for the court to reach the issue of when the negotiations became material. Assuming the merits of plaintiffs' claims, as required by Szabo (id.), there is simply no question that the class is so numerous that joinder of all members would be impractical. Parker v. Risk Management Alternatives Inc., 206 F.R.D. 211, 212 (N.D. Ill. 2002).
Defendants next attack the definition of the class, arguing that "in-and-outs"*fn3 cannot be members of the class because they cannot prove loss causation. See Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005). In Dura, the Supreme Court overturned the Ninth Circuit's inflated share approach, finding that merely purchasing at an inflated share price does not necessarily mean that there was any resultant economic loss. The court noted, 544 U.S. at 342-43:
[A]s a matter of pure logic, at the moment the transaction takes place, the plaintiff has suffered no loss; the inflated purchase payment is offset by ownership of a share that at that instant posses equivalent value. . . . If . . . purchaser sells the shares quickly before the relevant truth begins to leak out, the misrepresentation will not have led to any loss. If the purchaser sells later after the truth makes it way into the market place, an initially inflated purchase price might mean a later loss. But that is far from inevitably so. (Emphasis in original.)
Plaintiffs distinguish Dura, arguing that it involved a "purchaser" class (investors who were induced to buy and sell at an artificially high price), rather than a "seller" class (investors who were allegedly defrauded into selling at an artificially low price), and that the rationale for excluding in-and-out traders in a purchaser class does not apply to a seller class action. According to plaintiffs, in a purchaser class action "where an investor who purchases during the class period sells before the fraud is revealed, that investor is presumed to recover the artificial inflation paid on the purchase at the time of the intra-class period sale, and any decline in value is assumed to be attributable to market price movements unrelated to the alleged fraud." Therefore, that investor does not suffer a loss caused by the alleged misrepresentation or omission. No such rationale applies to a seller class, argue plaintiffs, because any investor who sold during the class period before the revelation of the merger sold at an artificially low price.
The court agrees with plaintiffs that the rationale behind excluding "in-and-out" traders from a traditional purchaser class, where revelation of the truth results in a decrease in stock price, is not applicable to the instant seller class. In the traditional purchaser class, any investor who bought and then sold before the revelation lowered the price incurred no injury as a result of the fraud because the stock was artificially high at the time of the sale, as it was at the time of the purchase. In contrast, in the instant case, any investor who sold (during the class period) before the fraud was revealed incurred injuries because that investor sold at a price that was artificially lower than the investor should have received. Regardless of the price such an investor paid for the stock, the price would have been higher*fn4 at any point after the (secret) merger negotiations became material and before the merger plans were disclosed. Consequently, that investor would have profited from the disclosure by the difference between the share price actually realized and the higher price that would have been driven by the disclosure. Accordingly, the court rejects defendants' argument that all in-and-out traders should be excluded from the class.
The same is not true, however, for short sellers who sell first and then hope to cover when the price falls. Anyone who sold short during the class period and then covered that sale by purchasing at a lower price before the fraud was revealed was not injured, but actually benefitted from the alleged omission. Short sellers are speculating that the price of a stock will fall before they have to close on the sale. If they guess wrong and the stock rises, they suffer a loss. Thus, anyone who sold short and then covered before the revelation of the merger increased the stock price, benefitted from the artificially low price at the time of the covering purchase. In ...