Opinion
Attorneys for Plaintiffs: Not Present.
Attorneys for Defendants: Not Present.
Honorable BEVERLY REID O'CONNELL, United States District Judge.
CIVIL MINUTES -- GENERAL
Proceedings: (IN CHAMBERS)
ORDER RE: MOTION TO CERTIFY CLASS [301]; MOTION TO EXCLUDE PLAINTIFFS' EXPERT WITNESS [315]; MOTION TO EXCLUDE DEFENDANTS' EXPERT WITNESS [321]
Pending before the Court are three motions: (1) Plaintiffs' motion for class certification, (Dkt. No. 301); (2) Defendants' motion to exclude the expert report and testimony of Dr. Jay Hartzell, (Dkt. No. 315); and (3) Plaintiffs' motion to exclude the report and testimony of Dr. Andrew Roper, (Dkt. No. 321). The Court held a hearing on these matters on October 10, 2015, during which it heard testimony from Dr. Roper and Dr. Hartzell. After considering the parties' papers, the deposition and hearing testimonies, and the expert declarations, the Court finds that both Dr. Roper and Dr. Hartzell are sufficiently qualified to opine on the matter of market efficiency. In light of their varying testimony and the facts of this case, the Court further concludes that Plaintiffs have demonstrated that the fraud-on-the-market presumption should apply, and that they have consequently satisfied the elements necessary for class certification. Accordingly, both parties' motions to exclude the other's expert witness are DENIED, and Plaintiffs' motion for class certification is GRANTED.
I. BACKGROUND
A. Factual History
This is a putative securities fraud class action brought under the Securities Act of 1933 and the Securities Exchange Act of 1934 as amended by the Private Securities Litigation Reform Act of 1995. Plaintiffs assert claims against China Integrated Energy Corporation (" China Integrated Energy"), some of its officers and directors, and its independent auditor, accounting firm Sherb & Co. (See Consolidated Class Action Compl. (" Compl.") ¶ ¶ 28-41.) Collectively, these individuals and entities are referred to as " Defendants."
Plaintiffs seek to represent a class of individuals who purchased or otherwise acquired common stock in China Integrated Energy between March 31, 2010, and April 21, 2011. (Pls.' Mot. (Dkt. No. 301) at 1; Compl. ¶ 52.) China Integrated Energy is a Delaware corporation operating in the People's Republic of China. (Compl. ¶ 2.) It purports to sell finished oil products, heavy oil products, and biodiesel fuel. (Compl. ¶ 2.) It also operates retail gas stations. (Compl. ¶ 2.)
According to Plaintiffs, the class period began on March 31, 2010, when China Integrated Energy issued its 2009 financial results. (Compl. ¶ 52.) They allege that the report was materially false and misleading because it overstated China Integrated Energy's 2009 revenue and net income. (Compl. ¶ 55.) Plaintiffs also assert that Defendants prepared two sets of financial statements: one presumably accurate set that Defendants filed with Chinese regulators, and another false and misleading set that they filed with the Securities and Exchange Commission (" SEC"). ( See Compl. ¶ ¶ 55-59.)
The discrepancy between the financial statements filed in China and those filed with the SEC came to light on March 16, 2011. ( See Compl. ¶ ¶ 58, 130.) On that day, Sinclair Upton Research published a report alleging that China Integrated Energy's SEC filings overstated revenues as compared with revenues reported in the Chinese filings. (Compl. ¶ ¶ 58, 130.) The report also asserted that China Integrated Energy had been funneling money to corporations owned by the son of Defendant Xincheng Gao. (Compl. ¶ 130.) In response to this report, China Integrated Energy's share price fell from $5.95 to a closing price of $5.00, nearly a 16% drop. (Compl. ¶ 130.)
The next day, analysts at Roth Capital Partners downgraded China Integrated Energy's shares from a " BUY" status to a " NEUTRAL" status. (Compl. ¶ 132.) They also reported that they had independently obtained the Chinese filings referenced in Sinclair Upton Research's report, and confirmed the prior report's accuracy. (Compl. ¶ ¶ 58, 132.) China Integrated Energy's share price fell again, from $5.00 to $3.52, a 24.6% drop. (Compl. ¶ 133.)
A week later, on March 23, 2011, China Integrated Energy issued a letter to shareholders, apparently in an attempt to rebut the reports' allegations. (Compl. ¶ 134.) It vigorously denied it had made any misstatements in its financial statements and SEC filings, and denied all other accusations in the Sinclair Upton Research report. (Compl. ¶ ¶ 134-38.) Notwithstanding this rebuttal attempt, China Integrated Energy's share prices continued to fall. ( See Compl. ¶ 140.)
On March 28, 2011, additional damaging information surfaced when another analyst firm, Alfred Little, issued a detailed report reviewing China Integrated Energy's Chinese filings and audited financial statements and calling the company a " complete hoax." (Compl. ¶ 141.) This report caused a 29% drop in share price, from $3.76 to $2.66, on March 28, 2011. (Compl. ¶ 143.)
In response to the accusations and resultant drop in share price, China Integrated Energy hired law firms and auditors to conduct an internal investigation. ( See Compl. ¶ 151.) Ultimately, these firms and auditors resigned, citing management's refusal to cooperate in the investigation. ( See Compl. ¶ ¶ 152-55.) On April 26, 2011, the company's outside auditor, KPMG, resigned and cautioned investors that the SEC filings it assisted in preparing should no longer be relied upon. (Compl. ¶ ¶ 156-57.)
On April 20, 2011, NASDAQ halted trading in China Integrated Energy's shares. (Compl. ¶ 145.) On November 21, 2011, NASDAQ decided to remove the company's shares from listing. (Compl. ¶ 150.)
B. Procedural History
Between March 25, 2011 and May 25, 2011, various plaintiffs filed five separate lawsuits, which were ultimately consolidated into one. ( See Dkt. Nos. 43-44.) On December 20, 2011, these plaintiffs filed a consolidated class action complaint. (Dkt. No. 59.) In their consolidated complaint, Plaintiffs allege four causes of action: (1) violations of Section 10(b) of the Securities Exchange Act of 1934 and related Rule 10b-5, (Compl. ¶ ¶ 176-84); (2) violations of Section 20(a) of the Securities Exchange Act (against company officers only), (Compl. ¶ ¶ 185-98); (3) violations of Section 11 of the Securities Act of 1933, (Compl. ¶ ¶ 199-209); and (4) violations of Section 15 of the Securities Act (against company officers only), (Compl. ¶ ¶ 210-13).
On August 15, 2013, Plaintiffs filed a motion for class certification, naming Puerto Rico Teachers Retirement System and Bristol Investment Fund Ltd. as the lead plaintiffs. (Dkt. No. 183.) In support of their motion, Plaintiffs offered the expert declarations of Michael Marek, (Dkt. No. 185-3), and Kenneth McGraw, (Dkt. No. 205). On April 14, 2014, Defendants filed a motion to exclude the declarations of Marek and McGraw. (Dkt. No. 226.) After holding a hearing on these matters, the Court granted Defendants' motion to exclude Plaintiffs' expert declarations on August 4, 2014 and consequently denied Plaintiffs' motion for class certification. (Dkt. No. 271.)
On November 3, 2014, Plaintiffs then renewed their motion for class certification, (Dkt. No. 301), which they supported with a report by a new expert witness, Dr. Jay Hartzell, (Dkt. No. 301-3). Defendants opposed this motion on December 22, 2014, (Dkt. No. 314), and then filed a motion to exclude the testimony of Dr. Hartzell on January 5, 2015, (Dkt. No. 315). Similarly, Plaintiffs filed a motion to exclude the expert testimony of Defendants' expert, Dr. Andrew Roper, on January 19, 2015. (Dkt. No. 321.) The Court then heard oral argument on these matters on February 10, 2015.
II. LEGAL STANDARD
A. Motion to Strike Expert Report
The proponent of the expert testimony has the burden of proving that the proposed expert testimony is admissible under Federal Rule of Evidence 702, Daubert, and its progeny. Lust ex rel. Lust v. Merrell Dow Pharm., Inc., 89 F.3d 594, 598 (9th Cir. 1996). The pertinent admissibility requirements must be met by a preponderance of the evidence, pursuant to Federal Rule of Evidence 104(a). Bourjaily v. United States, 483 U.S. 171, 175, 107 S.Ct. 2775, 97 L.Ed.2d 144 (1987). Federal Rule of Evidence Rule 702 provides,
A witness who is qualified as an expert by knowledge, skill, experience, training, or education may testify in the form of an opinion or otherwise if:
(a) the expert's scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or determine a fact in issue;
(b) the testimony is based on sufficient facts or data;
(c) the testimony is the product of reliable principles and methods; and
(d) the expert has reliably applied the principles and methods to the facts of the case.
Fed. R. Evid. 702. The Supreme Court in Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 113 S.Ct. 2786, 125 L.Ed.2d 469 (1993), announced that the key inquiry in evaluating expert scientific testimony centers on reliability; trial judges are to act as gatekeepers in excluding unreliable expert scientific testimony. Six years later, in Kumho Tire Co. v. Carmichael, 526 U.S. 137, 119 S.Ct. 1167, 143 L.Ed.2d 238 (1999), the Supreme Court extended this reliability analysis to all expert testimony, rather than just scientific testimony.
The Supreme Court in Daubert sought to guide trial courts by offering several nonexclusive, nondispositive factors that a trial court may consider in evaluating expert testimony: (1) whether the expert's technique or theory can be or has been tested; (2) whether the technique or theory has been subjected to peer review and publication; (3) the technique or theory's rate of error; (4) the existence and maintenance of standards and controls; and (5) the technique or theory's general acceptance. See Daubert, 509 U.S. at 593-94. Further, " [t]he inquiry envisioned by Rule 702 . . . is a flexible one." Id. at 594. In fact, the Supreme Court in Daubert emphasized that, in making this inquiry into reliability of expert testimony, trial judges are accorded significant discretion. Id.; see also Gen. Elec. Co. v. Joiner, 522 U.S. 136, 141, 118 S.Ct. 512, 139 L.Ed.2d 508 (1997) (holding that the trial court's decision in admitting or excluding expert testimony will be reviewed for abuse of discretion). See generally Datalex (Ir.) Ltd. v. PSA, Inc., CV01-06482DDPVBKX, 2003 WL 25667620 (C.D. Cal. Jan. 30, 2003) (denying a motion to exclude expert testimony after applying the nondispositive factors from Daubert ).
B. Motion for Class Certification
A party seeking class certification bears the burden of establishing that the prospective class satisfies Federal Rule of Civil Procedure 23(a). Ellis v. Costco Wholesale Corp., 657 F.3d 970, 979-80 (9th Cir. 2011). Under Rule 23(a), the party seeking certification must establish all four of the following: (1) numerosity, (2) commonality, (3) typicality, and (4) adequacy of representation. Fed.R.Civ.P. 23(a). This requires proof that:
(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.
Id.; accord Wal-Mart Stores, Inc. v. Dukes, 131 S.Ct. 2541, 2548, 180 L.Ed.2d 374 (2011). Additionally, a party seeking certification bears the burden of demonstrating that it has met at least one of the requirements of Rule 23(b). See Valentino v. Carter-Wallace, 97 F.3d 1227, 1234 (9th Cir. 1996). Certification should only be granted if, " after a rigorous analysis, " the court determines that the prospective class satisfies the requirements of Rule 23(a). Wal-Mart Stores, 131 S.Ct. at 2551 (quoting Gen. Tel. Co. of Sw. v. Falcon, 457 U.S. 147, 161, 102 S.Ct. 2364, 72 L.Ed.2d 740 (1982)) (internal quotation marks omitted). The same principles apply to a Rule 23(b) analysis. See Comcast Corp. v. Behrend, 133 S.Ct. 1426, 1432, 185 L.Ed.2d 515 (2013).
When reviewing motions for class certification, district courts are generally bound to take the substantive allegations of the complaint as true. In re Coordinated Pretrial Proceedings in Petroleum Prods. Antitrust Litig., 691 F.2d 1335, 1342 (9th Cir. 1982) (citing Blackie v. Barrack, 524 F.2d 891, 901 n.7 (9th Cir. 1975)). But " Rule 23 does not set forth a mere pleading standard. A party seeking class certification must affirmatively demonstrate his compliance with the Rule." Wal-Mart Stores, 131 S.Ct. at 2551. Thus, " sometimes it may be necessary for the court to probe behind the pleadings before coming to rest on the certification question." Id. (quoting Falcon, 457 U.S. at 161) (internal quotation marks omitted). Ultimately, district courts have " broad discretion to determine whether a class should be certified and to revisit that certification throughout the legal proceedings before the court." United Steel, Paper & Forestry, Rubber, Mfg. Energy, Allied Indus. & Serv. Workers Int'l Union, AFL-CIO, CLC v. ConocoPhillips Co., 593 F.3d 802, 810 (9th Cir. 2010).
III. DISCUSSION
In support of their renewed motion for class certification, Plaintiffs proffer the expert report of Dr. Jay Hartzell. (Dkt. No. 301-3.) They rely on Dr. Hartzell to testify that China Integrated Energy's stock was traded in an efficient market. Demonstrating market efficiency is crucial to Plaintiffs' motion. This is because Plaintiffs must prove reliance; that is, they must prove that they relied on Defendants' misrepresentations in purchasing China Integrated Energy's securities. Proof of reliance ensures an adequate connection between Defendants' wrongful conduct (the misrepresentations) and Plaintiffs' resultant injury (buying shares worth less than they were priced). Erica P. John Fund Inc. v. Halliburton Co., 131 S.Ct. 2179, 2184, 180 L.Ed.2d 24 (2011) ( Halliburton I ). But proving direct reliance on misrepresentations is somewhat difficult. A plaintiff establishes direct reliance by showing that it was aware of the defendant's statement and thereafter engaged in a relevant transaction such as purchasing stock. Id. at 2185. Even more difficult would be proving direct reliance individually for each member of a putative class. See Halliburton I, 131 S.Ct. at 2185; Basic Inc. v. Levinson, 485 U.S. 224, 245, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988). And even were it feasible to prove direct reliance individually for each member of the class, class certification would be improper under Rule 23(b)(3) because individual issues would predominate over common ones. See Amgen Inc. v. Conn. Ret. Plans & Trust Funds, 133 S.Ct. 1184, 1199, 185 L.Ed.2d 308 (2013).
Accordingly, Plaintiffs attempt to invoke a rebuttable presumption of reliance on behalf of the entire class as a whole, based on the " fraud-on-the-market" theory. " According to that theory, 'the market price of shares traded on well-developed markets reflects all publicly available information, and hence, any material misrepresentations.'" Halliburton I, 131 S.Ct. at 2185 (quoting Basic, 485 U.S. at 245). As such, the theory presumes that, by trading based on share price, an investor necessarily relies on any misrepresentations inherently incorporated into it. But the " fraud-on-the-market" theory applies only to the extent that the shares were traded in an efficient market. Id. Thus, demonstrating market efficiency is in essence a lynchpin to Plaintiffs' motion for class certification: market efficiency is essential to " fraud-on-the-market"; " fraud-on-the-market" is essential to demonstrating reliance on behalf of the class as a whole; and demonstrating reliance on behalf of the class as a whole is necessary to show that individual issues do not predominate over common ones, as required by Rule 23(b)(3). See Halliburton Co. v. Erica P. John Fund, Inc., 134 S.Ct. 2398, 2412, 189 L.Ed.2d 339 (2014) ( Halliburton II ) (reiterating that a plaintiff must prove " the prerequisites for invoking the [ Basic ] presumption--namely, publicity, materiality, market efficiency, and market timing . . . before class certification"). As a result, Plaintiffs must demonstrate market efficiency to prevail upon their motion.
In addition to providing the expert report of Dr. Hartzell, Plaintiffs support their theory of market efficiency by submitting the declaration of Plaintiffs' counsel, Ian Berg, along with evidence related to the five factors bearing on the issue of market efficiency discussed in Cammer v. Bloom, 711 F.Supp. 1264, 1286-87 (D.N.J. 1989). Although Plaintiffs correctly argue that expert testimony is not required to demonstrate market efficiency, " many courts have considered it when addressing [the Basic presumption], which may often benefit from statistical, economic, and mathematical analysis." In re Countrywide Fin. Corp. Sec. Litig., 273 F.R.D. 586, 609 (C.D. Cal. 2009) (quoting Unger v. Amedisys Inc., 401 F.3d 316, 323 (5th Cir. 2005)). And while Mr. Berg's evidence may be sufficient in situations such as in Countrywide where " efficiency is very nearly a nonissue, " here Defendants have provided expert witness testimony rebutting a finding of market efficiency. Accordingly, given the importance of their testimony to determining the matter of market efficiency--and consequently Plaintiffs' motion for class certification--the Court will first discuss Plaintiffs' motion to exclude Dr. Roper and Defendants' motion to exclude Dr. Hartzell as expert witnesses. The Court will then consider Plaintiffs' renewed motion for class certification.
A. Plaintiffs' Motion to Exclude the Testimony of Dr. Andrew Roper
Because Defendants' motion to exclude the testimony of Dr. Jay Hartzell relies on testimony proffered by their own expert, Dr. Andrew Roper, the Court will first consider Plaintiffs' motion to exclude the testimony of Dr. Roper. (Dkt. No. 321.) In the Court's previous motion, the Court accepted the expert testimony of Dr. Roper in the field of market efficiency, observing that:
Roper is vice-president of a financial and economic consulting firm and a lecturer at Stanford University Law School. At Stanford, he teaches a course on fraud-on-the-market theory, market efficiency, and application of economic analyses, including event studies, to assess economic and legal questions arising within securities class actions. Prior to joining his consulting firm, Roper was a professor of finance at the School of Business at University of Wisconsin--Madison. There, he taught courses on financial economics, which included securities markets, market efficiency, investment strategy, and the application of reliable economic analyses in empirical finance. He holds a master's degree in economics from University of California, Davis, and a Ph.D. in finance from Duke University. Throughout his career, Roper has published articles in leading peer-reviewed journals on economic and financial topics. His articles have involved economic analysis, including event studies. From his background and experience, it is evident to the Court that Roper is well qualified to opine on event studies, market efficiency, and the proper methods for conducting an event study.
(Dkt. No. 271 at 11 (citations omitted).) Plaintiffs now argue in essence that the Court should reconsider this finding that Dr. Roper is qualified based on his credentials, his failure to conduct his own, independent event study, his alleged biases in this case, and his presentation of improper legal opinions in his report.
As the passage above demonstrates, the Court has already considered Dr. Roper's credentials and found him to be qualified to testify on event studies, market efficiency, and the proper methods for conducting an event study. The additional challenge to his qualifications in Plaintiffs' Daubert motion relies primarily on Dr. Roper's failure to recall details of article titles and authors or when precisely he first studied market efficiency, as well as Plaintiffs' contention that Dr. Roper is " merely a critic of others' work -- not able to recall himself having performed any of the work he now criticizes." (Pls.' Mot. at 6.) None of the points raised by Plaintiffs disturbs the Court's determination that Dr. Roper is qualified to testify as an expert on these matters. His years of experience in both consulting and academics on the issues of market efficiency and the fraud-on-the-market theory far overshadow the importance of his ability to remember specific details during his deposition. And as Defendants point out in their opposition, while Dr. Roper could not recall " the name of the research paper he supposedly worked on as a graduate student at Duke University, " (Pls.' Mot. at 1), Dr. Roper did recall the name of the author--Dr. Campbell Harvey--and that the paper addressed " an empirical question about the impact of certain properties of equity markets when countries liberalize controls, " (Berg Decl. Ex. A at 40). Overall, the minor holes that Plaintiffs poke in Dr. Roper's credentials are insufficient to persuade the Court to reconsider its conclusion that Dr. Roper is qualified to testify as an expert.
Moreover, Plaintiffs mischaracterize In re Diamond Foods, Inc., Securities Litigation, 295 F.R.D. 240, 249 (N.D. Cal. 2013), in arguing that Dr. Roper must conduct his own independent analysis. There, the court held that the defendant had failed to rebut the plaintiff's evidence that the market was efficient for two reasons: (1) the defendant did not provide its own study or other evidence demonstrating that the market was not efficient; and (2) the defendant's expert did not provide a sufficient rebuttal of the plaintiff's event study. Id. at 250. Implicit in this holding is the notion that the defendant could have rebutted the plaintiff's position of market efficiency either by presenting its own study or by having its expert sufficiently rebut the plaintiff's event study. The court did not require the defendant to do both. Here, Defendants introduce Dr. Roper's testimony in the hopes of sufficiently rebutting Plaintiffs' expert's event study. That Defendants do not also present their own event study is immaterial for purposes of determining whether Dr. Roper is qualified to testify.
Next, Plaintiffs argue that Dr. Roper is biased both because " his only identifiable experience with event studies to test market efficiency occurred as a consultant for Cornerstone, where he was employed and gained almost of [sic] all of his income as a market efficiency critic" and because Dr. Roper has advertised his role in Defendants' previous successful motion to exclude Plaintiffs' experts, referring to it as " a complete Defense victory." (Pls.' Mot. at 11.) According to Plaintiffs, should they be successful in their class certification motion, Dr. Roper would have to retract the statement that he helped achieve a complete defense victory, thus providing incentive for him to testify in favor of the defense. But " [a]ssessing the potential bias of an expert witness, as distinguished from his or her specialized training or knowledge or the validity of the scientific underpinning for the expert's opinion, is a task that is 'properly left to the jury.'" Donahoe v. Arpaio, No. CV10-02756-PHX-NVW, 2013 WL 5604349, at *10 (D. Ariz. Oct. 11, 2013) (quoting Cruz--Vazquez v. Mennonite Gen. Hosp., Inc., 613 F.3d 54, 2010 WL 2898251, at *59 (1st Cir. 2010)). Here, where the expert's testimony is pertinent to an issue of law--whether to certify Plaintiffs' class--the Court will consider Dr. Roper's alleged bias in evaluating his credibility, but it does not present an appropriate basis upon which to exclude his testimony altogether. See United States v. Thompson, No. 05-50801, 2007 WL 2044725, at *2 (9th Cir. July 16, 2007) (" [A]s a general rule, bias is not a permissible reason for the exclusion of expert testimony." (citing United States v. Abonce--Barrera, 257 F.3d 959, 965 (9th Cir. 2001))); In re Toys " R" Us -- Del., Inc. - Fair & Accurate Credit Transactions Act (FACTA) Litig., No. CV 06-08163 MMM FMOX, 2010 WL 5071073, at *11 (C.D. Cal. Aug. 17, 2010) (" An expert witness's bias goes to the weight, not the admissibility of the testimony, and should be brought out on cross-examination." (internal quotation marks and modifications omitted)); 4 J. Weinstein & M. Berger, Weinstein's Federal Evidence, § 702.06[8] (2d ed. 2000) (" There is no requirement under Rule 702 than an expert witness be unbiased. Few people are.").
Plaintiffs also note that Dr. Roper now works for a subsidiary of FTI Consulting, which is the company that China Integrated Energy retained to assist with its investigation into the Sinclair Upton and Alfred Little Reports. (Pls.' Mot. at 11.) That Dr. Roper works for a subsidiary of a company that Defendants previously retained is tenuous circumstantial evidence of bias at best, and Plaintiffs do not suggest how this relationship would cause Dr. Roper to be biased.
See also Mettias v. United States, No. CIV. 12-00527 ACK, 2015 WL 224658, at *5 (D. Haw. Jan. 15, 2015) (" [A]n expert witness's bias or credibility is an issue for [the] jury and not an appropriate factor on which the Court may decide whether to admit an expert's testimony." (internal quotation marks omitted)); Scentsy, Inc. v. B.R. Chase, L.L.C., No. 1:11-CV-00249-BLW, 2012 WL 4523112, at *3 (D. Idaho Oct. 2, 2012) (" Harmony may cross-examine Palmer at trial about his bias toward Harmony, but his bias is not grounds for disqualification as an expert witness."); Sarantis v. ADP, Inc., No. CV-06-2153-PHX-LOA, 2008 WL 5120918, at *1 (D. Ariz. Aug. 25, 2008) (" Plaintiff's arguments of biased expert testimony and Dr. Pitt's alleged anti-religion bias proffered in the subject Motion may be appropriate to make to a jury why Dr. Steven Pitt testimony is not credible. These arguments, however, do not constitute an appropriate legal basis to exclude evidence prior to trial.").
Finally, Plaintiffs argue that Dr. Roper's references to words such as " biased subjectivity" and " unreliable" transform his statements into improper legal conclusions rather than informed opinions on economics. But these words are not necessarily legal conclusions; rather, they are commonly used phrases that are entirely appropriate to use in describing a methodology that (according to Dr. Roper) is unsound. And Dr. Roper's position as a lecturer at a law university does not somehow taint his testimony with legalese--he is testifying only in the capacity of an expert witness on market efficiency.
Accordingly, the Court again finds that Dr. Roper is sufficiently qualified to opine on event studies, market efficiency, and the proper methods for conducting an event study. Plaintiffs' motion to exclude him as a witness is therefore DENIED.
B. Defendants' Motion to Exclude the Expert Testimony of Dr. Jay Hartzell
In their motion, Defendants contend that the Court should exclude the declaration and testimony of Dr. Hartzell on the basis that, like Plaintiffs' previously excluded expert Michael Marek, Dr. Hartzell employs a subjective, outcome-oriented approach to determining market efficiency. Specifically, while Defendants concede that Dr. Hartzell identifies an objective event study methodology, they argue that he made four subjective decisions to transform objective evidence undermining his conclusion into evidence supporting his position, thus rendering his report unreliable. And as the Court explained in its prior order, " [t]he key inquiry in evaluating expert testimony centers on reliability." (Dkt. No. 271 at 4.)
Defendants do not dispute that Dr. Hartzell possesses the requisite " knowledge, skill, experience, training, or education" required to satisfy the standards of Federal Rule of Evidence 702.
" In analyzing event studies at the class certification stage, courts have acknowledged that 'many decision points in designing an event study require some subjectivity.'" Diamond Foods, 295 F.R.D. at 249 (quoting Countrywide, 273 F.R.D. at 618). But the researcher must take steps to minimize that inevitable subjectivity. See id. Here, Defendants contend that Dr. Hartzell, like Marek, failed to take such steps, rendering his opinion wholly subjective and consequently unreliable. In opposition, Plaintiffs argue that these four decisions, even if subjective, would not constitute reason to exclude Dr. Hartzell's report altogether. Plaintiffs note that Dr. Hartzell's report concludes that China Integrated Energy's shares traded in an efficient market based on an analysis of all five factors from Cammer, 711 F.Supp. at 1285-87, as well as three additional factors identified in Krogman v. Sterritt, 202 F.R.D. 467, 477-78 (N.D. Tex. 2001). (Pls.' Opp'n at 4.) The Ninth Circuit has observed that " Cammer sets out five well-recognized factors 'designed to help make the central determination of efficiency in a particular market.'" Miller v. Thane Int'l, Inc., 615 F.3d 1095, 1103 (9th Cir. 2010) (quoting Binder v. Gillespie, 184 F.3d 1059, 1063 (9th Cir. 1999)). As the Court explained in its previous order, however, the most important factor discussed in Cammer is the fifth one--whether there is " a cause and effect relationship between unexpected corporate events or financial releases and an immediate response in the stock price." See Cammer, 711 F.Supp. at 1287. To evaluate this factor, Dr. Hartzell performed an event study. And it is this event study that Defendants seek to undermine in this motion by arguing that it was founded upon subjective, rather than objective, decisions. Because the Court agrees that such subjectivity could render Dr. Hartzell's overall opinion unreliable, the Court will examine each of the four allegedly subjective decisions highlighted by Defendants.
Plaintiffs cite several cases for the proposition that the fraud-on-the-market presumption may apply even in the absence of an event study demonstrating cause and effect. See, e.g., Local 703, I.B. of T. Grocery & Food Emps. Welfare Fund v. Regions Fin. Corp., 762 F.3d 1248, 1256 (11th Cir. 2014) (" Neither are we persuaded by Regions's argument that a finding of market efficiency always requires proof that the alleged misrepresentations had an immediate effect on the stock price. Although many Circuit Courts have described cause-and-effect as the most important of the Cammer factors, Regions does not point us to any court that has adopted the unwavering evidentiary requirement it urges upon us. Nor could it. Even the Cammer court itself did not establish such a strict evidentiary burden at the class certification stage." (citation omitted)). Here, however, Dr. Hartzell testified in his deposition that " it would be difficult to reach [a conclusion of market efficiency] without looking at an event study." (Dkt. No. 314-1 at 9.) The Court finds that this testimony undermines Plaintiffs' argument that Dr. Hartzell would have come to the same conclusion even without the event study that Defendants challenge.
1. Step One: Dr. Hartzell's Selection of Events
To begin, Defendants argue that Dr. Hartzell subjectively selected events that supported the outcome Plaintiffs desired. In support of this argument, Defendants identify two events that Dr. Hartzell failed to include but should have: (1) the July 7, 2010 press release announcing China Integrated Energy's acquisition of a 50, 000-ton biodiesel production facility in Chongqing; and (2) a March 23, 2011 response by the company to the report issued by Sinclair Upton. Plaintiffs argue that Dr. Hartzell's selection of events (and omission of these) was necessarily within the acceptable range of " inevitable subjectivity" because it accorded with his methodology, which was upheld in Diamond Foods, 295 F.R.D. at 249. In Diamond Foods, Dr. Hartzell conducted an event study based on the value of the stock of Diamond Foods, Inc., in which he selected events " based on Diamond's Form 8-K disclosures during the class period." Id. at 248.
In rejecting the defendant's argument that the event studies were selected subjectively, the court noted: " Here, Dr. Hartzell's study examined each of Diamond's official disclosures (through its Form 8-Ks) throughout the class period and analyzed in depth both earnings statements and news regarding the anticipated Pringles acquisition. This order finds that the set of information selected for analysis is reasonably objective." Id. Plaintiffs therefore argue that inclusion of the Chongqing acquisition press release or the Sinclair Upton response would have violated the very methodology that was upheld in Diamond Foods because these events were not reported in Form 8-Ks. But Dr. Hartzell's methodology that the court upheld in Diamond Foods involved examining Form 8-Ks and " analyz[ing] in depth both earnings statements and news regarding the anticipated Pringles acquisition." Id. Inclusion of press releases--one of which involved " news regarding the anticipated [Chongqing] acquisition" --thus would not necessarily have violated the methodology upheld in Diamond Foods .
The Court also finds unpersuasive Defendants' position taken during oral argument that Dr. Hartzell's analysis is skewed because it accounts not only for the news in the Form 8-Ks but also the reaction of the market analysts. While this argument may undermine the weight or import of Dr. Hartzell's analysis, it does not provide a reason to exclude his report under Rule 702. Defendant will have the opportunity to rebut Dr. Hartzell's opinions at summary judgment and/or trial. Diamond Foods, 295 F.R.D. at 249.
a. The Chongqing Acquisition
With regard to the Chongqing acquisition news, Defendants argue that Dr. Hartzell improperly selected October 26, 2010--the date when the transaction closed--rather than July 7, 2010--the date that the acquisition was first announced--as the effective date of the event because there was a statistically significant price movement when the transaction closed but not when it was announced. As Defendants argue, if the information of this material event was disclosed in July, when the market did not react, and then it was repeated in October, when the market did react, this is evidence of an inefficient market. As Dr. Hartzell himself explained, " if the information was already in the market, you wouldn't expect to find a reaction on 10/26. . . . The market should not respond twice to literally the same thing." (Dkt. No. 314-1 at 68.) The dispute between the parties is thus when the information was introduced into the market. Dr. Hartzell opines that it was October 26, when the transaction closed, because before it closed there was " uncertainty" in the market owing to the fact that, until that time, the deal was " a nonbinding agreement pending completion of negotiation and due diligence." (Dkt. No. 314-1 at 68.) In support of this interpretation, Plaintiffs argue that the event was not announced in the company's Form 8-K until November 2, 2010, indicating that the October 26 date is the appropriate date of the material event.
Dr. Roper, however, opined that the October 26 press release reporting that the Chongqing transaction had closed " revealed little if any new news to the market." (Roper Decl. ¶ 65.) In support of this conclusion, Dr. Roper asserts that the July 7 press release reported the following information:
? [China Integrated Energy] had signed a letter of intent to acquire the Chongqing facility at an estimated cost of $16.5 million. [China Integrated Energy] expected to close in 3QFY2010.
? The acquisition involved a 50, 000 metric ton biodiesel production facility, expanding [China Integrated Energy]'s potential biodiesel production capabilities.
? [China Integrated Energy] expects the new facility will achieve profit margins similar to its other biodiesel facilities.
? [China Integrated Energy] estimated the acquisition would have an expected payback of less than two years.
(Roper Decl. ¶ 63.) By comparison, the October 26 press release contained the following information:
? [China Integrated Energy] closed on the Chongqing acquisition paying $16.5 million.
? The acquisition involved a 50, 000 metric ton biodiesel production facility, expanding [China Integrated Energy]'s potential biodiesel production capabilities.
? [China Integrated Energy] expects that the new facility will achieve profit margins similar to its other biodiesel facilities.
? [China Integrated Energy] expects the acquisition will be accretive to revenue and net income.
(Roper Decl. ¶ 62.) And Dr. Hartzell himself acknowledged that the only new information revealed on October 26 was that the deal had closed:
Q Okay. So what was the incrementally new information announced on October 26th, 2010, that you tested in your event study?
A Well, I -- I think it's here, which is that they should press release, announcing the completion of the assets of the Chongqing assets.
Q So it was the fact that they actually closed the deal?
A Yeah. They announced the completion of the asset at the end of the acquisition.
Q Was there anything else that was the event or was there new information other than the fact that they closed this deal?
A I don't recall anything else, again, other than the fact that -- the fact that they closed the deal may have other components of why that's informative, but I don't recall any other event on that day itself.
(Dkt. No. 314-1 at 67.) It is thus clear that Dr. Hartzell selected the date of October 26, 2010 as the date of the Chonqing acquisition market event based on the idea that the important " news (or unexpected component)" of the acquisition was that the transaction closed. Accepting this proposition requires concluding that there was, as Dr. Hartzell asserts, " uncertainty" in the marketplace regarding the deal. ( See Dkt. No. 314-1 at 67 (Hartzell Dep.) (" If you could say, yeah, with certainty [the Chongqing acquisition] was going to take place and then in fact it did, then that's not news.").)
Correspondingly, Dr. Hartzell must have objectively believed that there was uncertainty in the marketplace regarding this transaction in order to conclude that the October 26 information marked the material event for purposes of his event study. Yet Dr. Roper opines that there was no evidence of any such uncertainty:
[N]either of the analyst reports that covered the October 26, 2010 acquisition suggested that the fact that the transaction closed was a surprise to them. Moreover, from my review of press releases and analyst reports produced by Hartzell, the only interim updates regarding [China Integrated Energy]'s progress towards completing the transaction reiterated that the company expected to close on the acquisition.
(Roper Decl. ¶ 67.) And Dr. Hartzell's only evidence of the uncertainty upon which he relies is speculative; he states: " there's clearly uncertainty about [completion of the terms of the transaction]; otherwise, they wouldn't need to say review and update once they actually know what actually happened." (Dkt. No. 314-1 at 68.) That the parties to this transaction completed ordinary due diligence before closing the transaction does not suffice to demonstrate that there was uncertainty in the marketplace.
Without any evidence of uncertainty in the marketplace regarding the Chongqing acquisition--and without any testing of such uncertainty by Dr. Hartzell--the Court is left with two possible conclusions from the fact that the stock price moved only after the announcement that the transaction had closed. Either the market is efficient but there was uncertainty regarding the completion of the acquisition, or there was no uncertainty and the market is inefficient. Dr. Hartzell chose to accept the former conclusion, which supports Plaintiffs' theory of market efficiency. As Defendants argue, however, this is a subjective decision without any evidence to support it. And as Dr. Hartzell himself acknowledged that the presumption among experts in his field is that the market is inefficient, the Court finds his decision to err on the side of efficiency to be subjective.
( See Dkt. No. 314-1 at 42 (" Q. It's kind of interesting the way you guys phrase it in your profession. It's not about proving that the market is efficient. It's about disproving that it's inefficient. Right? A. Yeah. The null is that it's inefficient and we have to reject it. Q. Right. A. But that's a higher bar than saying the null is -- that it's efficient. Now, you prove to me it's not.").)
b. Response to the Sinclair Upton Report
The second event that Defendants argue Dr. Hartzell subjectively failed to include is the company's March 23, 2011 response to a report issued by Sinclair Upton. Defendants argue that this response should have been included in Dr. Hartzell's study because it fell within his specified methodology of including all events referenced in Form 8-Ks. Defendants assert that this report was referenced in the company's March 30, 2011 Form 8-K, but that Dr. Hartzell chose not to include it as an event because it did not produce a corresponding change in the stock price. As Plaintiffs note, however, the March 30 Form 8-K that Defendants allege referenced this March 23 response never actually does so. Rather, it states:
On March 21, 2011, the Audit Committee of the Board of Directors of the Registrant (the " Audit Committee") determined that it would launch an independent investigation (the " Investigation") into the allegations made about the Company in the March 16, 2011, Upton Sinclair report.
On March 28, 2011, in response to a report issued by Alfred Little about the Company, the Company issued a press release, denying the allegations made by Alfred Little and announcing that the Audit Committee will launch the Investigation.
The Audit Committee will announce at a later date the legal and forensic accounting advisors who will be engaged to assist the Audit Committee in the Investigation.
A copy of the press release is attached hereto as Exhibit 99.1 to this Current Report and is incorporated herein by reference.
China Integrated Energy, Inc., Current Report (Form 8-K) (Mar. 29, 2011), available at http://www.sec.gov/Archives/edgar/data/1070045/000114420411018113/v216483_8k. htm. The Court does not agree with Defendants that this announcement refers to the company's response on March 23. Accordingly, Defendants have not demonstrated that Dr. Hartzell subjectively omitted this event from his study.
2. Step Two: Dr. Hartzell's Alleged Use of After-the-Fact Market Reactions
Next, Defendants contend that Dr. Hartzell used " after-the-fact market reaction" to justify an objectively unreasonable directional hypothesis. In his report, Dr. Hartzell concluded that China Integrated Energy's First Quarter 2010 earnings announcements would result in a negative price movement. (Hartzell Decl. ¶ 28.) Dr. Hartzell describes the " reported sales of $109 million versus the consensus estimate of $85 million, and earnings per share (EPS) of $0.27 versus consensus of $0.26." (Hartzell Decl. ¶ 28.) He also notes that " China Integrated [Energy] raised its 2010 sales and net income guidance from $382 million and $48 million to $387 million and $49.5 million." (Hartzell Decl. ¶ 28.) Nevertheless, citing an analyst who deemed this guidance to be " puzzlingly conservative, " Dr. Hartzell classified this seemingly positive news as a negative event:
Based on the interpretation of the firm's guidance for the future as " puzzlingly conservative, " and the resultant decrease in the average 2010 EPS estimate, I classify this first event as " negative, " implying that it is likely to be associated with a negative stock-price reaction if China Integrated [Energy]'s stock trades in an efficient market.
(Hartzell Decl. ¶ 28.) Defendants challenge Dr. Hartzell's characterization, arguing that it is driven by an after-the-fact market reaction and that it contradicts the general expectation in Dr. Hartzell's field that prices increase when a company outperforms expectations and raises guidance. Moreover, Dr. Roper opines that Dr. Hartzell could only have arrived at his assessment that the news regarding this first quarter performance was " clearly negative" by " subjectively review[ing] ex post analyst reports written with the benefit of hindsight and somehow weigh[ing] these individual subjective analyst assessments in a manner that only Hartzell knows." (Roper Decl. ¶ 37.)
Plaintiffs object to Dr. Roper's conclusions by noting that Dr. Hartzell categorized events as positive or negative " without any consideration of the stock returns for China Integrated [Energy] on the 8-K date or any other date." (Hartzell Decl. ¶ 23.) Plaintiffs further note the court's holding in Diamond Foods, where the court rejected a similar argument, reasoning:
As to the content of those reports, Dr. Hartzell claims that such information was used to " help classify each earnings announcement as a positive or negative surprise, " or as one that was unlikely to cause a price reaction. He did not, however, rely on the analyst reports of the actual post-announcement stock-price reactions to establish the predicted direction for the stock price change. Defendant's expert has failed to establish that the event study uses a flawed methodology on this ground, based on this single example.
295 F.R.D. at 249. Plaintiffs thus argue that Dr. Roper's criticism amounts to nothing more than disagreement regarding the directional characterization of this event.
Yet the Court is " concerned not with the correctness of the expert's conclusions but the soundness of his methodology." Estate of Barabin v. AstenJohnson Inc., 740 F.3d 457, 463 (9th Cir. 2014) (internal quotation marks and alterations omitted). Here, Dr. Hartzell conceded that, generally, " good quarter news . . . [and] . . . increasing guidance is viewed positively." (Dkt. No. 314-1 at 52.) And Dr. Roper points out that the publications cited by Dr. Hartzell as bases for his characterizations do not necessarily support an objective characterization that the first quarter news was negative. (Roper Decl. ¶ ¶ 29-59). In light of this backdrop, a purely objective decision to characterize this event as negative required Dr. Hartzell to have concluded that the small increase in guidance relative to the strong earnings was sufficient to render this a negative event. But Dr. Hartzell testified in his deposition that he did not address this effect in his study:
Q What is the -- what is your field's consensus on inconsistencies in past out-performance and future guidance?
A I don't know of a study that's weighed those two off each other. I mean, conceptually it's just a question of magnitudes. Is this quarter that great compared to the guidance shrinkage or not? Conceptually, it's easy. We would teach MBAs and BBAs how to weigh those two things. I don't know of an empirical study that does that.
Q But here you didn't weigh those two things. You relied upon what the analysts said?
. . . .
A Again, I've seen that raise a flag. I didn't build a model to try to quantify the two effects.
(Dkt. No. 314-1 at 52.) Dr. Hartzell's methodology in this manner is thus troubling because it is not articulable. That is, he is presented with analysts' reports that contain both positive and negative reviews, as well as an inconsistency between performance and future guidance, but he cannot articulate why the negative news in the reports were more persuasive than the positive news, or why this level of inconsistency between performance and future guidance was sufficient to characterize this as a " negative" event.
During oral argument, however, Dr. Hartzell did provide further explanation as to how a positive earnings announcement can be consistent with a negative characterization as an event. As he explained, modest guidance coupled with strong first quarter results can indicate an expectation of underperformance for the upcoming financial quarters. To illustrate, Dr. Hartzell discussed how news that a company beat its first quarter's expected earnings by a figure of $20 could nevertheless be a negative event if the guidance predicts that the company will finish the year by a total of $5 over expectations, because that would indicate that the company will underperform by $15 over the following three quarters.
Without such explanation, the Court agrees that the decision appears to be subjective. As discussed above, however, designing an event study inevitably requires some subjectivity. Diamond Foods, 295 F.R.D. at 249. And while Defendants cite Dr. Hartzell's testimony for the proposition that he should have minimized that subjectivity by designing an empirical study to quantify the effect of the inconsistency between performance and future guidance, his testimony does not suggest that such a course of action would be appropriate. (Nor does Dr. Roper so suggest.) Rather, Dr. Hartzell's testimony suggests that, given the conceptual ease of the comparison, experts can form their conclusion by weighing the relative magnitudes of the quarter performance and the future guidance. And Defendants do not provide any evidence indicating that an empirical study would help minimize the subjectivity inherent in this analysis. Accordingly, the Court agrees with Defendants that Dr. Hartzell's decision to characterize the first quarter earnings report as negative contained a component of subjectivity, but finds that the subjectivity was minimal and seemingly inevitable.
3. Step Four: Dr. Hartzell's Evaluation of the Alfred Little Report
Defendants' third argument asserts that Dr. Hartzell's evaluation of the market in response to the Alfred Little Report demonstrates his subjective approach to the event study. Specifically, Defendants note that the report contained very little new information but nevertheless coincided with the largest one-day drop in China Integrated Energy's stock price (29%) during the class period. And they argue that Dr. Hartzell's conclusion that this reaction of the market supports a finding of market efficiency undermines his analysis because such trivial news should not have such a major impact on the share price. But it is not clear that it was such trivial news; rather, as Plaintiffs note, it included video evidence of the alleged fraud and sham operations, and it helped spurn an internal investigation. More importantly, the Supreme Court has criticized scrutiny into the degree to which public information affects stock price in determining market efficiency. As the Supreme Court recently reasoned, " [d]ebates about the precise degree to which stock prices accurately reflect public information are thus largely beside the point. 'That the . . . price [of a stock] may be inaccurate does not detract from the fact that false statements affect it, and cause loss, ' which is 'all that Basic requires." Halliburton II, 134 S.Ct. at 2410 (quoting Schleicher v. Wendt, 618 F.3d 679, 685 (7th Cir. 2010)); accord Lumen v. Anderson, 280 F.R.D. 451, 460-61 (W.D. Mo. 2012) (" The only question is whether the market rapidly assimilates public information--not whether it behaves in a manner that is completely rational or accurate."). Here, regardless of whether the market should have reacted so strongly to such news, the decrease in stock price following the disclosure of the Alfred Little Report corroborates Dr. Hartzell's conclusion of an efficient market.
4. Circular Logic of Dr. Hartzell's " Thought Experiment"
Finally, Defendants argue that Dr. Hartzell employs circular reasoning in his " thought experiment." Defendants contend that Dr. Hartzell's attempt to prove that his twelve event days had a higher incidence of statistically significant price movements than twelve days selected at random is circular because his event days were specifically selected because they were more likely to be associated with price changes. Defendants' criticisms in this regard are baseless and are unsupported even by their own expert's testimony. Accepting this line of reasoning would preclude experts from conducting the very type of event study analysis that Dr. Hartzell correctly notes is " widely accepted" in this industry. (Hartzell Decl. ¶ 18; accord Diamond Foods, 295 F.R.D. at 248.)
5. Dr. Hartzell Is Sufficiently Qualified
Defendants have thus identified two decisions in which Dr. Hartzell has injected some degree of subjectivity: (1) his decision to use the later date for the Chongqing acquisition event, and (2) his characterization of the first quarter earnings as negative. As discussed above, however, " 'many decision points in designing an event study require some subjectivity.'" Diamond Foods, 295 F.R.D. at 249 (quoting Countrywide, 273 F.R.D. at 618). In light of the extensive analysis performed by Dr. Hartzell, these two subjective components are not enough to render his report unreliable. Accordingly, the Court DENIES Defendants' motion to exclude the testimony and report of Dr. Hartzell.
C. Plaintiffs' Motion for Class Certification
Finally, Plaintiffs have renewed their motion for class certification. In their motion, Plaintiffs seek to certify a class comprising:
all persons and entities, other than Defendants and their affiliates, who purchased or otherwise acquired the common stock of China Integrated [Energy] between March 31, 2010 through April 21, 2011 . .., including persons or entities that purchased common stock pursuant and/or traceable to [China Integrated Energy's] Registration Statement, effective May 19, 2010, and the Prospectuses issued in connection with [its] Secondary Offerings on or about December 28, 2010 through January 7, 2011 . .., and who were damaged thereby.
(Pls.' Mot. at 1.) Defendants contend that certification is improper for a number of reasons, although they primarily rely on establishing Plaintiffs' failure to prove market efficiency. To acquire certification, Plaintiff must satisfy each of the elements under Rule 23(a) in addition to one of the requirements under Rule 23(b).
1. Rule 23(a)
Rule 23(a) requires Plaintiffs to establish four elements: (1) numerosity, (2) commonality, (3) typicality, and (4) adequacy. Defendants argue that the Court should separate Plaintiffs' proposed class into two subclasses--one comprising those putative members asserting section 10(b) claims and one comprising members asserting section 11 claims--and perform a separate Rule 23(a) inquiry into each subclass. But other courts have recognized that " [section 10(b)] and [section 11] claims--though they have slightly different legal standards (and burdens) . . . --are best tried in a single class." Countrywide, 273 F.R.D. at 597 (Pfaelzer, J.) (citing In re Flag Telecom Holdings, Ltd. Sec. Litig., 574 F.3d 29, 35-37 (2d Cir. 2009) (approving this commonsense result, though recognizing that distinctions between the '33 and '34 Acts could be cause for concern under some circumstances)). Accordingly, the Court will consider Plaintiffs as one class in analyzing the requirements of Rule 23(a).
a. Numerosity
First, numerosity is satisfied if " the class is so large that joinder of all members is impracticable." Evon v. Law Offices of Sidney Mickell, 688 F.3d 1015, 1029 (9th Cir. 2012) (citing Fed.R.Civ.P. 23(a)). " The numerosity requirement is not tied to any fixed numerical threshold--it 'requires examination of the specific facts of each case and imposes no absolute limitations.'" Rannis v. Recchia, 380 F.App'x 646, 651 (9th Cir. 2010) (quoting Gen. Tel. Co. of the Nw., Inc. v. EEOC, 446 U.S. 318, 330, 100 S.Ct. 1698, 64 L.Ed.2d 319 (1980)). Although Rule 23(a) does not require a specific minimum number of class members, Ninth Circuit precedent suggests that numerosity is satisfied when the prospective class includes at least forty members. Id.
" [T]he prerequisite [of numerosity] expressed in Rule 23(a)(1) is generally assumed to have been met in class action suits involving nationally traded securities." Yamner v. Boich, No. C-92-20597 RPA, 1994 WL 514035, at *3 (N.D. Cal. Sept. 15, 1994) (quoting Zeidman v. J. Ray McDermott & Co., 651 F.2d 1030, 1039 (5th Cir. 1981)). Plaintiffs allege that millions of shares of common stock were traded over the relevant class period. Although Plaintiffs have not specified precisely how many class members there are, the Court is persuaded that it is well in excess of forty members. See In re Verisign, Inc. Sec. Litig., No. C 02-02270 JW, at *13 (N.D. Cal. Jan. 13, 2005) (" [F]ederal trial courts are quite willing to accept common sense assumptions in order to support a finding of numerosity, often looking at the number of shares traded or transactions completed rather than seeking to determine directly the number of potential class members involved."); Schwartz v. Harp, 108 F.R.D. 279, 281-82 (C.D. Cal. 1985) (" A failure to state the exact number in the proposed class does not defeat class certification, and plaintiff's allegations [that 1, 000, 000 shares of Vector stock were sold at the initial offering] plainly suffice to meet the numerosity requirement of Rule 23." (citation omitted)).
b. Commonality and Typicality
Next, Plaintiffs must demonstrate commonality and typicality. Rule 23(a)'s commonality and typicality factors " tend to merge" in that both commonality and typicality " serve as guideposts for determining whether, under the particular circumstances, maintenance of a class action is economical and whether the named plaintiff's claim and the class claims are so interrelated that the interests of the class members will be fairly and adequately protected in their absence." Meyer v. Portfolio Recovery Assocs. LLC, 707 F.3d 1036, 1041 (9th Cir. 2012) (quoting Wal-Mart Stores, 131 S.Ct. at 2551 n.5) (internal quotation marks omitted). " Commonality simply requires that there be at least one legal or factual issue common to the class, " Verisign, at *15, whereas " [t]he test of typicality is whether other members have the same or similar injury, whether the action is based on conduct which is not unique to the named plaintiffs, and whether other class members have been injured by the same course of conduct, " Hanon v. Dataproducts Corp., 976 F.2d 497, 508 (9th Cir. 1992). The Court is persuaded that Plaintiffs have satisfied both requirements.
" Commonality, like numerosity, is a prerequisite which plaintiffs generally, and which Plaintiffs here, satisfy very easily." Verisign, at *15. Because of the common effect that such misrepresentations have on all shareholders, " [r]epeated misrepresentations by a company to its stockholders satisfy the commonality requirement of Rule 23(a)(2)." In re Juniper Networks, Inc. Sec. Litig., 264 F.R.D. 584, 588 (N.D. Cal. 2009). Plaintiffs allege here that China Integrated Energy made various misstatements in its SEC filings, Registration Statement, press releases, and public statements, along with other factual issues that are common to all putative class members. ( See Compl. ¶ 174.) That is enough to satisfy the commonality requirement. See In re Cooper Cos. Sec. Litig., 254 F.R.D. 628, 635 (C.D. Cal. 2009) (" These common questions form the core of a case for securities fraud; they are also extremely similar to questions of law and fact that other courts have found to be common in previous securities fraud cases."); In re Alco Int'l Grp., Inc., Sec. Litig., 158 F.R.D. 152, 154 (S.D. Cal. 1994) (" Classic securities fraud cases involving a class of purchasers allegedly defrauded over a period of time by similar misrepresentations satisfy the common question requirement.").
As for typicality, " [t]he Ninth Circuit does not require the named plaintiffs' injuries to be 'identical with those of the other class members, [but] only that the unnamed class members have injuries similar to those of the named plaintiffs and that the injuries result from the same injurious course of conduct.'" Cooper, 254 F.R.D. at 635 (second modification in original) (quoting Armstrong v. Davis, 275 F.3d 849, 869 (9th Cir. 2001)). Here, Plaintiffs have alleged that both lead Plaintiffs Puerto Rico TRS and Bristol Investment purchased shares of China Integrated Energy during the class period and suffered damages from Defendants' alleged misrepresentations and omissions. (Compl. ¶ ¶ 26-27.) Accordingly, the lead Plaintiffs' alleged injuries are sufficiently typical of those of the putative class members.
Defendants also argue that the lead Plaintiffs are not sufficiently typical because they " targeted [China Integrated Energy] believing the market to be inefficient and both purchased [China Integrated Energy shares] with knowledge of the alleged fraud, which thus subjects their claims to defenses not typical of the class as a whole. (Opp'n at 12-13.) But Defendants do not sufficiently develop this argument, seeking instead to incorporate large portions of argument from a prior brief. Plaintiffs note in their reply that this argument has been rejected by courts in the past. See, e.g., In re Pfizer Inc. Sec. Litig., 282 F.R.D. 38, 45 (S.D.N.Y. 2012) (rejecting similar argument); Saddle Rock Partners v. Hiatt, No. 96 Civ. 9474, 2000 WL 1182793, at *4 (S.D.N.Y. Aug. 21, 2000) (finding that the possible defense that plaintiff " did not rely on the integrity of the market" when purchasing a company's stock did not warrant denial of class certification motion on the ground of atypicality, even though plaintiff was " gambling" and " traded on perceived market inefficiencies"). Moreover, Defendants' arguments that the lead Plaintiffs knew of the alleged fraud does not destroy typicality because the fact that a party purchased stock both before and after disclosures does not render that party atypical for purposes of class certification. See In re Connetics Corp. Sec. Litig., 257 F.R.D. 572, 577 (N.D. Cal. 2009) (" [T]he Court finds that lead plaintiff's post-disclosure purchases do not automatically defeat typicality.").
c. Adequacy
Finally, Plaintiffs must demonstrate that their lead parties are adequate representatives of the class. The adequacy requirement " serves to uncover conflicts of interest between named parties and the class they seek to represent." Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 625, 117 S.Ct. 2231, 138 L.Ed.2d 689 (1997) (internal citation and quotation marks omitted). Under Ninth Circuit precedent, adequacy depends on the resolution of two questions: (1) whether " the named plaintiffs and their counsel have any conflicts of interest with other class members, " and (2) whether " the named plaintiffs and their counsel [will] prosecute the action vigorously on behalf of the class." Hanlon, 150 F.3d at 1020.
As for the first question, Defendants have identified no potential conflict of interest between the lead Plaintiffs and the remaining putative members of the class. And as Plaintiffs note, their interests appear to be identical in obtaining the maximum possible recovery from Defendants. See, e.g., Verisign, at *29 (" The Lead Plaintiffs' claims and the unnamed class members' claims do not conflict. They all arise out of the same set of facts -- Defendants' alleged misrepresentations during the Class Period."). With regard to the second question, both the lead Plaintiffs and their counsel have prosecuted this action vigorously for over three years, and Plaintiffs' counsel appears to have an expertise in this field. (Berg Decl. ¶ 4, Ex. 3.) As Defendants do not identify any reasons why the lead Plaintiffs and their counsel would not be adequate, the Court finds that Plaintiffs have sufficiently demonstrated adequacy.
Accordingly, Plaintiffs have satisfied each of the requirements of Rule 23(a). To obtain certification, however, they must also satisfy one element from Rule 23(b).
2. Rule 23(b)
Rule 23(b) can be satisfied in one of three ways. In cases like this one, where Plaintiffs assert individualized monetary claims, certification is properly considered under Rule 23(b)(3). Wal-Mart Stores, 131 S.Ct. at 2558. Certification under this provision is appropriate where (1) common questions " predominate over any questions affecting only individual members, " and (2) class resolution is " superior to other available methods for the fair and efficient adjudication of the controversy." Amchem Prods., 521 U.S. at 615 (internal quotation marks omitted).
a. Predominance
The predominance inquiry " tests whether [the] proposed classes are sufficiently cohesive to warrant adjudication by representation" and " trains on the legal or factual questions that qualify each class member's case as a genuine controversy." Id. at 623. In doing so, it " focuses on the relationship between the common and individual issues. When common questions present a significant aspect of the case and they can be resolved for all members of the class in a single adjudication, there is clear justification for handling the dispute on a representative rather than on an individual basis." Hanlon, 150 F.3d at 1022. A finding of commonality under Rule 23(a)(2) is insufficient by itself to satisfy Rule 23(b)(3). Id. (" [The predominance] analysis presumes that the existence of common issues of fact or law have been established pursuant to Rule 23(a)(2)."). Nevertheless, predominance does not require that the legal and factual issues be identical across the class. Certification is proper where " [a] common nucleus of facts and potential legal remedies dominates [the] litigation." Id.
As the Court explained at the beginning of its discussion above, proving direct reliance (an essential element of a section 10(b) claim) individually for each member in a securities class action makes it impossible to satisfy the predominance requirement of Rule 23(b)(3). See Halliburton I, 131 S.Ct. at 2184-85; Amgen, 133 S.Ct. at 1199. Accordingly, Plaintiffs must show that they can invoke the " fraud-on-the-market" theory to establish reliance on behalf of the class as a whole. Halliburton I, 131 S.Ct. at 2184-85. And " [t]he burden of proving those prerequisites [to invoking the " fraud-on-the-market" theory] still rests with plaintiffs and (with the exception of materiality) must be satisfied before class certification." Halliburton II, 134 S.Ct. at 2412.
" The fraud-on-the-market theory rests on the premise that certain well developed markets are efficient processors of public information." Amgen, 133 S.Ct. at 1192. As a result, " courts may presume that investors trading in efficient markets indirectly rely on public, material misrepresentations through their reliance on the integrity of the price set by the market." Id. at 1192-93 (internal quotation marks omitted). The principal inquiry in determining whether to apply the fraud-on-the-market theory is therefore whether the relevant market is efficient.
To begin, the Court notes that a listing on a major national stock exchange such as the NASDAQ, which China Integrated Energy held throughout the class period, is generally a strong indicator of market efficiency, although it is by no means dispositive. See, e.g., Vinh Nguyen v. Radient Pharm. Corp., 287 F.R.D. 563, 573 n.7 (C.D. Cal. 2012) (" [T]he federal courts are unanimous in their agreement that a listing on the NASDAQ or a similar national market is a good indicator of efficiency." (modification in original) (quoting In re Initial Pub. Offering Sec. Litig., 544 F.Supp.2d 277, 296 n.133 (S.D.N.Y. 2008)); Smilovits v. First Solar, Inc., 295 F.R.D. 423, 431 (D. Ariz. 2013) (" In keeping with Basic and the other cases cited in the first paragraph of this section, the Court concludes that the trading of First Solar stock on NASDAQ--a major, well-developed stock exchange--weighs in favor of finding market efficiency.").
See also In re DVI, Inc. Sec. Litig., 639 F.3d 623, 634 (3d Cir. 2011) (" [T]he listing of a security on a major exchange such as the NYSE or the NASDAQ weighs in favor of a finding of market efficiency."), abrogated on other grounds by Amgen, 133 S.Ct. 1184, 185 L.Ed.2d 308; Lumen, 280 F.R.D. at 459 (" even if the NASDAQ is not to be automatically accepted as an efficient market, the aforementioned cases (and others too numerous to cite) establish the NYSE and NASDAQ are at least entitled to a presumption of efficiency").
As for a more conclusive test for determining market efficiency, neither the Supreme Court nor the Ninth Circuit has adopted a specific standard. Nevertheless, as discussed above, the Ninth Circuit has recognized that " Cammer sets out five well-recognized factors 'designed to help make the central determination of efficiency in a particular market.'" Miller, 615 F.3d at 1103 (quoting Binder, 184 F.3d at 1063). These factors include: " first, whether the stock trades at a high weekly volume; second, whether securities analysts follow and report on the stock; third, whether the stock has market makers and arbitrageurs; fourth, whether the company is eligible to file SEC registration form S-3, as opposed to form S-1 or S-2; and fifth, whether there are 'empirical facts showing a cause and effect relationship between unexpected corporate events or financial releases and an immediate response in the stock price.'" Binder, 184 F.3d at 1065 (quoting Cammer, 711 F.Supp. at 1286-87). The Court will address each factor in turn.
First, Plaintiffs have produced evidence demonstrating that China Integrated Energy's average weekly trading volume turnover was 7.7% between April 2, 2010 and April 22, 2011, which approximates almost precisely the relevant class period. (Berg Decl. Ex. 4.) Thus, the weekly trading volume here far exceeds the two percent that the court in Cammer found to favor market efficiency on the basis that it " implies a likelihood that many investors are executing trades on the basis of newly available or disseminated corporate information." Cammer, 711 F.Supp. at 1286.
Second, " [t]he existence of securities analysts following [China Integrated Energy] stock during the class period would imply that the market would rapidly and fully incorporate information into the stock price because analyst reports would likely be 'closely reviewed by investment professionals, who would in turn make buy/sell recommendations to client investors.'" Diamond Foods, 295 F.R.D. at 248 (quoting Cammer, 711 F.Supp. at 1286). Plaintiffs have submitted documentation illustrating that China Integrated Energy was covered by several financial analysts during the relevant time period, including Cowen & Company, Oppenheimer & Co., Roth Capital Partners, Rodman & Renshaw, and RedChip Research. (Berg Decl. Ex. 5.) This factor thus weighs in favor of market efficiency. See, e.g., Aranaz v. Catalyst Pharm. Partners Inc., 302 F.R.D. 657, 669 (S.D. Fla. 2014) (finding that this factor suggested market efficiency with four securities analysts following the company).
Third, courts have recognized that the existence of market makers and arbitrageurs " further provide[s] a mechanism through which the market could be expected to receive information and fully incorporate it into the stock price of a security, as these individuals 'would react swiftly to company news and reported financial results by buying or selling stock and driving it to a changed price level.'" Diamond Foods, 295 F.R.D. at 248 (quoting Cammer, 711 F.Supp. at 1286-87). Plaintiffs have submitted evidence of twenty-one brokers reporting trading in excess of one million shares of China Integrated Energy common stock. (Berg Decl. Ex. 6; Hartzell Decl. ¶ 14.) This exceeds the eleven in Cammer, 711 F.Supp. at 1283 n.30, and the nineteen in Diamond Foods, 295 F.R.D. at 248. Accordingly, this factor also weighs in favor of market efficiency.
Fourth, China Integrated Energy indisputably " was entitled to file an S-3 Registration Statement in connection with public offerings, " Cammer, 711 F.Supp. at 1287, as it filed such a statement with the SEC on May 5, 2010, (Berg Decl. Ex. 7). As the court explained in Cammer, the S-3 form is " predicated on the Commission's belief that the market operates efficiently for these companies, i.e., that the disclosure in Exchange Act reports and other communications by the registrant, such as press releases, has already been disseminated and accounted for by the market place." Cammer, 711 F.Supp. at 1284; accord Cheney v. Cyberguard Corp., 213 F.R.D. 484, 500 (S.D. Fla. 2003) (" Eligibility to complete a S-3 Form is helpful because the SEC permits registration only on the premise that the stock is already traded on an open and efficient market, such that further disclosure is unnecessary." (internal quotation marks omitted)). This factor thus weighs in favor of market efficiency as well.
Finally, the fifth Cammer factor considers whether Plaintiffs have submitted " empirical facts showing a cause and effect relationship between unexpected corporate events or financial releases and an immediate response in the stock price." Cammer, 711 F.Supp. at 1287. As previously noted, this final factor is both the most important and most commonly contested. Here, Defendants dispute this element primarily by attacking the methodology of Dr. Hartzell, whose report they claim is rendered unreliable by his subjectivity in carrying out what would otherwise be an objective event study. As discussed above, however, the Court finds both that Dr. Hartzell is sufficiently qualified to conduct an event study and that his study was sufficiently objective to be reliable. After conducting this study, Dr. Hartzell concluded that " the market in which China Integrated [Energy] stock traded during the class period was semi-strong form efficient." (Hartzell Decl. ¶ 74.) And while Defendants' expert, Dr. Roper, opines at length as to the flaws in Dr. Hartzell's methodology, he does not provide a study or other evidence to rebut Dr. Hartzell's findings. As the Court has upheld Dr. Hartzell's study, the Court is thus faced with a similar situation to that in Diamond Foods, where the court observed:
" The most common empirical test for a causal connection is an event study, which attempts to calculate the effect of an event on the value of the stock of a company . . . ." Diamond Foods, 295 F.R.D. at 248.
[D]efendant does not provide a study or other evidence concluding that the market for Diamond stock was not efficient during the class period. Defendant's expert, while purportedly identifying fundamental flaws in plaintiff's event study, has not provided sufficient rebuttal of the study's conclusion regarding efficiency. Nor has defendant identified any authority, binding or otherwise, that has held that common shares traded on the NASDAQ are not traded in an efficient market.
295 F.R.D. at 250. Thus, as in Diamond Foods, the Court is compelled to reach the conclusion that, " [f]or purposes of this order, plaintiff has sufficiently demonstrated market efficiency and is therefore entitled to the Basic presumption of reliance." Id.
Nevertheless, this presumption is rebuttable, so Defendants therefore " will have the opportunity at trial and/or summary judgment to rebut the presumption that the market for Diamond shares was efficient during the relevant period." Diamond Foods, 295 F.R.D. at 250.
b. Superiority
To satisfy Rule 23(b)(3), Plaintiffs must also demonstrate that class resolution is superior to other methods of adjudicating their case. " Superiority is demonstrated where 'class-wide litigation of common issues will reduce litigation costs and promote greater efficiency.'" In re Heritage Bond Litig., MDL No. 02-ML-1475 DT, at *36 (C.D. Cal. July 12, 2004) (quoting Valentino, 97 F.3d at 1234). Plaintiffs argue that certification would promote judicial efficiency by permitting claims and issues that are common to the putative class members to be resolved simultaneously. The Court agrees. Indeed, " [d]istrict courts have consistently recognized that the common liability issues involved in securities fraud cases are ideally suited for resolution by way of a class action." Cooper, 254 F.R.D. at 641; accord In re Micron Techs., Inc. Sec. Litig., 247 F.R.D. 627, 635 (D. Idaho 2007) (" If this action was not certified as a class, each plaintiff would have to establish the same fraudulent scheme. This repetitive process would 'unnecessarily burden the judiciary.'" (quoting Hanlon, 150 F.3d at 1023)); In re DJ Orthopedics, Inc., No. 01-CV-2238-K (RBB), at *29 (S.D. Cal. Nov. 16, 2003) (" [A] class action is clearly the preferred mechanism for adjudicating these [securities] cases."). The Court thus finds that Plaintiffs have satisfied Rule 23(b)(3).
3. Class Certification
As explained above, Plaintiffs have satisfied the requirements of both Rule 23(a) and Rule 23(b)(3). Consequently, the Court hereby GRANTS Plaintiffs' motion for class certification and certifies Plaintiffs' class comprised of
all persons and entities, other than Defendants and their affiliates, who purchased or otherwise acquired the common stock of China Integrated [Energy] between March 31, 2010 through April 21, 2011 . .., including persons or entities that purchased common stock pursuant and/or traceable to [China Integrated Energy's] Registration Statement, effective May 19, 2010, and the Prospectuses issued in connection with [its] Secondary Offerings on or about December 28, 2010 through January 7, 2011 . .., and who were damaged thereby.
IV. CONCLUSION
For the reasons discussed above, Plaintiffs' motion to exclude Dr. Roper is DENIED; Defendants' motion to exclude Dr. Hartzell is DENIED; and Plaintiffs' motion for class certification is GRANTED.
IT IS SO ORDERED.