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Lawrence E. Jaffe Pension Plan, On Behalf of Itself and All Others v. Household International

September 21, 2012


The opinion of the court was delivered by: Judge Ronald A. Guzman


In phase one of this bifurcated case, a jury returned a verdict in favor of plaintiffs and against some or all of the defendants on the Section 10(b)/Rule 10b-5 claims as to Statement Nos. 14-18, 20-24, 27-29, 32, 36-38 ("the seventeen statements"). (Verdict Form at 14-18, 20-24, 27-29, 32, 36-38; id., Table A, Alleged False or Misleading Statements at 11-26.) This means the jury found that the statements made and/or facts withheld regarding predatory lending, 2 delinquency/re-aging, and the Restatement were false or misleading, material, made with the requisite state of mind, and substantially caused the economic loss plaintiffs suffered. (See id.; see also Jury Instructions at 25- 32.) In addition, the jury credited the Leakage Model of damages presented by plaintiffs' expert Daniel Fischel. (See Verdict Form at 41.) At trial, defendants offered, and the jury rejected, two of the three types of evidence that can be used to rebut the presumption of reliance, i.e., that market makers were privy to the truth, and the truth had credibly entered the market and dissipated the effects of the omissions and misstatements. Thus, in phase two, the focus has been on the third kind of rebuttal evidence, that which severs the link between the alleged omissions and misstatements and either the price paid or received by any claimant. Accordingly, each claimant was required to respond "yes" or "no" to the following inquiry: "If you had known at the time of your purchase of Household stock that defendants' false and misleading statements had the effect of inflating the price of Household stock and thereby caused you to pay more for Household stock than you should have paid, would you have still purchased the stock at the inflated price that you paid?" (hereinafter "claim form question"). (1/11/11 Order, Ex. 2 at 8.) The Court also permitted the custodian banks and third-party claim filers to send claimants with an allowed loss greater than $250,000.00 a supplemental form that asked the same question. (5/31/11 Order.) In addition, the parties were afforded discovery to meet their respective burdens with regard to the presumption of reliance. The parties now present the individual claims as to which they contend there is no triable issue with regard to reliance.

There are three categories of claimants: (1) those that responded "no" to the claim form question;*fn1 (2) those that responded "yes" to the claim form question; and (3) those that returned the claim form but did not answer the claim form question.*fn2

If a claimant responded "no" to the claim form question, and defendants do not point to any evidence that reasonably suggests "no" does not mean "no," that claimant is entitled to judgment as to liability because defendants have not created a triable issue of fact as to his reliance on price. Defendants argue that anything short of a jury trial on all issues relating to an award of statutory damages is a deprivation of their Seventh Amendment rights. See U.S. Const. amend. VII (stating that "[i]n Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved"). It is well settled, however, that summary disposition procedures do not violate the Seventh Amendment. Burks v. Wis. Dep't of Transp., 464 F.3d 744, 759 (7th Cir. 2006). Thus, if there are no factual issues to be resolved, the claims can be adjudicated short of trial without running afoul of the Seventh Amendment.

Defendants also argue that the jury verdict itself rebuts the presumption of market reliance as to the entire class because the dates on which the actionable misstatements/opinions occurred do not correspond to an increase in inflationary impact on Household stock. However, the expert testimony credited by the jury was that a misstatement or omission may cause inflation in the stock price merely by maintaining the market expectations or preventing them from falling further, even if the inflation does not increase on the date the misstatement or omission is made. (See, e.g., Trial Tr. at 2605 (plaintiffs' expert Fischel stating that stock is inflated where stock is prevented from falling to a lower level)); see Schleicher v. Wendt, 618 F.3d 679, 683 (7th Cir. 2010) (price can be inflated by false statement or omission when it stops price from declining); Nathenson v. Zonagen Inc., 267 F.3d 400, 419 (5th Cir. 2001) (statement actionable with no price increase); In re Vivendi Universal, S.A. Sec. Litig., 765 F. Supp. 2d 512, 562 (S.D.N.Y. 2011) ("[A] statement can cause inflation by causing the stock price to be artificially maintained at a level that does not reflect its true value."). Thus, the fact that the artificial inflation did not increase each day on which the jury found an actionable misstatement or omission occurred does not mean that there is a triable issue as to whether the presumption of reliance has been rebutted.

Defendants also argue that the jury verdict itself rebuts the presumption of market reliance as to the entire class because the Leakage Model did not isolate as to any given day the inflation caused by a misstatement or omission regarding each of the three subjects presented to the jury, i.e., predatory lending v. 2 delinquency/re-aging v. Restatement, and thus plaintiffs have failed to show that the actionable misstatement or omission about a particular subject caused an independent inflationary price impact. (Defs.' Submission Regarding Rebuttal Presumption Reliance at 3-17.) As the evidence at trial demonstrated, the actionable misstatements or omissions on these three subjects were inextricably intertwined. The jury found that defendants made actionable misstatements about re-aging to cover up their predatory lending practices and, in turn, made actionable Restatement misstatements to cover up their re-aging methods. Moreover, as Fischel explained, the inflated price of Household's stock at any given time reflected the ever-changing mix of information that was publicly available. Given the interdependence of the fraudulent statements and the volatility of the information mix, it would be virtually impossible to parse out the damages by topic.

Fortunately, the law does not require the impossible. Rather, it gives a jury discretion to determine a damages award, as long as the award has a reasonable basis in the evidence. See Am. Nat'l Bank & Trust Co. v. Reg'l Transp. Auth., 125 F.3d 420, 435-40 (7th Cir. 1997); Dresser Indus., Inc. v. Gradall Co., 965 F.2d 1442, 1447 (7th Cir. 1992) (per curiam); First Nat'l Bank of Kenosha v. United States, 763 F.2d 891, 896 (7th Cir. 1985); (see also Jury Instructions 34 ("Any damages you award must have a reasonable basis in the evidence. Damages must not be proved with mathematical certainty but there must be enough evidence for you to make a reasonable estimate of damages.")). In this case, there were multiple statements and partial disclosures over an extended time period, and the parties' experts provided testimony in support of their positions regarding whether the stock price was affected by misrepresentations or omissions and the estimate of damages stemming therefrom, and the jury chose to credit Fischel's Leakage Model of damages (discounting industry, market or company-specific non-fraud declines unrelated to the actionable misstatements or omissions) over defendants' counter-arguments. Here, all of the evidence, including Fischel's testimony about the amount of artificial inflation, provided a reasonable basis for the jury's damages award.

Defendants also argue that they have rebutted the presumption of reliance as to index funds that answered "no" to the claim form question because the evidence shows that the price of stock has no impact on their purchasing decisions. (See, e.g., Defs.' Ex. 7, The Munder Institutional Funds Prospectus at MCM 0000410 (stating that it "attempts to duplicate the investment composition and performance of the particular index through statistical procedures").) The Court disagrees. The weight of each stock in a capitalization-weighted index is proportional to each company's market capitalization, i.e., its market price multiplied by the number of outstanding shares. See, Financial Glossary, & (last visited Sept. 20, 2012).*fn3 In other words, indexes rely on investor opinion as reflected in market price to assign weight to stocks. Likewise, the index funds, which adjust their portfolios to match a target index, rely on investor opinion as reflected in stock price each time they make an adjustment. (See Defs.' Ex. 9, Rule 30(b)(6) Dep. State Street at 43-44 ("[W]e wouldn't have purchased the stock in any of the portfolios which were found to be fraudulent.").) In short, the evidence about the investment goals of index funds, which is all that defendants offer, does not support the inference that such funds are indifferent to market price. See In re Countrywide Fin. Corp. Sec. Litig., 273 F.R.D. 586, 602 (C.D. Cal. 2009) ("Defendants argue that because index purchases seek to match a predetermined index of securities, such purchases are not made in reliance on any misrepresentation. To the contrary: because index purchases seek only to match the index and exclude other considerations (such as, for example, reliance on nonpublic information or other idiosyncratic motivations), index purchases rely exclusively upon the market to impound any representations (including misrepresentations) into securities' prices."); see also In re Connetics Corp. Sec. Litig., 257 F.R.D. 572, 578 (N.D. Cal. 2009) (rejecting argument that plaintiff, which made some of its trades "based on a computer program that was designed to mirror a stock index," was not typical of the class of investors because there was no evidence suggesting "that the index did not . . . rely on the integrity of the market"). Defendants have not, therefore, created a triable issue of fact as to the reliance of index investors that responded "no" to the claim form question.

The same is true for Capital Guardian Trust Co., Capital Research & Management Co. and Davis Select Advisors ("DSA"), claimants who gave a "no" answer to the claim form question but testified that they rejected or doubted the validity of the efficient capital market theory. (See Pls.' Ex. 13, Capital Guardian Trust Co. Rule 30(b)(6) Dep. at 68-69 ("[H]istory . . . show[s] that the efficient capital markets pricing theory" that "all current available information has already been factored into the stock price[,]" is "not always accurate."); Pls.' Ex. 14, Capital Research & Management Co. Rule 30(b)(6) Dep. at 37-38 (testifying that its "investment philosophy" suggests it is "not true" that "the price of a stock reflects all the information available at that time"); Pls.' Ex. 12, DSA Rule 30(b)(6) Dep. at 45-46 (stating that it "cannot be correct," given the stock market's history, that "stocks are fairly priced at all times because [the market price] immediately reflects all information in the public domain")). Given the parties' stipulation that "Household common stock traded in an efficient market" (Final Pretrial Order, Ex. A, Uncontested Fact No. 10), whether these claimants fully subscribe to the efficient market theory is irrelevant. What is relevant is whether they would have traded in Household stock if they had known about the fraud. See Basic, Inc. v. Levinson, 485 U.S. 224, 248 (1988). Each of them unequivocally answered "no." (See Pls.' Ex. 12, DSA Rule 30(b)(6) Dep. at 143 ("It is definitely not appropriate to invest in companies run by crooked executives."); Pls.' Ex. 13, Capital Guardian Trust Co. Rule 30(b)(6) Dep. at 35 ("If we'd ever known that a management had knowingly misled or misstated or produced false statements, I think that would almost, . . . automatically exclude us from wanting to invest in -- with such a company."); Pls.' Ex. 14, Capital Research & Management Co. Rule 30(b)(6) Dep. at 71-73 (deponent testifying that he could not "imagine a scenario where [he] would have bought . . . Household stock knowing that it was inflated above its true value" because "part of our investment philosophy is to find undervalued assets . . . . [and] that involves the values of the enterprise, the strength of the fundamentals and a sense of trust in the management"); id. at 74 ("[I]f we would have known [the price of Household stock] was inflated, we wouldn't have purchased the stock.").) Thus, these claimants' testimony about efficient market theory does not create a triable issue as to whether they relied on price when they engaged in the stock transactions at issue in this case.

Alternatively, defendants argue that DSA could not have relied on any Restatement misstatement in purchasing Household stock because the Restatement affected earnings near term and DSA judges its performance over a three- to ten-year term. (See Defs.' Ex. 13, DSA Rule 30(b)(6) Dep. at 95, 185.) But DSA does not say that it would have purchased Household stock even if it had known of the fraud. On the contrary, DSA testified that "one of the biggest parts of an investment decision is the price of the stock and management's integrity and what they are telling you." (Id. at 185.) Thus, no reasonable jury could infer solely from DSA's emphasis on long-term performance that it did not rely on the integrity of the Household stock price. Defendants have not, therefore, raised a triable issue as to DSA's reliance on the Restatement misstatements.

Defendants also argue that they have created a triable issue as to whether lead plaintiff Glickenhaus & Co. and claimants for which it made investment decisions relied on the March 23, 2001 Origination News article misstatement. (See Verdict Form, Table A at 11 ("Gary Gilmer, president and chief executive of Household's subsidiaries HFC and Beneficial said the company's position on predatory lending is perfectly clear. Unethical lending practices of any type are abhorrent to our company, our employees and most importantly our customers.") In support, defendants cite to Glickenhaus' deposition testimony that it would not "necessarily believe that [an Origination News quote is] accurate or true," but believes that Household's press releases are true and "relies on [them] in making investment decisions." (Defs.' Ex. 8, Glickenhaus Rule 30(b)(6) Dep. at 58-65.)

It is undisputed, however, that the quote from the Origination News article appeared in a Household press release. (Id.) Thus, viewing the facts in defendants' favor, no reasonable jury could find that Glickenhaus did not rely on Gilmer's quote. The Court, therefore, holds that defendants have not created a triable issue of fact as to Glickenhaus' reliance.

Defendants have, however, created a triable issue of fact as to the reliance of claimants who:

(1) responded "yes" to the claim form question; (2) submitted duplicate claims with conflicting answers to the claim form question; and (3) submitted multiple claims with different answers to the claim ...

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