United States District Court, D. Kansas
CORA E. BENNETT, Individually and On Behalf of All Others Similarly Situated, Plaintiff,
SPRINT NEXTEL CORPORATION, GARY D. FORSEE, PAUL N. SALEH, and WILLIAM G. ARENDT, Defendant.
MEMORANDUM AND ORDER
ERIC F. MELGREN, District Judge.
This is a securities class action against Defendant Sprint Nextel Corporation ("Sprint" or the "Company") and certain former Sprint officers and directors-Defendants Gary D. Forsee, Paul N. Saleh, and William G. Arendt. Lead Plaintiffs PACE Industry Union-Management Pension Fund ("PACE"), Skandia Life Insurance Company ("Skandia"), and the West Virginia Investment Management Board ("WVIMB"), on behalf of themselves and others similarly situated, assert that Defendants violated §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 as a result of false and misleading statements and omissions made by Defendants regarding Sprint's business performance and financial results. This matter comes before the Court on Lead Plaintiffs' Motion for Class Certification (Doc. 116). For the reasons set forth below, the Court grants Lead Plaintiffs' motion.
I. Factual and Procedural Background
Sprint is a wireless and wireline communications services company with its headquarters in Overland Park, Kansas. In August 2005, Sprint, the country's then third largest wireless carrier, acquired Nextel, the country's fifth largest carrier, for $37.8 billion. Sprint allocated $15.6 billion of the purchase price to goodwill. Defendant Forsee became CEO of the combined Company and Defendant Saleh became the CFO.
According to Plaintiffs, problems arose almost immediately after Sprint's acquisition of Nextel. Plaintiffs contend that cultural differences divided legacy Sprint and Nextel personnel and technological differences eliminated the possibility of integrating the two companies' wireless networks. Plaintiffs claim that the combination of these difficulties, among others, led to the deterioration of the Company's customer base. Plaintiffs allege that to cover up the Company's worsening condition, Defendants made repeated false and misleading statements about the Company's business metrics and financials. Specifically, Plaintiffs contend that from October 26, 2006, through February 27, 2008, through press releases, conference calls, and SEC filings, Defendants falsely represented that Sprint received billions of dollars in benefits from merger synergies, that Sprint improved its customer mix as a result of tightening credit standards, that the integration of the Sprint and Nextel cellular platforms was progressing as planned, and that the goodwill associated with the Nextel purchase was not impaired.
Plaintiffs claim that Sprint's true condition was not revealed until after Dan Hesse was named CEO of Sprint on December 18, 2007. This was two months after Sprint's board of directors forced Defendant Forsee to resign as the Company's CEO and Chairman. On January 18, 2008, Sprint disclosed that it suffered a net loss of 683, 000 post-paid subscribers in the fourth quarter of 2007 and that it was evaluating a charge in the fourth quarter related to a goodwill write-down. That day, the Company's stock price dropped 24.8% or $2.87 per share. On February 28, 2008, Sprint issued a press release disclosing the Company's fourth quarter and fiscal year 2007 results, which stated that "the company recorded a non-cash goodwill impairment charge of $29.7 billion" contributing to a "net loss for the quarter [of] $29.5 billion or $10.36 diluted loss per share." The next day, on February 29, 2008, Sprint filed its 4Q and FY 2007 results with the SEC, which Plaintiffs claim further disclosed the scope of problems resulting from Defendants' reliance on subprime customers and the failure to integrate Sprint and Nextel systems and operations. On February 28 and 29, 2008, the Company's stock price dropped a cumulative 20.5% or $1.84 per share. Overall, in a little more than six months, Sprint's stock price dropped almost 70% from its class period high of $23.25 per share to less than $7.15 per share.
There are currently three Lead Plaintiffs: PACE, Skandia, and WVIMB. PACE is a defined benefit plan based in Nashville, Tennesee, that is jointly administered by labor and management. PACE alleges that during the class period, it purchased over 180, 000 shares of Sprint common stock, expending $3.6 million. Skandia is a life insurance company headquartered in Stockholm, Sweden, that provides financial and insurance services, with assets under management as of the end of fiscal year 2010 of approximately $44.8 billion. Skandia alleges that during the class period, it purchased over 448, 000 shares of Sprint common stock, expending over $5.6 million. WVIMB is an institutional investor based in Charleston, West Virginia, that provides fiscal administration and investment management services to twenty-two participant plans. WVIMB alleges that during the class period, it purchased: (1) over 405, 000 shares of Sprint stock, expending $7.5 million, (2) 3.3 million units of Sprint's 6.0% bonds, due December 1, 2016, (3) 120, 000 units of Sprint's 6.9% bonds, due May 1, 2019, and (4) 3, 070, 000 units of Sprint's 8.75% bonds, due March 15, 2032. Lead Plaintiffs now move the Court for an order certifying this action as a class action under Fed.R.Civ.P. 23(a) and 23(b)(3).
A. Class Certification Under Rule 23
1. General Standards Governing Class Certification
Whether to certify a class is committed to the broad discretion of the trial court. In exercising this discretion, the Court should err on the side of class certification because it has the authority to later redefine or even decertify the class if necessary. In deciding whether to certify, the Court must perform a "rigorous analysis" as to whether the proposed class satisfies the requirements of Rule 23 of the Federal Rules of Civil Procedure. Rule 23 does not provide the Court with the authority to conduct a preliminary inquiry into the merits of the lawsuit to determine whether it may be maintained as a class action. The Tenth Circuit, however, has emphasized that the question of class certification involves considerations that are "enmeshed in the factual and legal issues comprising the plaintiff's cause of action." Although the Court may not evaluate the strength of a cause of action at the class certification stage, it must consider, "without passing judgment on whether plaintiffs will prevail on the merits, " whether the requirements of Rule 23 are met.
As the parties seeking class certification, Plaintiffs have the burden to demonstrate under a strict burden of proof that the requirements of Rule 23 are clearly satisfied. In doing so, Plaintiffs must establish that the prerequisites of Rule 23(a) are satisfied and that the proposed class falls under one of the categories described in Rule 23(b).
2. Class Definition
In determining whether to certify a class, the Court first addresses the proposed class definition. "Defining the class is of critical importance because it identifies the persons (1) entitled to relief, (2) bound by a final judgment, and (3) entitled under Rule 23(c)(2) to the best notice practicable in a Rule 23(b)(3) action." Therefore, the definition must be "precise, objective, and presently ascertainable." Here, Lead Plaintiffs seek certification of the following class:
All persons and entities who purchased or otherwise acquired the publicly-traded common stock of Sprint Nextel Corporation... from October 26, 2006, through February 27, 2008, inclusive... and who were damaged thereby. Included in the Class are purchasers of Sprint common stock ["Sprint Stock"] and the following Sprint debt securities ["Sprint Bonds"]: (i) 6.0% bonds, due December 1, 2016; (ii) 6.9% bonds, due May 1, 2019; (iii) 8.75% bonds, due March 15, 2032; (iv) 8.375% bonds, due March 15, 2012; (v) 7.625% bonds, due January 30, 2011; (vi) 6.375% bonds, due May 1, 2009; (vii) 6.875% bonds, due November 15, 2028; (viii) 6.875% bonds, due October 31, 2013; (ix) 5.95% bonds, due March 15, 2014; and (x) 7.375% bonds, due August 1, 2015. Excluded from the Class are Defendants herein, members of each Defendant's immediate family, any entity in which any Defendant has or had a controlling interest, officers and directors of Sprint, and Defendants' legal representatives, heirs, successors, or assigns of any such excluded party.
Defendants do not object to Lead Plaintiffs' proposed class definition. Furthermore, the Court finds that the proposed class is sufficiently defined to allow potential class members to be identified.
3. Rule 23(a) Requirements
Rule 23(a) provides the following prerequisites for class certification: "(1) Numerosity: the class is so numerous that joinder of all members is impracticable; (2) Commonality: there are questions of law or fact that are common to the class; (3) Typicality: the claims or defenses of 4the representative parties are typical of the claims or defenses of the class; and (4) Adequacy of Representation: the representative parties will fairly and adequately represent the interests of the class." Of the four requirements listed above, Defendants only contend that Lead Plaintiffs have not met the requirement of typicality. Nonetheless, the Court will briefly analyze whether Plaintiffs have met all of the Rule 23(a) requirements for class certification.
To satisfy the numerosity requirement of Rule 23(a)(1), Plaintiffs must establish that the class is so numerous so as to make joinder impracticable. Plaintiffs must produce some evidence or otherwise establish by reasonable estimate the number of class members who may be involved. Courts have found that classes as small as twenty members can satisfy the numerosity requirement, and a "good faith estimate of at least 50 members is a sufficient size to maintain a class action." Here, there were, on average, 645 institutional investors holding Sprint common stock and 224 holding Sprint bonds during the class period. The Court therefore finds that Plaintiffs have established the numerosity required to maintain a class action.
Rule 23(a)(2) requires Plaintiffs to show that questions of law or fact are common to the class, that is, members of the putative class "possess the same interest and suffer the same injury." This inquiry requires the Court to find only whether common questions of law or fact exist. Unlike the Court's analysis under Rule 23(b)(3), this inquiry does not require a finding that such questions predominate.
Plaintiffs have identified the following three questions of law and fact that they claim are common to all class members: (1) whether Defendants' alleged acts violated federal securities laws; (2) whether Defendants' statements during the class period were materially false and misleading when issued or whether Defendants' statements omitted material facts necessary to make the statements not misleading; and (3) the extent and measure of damages sustained by class members. Plaintiffs assert that common questions of law and fact are present where "the alleged fraud involves material misrepresentations and omissions in documents circulated to the investing public, press releases and statements provided to the investment community and the media, and investor conference calls." The Court agrees. The alleged misrepresentations and omissions leading to ...