The opinion of the court was delivered by: Walls, District Judge.
Plaintiffs William P. and Virginia I. Yeager, co-trustees of
the William P. Yeager and Virginia I. Yeager Trust (collectively
"Yeager plaintiffs"), move for partial summary judgment that
defendant Cendant*fn1: 1) violated Section 11 of the Securities
Act of 1933 ("Securities Act") and is liable to plaintiffs for
$15,849,680.92 plus interest (Count 1); 2) violated Section
12(a)(2) of the Securities Act (Count 5); 3) violated Rule 10(b)
of the Securities Exchange Act of 1934 ("Exchange Act") and Rule
10b-5 promulgated thereunder (Count 7); and 4) violated Section
14a of the Exchange Act and Rule 14a-9 promulgated thereunder
(Count 12). The court heard oral argument on July 31, 2000.
The facts underlying this action are fully set forth in this
court's December 13, 1999 opinion which granted in part and
denied in part defendants' motion to dismiss the Yeagers'
complaint. See 190 F.R.D. 331 (D.N.J. 1999). Briefly, the
Yeagers acquired 1,109,854 shares of common stock of defendant
Cendant Corporation in exchange for 461,847 shares of HFS
Incorporated in the December 1997 merger of CUC International,
Inc. and HFS. Soon after the oft-discussed April 1998 mea culpas
by Cendant, see e.g. In re Cendant Corp. Litigation, 182 F.R.D.
144 (D.N.J. 1998), and 60 F. Supp.2d 354 (D.N.J. 1999), the
Yeagers began to sell off their Cendant holdings; they had fully
divested their Cendant shares by July 1998. Yeager Br. at 12.
These plaintiffs' securities law claims, addressed in this
opinion, arise from public documents generated by CUC, HFS and
Cendant: 1) a Registration Statement filed by HFS and CUC with
the SEC on August 28, 1997; 2) a Joint Proxy
Statement/Prospectus, also filed by HFS and CUC with the SEC on
August 28, 1997, and distributed to HFS shareholders, including
plaintiffs, on August 29, 1997. The Yeagers also rely on
documents created after the disclosures of fraud, during the
investigation and litigation that followed: 3) an Audit Report,
filed with the SEC in Cendant's August 28, 1998 form 8-K,
presented to Cendant's Audit Committee by the law firm Willkie
Farr & Gallagher and accounting/consulting firm Arthur Anderson
LLP; and 4) Cendant's cross-claim and amended cross-claim against
CUC's long-time auditors Ernst & Young LLP, filed August 19, 1999
and June 19, 2000, respectively.
1. Standard for Summary Judgment
Summary judgment is appropriate where the moving party
establishes that "there is no genuine issue as to any material
fact and that [it] is entitled to a judgment as a matter of law."
Fed.R.Civ.P. 56(c). A factual dispute between the parties will
not defeat a motion for summary judgment unless it is both
genuine and material. See Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 247-48, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A
factual dispute is genuine if a reasonable jury could return a
verdict for the non-movant and it is material if, under the
substantive law, it would affect the outcome of the suit. See
Anderson, 477 U.S. at 248, 106 S.Ct. 2505. The moving party must
show that if the evidentiary material of record were reduced to
admissible evidence in court, it would be insufficient to permit
the non-moving party to carry its burden of proof. See Celotex
v. Catrett, 477 U.S. 317, 318, 106 S.Ct. 2548, 91 L.Ed.2d 265
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).
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.
Section 12(a)(2) of the Securities Act, 15 U.S.C. § ...