The opinion of the court was delivered by: George M. Marovich United States District Judge
MEMORANDUM OPINION AND ORDER
Lead plaintiffs, the Paul H. Shield, M.D. Inc. Money Purchase Plan and the Paul H. Shield, M.D. Inc. Profit Sharing Plan, together with named plaintiffs Alan Goodman, James Rourke and Daniel Nesi, assert two claims against defendants Northfield Laboratories, Inc. ("Northfield"), Steven A. Gould, M.D. ("Gould") and Richard E. DeWoskin ("DeWoskin"). In Count I, plaintiffs assert that defendants violated § 10(b) of the Securities Exchange Act of 1934 (the "Act"), 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. 240.10b-5. In Count II, plaintiffs assert against DeWoskin and Gould a "control person" claim for violation of § 20(a) of the Act. Lead plaintiffs and the named plaintiffs move for class certification.
The Court has outlined the facts of this case in previous opinions. See In re: Northfield Labs., Inc. Securities Lit'n, 527 F. Supp.2d 769 (N.D. Ill. 2007) and 2008 WL 4372743 (Sept. 23, 2008). The Court does not repeat the facts here.
Defendant Northfield was founded in 1985 by defendants DeWoskin and Gould. Northfield's primary purpose was to research and develop a hemoglobin-based blood substitute called PolyHeme to treat life-threatening blood loss. PolyHeme was a hemoglobin-based, oxygen-carrying blood substitute that was compatible with all blood types. Northfield manufactured PolyHeme by extracting hemoglobin molecules from outdated human blood, chemically modifying the hemoglobin into a polymerized form of hemoglobin and incorporating the polymerized hemoglobin into a solution, which could then be administered to humans. Northfield was never able to bring PolyHeme to market, and the company declared bankruptcy on June 1, 2009. Defendant DeWoskin served as Chairman and CEO from 1985 to July 2002. Defendant Gould took over as Northfield's Chairman and CEO in July 2002.
The Court previously concluded that plaintiffs had stated a claim against defendants for securities fraud. First, plaintiffs allege that after Northfield had closed a clinical trial due to allegedly negative results, defendants stated, on August 3, 2001, that they intended to close the trial. Second, plaintiffs allege that defendants, in Northfield's August 9, 2002 10-K filing (and in its 2003 and 2004 10-K filings), misstated the reason why the clinical study was stopped. Third, plaintiffs allege that on October 11, 2001, Gould made a misstatement when he stated "no evidence of blood vessel constriction, or renal, pancreatic, gastrointestinal or cardiac dysfunction" were observed in a clinical trial even though cardiac dysfunction was observed. Fourth, plaintiffs allege that a September 4, 2001 press release contained misstatements about clinical trial results. Fifth, plaintiffs allege that defendants included misstatements in an August 3, 2001 proxy statement when they said "none of the adverse effects historically associated with other hemoglobin solutions have been identified by our clinical studies" when in fact, plaintiffs allege, cardiac events were not only present but historically associated with hemoglobin solutions.
II. Standard on a motion for class certification
As the parties proposing the class, the plaintiffs bear the burden of establishing that the putative class meets all of the requirements of Rule 23(a) and one of the requirements of Rule 23(b) of the Federal Rules of Civil Procedure. Oshana v. Coca-Cola Co., 472 F.3d 506, 513 (7th Cir. 2006). Rule 23(a) allows individual plaintiffs to represent a class "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 plaintiffs seek to proceed under Rule 23(b)(3), which allows a class action to proceed 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).
In Szabo v. Bridgeport Machines, Inc., the Seventh Circuit explained that a district court is not limited to the pleadings when considering a motion for class certification. The Seventh Circuit said:
Before deciding whether to allow a case to proceed as a class action, . . . a judge should make whatever factual and legal inquiries are necessary under Rule 23.
This would be plain enough if, for example, the plaintiff alleged that the class had 10,000 members, making it too numerous to allow joinder, see Rule 23(a)(1), while the defendant insisted that the class contained only 10 members. A judge would not and could not accept the plaintiff's assertion as conclusive; instead the judge would receive evidence (if only by affidavit) and resolve the disputes before deciding whether to certify the class.
Szabo, 249 F.3d 672, 676 (7th Cir. 2001). Furthermore, the Seventh Circuit explained that if class certification issues overlap with the merits, "then the judge must make a preliminary inquiry into the merits." Id.
Plaintiffs move to certify a class of: all persons who purchased securities of Northfield Laboratories, Inc., including purchasers of common stock and call options, and sellers of put options, during the period from March 19, 2001, through March 20, 2006, inclusive.
Plaintiffs wish to exclude from the class "defendants, members of the immediate family of each of the defendants, any person, firm, trust, corporation, office, 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."
A. The Rule 23(a) requirements
Plaintiffs state that they do not know the number of class members but that the number is in the thousands. Defendants do not dispute this. Given that (1) Northfield had 14,242,000 shares outstanding at the beginning of the class period and 26,761,000 shares outstanding at the end of the class period; and (2) between 6.7% and 26.6% of the shares were held by institutional investors over the course of the proposed class period, the Court agrees that the number of class members is so high as to make joinder impracticable.
Plaintiffs assert and defendants do not dispute that there are common questions of law and fact. In order to prevail on a claim under § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, the plaintiffs must establish: (1) a material misrepresentation; (2) scienter; (3) a connection with the sale or purchase of a security; (4) reliance; (5) economic loss; and (6) loss causation. Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 341-342 (2005). Factual and legal issues that will be common to the class include whether Northfield made material misrepresentations and whether defendants acted with scienter. Accordingly, the Court concludes that there are common questions of law and fact.
3. Typicality and adequacy
The typicality and adequacy requirements tend to merge, and they "serve as guideposts" for determining whether "the named plaintiff's claims and the class claims are so interrelated that the interests of the class will be fairly and adequately protected in their absence." Amchem Products, Inc. v. Windsor, 521 U.S. 591, 626 n. 20 (1997) (quoting General Telephone Co. of Southwest v. Falcon, 457 U.S. 147, 157 n. 13 (1982)).
Plaintiffs argue that they are typical and adequate, because their claims arise out of the same set of circumstances as the class and because their claims are not antagonistic to the claims of the class. Defendants make two main arguments as to why the lead and named plaintiffs are not adequate class representatives.
First, defendants argue that none of the lead or named plaintiffs are adequate, because each purchased additional shares of Northfield even after the alleged fraud was revealed. The cases defendants cite for this proposition do not explain why purchasing shares after the fraud would make one an inadequate class representative. As far as the Court can tell, the cases trace back to the idea that current shareholders and former shareholders might have an inherent conflict of interest, because current shareholders have an interest in the defendant company's maintaining a healthy balance sheet, while the former shareholders are merely interested in obtaining the maximum amount of cash from the company. See In re: Park City Sec. Lit'n, 189 F.R.D. 91, 108 (D. N.J. 1999).*fn1 That conflict between current and former shareholders, however, does not exist here, because Northfield is no longer a going concern.
Furthermore, the fact that an individual found it reasonable to purchase shares at a lower price after the alleged fraud was disclosed does not mean the individual failed to rely on the market price when s/he made purchases during the class period. Accordingly, the Court agrees with the Courts that have concluded that individuals who made purchases after the alleged fraud was disclosed are not automatically inadequate class representatives. See Silverman v. Motorola, Inc., 259 F.R.D. 163, 172 (N.D. Ill. 2009); In re Monster Worldwide, Inc. Sec. Lit'n, 251 F.R.D. 132, 135 (S.D. N.Y. 2008) ("the fact that a putative class representative purchased additional shares in reliance on the integrity of the market after the disclosure of corrective information has no bearing on whether or not [the representative] relied on the integrity of the market during the class period, that is, before the information at issue was corrected or changed.") (quoting In re Salomon Analyst Macromedia, 236 F.R.D. 208, 216 (S.D. N.Y. 2006), vacated on other grounds, 544 F.3d 474 (2d Cir. 2008)).
Second, defendants argue that two of the named plaintiffs, Goodman and Nesi, are inadequate class representatives, because they demonstrated a lack of veracity at their depositions. The Court agrees with the general principle that a lack of honesty makes one an inadequate class representative. See Kaplan v. Pomerantz, 132 F.R.D. 504, 510 (N.D. Ill. 1990). There, the court said,
In light of these instances of false deposition testimony, the Court cannot in good conscience allow this case to continue as a class action with plaintiff serving as the class representative. A plaintiff's honesty and integrity are important considerations in allowing him to represent a class. . . . Plaintiff may be correct in asserting that the subjects of his statements are of marginal relevance to this lawsuit; nonetheless, they evince a willingness to give intentionally false testimony in an effort to further his interests in this litigation. Under these circumstances, allowing him to prosecute this case as a class action would not be fair to the Court, to the defendants, or to the other individuals whose interests plaintiff purports to represent.
Kaplan, 132 F.R.D. at 510. This Court, likewise, has no tolerance for false testimony and agrees with Kaplan. The Court now turns to the question of whether either Goodman or Nesi gave false testimony during his deposition.
Defendants argue that Goodman gave false testimony about whether he reviewed documents in preparation for his deposition and whether he brought documents with him to the deposition. Here are excerpts from his deposition:
Q: Did you review any documents in preparing for your deposition?
A: I'm not positive of reviewing documents. It's possible. I'm not 100 percent sure of that, but it's possible
Q: When did this meeting take place?
A: A couple days ago. I guess it was Saturday, I believe. ...