Once the moving party has carried its burden under Rule 56,
"its opponent must do more than simply show that there is some
metaphysical doubt as to the material facts in question."
Matsushita Elec. Indus. Co. v. Zenith Radio Corp.,
475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). The opposing
party must set forth specific facts showing a genuine issue for
trial and may not rest upon the mere allegations or denials of
its pleadings. See Sound Ship Building Corp. v. Bethlehem Steel
Co., 533 F.2d 96, 99 (3rd Cir. 1976), cert. denied,
429 U.S. 860, 97 S.Ct. 161, 50 L.Ed.2d 137 (1976). At the summary judgment
stage the court's function is not to weigh the evidence and
determine the truth of the matter, but rather to determine
whether there is a genuine issue for trial. See Anderson, 477
U.S. at 249, 106 S.Ct. 2505. In doing so, the court must construe
the facts and inferences in the light most favorable to the
non-moving party. See Wahl v. Rexnord, Inc. 624 F.2d 1169, 1181
(3rd Cir. 1980).
2. Section 11
Plaintiffs request summary judgment, as to both liability and
damages, under Section 11 of the Securities Act of 1933,
15 U.S.C. § 77k(a). Under Section 11, purchasers of registered
securities may sue enumerated individuals for materially false or
misleading information included in, or the omission of material
information from, the registration statement. Plaintiffs may meet
their prima facie burden by showing only a material misstatement
or omission. Notably, "[l]iability against the issuer of a
security is virtually absolute," Herman & MacLean v.
Huddleston, 459 U.S. 375, 382, 103 S.Ct. 683, 74 L.Ed.2d 548
(1983), so that plaintiffs need not demonstrate scienter. Id.;
In re Cendant Corporation Litigation, 60 F. Supp.2d 354, 363
(D.N.J. July 27, 1999).
Plaintiffs contend that misstatements in the August 1997
registration statement, particularly concerning CUC's
fraudulently reported earnings, "would have been viewed by the
reasonable investor as having altered the `total mix' of
information made available," and are therefore material as a
matter of law. See In re Donald J. Trump Casino Sec.
Litigation-Taj Mahal Litig., 7 F.3d 357, 369 (3rd Cir. 1993)
(citation omitted). Though materiality is "a relative concept,"
id., Cendant does not deny that the representations in the
registration statement were material, and this court finds no
reason to reject the parties' assertions on the point.
Recognizing the "relatively minimal burden" on a Section 11
plaintiff, see Herman & MacLean, 459 U.S. at 382, 103 S.Ct.
683, Cendant apparently concedes liability. See Cendant Br. at
11 (arguing that plaintiffs' motion for summary judgment on
Section 11 claims should be denied — but only to the extent
plaintiffs seek "rote application" of the statutory damages
measure). However, the corporation invokes the statutory defense
of "negative causation," see 15 U.S.C. § 77k(e). Under this
provision, "if the defendant proves that any portion or all of
[plaintiffs'] damages represents other than the depreciation in
value of such security resulting from [the misstatements or
omissions in] the registration statement," its liability is
reduced or eliminated. Id. By the plain language of the
statute, defendant bears the burden of proof on this affirmative
defense. Akerman v. Oryx Communications, Inc., 810 F.2d 336,
341 (2nd Cir. 1987); McMahan & Co. v. Wherehouse Entertainment,
Inc., 65 F.3d 1044, 1048 (2nd Cir. 1995).
The Yeager plaintiffs calculate Section 11 damages according to
15 U.S.C. § 77k(e), which allows recovery of "the difference
between the amount paid for the security (not exceeding the price
at which the security was offered to the public) and . . . (2)
the price at which such security shall have been disposed of in
the market before suit." Plaintiffs evidence that they exchanged
461,847 shares of HFS common stock, worth $35,764,277.06 at
closing on the day before the merger; in return, they received
1,109,864 CUC/Cendant shares
and $16.05 cash. Yeager Decl. ¶¶ 2-3, Yeager Appendix Exhs. 14,
16, 17. After Cendant's disclosures of fraud, the Yeagers sold
all of their Cendant stock between May 19 and July 15, 1998, for
total proceeds of $19,914,580.09. Yeager Decl. ¶ 4, Yeager
Appendix Exh. 18. Plaintiffs request $15,849,680.92 in damages,
which represents the difference between the value of the HFS
shares they traded in, and the selling price received in May and
June 1998. They also seek prejudgment interest. See Feather v.
United Mine Workers of America, 711 F.2d 530, 540 (3rd Cir.
Cendant seeks to reduce that figure, relying on the declaration
of financial economist Dr. Marcia Kramer Mayer. Dr. Mayer, a
specialist in securities and financial economics, opines that
plaintiffs have "fail[ed] to account for the fact that a
substantial portion of the decline in Cendant's stock price
between the time of the acquisition of their shares and the time
of their sales of these shares was attributable to factors other
than the accounting irregularities and errors." Mayer Decl. ¶ 9.
Her statistical "event study," which assesses the reaction of
Cendant's stock price to each public disclosure of accounting
irregularities, purports to evaluate the amount of artificial
inflation per share (the portion of the price attributable to the
alleged misstatements) on various dates. Id. ¶¶ 19-23. For
example, Dr. Mayer finds that Cendant's April 15, 1998 disclosure
reduced artificial inflation to $6.40 (down from $13.39 at the
time of the merger), and that the company's July 14, 1998
disclosure eliminated all remaining artificial inflation. Id. ¶
25 and Exh. 7. She concludes that, though the Yeager plaintiffs
sustained actual losses of between $9.63 to $16.50 on their
Cendant sales, only $6.99 of the May and June 1998 losses, and
$13.39 of the July losses, are attributable to misstatements in
Cendant's financials. "The remainder is attributable to other
factors, such as (but not limited to) changes in general market
and industry conditions." Id. ¶ 26 and Exh. 7.
Such statistical evidence is sufficient to create a triable
issue of fact on the negative causation issue, as to the amount
of appropriate damages. See, e.g., Akerman, 810 F.2d at 342.
Whether Cendant can prove its assertion that causes other than
the misstated financials contributed to plaintiff's losses
remains to be seen at trial. See Collins v. Signetics Corp.,
605 F.2d 110, 115 (3rd Cir. 1979) (affirming jury verdict for
defendant based on corporate defendant's expert testimony that
various economic and political factors caused a market decline,
including "high interest rates, inflation, the war in the Middle
East, Watergate, Vice President Spiro Agnew's resignation, a
large verdict against International Business Machine Corporation,
the oil embargo and subsequent long lines at gasoline stations,
closing of large automobile plants, President Nixon's
resignation, United States-Soviet confrontations, and shortages
and fears of shortages in general"), overruled on other grounds,
Pinter v. Dahl, 486 U.S. 622, 644, 108 S.Ct. 2063, 100 L.Ed.2d
Yet, as noted by plaintiffs, Cendant's own expert admits that
at least some of the Yeagers' losses, $11,661,078.96,*fn2 can be
traced directly to the registration statement. Mayer Decl. ¶ 26.
Because Cendant does not dispute its Section 11 liability,
plaintiff's request for partial summary judgment as to liability
is granted; because Cendant concedes $11,661,078.96 in damages,
plaintiffs are entitled to summary judgment as to that amount on
their Section 11 claims.
3. Section 12(a)(2)
Section 12(a)(2) of the Securities Act, 15 U.S.C. § 77l
Any person who . . . offers or sells a security . . .
by the use of any means or instruments of
transportation or communication in interstate
commerce or of the mails, by means of a prospectus .
. . which includes an untrue statement of material
fact . . . (the purchaser not knowing of such untruth
or omission), and who shall not sustain the burden of
proof that he did not know, and in the exercise of
reasonable care could not have known, of such untruth
or omission, shall be liable . . . to the person
purchasing such security from him . . . for damages
if he no longer owns the security.
To warrant summary judgment, plaintiffs must establish a lack of
disputed issues concerning Cendant's offering of shares by means
of a prospectus which contained material misstatements of fact.
In re MobileMedia Securities Litig., 28 F. Supp.2d 901, 933
(D.N.J. 1998). The legal standard for materiality under this
provision is the same as under Section 11. In re Donald J. Trump
Casino Sec. Litig., 7 F.3d at 369.
The Yeagers contend that they have evidenced these elements:
they were offered stock by means of the Joint Proxy
Statement/Prospectus, and the Joint Proxy Statement/Prospectus
contained material misstatements concerning CUC's financial
performance for the years ended January 31, 1996 and January 31,
1997, and the quarters ended April 30, 1997 and July 31, 1997.
Yeager Br. at 31. Cendant does not challenge these assertions.
See, e.g., Cendant Response to Plaintiffs' First Set of
Requests for Admission, Yeager Exh. 4 ¶¶ 33, 40 ("Cendant admits
that the Joint Proxy Statement was inaccurate in certain material
respects . . .").
Summary judgment is granted to the Yeager plaintiffs on their
claims under Section 12(a)(2) of the Securities Act.
4. Section 10(b) and Rule 10b-5
The parties debate Cendant's liability under Section 10(b) of
the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5, which make
(a) To employ any device, scheme, or artifice to
(b) To make any untrue statement of material fact or
to omit to state a material fact necessary in
order to make the statements made, in light of
the circumstances in which they were made, not
(c) To engage in any act, practice, or course of
business which operates or would operate as a
fraud or deceit upon any person, in connection
with the purchase or sale of any security.
17 C.F.R. § 240.10b-5. To prove such a claim, plaintiffs must
show that Cendant, in connection with the purchase or sale of a
security, (1) misrepresented or omitted (2) a material fact (3)
with knowledge or recklessness (scienter), and (4) reasonable
reliance by plaintiffs with (5) consequent injury. In re Advanta
Corp. Securities Litig.,