Hodges v. Akeena Solar, Inc.

Citations: 274 F.R.D. 259; 2011 U.S. Dist. LEXIS 25518; 2011 WL 1518903Docket: No. C 09-02147 JW

Court: District Court, N.D. California; March 9, 2011; Federal District Court

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The court order grants Plaintiffs' motions to withdraw Sharon Hodges as a representative plaintiff and to certify a class for a putative class action against Akeena Solar, Inc. and individual defendants. The plaintiffs, including Joel Gentleman and David Gordon, allege violations of the Securities Exchange Act of 1934, specifically claims of false and misleading statements and omissions that inflated Akeena's stock price between December 26, 2007, and March 13, 2008. 

The factual background outlines that Akeena Solar, which markets solar power systems, was led by Defendant Cinnamon, who, facing a divorce settlement, sought to inflate the company's stock price to fund the buyout. This included a misleading announcement about a credit line increase and a flawed licensing agreement with Suntech that was not disclosed to investors. These actions allegedly allowed Cinnamon to sell fewer shares than would have been necessary without the inflation, leading to significant financial repercussions when Akeena later disclosed poor financial results. 

The plaintiffs assert three causes of action: 1) Violations of 10(b) of the Exchange Act through false statements and omissions, 2) Control person liability under 20(a) of the Exchange Act for these violations against the individual defendants, and 3) Insider trading liability under Section 20A of the Exchange Act against Cinnamon. The court's ruling follows a hearing held on February 28, 2011.

On May 18, 2009, Sharon Hodges initiated a lawsuit on behalf of individuals who purchased Akeena common stock between December 26, 2007, and March 13, 2008. An amended complaint was filed on December 11, 2009, and on May 20, 2010, the court denied the defendants' motion to dismiss. The court is currently considering two motions: one to withdraw Hodges as a representative plaintiff and another for class certification. 

For voluntary dismissal under Fed. R. Civ. P. 41(a)(2), a court typically grants the motion unless the defendant can demonstrate significant legal prejudice. Legal prejudice refers to harm to a legal interest, claim, or argument—not mere inconvenience or tactical disadvantage. 

Regarding class certification, the decision lies within the discretion of the district court, which must conduct a rigorous analysis to ensure that the party seeking certification meets all requirements of Rule 23(a) and at least one from Rule 23(b). The court generally accepts the allegations in the complaint as true but can look beyond the pleadings to evaluate compliance with Rule 23.

The plaintiffs argue that withdrawing Hodges as Lead Plaintiff will not prejudice the defendants, citing her exhaustion from a deposition. With no opposition from the defendants, the court grants this motion. Additionally, the proposed class includes all individuals who acquired Akeena securities during the specified period, excluding defendants and their immediate family members. The plaintiffs seek to appoint Scott+Scott LLP as lead class counsel. To certify the class under Rule 23(a), the court must find that the class is numerous, has common legal or factual questions, the representative parties’ claims are typical, and they will adequately protect the class's interests.

Numerosity is established as the Plaintiffs demonstrate that Akeena stock traded on the NASDAQ with an average weekly volume of 14.6 million shares during the class period, indicating that the number of investors potentially affected is in the thousands. The Court, while noting that Defendants do not dispute this aspect, confirms that the numerosity requirement of Rule 23(a)(1) is satisfied, as a class of one thousand members is considered sufficiently numerous. 

For commonality, Plaintiffs argue that there are several shared legal and factual questions impacting the entire class, including whether Defendants violated federal securities laws, omitted or misrepresented material facts about Akeena’s finances, acted with the necessary state of mind, and whether the market price of Akeena’s securities was artificially inflated due to these omissions and misrepresentations. The Court finds that these issues, which are central to all class members, fulfill the commonality requirement of Rule 23(a)(2). Thus, the Court concludes that both the numerosity and commonality requirements for class certification have been met.

The typicality requirement under Rule 23(a)(3) is satisfied as the claims of all Class members are based on the same legal theories and operative facts, specifically that they purchased Akeena’s securities at inflated prices due to Defendants’ misconduct and suffered losses after the stock price declined when the company's true condition was partially revealed. The representative claims are deemed "typical" if they are reasonably coextensive with those of absent class members, not necessarily identical, and the Court finds that the injuries of the representative plaintiffs, Gordon and Gentleman, align with those of the class, as both purchased shares during the Class Period and incurred significant losses.

For the adequacy requirement under Rule 23(a)(4), Plaintiffs assert they are suitable representatives due to their experienced counsel and absence of conflicts with class members. Defendants argue that the representatives lack case knowledge and are indifferent to the outcome. Adequacy is assessed based on potential conflicts of interest and the representatives' commitment to the case. The Court determines that Plaintiffs demonstrate sufficient familiarity with the suit and their responsibilities as lead plaintiffs, with no evidence of conflicts. They plan to prosecute the case vigorously, and counsel from Scott+Scott has the necessary experience in complex class actions. Consequently, the Court concludes that both the typicality and adequacy requirements of Rule 23(a) are met.

Rule 23(b) requires plaintiffs to demonstrate that specific criteria are satisfied for class action certification, in addition to meeting Rule 23(a) prerequisites. Plaintiffs are pursuing certification of a Rule 23(b)(3) class, which necessitates proving two key conditions: first, that common legal or factual questions among class members dominate over individual questions; second, that a class action is the most effective method for resolving the dispute fairly and efficiently.

Predominance relates to whether common legal and factual questions outweigh individual ones in a class action. Plaintiffs argue that Defendants' conduct inflated Akeena common stock prices through deceptive statements affecting all class members, while Defendants counter that Plaintiffs have not demonstrated the applicability of the fraud-on-the-market presumption. Defendants assert that Plaintiffs' expert testimony indicates no significant stock price decline occurred when the truth about the misrepresentations was revealed, challenging the notion that these misrepresentations distorted the stock price.

The predominance inquiry under Rule 23(b)(3) requires a cohesive class for representative adjudication, focusing on the balance of common and individual issues. Reliance on misstatements is essential for a Rule 10b-5 claim, where reliance on public misrepresentations is generally presumed unless rebutted by evidence severing the link between misrepresentations and trading decisions. In assessing the fraud-on-the-market presumption, courts must rigorously evaluate the plaintiffs' entitlement to this presumption at the class certification stage.

Plaintiffs argued that Akeena’s stock traded on an efficient market, supported by evidence of high trading volume, analyst coverage, and compliance with Form S-3 requirements. They established a cause-and-effect relationship between corporate announcements and stock price movements, meeting the Cammer factors for market efficiency. Defendants challenge this by asserting that the lack of immediate stock price decline following the revelation of misrepresentations rebuts the presumption of reliance. Plaintiffs contend that it is premature for the Court to conclude on price distortion and argue that Defendants have not disproven loss causation, noting that Northern District of California courts have previously dismissed the need for loss causation at the class certification stage.

The Ninth Circuit has not explicitly ruled on whether plaintiffs must demonstrate loss causation at the class certification stage to benefit from the fraud-on-the-market presumption, but existing precedents indicate that such a requirement would likely be rejected. In a relevant securities fraud case, plaintiffs alleged significant stock price increases for Akeena following announcements by defendants, with a peak price of $16.80 per share before subsequent disclosures caused the stock to drop. Defendants argued that plaintiffs' expert testimony showed no significant decline in stock price corresponding to the disclosures of the "truth" about the credit line increase and the agreement with Suntech. However, the expert did not provide an opinion on loss causation, leading the court to conclude that defendants failed to eliminate the possibility of a rational jury finding that the misrepresentations misled the market. Consequently, the court determined that plaintiffs had adequately alleged loss causation to support their reliance on the fraud-on-the-market theory, fulfilling the predominance requirement of Rule 23(b)(3).

Regarding the superiority of a class action, plaintiffs argued that it was more efficient than individual lawsuits due to the large number of class members and the typical small size of claims. Defendants did not dispute this point. The court evaluated the four Rule 23(b)(3) superiority factors: the interests of class members in controlling separate actions, existing litigation related to the controversy, the desirability of concentrating litigation in one forum, and the manageability of a class action. The court noted the absence of other related actions and the improbability of managing thousands of individual claims, thereby supporting the need for a class action. The court found no significant management difficulties in proceeding as a class action and concluded that plaintiffs met the superiority requirement of Rule 23(b)(3).

Defendants argue the class period for Akeena's securities fraud should conclude on January 17, 2008, asserting that any misleading statements were corrected by January 16, 2008, when relevant information was disclosed. They claim investors could not have relied on alleged misrepresentations after this date. Plaintiffs counter that the January 16 disclosures were partial, suggesting that it is premature for the Court to determine that investors who bought Akeena stock between January 16 and March 13, 2008, were aware of the truth. The Court must evaluate whether a 'curative disclosure' rendered it unreasonable for investors to remain misled. It concludes that there are still factual questions regarding the completeness of the January 16 disclosures, particularly since Akeena's audited financial results were not released until after that date, and crucial statements regarding the Suntech agreement were not made until March 13. Thus, the class period will remain open until March 13, 2008.

Regarding the Section 20A claim, Defendants seek to establish a subclass for those who purchased Akeena stock on the same days as insider Cinnamon's sales, arguing only they have standing. However, the Ninth Circuit has not definitively defined 'contemporaneous' trading under Section 20A, and other courts suggest that purchases made within five days of an insider's sale suffice for standing. The Court concludes that all individuals who purchased stock during the time of the insider sales can maintain a 20A claim, hence the class definition will not be altered to create a subclass based on the timing of purchases relative to Cinnamon's sales.

The Court has granted the Plaintiffs' request to remove Sharon Hodges as a Representative Plaintiff and has approved the motion for class certification. The certified class includes all individuals who purchased or acquired Akeena Solar, Inc. securities between December 26, 2007, and March 13, 2008, and suffered damages as a result. Exclusions from this class include Defendants, Akeena's officers and directors, their immediate family members, legal representatives, and any entities in which Defendants have a controlling interest. The parties are required to submit a proposed form of class notice and a joint proposal for its dissemination by March 21, 2011. 

Additionally, the Court noted that it independently assesses compliance with Federal Rule of Civil Procedure 23(a) regardless of the Defendants' admissions. The excerpt references various docket items related to motions and declarations supporting the class certification process, including opposition from Defendants and a previous denial of a protective order for Hodges. The Ninth Circuit's endorsement of five factors for determining an efficient market is cited, which includes stock trading volume, analyst coverage, presence of market makers, eligibility for SEC registration, and empirical evidence linking corporate events to stock price changes. Lastly, it notes the potential lack of market response to misrepresentations as a key consideration.

Courts must assess evidence related to the requirements of Rule 23 during class certification, even if it also touches on the underlying merits of the case. The applicability of the fraud-on-the-market presumption is essential to evaluate the predominance requirement under Rule 23(b)(3). The Ninth Circuit has not defined the exact parameters of "contemporaneous trading," indicating that a vague three-year period lacks the specificity needed to meet the requirement. Additionally, the court has noted that a two-month gap would exceed acceptable limits for contemporaneous trading. This guidance suggests that the specifics of trading timeframes should be clarified in future cases closer to the borderline of acceptability.