# Howard v. Liquidity Services, Inc.

> District Court, District of Columbia · September 6, 2017 · 322 F.R.D. 103

URL: https://www.frixlaw.com/law-library/cases/4201531

## Case

- **Full name:** Leonard HOWARD, Individually and on Behalf of All Others Situated, Plaintiff, v. LIQUIDITY SERVICES INC., William P. Angrick III, and James M. Rallo, Defendants
- **Court:** District Court, District of Columbia
- **Decided:** September 6, 2017
- **Citations:** 322 F.R.D. 103
- **Precedential status:** Published
- **Opinion:** Opinion by Howell
- **Judges:** Chief Judge Beryl A. Howell
- **Nature of suit:** Civil
- **Cited by:** 14 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/4201531

## How later opinions describe it (automated extraction)

- finding commonality where element was uncontested

## Opinion text

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA

LEONARD HOWARD, individually and on
behalf of all others situated,

Plaintiff, Civil Action No. 14-1183 (BAH)

v. Chief Judge Beryl A. Howell

LIQUIDITY SERVICES INC., WILLIAM P.
ANGRICK III, and JAMES M. RALLO,

Defendants.

MEMORANDUM OPINION

In this putative shareholder class action, the plaintiffs allege that Liquidity Services, Inc.

(“LSI”) publicly touted its retail division as a driver of the company’s overall growth despite

internal knowledge that the retail division was troubled and suffering from deteriorating margins

due to heightened competition. The plaintiffs assert claims under section 10(b) and of the

Securities Exchange Act of 1934 (the “Exchange Act”), and the Security Exchange

Commission’s Rule 10b-5, promulgated thereunder, see 17 C.F.R. § 240.10b–5, as well as

section 20(a) of the Exchange Act, alleging that the defendants disseminated “materially false

and misleading information” and omitted “other material information that artificially inflated

Liquidity’s stock price.” Amended Compl. (“Am. Compl.”) ¶ 1, ECF No. 35. When the truth

emerged, LSI’s stock price plummeted, resulting in financial losses to investors who purchased

the stock at inflated prices.

The co-lead plaintiffs, Caisse de dépôt et placement du Québec (“Caisse”) and the

Newport News Employees’ Retirement Fund (“NNERF”), now seek to certify a class consisting

of purchasers of common stock of LSI from February 1, 2012, to May 7, 2014, (the “class

1
period”) against the defendants: LSI; the company’s Chief Executive Officer, William Angrick;

and the company’s Chief Financial Officer, James Rallo. 1 Presently before the Court are the

plaintiffs’ motion for class certification and appointment of class representatives and class

counsel, and the defendants’ related motion for summary judgment on the issue of the co-lead

plaintiffs’ reliance on alleged misrepresentations and omissions. For the reasons set forth below,

the plaintiffs’ motion for class certification and appointment of class representatives and class

counsel is granted. The defendants’ motion for partial summary judgment is denied.

I. BACKGROUND

The plaintiffs’ allegations are detailed in the Court’s prior opinion in this action. See

Howard v. Liquidity Servs., Inc., 177 F. Supp. 3d 289, 295–303 (D.D.C. 2016). The factual

background and procedural history relevant to understanding the pending motion for class

certification and motion for summary judgment are set out below.

A. Factual Background 2

The factual background proceeds in four parts. Following an overview of LSI’s business

model, and LSI’s Department of Defense business, the alleged misrepresentations concerning the

retail division are set out. This section concludes with an overview of the plaintiffs’ investment

advisories, since the defendants’ opposition to class certification focuses in large part on

purported distinctions between these advisories and other putative class members.

1
The Proposed Class is defined in the plaintiffs’ motion for class certification as “all persons and entities
who purchased or otherwise acquired the publicly traded common stock of Liquidity Services, Inc. (‘Liquidity’ or
the ‘Company’) during the period of February 1, 2012 through May 7, 2014, inclusive (the ‘Class Period’), and who
were damaged thereby (the ‘Class’).” Pls.’ Mem. Supp. Mot. Class Cert. (“Pls.’ Mem. Supp. Class Cert.”) at 1, ECF
No. 64.
2
Many of the relevant filings and exhibits thereto were filed under seal and are quoted in this Memorandum
Opinion. The documents are unsealed to the extent of the quoted material since the Court finds such unsealing
necessary to explain the reasoning in ruling on the pending motions.

2
1. Liquidity Services, Inc.

LSI, founded in 1999, provides online auction marketplaces for “surplus and salvage

assets”—also known as a “reverse supply chain”—for which service the company retains a

percentage of the sale proceeds. Defs.’ Mot. Summ. J., Ex. 1, LSI Form 10-K for Fiscal Year

Ended Sept. 30, 2014 at 1, ECF No. 83-2. LSI is comprised of three business divisions: (1) the

retail division, sometimes referred to as the commercial division, which sells consumer goods;

(2) the capital assets division, which sells large items including material-handling equipment,

rolling stock such as trucks and military tanks, heavy machinery, and scrap metal; and (3) the

public sector division, which sells surplus and salvage assets on behalf of local and state

governments. See Defs.’ Opp’n Pls.’ Mot. Class Cert., Ex. 42, LSI Corporate Structure Chart,

ECF No. 81-43; Defs.’ Mem. Supp. Mot. Protective Order at 3, ECF No. 65. The capital assets

division is further divided by type of seller into the “commercial capital assets division” and

Department of Defense (“DoD”) business. See LSI Corporate Structure Chart; Defs.’ Mem.

Supp. Mot. Protective Order at 3. The commercial capital assets division consists of three online

marketplaces, each with a particular focus: Truck Center, Network International, and

GoIndustry. Defs.’ Mem. Supp. Mot. Protective Order at 3; Disc. Hr’g Tr. dated Oct. 14, 2016

(“Disc. Hr’g Tr.”) at 5:2–8, ECF No. 72. Network International enables energy sector clients to

sell equipment in the oil, gas, and petrochemical industries. GoIndustry provides surplus asset

management, auction, and valuation services largely to Asian and European clients in the

manufacturing sector. Truck Center sells trucks and trailers through online auctions. See Defs.’

Mem. Supp. Mot. Dismiss at 7, ECF No. 40; Am Compl. ¶ 49.

The Court previously dismissed claims based on alleged misrepresentations regarding

“inorganic growth” in the commercial capital assets division, i.e., growth by the acquisition of

3
Network International and GoIndustry. Howard, 177 F. Supp. 3d at 317; Disc. Hr’g Tr. at 9:1–3.

The Court has also clarified that, based on the plaintiffs’ evidence, the allegations of material

misrepresentations about “organic growth”—growth through sustained margins and

improvements in sales—concern only the retail division, and has limited discovery accordingly.

Disc. Hr’g Tr. at 9:5–16, 14:18–20. Consequently, of LSI’s three business divisions, the capital

assets and the public sector divisions are not at issue. Id. at 11:5–8, 8:10–18, 10:15–18. Thus,

the only remaining allegations concern misrepresentations and omissions regarding organic

growth in the retail division.

2. Department of Defense Contracts

Prior to and during the class period, a large portion of LSI’s revenue came from exclusive

rights to sell DoD surplus and scrap property. LSI had two contracts with DoD: a non-rolling

surplus goods contract, which granted LSI the exclusive right to sell surplus property turned in to

the Defense Logistics Agency (“DLA”), and an exclusive scrap material contract, which granted

LSI the right to sell substantially all DoD scrap property turned into the DLA, such as metals,

alloys, and building materials. Defs.’ Mot. Dismiss, Ex. 1, LSI Form 10-K for Fiscal Year

Ended Sept. 30, 2012 at 6, ECF No. 40-2 (“The Surplus Contract accounted for 29.9%, 30.3%,

and 27.2% of [LSI] revenue . . . for the fiscal years ended September 30, 2010, 2011 and 2012,

respectively. . . . the Scrap Contract . . . accounted for 25.0%, 25.5%, and 16.1% of [LSI]

revenue . . . for the fiscal years 2010, 2011 and 2012, respectively.”). LSI entered into the

surplus contract in 2001 and renewed the contract in 2008; LSI entered into the scrap goods

contract in 2005. Id. In late November of 2012, LSI acknowledged: if “we are not awarded new

DoD contracts when our current contracts expire, [if] any of our DoD contracts are terminated[,]

4
or [if] the supply of assets under the contracts is significantly decreased, we would experience a

significant decrease in revenue and have difficulty generating income.” Id. at 8.

After the scrap goods contract expired in June 2012, DoD extended the contract for two

additional one-year terms, through June 2014. Id. at 6. The surplus contract expired in February

2012, at which time DoD exercised two one-year renewal options, extending the contract until

February 2014. Id. The plaintiffs allege that as the 2014 contract expiration dates approached,

“[f]ear was mounting . . . within all levels of the Company” that the contracts with DoD, which

were “subject to a competitive bidding process,” would not “be renewed on the same favorable

terms, or even renewed at all.” Am. Compl. ¶ 3.

Around this time, LSI “sought to expand into the larger and more lucrative retail and

commercial markets” because “it could not count on maintaining an exclusive relationship with

the federal government indefinitely.” Pls.’ Mem. Supp. Mot. for Class Cert. (“Pls.’ Mem. Supp.

Class Cert.”) at 3, ECF No. 64. This expansion entailed increased efforts and acquisitions in the

retail reverse supply chain market and the commercial capital assets market, including expanding

its distribution center in Dallas, Texas, which opened in 2005 to sell excess goods for major

commercial retailers. Specifically, LSI aimed to have deeper client engagement with existing

clients, and to expand its geographic reach and client base. See id.; see also Am. Compl. ¶¶ 8,

53. In October 2011, LSI acquired Jacob’s Trading, which sells bulk returns from well-known

retailers. LSI Form 10-K for Fiscal Year Ended Sept. 30, 2012 at 3, 8.

In April 2014, LSI lost the DoD surplus contract to a competitor, at the same time LSI’s

DoD scrap contract was renewed on new and less favorable terms.

5
3. Alleged Misrepresentations and Omissions

Based in part on information supplied by twenty confidential witnesses (“CWs”),

including a vice-president, directors, and other senior managers of LSI components, the plaintiffs

allege that, from February 1, 2012, to May 7, 2014, the defendants constructed a story of

sustained growth and expansion of LSI’s business outside of the DoD contracts. See Am.

Compl. ¶¶ 1–20. In particular, the plaintiffs contend that the defendants issued fraudulent and

misleading public statements on fifteen separate days over nine consecutive fiscal quarters

regarding the growth of its non-DoD business—particularly emphasizing the “two pillars of

growth: (1) ‘organic’ growth through sustained margins and improvements in client

penetration and services; and (2) ‘inorganic growth through Liquidity’s acquisition strategy.”

Am. Compl. ¶ 5 (emphasis in original). The plaintiffs allege that misrepresentations artificially

inflated stock prices throughout the class period, Am. Compl. ¶ 60, and that LSI’s CEO, Mr.

Angrick, exploited this “wave of artificial stock inflation” with “strategically timed stock sales

during the Class Period” that “paid him $68.2 million,” id. ¶ 18 (emphasis in original).

As noted above, only those allegations concerning misrepresentations about the organic

growth of LSI’s retail division remain. Howard, 177 F. Supp. 3d at 317; Disc. Hr’g Tr. at 14:18–

20. On two of the fifteen days originally at issue, the defendants made statements concerning

only inorganic growth (in particular about the acquisition of GoIndustry), and no statements

concerning organic growth in the retail division. Thus, the statements issued on those two days

are no longer relevant because the plaintiffs’ claims concerning inorganic growth through

acquisition have been dismissed. 3

3
The plaintiffs claim that defendants made fraudulent or misleading statements about the acquisition of
GoIndustry on May 9, 2013, and July 5, 2013. Am. Compl. ¶¶ 122–24, 126–27. Regarding the statements issued on
August 7, 2013, the plaintiffs’ allegations largely concern the defendants’ discussion of inorganic growth through
the acquisition of GoIndustry, but the plaintiffs also allege that the defendants made misleading statements about

6
The plaintiffs quote extensively from public statements made in press releases, earnings

calls, and filings with the U.S. Securities and Exchange Commission (“SEC”) during each of the

nine fiscal quarters that fall in the class period. The plaintiffs allege that the defendants’ public

statements about LSI’s financial performance through the February 7, 2014 release were

materially misleading and led investors to believe that the company was growing its retail

division business and maintaining margins. According to the plaintiffs, contrary to LSI’s public

statements, the retail division was suffering from deteriorating margins due to heightened

competition. Am. Compl. ¶¶ 65, 67–73. As detailed in the Court’s previous opinion, the

plaintiffs have made no allegation that the released financial results were inaccurate. Howard,

177 F. Supp. 3d at 306–07. Rather, the plaintiffs allege that the defendants misrepresented the

underlying health of the retail division by making statements attributing “strong results” for the

fiscal quarters to “record volumes in both [LSI’s] commercial capital assets and retail supply

chain verticals.” Am. Compl. ¶ 106; Defs.’ Mot. Dismiss, Ex. 1, LSI Earnings Conference Call

Transcript (dated Feb. 1, 2012) at 3, ECF No. 48-2 (emphasis in original).

Indeed, LSI and its executives made many statements touting the strength of the retail

division. Beginning on February 1, 2012, and throughout the class period, LSI maintained that

“[r]ecord GMV [gross merchandise volume 4] results were primarily driven by growth in the

volume of goods sold in [LSI’s] retail supply chain and municipal government marketplaces

by existing and new clients.” Am. Compl. ¶ 111 (quoting a May 3, 2012 press release)

(emphasis in original). In the third quarter of 2012, LSI continued to report that the company’s

organic growth within LSI generally. Am. Compl. ¶¶ 208–11. The remaining dates at issue are February 1, 2012;
May 3, 2012; July 31, 2012; November 29, 2012; December 12, 2012; January 16, 2013; January 31, 2013; March
5, 2013; May 2, 2013; August 6, 2013; August 7, 2013; November 21, 2013; and February 7, 2014. See Am.
Compl. ¶¶ 46–111.
4
“GMV” is “a metric often provided by online sellers and which Liquidity defines as a measurement of the
total sales value of all merchandise sold through [its] marketplaces during a given period.” Am. Compl. ¶ 38
(internal quotation marks omitted).

7
“strong results for the quarter were driven by record volumes in both our retail supply chain

group, which did not slow down from its seasonal high in the second quarter as we continued

to add new clients and further penetrate existing clients, and continued growth in our public

sector verticals,” id. ¶ 135 (emphasis in the original). During the earnings call discussing results

for the fourth quarter of 2012, Mr. Angrick repeated that LSI “enjoyed broad-based organic

growth” due to market share expansion within the commercial, non-DoD, market. Id. ¶ 146.

LSI also publicly claimed that competition was not seriously affecting the health of its retail

division. On December 12, 2012, during LSI’s Investor Day presentation, Mr. Rallo stated that

“when you look to the competition, there is a lot of it, but it’s not very formidable.” Id. ¶ 165

(emphasis in original); see also id. ¶ 185 (citing Mr. Rallo’s statement during the March 5, 2013

earnings call discussing second quarter 2013 financial results).

LSI continued to proclaim that its retail division was a source of growth throughout 2013.

On January 31, 2013, the defendants released first quarter results for fiscal year 2013. Id. ¶ 172.

During the earnings call with analysts, Mr. Rallo lauded the “retail business” for “perform[ing]

extremely well during the first quarter.” Id. ¶ 179. On May 2, 2013, LSI released the second

quarter 2013 financial results. Id. ¶ 187. During the earnings call, Mr. Rallo again attributed the

increase in GMV to the “nice growth in the retail side of our business, driving efficiencies

there.” Id. ¶ 192 (emphasis in original). While LSI’s third quarter earnings fell below previous

guidance, fourth quarter earnings met or exceeded guidance, which Mr. Angrick attributed to

“strong sequential growth in our retail supply chain marketplaces driven primarily from new

consumer electronic programs with existing clients.” Id. ¶ 220 (emphasis in original).

The defendants’ laudatory statements about the retail division persisted into early 2014.

On February 7, 2014, the defendants released the first quarter financial results for fiscal year

8
2014 and Mr. Angrick stated that the “better than expected financial results” were “driven by

strong topline performance in our retail supply chain and municipal government businesses,”

and that the “retail supply chain business saw sequential growth in GMV.” Id. ¶¶ 226–27

(emphasis in original).

On May 8, 2014, the defendants announced financial results for the second quarter of

fiscal year 2014, which fell below guidance. Id. ¶ 233. GMV had decreased by 12 percent,

while adjusted EBITDA (earnings before interest, tax, depreciation and amortization) and

adjusted diluted EPS (earnings per share) suffered 43 percent and 46 percent declines,

respectively, as compared to the same period in the previous year. Id. In the statement

accompanying LSI’s Form 8-K, filed with the SEC, Mr. Angrick attributed these results to

several factors, including the loss of the DoD surplus contract; the restructured, less profitable

DoD scrap contract; “mix changes in our . . . retail businesses and delayed capital asset projects

in both the U.S. and Europe;” and “unusual softness in our energy vertical due to an industry

wide decline in line pipe and related equipment.” Id. ¶ 234; Merrill Lynch Analyst Report (dated

Apr. 3, 2014) at 2–3. On this news, LSI’s stock price plummeted nearly 30 percent. Id. ¶ 239.

The plaintiffs allege that the defendants’ public statements about the financial performance of

LSI through the February 7, 2014 release were materially misleading and caused investors to

believe that the company was growing its non-DoD business. Contrary to LSI’s public

statements, the plaintiffs allege that the LSI’s components that were publicly touted as driving

the organic and inorganic growth were internally known as drags on performance. Am. Compl.

¶¶ 5–10.

The plaintiffs further assert that, “[b]etween June 20, 2012, and May 7, 2014, selective

information was revealed about Liquidity’s financial performance and outlook, which had a

9
material adverse impact upon Liquidity’s stock price without revealing the full extent of the

known risks and challenges facing the Company.” Id. ¶ 283. According to the plaintiffs,

“[a]nalysts following the company downplayed the significance of these partial disclosures,

accepting Defendants’ efforts to mitigate and blunt the truth.” Id. These partial disclosures

include, inter alia, (1) a June 22, 2012 statement by Mr. Rallo to investors attending a conference

sponsored by Stifel Nicolaus that “margins may not continue to grow as in the past,” id. ¶ 283(a);

(2) a July 1, 2012 report from a short-selling research firm, Off Wall Street Consulting Group,

indicating, among other things, that non-DoD business is “unlikely to drive the earnings growth

that investors expect,” and that “competition is increasing,” id. ¶ 283(b); and (3) a September 12,

2012 “reduction in price target by Stifel Nicolaus, citing a decline in GMV in August compared

to July and sales that were lower than forecast[ed],” id. ¶ 283(c). The plaintiffs claim that,

“[w]hile all of these partial disclosures revealed pieces of information that cast some doubt on

Defendants’ bullish claims that Liquidity would continue to grow and achieve guided profit

levels, none of them provided investors with anything close to the full picture of the known risks

and challenges facing the Company and its ability to achieve the guidance levels Defendants

provided the market.” Id. ¶ 284.

4. The Plaintiffs’ Investment Advisors

Co-lead plaintiffs Caisse, an institutional investor headquartered in Montreal, Canada, id.

¶ 25, and NNERF, a public pension fund established and administered by the city of Newport

News, Virginia, id. ¶ 26, invested in LSI through “professional investment managers to whom

they extended discretionary trading authority,” Pls.’ Omnibus Reply Mem. Supp. Mot. Class

Cert. & Opp’n Defs.’ Mot. Summ. J. (“Pls.’ Omnibus Reply”) at 2 n.5, ECF No. 89. Caisse

invested in LSI common stock through Van Berkom and Associates, Inc. (“Van Berkom”). Id.;

10
see also Pls.’ SMF Opp’n Defs.’ Mot. Summ. J. (“Pls.’ SMF”) at 6–10, ECF No. 89-1. Mathieu

Sirois, a portfolio manager at Van Berkom, made investment decisions on behalf of Caisse

concerning LSI, and served as Van Berkom’s Rule 30(b)(6) designee. Defs.’ Opp’n Pls.’ Mot.

Class Cert. at vi; see also generally Defs.’ Opp’n Pls.’ Mot. Class Cert., Ex. 1, Deposition of

Mathieu Sirois (“Sirois Dep.”), ECF No. 81-2. The NNERF used two investment managers who

invested in LSI common stock: Pier Capital, LLC (“Pier Capital”) and NewSouth Capital

Management, Inc. (“NewSouth”). Pls.’ Omnibus Reply at 2 n.5; see also Pls.’ SMF at 54, 71.

Alexander Yakirevich, a portfolio manager at Pier Capital, made investment decisions on behalf

of NNERF concerning LSI, and served as Pier Capital’s Rule 30(b)(6) designee. Defs.’ Opp’n

Pls.’ Mot. Class Cert. at vi, ECF No. 81; see also generally Defs.’ Mot. Summ. J., Ex. 17,

Deposition of Alexander Yakirevich (“Yakirevich Dep.”), ECF No. 83-19. Alexander McLean,

a portfolio manager at New South, made investment decisions on behalf of NNERF concerning

LSI, and served as New South’s Rule 30(b)(6) designee. See generally Defs.’ Opp’n Pls.’ Mot.

Class Cert., Ex. 3, Deposition of Alexander McLean (“McLean Dep.”), ECF. No. 81-4.

B. Procedural History

The original lead plaintiff, Leonard Howard, an individual investor, filed this putative

class action against LSI and Messrs. Angrick and Rallo on July 14, 2014. Compl. at 1, ECF No.

1. Several other shareholders entered appearances to move for appointment as lead plaintiff. See

Mots. Appoint Counsel & Appointment as Lead Pl., ECF. Nos. 25, 26, 29, 31. On October 14,

2014, institutional investors Caisse and NNERF were appointed as co-lead plaintiffs pursuant to

the Private Securities Litigation Reform Act of 1995 (“PSLRA”), 15 U.S.C. § 78u-4(a)(3), given

that these two institutional investors had “‘the largest financial interest in the relief sought by the

class’” and “(b) otherwise satisf[ied] the requirements of Rule 23 of the Federal Rules of Civil

11
Procedure, which, as set forth in the PSLRA, establishes the presumption that the Institutional

Investors are the plaintiffs ‘most capable of adequately representing the interests of class

members.’” Order Appointing Lead Pl. & Approving Selection of Counsel at 1, ECF No. 32.

The co-lead plaintiffs filed an amended complaint on December 15, 2014. See generally Am.

Compl.

Thereafter, the defendants filed a motion to dismiss pursuant to Federal Rules of Civil

Procedure 12(b)(6) and 9(b), and the PSLRA. See generally Defs.’ Mot. Dismiss. The Court

dismissed part of the plaintiffs’ Count I, which alleged violations of Section 10(b) of the

Securities Exchange Act of 1934 based on misrepresentations regarding the acquisitions of

Network International and GoIndustry in the commercial capital assets division. Howard, 177 F.

Supp. 3d at 311. The Court denied the motion to dismiss the portion of Count I based on

“alleged misrepresentations regarding the financial performance of Liquidity Services, Inc.’s

retail and commercial capital assets divisions.” Id. Further, the Court denied the defendants’

motion to dismiss plaintiffs’ Count II, which alleges that Messrs. Angrick and Rallo are jointly

and severally liable for LSI’s alleged 10(b) violation. Id. at 316–17. As explained above, during

a subsequent hearing addressing a discovery dispute, the Court clarified that the allegations of

material misrepresentations about “organic growth” through sustained margins concern only the

retail division, based on the evidence proffered by the plaintiffs thus far. Disc. Hr’g Tr. at

14:18–20. 5 Following the discovery hearing, the defendants moved for reconsideration of the

5
The parties’ discovery dispute concerned whether the defendants had to produce discovery concerning
LSI’s business divisions other than the retail division. The plaintiffs had filed a motion to compel such discovery,
see generally Pls.’ Mot. Compel Discovery, ECF No. 66, and the defendants had filed a motion for a protective
order concerning that same discovery, see generally Defs.’ Mot. Protective Order, ECF No. 65. In this context, and
more than six months after the defendants’ motion to dismiss had been decided, see Minute Entry (dated Oct. 14,
2016), the defendants explained for the first time LSI’s structure and its various business components.

12
Court’s previous opinion denying their motion to dismiss, Defs.’ Mot. Recons., ECF No. 73,

which was denied, see Minute Order (dated Dec. 21, 2016).

The plaintiffs have now moved to certify a class consisting of “all persons and entities

who purchased or otherwise acquired the publicly traded common stock” of LSI “during the

period of February 1, 2012 through May 7, 2014, inclusive,” and “who were damaged thereby.”

Pls.’ Mem. Supp. Class Cert. at 1. Shortly after filing their opposition to class certification, the

defendants moved for partial summary judgment on the issue of reliance by the co-lead

plaintiffs. See generally Defs.’ Mot. Summ. J., ECF No. 83. The defendants’ opposition to the

plaintiffs’ motion for class certification and the defendants’ motion for summary judgment

advance similar arguments and, thus, both motions are addressed in this Memorandum Opinion. 6

II. LEGAL STANDARD

The legal standards governing the plaintiffs’ motion for class certification and the

defendants’ motion for summary judgment are set out in turn.

A. Class Certification

Class certification is governed by Federal Rule of Civil Procedure 23, which requires two

separate inquiries set out in Rule 23(a) and Rule 23(b). See In re Rail Freight Fuel Surcharge

Antitrust Litig., 725 F.3d 244, 249 (D.C. Cir. 2013); Richards v. Delta Air Lines, Inc., 453 F.3d

525, 529 (D.C. Cir. 2006). First, pursuant to Rule 23(a), the plaintiff must show 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

6
Upon granting the defendants leave to file their motion for summary judgment, the Court expressly
instructed that “[t]he Lead Plaintiffs may seek leave to file a sur-reply.” See Minute Order (dated Apr. 11, 2017).
Accordingly, the plaintiffs’ motion for leave to file a sur-reply, ECF No. 94, is granted, over the defendants’
objections, see Defs.’ Opp’n to Lead Pltfs.’ Mot. for Leave to File Sur-Reply, ECF No. 96 (arguing that the
plaintiffs’ motion for leave to file a sur-reply should be denied because it contains additional arguments about facts
that were raised in the parties’ opening and opposition briefs, rather than arguments about new factual matters).

13
claims or defenses of the class; and (4) the representative parties will fairly and adequately

protect the interests of the class. These four requirements are referred to as numerosity,

commonality, typicality, and adequacy of representation, respectively. See generally Wal–Mart

Stores, Inc. v. Dukes, 564 U.S. 338 (2011). “In addition to satisfying Rule 23(a)’s prerequisites,

parties seeking class certification must show that the action is maintainable under Rule 23(b)(1),

(2), or (3).” Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 614 (1997). Here, the plaintiffs

point to Rule 23(b)(3) as the basis for this putative class action. Accordingly, the plaintiffs must

demonstrate (1) that questions of law and fact common to the entire class predominate, and (2)

the superiority of the class action method to other methods of adjudication. FED. R. CIV. P.

23(b)(3).

The D.C. Circuit has cautioned that class certification “is far from automatic.” In re Rail

Freight Fuel Surcharge Antitrust Litig., 725 F.3d at 249. Indeed, “Rule 23 does not set forth a

mere pleading standard. A party seeking class certification must affirmatively demonstrate his

compliance with the Rule—that is, he must be prepared to prove that there are in fact sufficiently

numerous parties, common questions of law or fact, etc.” Id. (quoting Wal–Mart, 564 U.S. at

350) (emphasis in original) (internal quotation marks omitted). Determining whether the class

proponent has satisfied its Rule 23 burden often “resembles an appraisal of the merits, for ‘it may

be necessary for the court to probe behind the pleadings before coming to rest on the certification

question.’” Id. (quoting Gen. Tel. Co. of Southwest v. Falcon, 457 U.S. 147, 160 (1982)); see

also Wal–Mart, 564 U.S. at 350. Still, “Rule 23 grants courts no license to engage in free-

ranging merits inquiries at the certification stage. Merits questions may be considered to the

extent—but only to the extent—that they are relevant to determining whether the Rule 23

prerequisites for class certification are satisfied.” DL v. District of Columbia, 713 F.3d 120, 125

14
(D.C. Cir. 2013) (quoting Amgen Inc. v. Conn. Ret. Plans & Trust Funds, 568 U.S. 455, 466

(2013) (internal quotation marks omitted)).

B. Summary Judgment

Federal Rule of Civil Procedure 56 provides that summary judgment shall be granted “if

the movant shows that there is no genuine dispute as to any material fact and the movant is

entitled to judgment as a matter of law.” FED. R. CIV. P. 56(a). The moving party bears the

burden to demonstrate the “absence of a genuine issue of material fact” in dispute, Celotex Corp.

v. Catrett, 477 U.S. 317, 323 (1986), while the nonmoving party must present specific facts

supported by materials in the record that would be admissible at trial and that could enable a

reasonable jury to find in its favor, see Anderson v. Liberty Lobby, Inc. (“Liberty Lobby”), 477

U.S. 242, 256–57 (1986); Allen v. Johnson, 795 F.3d 34, 38 (D.C. Cir. 2015) (noting that, on

summary judgment, the appropriate inquiry is “whether, on the evidence so viewed, a reasonable

jury could return a verdict for the nonmoving party”) (internal quotation marks omitted)); see

also FED. R. CIV. P. 56(c), (e)(2)–(3).

“Evaluating whether evidence offered at summary judgment is sufficient to send a case to

the jury is as much art as science.” Estate of Parsons v. Palestinian Auth., 651 F.3d 118, 123

(D.C. Cir. 2011). This evaluation is guided by the related principles that “courts may not resolve

genuine disputes of fact in favor of the party seeking summary judgment,” Tolan v. Cotton, 134

S. Ct. 1861, 1866 (2014) (per curiam), and “[t]he evidence of the nonmovant is to be believed,

and all justifiable inferences are to be drawn in his favor,” id. at 1863 (alteration in original)

(quoting Liberty Lobby, 477 U.S. at 255). Courts must avoid making “credibility determinations

or weigh[ing] the evidence,” since “[c]redibility determinations, the weighing of the evidence,

and the drawing of legitimate inferences from the facts are jury functions, not those of a judge.”

15
Reeves v. Sanderson Plumbing Products, Inc., 530 U.S. 133, 150-51 (2000) (internal quotation

marks omitted); see also Burley v. Nat’l Passenger Rail Corp., 801 F.3d 290, 295–96 (D.C. Cir.

2015). In addition, for a factual dispute to be “genuine,” the nonmoving party must establish

more than “[t]he mere existence of a scintilla of evidence in support of [its] position,” Liberty

Lobby, 477 U.S. at 252, and cannot rely on “mere allegations” or conclusory statements, see

Equal Rights Ctr. v. Post Props., 633 F.3d 1136, 1141 n.3 (D.C. Cir. 2011); Veitch v. England,

471 F.3d 124, 134 (D.C. Cir. 2006); Greene v. Dalton, 164 F.3d 671, 675 (D.C. Cir. 1999);

Harding v. Gray, 9 F.3d 150, 154 (D.C. Cir. 1993); accord FED. R. CIV. P. 56(e). If “opposing

parties tell two different stories, one of which is blatantly contradicted by the record, so that no

reasonable jury could believe it, a court should not adopt that version of the facts for purposes of

ruling on a motion for summary judgment.” Lash v. Lemke, 786 F.3d 1, 6 (D.C. Cir. 2015)

(quoting Scott v. Harris, 550 U.S. 372, 380 (2007)). The Court is only required to consider the

materials explicitly cited by the parties, but may on its own accord consider “other materials in

the record.” FED. R. CIV. P. 56(c)(3).

III. DISCUSSION

In this lawsuit, the plaintiffs allege violations of sections 10(b) and 20(a) of the Securities

Exchange Act of 1934. Section 10(b) makes it illegal to “use or employ, in connection with the

purchase or sale of any security . . . any manipulative or deceptive device or contrivance in

contravention of such rules and regulations as the Commission may prescribe . . . .” 15 U.S.C.

§ 78j(b). Rule 10b–5, in turn, prohibits “mak[ing] any untrue statement of a material fact . . . in

connection with the purchase or sale of any security.” 17 C.F.R. § 240.10b–5. The elements of a

securities fraud claim brought under § 10(b) and Rule 10b–5 are “(1) a material

misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the

16
misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the

misrepresentation or omission; (5) economic loss; and (6) loss causation.” In re Harman Intern.

Indus., Inc. Sec. Litig., 791 F.3d 90, 99 (D.C. Cir. 2015) (quoting Janus Capital Grp., Inc. v.

First Derivative Traders, 564 U.S. 135, 140 n.3 (2011)). Section 20(a) of the Securities

Exchange Act provides that individuals who are in “control of the primary violator” of other

provisions of the Act, including section 10(b), maybe be held jointly and severally liable. In re

Harman, 791 F.3d at 111. The elements of a section 20(a) claim are (1) that “there is a viable

claim against the corporation,” under section 10(b), and (2) that the section 20(a) defendants

qualify as “controlling persons.” Id.

The plaintiffs have moved for class certification, and the defendants, in addition to

opposing class certification, have moved for summary judgment. The defendants oppose class

certification primarily on the ground that the proposed lead plaintiffs are subject to unique

defenses regarding the reliance element of their claims. Similarly, the defendants’ motion for

summary judgment contends that there are no genuine issues of material fact with respect to the

proposed lead plaintiffs’ non-reliance on the alleged misrepresentations and omissions. These

two motions are addressed in turn after setting out the applicable standard provided in Basic v.

Levinson, 485 U.S. 224, 245 (1988), for invoking the presumption of reliance, on which the

plaintiffs rely to establish their reliance on the alleged misrepresentations and omissions. See

Am. Compl. ¶ 291 (“Co-Lead Plaintiffs are entitled to a presumption of reliance on Defendants’

material misrepresentations and omissions pursuant to the fraud-on-the-market theory.”).

A. The Basic Presumption

A plaintiff asserting security fraud claims under section 10(b) and Rule 10b–5 must

prove, inter alia, reliance upon the alleged misrepresentations or omissions in question. In re

17
Harman, 791 F.3d at 99. As the Supreme Court has explained, “[t]he reliance element [of a

§ 10(b) and Rule 10b–5 securities fraud claim] ‘ensures that there is a proper connection between

a defendant’s misrepresentation and a plaintiff’s injury.’” Halliburton Co. v. Erica P. John

Fund, Inc., 134 S. Ct. 2398, 2407 (2014) (Halliburton II) (quoting Amgen, 568 U.S. at 461).

“The traditional (and most direct) way a plaintiff can demonstrate reliance is by showing that he

was aware of a company’s statement and engaged in a relevant transaction—e.g., purchasing

common stock—based on that specific misrepresentation.” Erica P. John Fund, Inc. v.

Halliburton Co., 563 U.S. 804, 810 (2011) (Halliburton I). In Basic v. Levinson, the Supreme

Court recognized, however, that “requiring such direct proof of reliance . . . place[s] an

unnecessarily unrealistic evidentiary burden on the Rule 10b–5 plaintiff who has traded on an

impersonal market.” Halliburton II, 134 S. Ct. at 2407 (citing Basic, 485 U.S. 224, 245 (1988)).

Even if a plaintiff could show awareness of the alleged misrepresentation, he would also have to

“show a speculative state of facts, i.e., how he would have acted . . . if the misrepresentation had

not been made.” Basic, 485 U.S. at 245. The Supreme Court further acknowledged that,

requiring individualized proof of reliance would essentially prevent security fraud suits from

proceeding as class actions, as individual issues of reliance would predominate over common

issues, foreclosing class certification under Rule 23(b). Halliburton II, 134 S. Ct. at 2407–08

(citing Basic, 485 U.S. at 242).

To avoid this outcome, the Basic Court established a rebuttable presumption of reliance,

predicated on the notion that “[a]n investor who buys or sells stock at the price set by the market

does so in reliance on the integrity of that price. Because most publicly available information is

reflected in market price, an investor’s reliance on any public material misrepresentations

. . . may be presumed for purposes of a Rule 10b–5 action.” Basic, 485 U.S. at 247; accord

18
Halliburton II 134 S. Ct. at 2408. To invoke Basic’s presumption of reliance, “a plaintiff must

prove that: (1) the alleged misrepresentations were publicly known, (2) they were material,

(3) the stock traded in an efficient market, and (4) the plaintiff traded the stock between when the

misrepresentations were made and when the truth was revealed.” Halliburton II, 134 S. Ct. at

2413 (citing Basic, 485 U.S. at 248; Amgen, 133 S. Ct. at 1198).

That said, the Basic presumption of reliance is “rebuttable rather than conclusive.”

Halliburton II, 134 S. Ct. at 2408. A defendant may rebut the Basic presumption with “[a]ny

showing that severs the link between the alleged misrepresentation and either the price received

(or paid) by the plaintiff, or [its] decision to trade at a fair market price.” Basic, 485 U.S. at 248.

Thus, a defendant can rebut the Basic presumption, for example, by establishing that the plaintiff

“would have bought or sold the stock even had he been aware that the stock’s price was tainted

by fraud.” Halliburton II, 134 S. Ct. at 2408; see also Basic, 485 U.S. at 249 (“For example, a

plaintiff who believed that Basic’s statements [falsely disclaiming the possibility of a merger]

were false and that Basic was indeed engaged in merger discussions, and who consequently

believed that that Basic stock was artificially underpriced, but sold his shares nevertheless

because of other unrelated concerns, e.g., potential antitrust problems, or political pressures to

divest from shares of certain businesses, could not be said to have relied on the integrity of a

price he knew had been manipulated.”).

The defendants do not dispute that the plaintiffs have properly invoked Basic’s rebuttable

presumption. 7 Rather, the defendants contend that the presumption has been rebutted. As the

7
In short, the plaintiffs have established that the alleged misrepresentations were “publicly known” and
“material,” and that the plaintiffs “traded the stock between when the misrepresentations were made and when the
truth was revealed.” Halliburton II, 134 S. Ct. at 2413 (citing Basic, 485 U.S. at 248; Amgen, 568 U.S. at 460–61).
As for market efficiency, the defendants do not dispute the plaintiffs’ expert’s determination that “the market for
Liquidity Services Common Stock was efficient throughout the class period.” Pls.’ Mot. Class Cert., Abramowitz
Decl., Ex. 2, Expert Report of Chad Coffman, CFA (dated Sept. 2, 2016) (“Coffman Rep.”) ¶ 6, ECF No. 64-4. The
expert, Chad Coffman, analyzed the so-called Cammer factors, see generally Cammer v. Bloom, 711 F. Supp. 1264

19
defendants acknowledge, they bear the burden of rebutting the Basic presumption. Defs.’ Mot.

Summ. J. at 15 (“Basic thus shifted the burden so that defendants must show ‘by a

preponderance of the evidence’ that the presumption of reliance is rebutted.” (quoting In re

Moody’s Corp. Sec. Litig., 274 F.R.D. 480, 490 (S.D.N.Y. 2011))); see also Erica P. John Fund,

Inc. v. Halliburton Co., 309 F.R.D. 251, 258 (N.D. Tex. 2015) (the defendant bears the burden of

production and persuasion as to rebutting the Basic presumption). 8

B. The Plaintiffs’ Motion for Class Certification

The defendants do not dispute that the plaintiffs in this case satisfy Rule 23(a)’s

requirements of numerosity and commonality, and the 23(b)(3) requirement of superiority of the

class action mechanism. See generally Defs.’ Opp’n Pls.’ Mot. Class Cert.; see also Pls.’

Omnibus Reply at 1 n.2. Nevertheless, “certification is proper only if ‘the trial court is satisfied,

after a rigorous analysis, that the prerequisites of Rule 23(a) have been satisfied,’” Wal–Mart

Stores, Inc., 564 U.S. at 350–51 (quoting General Telephone Co. of Sw. v. Falcon, 457 U.S. 147,

161 (1982); see also General Telephone Co., 457 U.S. at 160 (“[A]ctual, not presumed,

conformance with Rule 23(a) remains . . . indispensable.”). Thus, each applicable Rule 23(a)

and relevant Rule 23(b) requirement is addressed seriatim.

(D. N.J. 1989) (identifying as relevant factors (1) average weekly trading volume, (2) analyst coverage, (3) market
makers, (4) SEC Form S-3 eligibility, and (5) price reaction to unexpected information), in addition to other factors
courts consider in addressing efficiency, in opining that the market for LSI stock was efficient. See Coffman Rep.
¶¶ 21, 24.
8
The plaintiffs also contend that they are entitled to the so-called Affiliated Ute presumption, which applies
in the case of an alleged omission or “failure to disclose” (as compared to an alleged misrepresentation). Affiliated
Ute Citizens of Utah v. United States, 406 U.S. 128, 153 (1972). Given that the “gravamen” of the plaintiffs’ claims
is that the defendants issued statements containing misrepresentations as to the retail division, the Affiliated Ute
presumption is inapplicable here. In re Interbank Funding Corp. Sec. Litig., 629 F.3d 213, 215 (D.C. Cir. 2010)
(finding that the Affiliated Ute presumption did not apply where the defendant allegedly took part in a Ponzi scheme
and “the gravamen of the appellants’ complaint [was] that, by certifying Interbank’s materially false financial
statements, Radin affirmatively misrepresented Interbank’s financial situation”).

20
1. Rule 23(a) Requirements

As noted, Rule 23(a) requires the plaintiff to demonstrate that the putative class meets the

numerosity, commonality, typicality, and adequacy of representation prerequisites for

certification.

a. Numerosity

Rule 23(a)(1) permits members of a class to sue as representative parties if “the class is

so numerous that joinder of all members is impractical.” “Absent unique circumstances,

‘numerosity is satisfied when a proposed class has at least forty members.’” Coleman ex rel.

Bunn v. District of Columbia, 306 F.R.D. 68, 76 (D.D.C. 2015) (quoting Richardson v. L’Oreal

USA, Inc., 991 F. Supp. 2d 181, 196 (D.D.C. 2013)). “In assessing the number of potential class

members, the Court need only find an approximation of the size of the class, not ‘an exact

number of putative class members.’” Bunn, 306 F.R.D. at 76 (quoting Pigford v. Glickman, 182

F.R.D. 341, 347 (D.D.C. 1998)). It is undisputed that there were more than 1,000 purchasers of

LSI stock during the class period. See Pls.’ Mem. Supp. Class Cert., Ex. 1, Defs.’ Resps. and

Objs. to Pls.’ First Set of Reqs. for Admis. (“Defs.’ RFA Responses”) at 4, ECF No. 64-3. While

the exact number of class members will not be ascertained until official notice is given, the

putative class likely numbers over 1,000, and certainly well over 40. Thus, the numerosity

requirement is satisfied.

b. Commonality

Rule 23(a)(2) requires the plaintiffs to show the existence of “questions of law or fact

common to the class.” In addressing this requirement, the Supreme Court has explained that the

class’s “claims must depend upon a common contention” that is “capable of classwide

resolution—which means that determination of its truth or falsity will resolve an issue that is

21
central to the validity of each one of the claims in one stroke.” Wal–Mart, 564 U.S. at 350

(2011); accord DL, 713 F.3d at 125 (discussing Wal–Mart). “The touchstone of the

commonality inquiry is ‘the capacity of a classwide proceeding to generate common answers apt

to drive the resolution of the litigation.’” Bunn, 306 F.R.D. at 82 (emphasis in original) (quoting

Wal–Mart, 564 U.S. at 350). “Depending upon the circumstances, this may involve many

common issues that together provide a resolution, but ‘even a single common question will do.’”

Id. (quoting Wal–Mart, 564 U.S. at 359); see also In re District of Columbia, 792 F.3d 96, 100

(D.C. Cir. 2015) (“[T]he Supreme Court explained in Wal–Mart that ‘for purposes of Rule

23(a)(2) even a single common question will do.’” (quoting Wal–Mart, 564 U.S. at 359)). “A

class may satisfy the commonality requirement even if factual distinctions exist among the

claims of putative class members.” Bunn, 306 F.R.D. at 82. “Ultimately, ‘[w]hen the party

opposing the class has engaged in some course of conduct that affects a group of persons and

gives rise to a cause of action, one or more of the elements of that cause of action will be

common to all of the persons affected.’” Id. (quoting NEWBERG ON CLASS ACTIONS § 3:20 (5th

ed. 2014)). Commonality often exists in securities class actions where investors sue for

misrepresentations or omissions that had an impact on stock price. See In re Newbridge

Networks Securities Litig., 926 F. Supp. 1163, 1176 (D.D.C. 1996) (“[W]here members of a class

are subject to the same misrepresentations and omissions, and where alleged misrepresentations

fit within a common course of conduct, common questions exist and a class action is

appropriate.”); In re VeriSign, Inc. Sec. Litig., No. 02-cv-2270, 2005 WL 7877645, at *5 (N.D.

Cal. Jan. 13, 2005) (“Commonality is easily met in cases where class members all bought or sold

the same stock in reliance on the same disclosures made by the same parties, even when damages

may vary.” (internal quotation marks omitted)).

22
While the defendants contest other 23(a) requirements that might overlap with the

commonality inquiry, the defendants do not explicitly dispute that the plaintiffs satisfy Rule

23(a)(2)’s commonality requirement. Here, common questions emerge from the defendants’

common course of conduct: allegedly issuing misrepresentations and omissions to the investing

public. As the plaintiffs contend in their motion for class certification, “the common questions

of law and fact at issue here include: (a) whether Defendants violated the Exchange Act;

(b) whether Defendants misrepresented and/or omitted material facts in their public statements;

(c) whether Defendants knowingly or recklessly disregarded that their statements were false and

misleading; (d) whether the price of Liquidity’s stock was artificially inflated as a result of

Defendants’ misrepresentations and/or omissions; and (e) whether and to what extent disclosure

of the truth regarding Defendants’ misrepresentations and/or omissions of material facts caused

Class members to suffer economic harm.” Pls.’ Mem. Supp. Class Cert. at 8. Accordingly, Rule

23(a)(2)’s commonality requirement is satisfied.

c. Typicality

Under Rule 23(a)(3), the representative parties’ claims or defenses must be “typical of the

claims or defenses of the class.” “‘Typicality’ is satisfied ‘if each class member’s claim arises

from the same course of events that led to the claims of the representative parties and each class

member makes similar legal arguments to prove the defendant’s liability.’” In re APA

Assessment Fee Litig., 311 F.R.D. 8, 15 (D.D.C. 2015) (quoting Trombley v. Nat’l City Bank,

826 F. Supp. 2d 179, 192 (D.D.C. 2011) (internal quotation marks omitted)). While “the class

representatives should have ‘suffered injuries in the same general fashion as absent class

members,’” id. (quoting In re Vitamins Antitrust Litig., 209 F.R.D. 251, 260 (D.D.C. 2002)

(internal quotation marks omitted)), “[t]he facts and claims of each member of the class need not

23
be identical,” id. (citing Daskalea v. Wash. Human Soc’y, 275 F.R.D. 346, 358 (D.D.C. 2011)).

Typicality “is not destroyed merely by ‘factual variations.’” Wagner v. Taylor, 836 F.2d 578,

591 (D.C. Cir. 1987). Instead, the typicality requirement calls for “‘sufficient factual and legal

similarity between the class representative’s claims and those of the class to ensure that the

representative’s interests are in fact aligned with those of the absent class members.’” In re Navy

Chaplaincy, 306 F.R.D. 33, 53 (D.D.C. 2014) (quoting WILLIAM B. RUBENSTEIN, NEWBERG ON

CLASS ACTIONS § 3:31 (5th ed. 2013)).

While factual variations are acceptable, “class certification is inappropriate where a

putative class representative is subject to unique defenses which threaten to become the focus of

the litigation.” Baffa v. Donaldson, Lufkin & Jenrette Secs. Corp., 222 F.3d 52, 59 (2d Cir.

2000) (internal quotation marks and citation omitted); see also Kas v. Fin. Gen. Bankshares, Inc.,

105 F.R.D. 453, 461 (D.D.C. 1984). The “presence of a unique defense will not . . . destroy

typicality,” however, unless it “will ‘skew the focus of the litigation’ and create ‘a danger that

absent class members will suffer if their representative is preoccupied with defenses unique to

it.’” Meijer, Inc. v. Warner Chilcott Holdings Co. III, 246 F.R.D. 293, 302 (D.D.C. 2007)

(quoting In re Cardizem CD Antitrust Litig., 200 F.R.D. 297, 304–05 (E.D. Mich. 2001)).

Here, the defendants do not dispute that the class members’ claims are based on the same

legal theory—that the defendants violated sections 10(b) and 20(a) of the Securities Exchange

Act by making the same alleged misrepresentations and omissions. Nor do the defendants

dispute that, like the rest of the putative class members, Caisse and NNERF each purchased

shares of LSI’s stock during the class period, and contend that they relied on LSI’s alleged

misrepresentations and omissions through Basic’s fraud-on-the-market theory and suffered

damages when LSI’s stock price came to reflect the truth about the retail division’s margins and

24
organic growth. Instead, the defendants argue that Caisse and NNERF are atypical because they

are subject to the unique defense of non-reliance on alleged misrepresentations and omissions, or

on the market price of LSI stock. According to the defendants, “the mere fact that Plaintiffs will

be subject to such defenses renders their claims atypical,” because those defenses threaten to

become the focus of the litigation, even if they are ultimately not viable. Defs.’ Opp’n Pls.’ Mot.

Class Cert. at 16. The defendants further contend that NNERF is atypical because Pier Capital,

one of the two investment advisories that purchased shares of LSI on behalf of NNERF, earned a

profit on its LSI investment. These two elements—reliance and loss—are addressed in turn.

i. Reliance

According to the defendants, Caisse and NNERF are subject to unique defenses as to the

element of reliance, and therefore are atypical of other putative class members. Specifically, the

defendants contend that plaintiffs are variously susceptible to three defenses concerning the issue

of reliance: (1) the plaintiffs’ “investment advisors testified that they were not misled about the

very subjects of the purported fraud,” and in any event the health of the retail division was

irrelevant to their investment decisions, id. at 2; (2) the plaintiffs’ “investment advisors admitted

that they believed the market for LSI stock was inefficient and did not reflect LSI’s intrinsic

value,” id. at 4 (emphasis in original); and (3) “both New South and Van Berkom (and, by

extension, Plaintiffs) are subject to atypical defenses due to their close relationship and frequent

private meetings with LSI senior management,” id. As the defendants’ rebuttal rests on specific

facts related to each investment advisory of Caisse and NNERF, the defendants’ arguments with

respect to each investment advisory is addressed in turn.

1. Van Berkom

On February 25, 2013, Van Berkom acquired 16,630 shares of LSI stock for a fund in

which Caisse invested. Pls.’ SMF ¶¶ 17, 19. The defendants argue that Caisse is not typical

25
because Van Berkom (1) was not misled about LSI’s retail division, Defs.’ Opp’n Pls.’ Mot.

Class Cert. at 18; (2) understood that the market had undervalued LSI shares and invested to

exploit markets inefficiencies instead of relying on the integrity of the market price, id. at 21; and

(3) had private interactions with LSI management, id. at 22. These three arguments are

addressed seriatim.

(a) Van Berkom, and, by Extension,
Caisse, Was Misled by the Alleged
Misrepresentations

The defendants contend that Caisse is subject to unique defenses involving the Basic

presumption because Van Berkom was not misled about the health of LSI’s retail division. In

particular, the defendants maintain that LSI’s DoD business was Van Berkom’s primary

consideration in deciding to invest in LSI and that the health of the retail division was irrelevant.

According to the defendants, Van Berkom “would still be invested in LSI but for the loss of the

DoD contract—regardless of any supposed fraud regarding the Retail Division.” Id. at 17. For

support, the defendants cite testimony from Van Berkom’s portfolio manager, Mathieu Sirois, as

well as Van Berkom’s review of its small-cap investments to argue that “the reason for Van

Berkom’s early exit was that its entire investment thesis was defeated by the loss of the DoD

contract—a ‘binary event’ that ‘broke’ its model and ‘destroyed the economics of the business.’”

Id. at 18; see also Defs.’ Opp’n Pls.’ Mot. Class Cert., Ex. 10, Van Berkom & Assoc., Review

and Outlook of U.S. Small-Cap Stocks at VAN-BERKOM_000072, ECF No. 81-11

(characterizing LSI’s loss of the DoD surplus contract as a “binary event[]” and explaining that

“the news about the loss of the contract was . . . hard . . . to swallow”).

The defendants rely heavily on Sirois’s response to the deposition question: “Would you

think if that DoD contract had been renewed on the same terms you would be in the stock

today?” Id. (quoting Sirois Dep. at 78:20–22). Sirois answered, “Yes, most likely. I mean, that

26
broke the model.” Id. (quoting Sirois Dep. at 78:23–24). Although in a vacuum this testimony

might suggest that Van Berkom was concerned only with the DoD business, and that the retail

division was irrelevant to Van Berkom’s investment decision, the totality of Sirois’s testimony

indicates that Van Berkom considered non-DoD components of the company. In addition to

saying that Van Berkom “most likely” would still be invested in LSI stock had DoD renewed its

contracts, Sirois immediately clarified that LSI “went from pretty good margins to making

almost nothing. And therefore, when that happened, the stock no longer fit with our criteria and

that’s why we sold it.” Sirois Dep. at 78:20-79:2. Thus, Van Berkom was concerned with LSI’s

margins, and, as explained by Sirois, when LSI “lost part of the surplus contract with the DOD,

this was when the weak margins on the commercial side really came to light, and that was the

big thing.” Id. at 25:12–26:14 (emphasis added). Sirois’s testimony thus supports the plaintiffs’

contention that “the loss of a portion of the DoD contract caused Van Berkom to reevaluate its

investment in LSI not merely because it meant losing DoD revenues, but because this revealed

that a fundamental premise of Van Berkom’s investment thesis—that LSI had the potential to

realize organic growth and profits in the Retail Division—was entirely false.” Pls.’ Omnibus

Reply at 12. Even if the plaintiffs have overstated the extent to which organic growth in the

retail division was a “fundamental premise” of Van Berkom’s investment thesis, the record

demonstrates that Van Berkom cared about margins within the retail division. See, e.g., Sirois

Dep. at 52:10–12 (noting that if Van Berkom “thought [organic growth] was going down to that

level [Van Berkom] would have never made the investment”).

To be sure, Van Berkom viewed the loss of the DoD contract as the “biggest letdown,”

and stated that “what broke the model altogether was not the retail trends.” Id. at 77:18–78:6.

Yet even these statements do not prove that Van Berkom’s choice to invest was unrelated to the

27
supposed strength of the retail division. As Sirois testified, “[i]t was all about the money they

were not making on the commercial side and all this money they were making on the DOD that

was taken away on the renewal.” Id. When asked point blank whether Van Berkom invested in

LSI “based on the expectation that DOD would be renewed,” Sirois responded, “[y]es, but also

on the expectation that commercial business would be more profitable.” Id. at 32:4–14. Thus,

the defendants have not established that Van Berkom cared only about the DoD contract, and

that the subject of the purported fraud—the health of the retail division—was “irrelevant to [Van

Berkom’s] decision to purchase” shares of LSI. GAMCO Inv’rs, Inc. v. Vivendi, S.A., 927 F.

Supp. 2d 88, 100 (S.D.N.Y. 2013) (holding that the Basic presumption was rebutted with respect

to a particular plaintiff, after the class certification decision, because the subject of the fraud was

irrelevant as to that plaintiff).

Nevertheless, to bolster their argument, the defendants cite a string of out-of-Circuit

district court decisions, each of which concerns the same allegedly fraudulent statements, in

which the defendants succeeded in rebutting the Basic presumption with respect to particular

plaintiffs. See Defs.’ Opp’n Pls.’ Mot. Class Cert. at 18–19 (citing In re Vivendi Universal S.A.

Securities Litig., 183 F. Supp. 3d 458, 466 (S.D.N.Y. 2016) (“Capital Guardian”); In re Vivendi

Universal S.A. Securities Litig., 123 F. Supp. 3d 424, 426–27 (S.D.N.Y. 2015) (“Southeastern

Asset Management” or “SAM”); and GAMCO, 927 F. Supp. 2d at 100 (collectively, “the Vivendi

cases”). By way of background, the Vivendi litigation arose out of alleged misstatements and

omissions by Vivendi, a French multimedia firm trading American Depository Shares on the

New York Stock Exchange. GAMCO, 927 F. Supp. 2d at 92. Beginning in the late 1990s,

Vivendi “engaged in a series of mergers and acquisitions,” and, “[a]s a result of this activity, . . .

took on a significant debt, and eventually faced a liquidity crisis.” Id. The alleged

28
misstatements and omissions concerned Vivendi’s alleged attempts to conceal the liquidity crisis.

Id. Following a jury verdict in favor of the class plaintiffs, “the . . . core disputes remaining . . .

address[ed] whether certain, sophisticated members of the class actually relied on defendant

Vivendi[’s] . . . misstatements in trading its stock.” SAM, 123 F. Supp. 3d at 425. 9 The Vivendi

cases are distinguishable from the instant case on their facts and ultimately undercut the

defendants’ argument. For example, in GAMCO, the court held that the Basic presumption was

rebutted where the subject of the fraud was “irrelevant” to the investors’ decision to purchase

shares of the defendant company. GAMCO, 927 F. Supp. 2d at 97, 100. Here, although the

defendants have shown that the DoD contract was a significant driver of Van Berkom’s decision

to invest in LSI, and, later, to sell LSI shares, Sirois’s testimony amply demonstrates that Van

Berkom also decided to invest based on growth prospects in other LSI divisions. Those divisions

were not “irrelevant” to Van Berkom’s purchasing decision.

The defendants further contend that even if the performance of the retail division was

relevant, Van Berkom was not actually misled about LSI’s competition or retail division

margins. Defs.’ Opp’n Pls.’ Mot. Class Cert. at 19–21. Regarding competition, the plaintiffs

allege that LSI’s statement that “when you look at the competition, there is a lot of it, but it’s not

very formidable” was misleading. Am. Compl. ¶¶ 11, 165, 185. The defendants argue that Van

9
As noted, the Vivendi cases were decided after class certification, raising the question whether the
defendants’ reliance arguments are appropriate at the class certification stage. See, e.g., Willis v. Big Lots, Inc., Civ.
No. 2:12-604, 2017 WL 1063479, at *7 (S.D. Ohio Mar. 17, 2017) (distinguishing the Vivendi decisions when
addressing a motion for class certification because, inter alia, the Vivendi cases were “made in the course of post-
trial proceedings wherein the defendant attempted to rebut the presumption of reliance with respect to individual
plaintiffs”); see also Todd v. STAAR Surgical Co., Civ. No. 14-05263, 2017 WL 821662, at *5 (C.D. Cal. Jan. 5,
2017) (collecting cases for the proposition that “[d]istrict courts generally find that where plaintiffs have bought and
sold stock for investment purposes, subject to the same information and representations as the market at large those
plaintiffs are typical and not subject to a unique defense” (internal quotation marks omitted)); Loritz v. Exide Techs.,
Civ. No. 2:13-02607, 2015 WL 6790247, at *5 (C.D. Cal. July 21, 2015) (“[T]he defense of nonreliance is not itself
a basis for denial of class certification.” (citing Hanon v. Dataproducts Corp., 976 F.2d 497, 509 (9th Cir. 1992)));
In re Vivendi Universal, S.A. Sec. Litig., 765 F. Supp. 2d 512, 584–85 (S.D.N.Y. 2011) (collecting cases for the
proposition that “courts in securities fraud actions have consistently recognized that issues of individual reliance can
and should be addressed after a class-wide trial, through separate jury trials if necessary”).

29
Berkom was not misled by this statement because Sirois had identified LSI’s competitors

through his own due diligence, Sirois Dep. at 109:5–24, and agreed that competitors were not

“all on equal footing” with LSI, id. at 19:2–12. The plaintiffs are “baffl[ed]” by the defendants’

assertion, since, “as reflected in a memorandum to clients, Van Berkom believed that LSI’s

‘strong competitive position and its large scale’ enabled it to ‘generate[] good profit margins,

high returns on capital (over 25%) and equity and steady free cash flows.’” Pls.’ Omnibus Reply

at 12 (quoting Abramowitz Decl., Ex. 6, March 2013 Memo. to Clients at 8, ECF No. 88-3

(explaining that due to LSI’s “significant[]” growth, “huge barriers to entry” were created “for

any competitor” (emphasis added))). Furthermore, although Sirois testified that he had identified

LSI’s competitors and determined that they were not as “sophisticated” as LSI, Sirois Dep. at

19:4, Sirois later testified that Van Berkom “knew [the competitors] could create some noise and

some slow-down in [LSI’s] business, but we felt that at the end of the day that [LSI’s]

competitive advantages were strong enough that they should be able to grow at a decent clip,” id.

at 116:11–15. Thus, the totality of the evidence suggests that although Van Berkom researched

and was able to identify LSI’s competitors, Van Berkom ultimately believed that LSI had a

“strong competitive position.” March 2013 Memo to Clients at 8 (emphasis added); see also

Sirois Dep. at 12:4–5 (stating that Van Berkom invests in companies that it identifies as having a

“sustainable competitive advantage”). Accordingly, the defendants are incorrect in asserting that

Van Berkom was “fully capable of sizing up the competition,” and “agreed with [Mr.] Rallo”

that competition was not very formidable, as the defendants maintain. Defs.’ Opp’n Mot. Class

Cert. at 19 (emphasis in original).

The defendants have likewise failed to show that Van Berkom “kn[ew] of the purportedly

concealed facts as to . . . organic growth” in the retail division. Defs.’ Opp’n Pls.’ Mot. Class

30
Cert. at 21. The defendants point to Sirois’s testimony that Van Berkom “knew [DoD margins]

were higher. [LSI] [m]anagement had said the DoD margins were higher, and it made sense for

a couple of reasons.” Sirois Dep. at 26:19–21. Again, these cherry-picked sound bites do not

accurately reflect the totality of Sirois’s testimony with respect to margins. Sirois testified that

Van Berkom had no way of ascertaining margins in particular divisions, and was unaware that

the margins in the retail division were so low until the loss of the DoD contract exposed the truth

about the margins in the non-government divisions. Id. at 25:12–26:21 (“The only thing I will

say is the key in the economic model of the business were the margins they were generating on

the commercial business versus the government business, and they never disclosed that to

anyone. . . . So we did all the research we could do in the world to try to find out what the margin

structure could be of each of these businesses.”); id. at 26:18–27:10 (“We just didn’t know how

weak the commercial margins were, and I don’t think there is any research in the world that

would have shown that.”); id. at 27:18–22 (“[W]e knew that retail margins were weaker. We

know they were lower. We just didn’t know they were that bad. And when the lost the [DoD]

surplus contract that proved to be the case.”). Van Berkom’s understanding that retail margins

were lower than DoD margins does not establish that Van Berkom was not misled about the

strength of margins in the retail division, or the extent to which the DoD business propped up

failing units.

Similarly, the defendants claim that Van Berkom “invested in 2013 knowing full well

that LSI’s ‘organic growth’ had slowed, and would not return for one or two years—i.e., well

after the end of the Class Period—and that LSI’s Retail Division’s margins would not be

expanding during this time, either.” Defs.’ Opp’n Pls.’ Mot. Class Cert. at 20 (citing Sirois Dep.

at 42:20–43:19) (emphasis in original). The defendants are correct that Van Berkom did not

31
expect any margins to increase from around 2013 to 2015—an “investment period” for LSI. See

Sirois Dep. at 44:7–9 (“Q: You understood in 2013 margins weren’t going up for the next two

years? A: Yes.”); id. at 42:11–15 (“Q: So you are telling us that Ammar’s takeaway from this

meeting is that margins are not expanding? . . . A: In the short term, because they were going

into an investment period.”). Yet, when pressed further by the defendants’ attorney as to

whether Van Berkom “underst[ood] that in 2013 there was not margin expansion in the next two

years,” Sirois clarified: “Probably not a whole lot, but the whole point was more that the

commercial business just wasn’t making any money, and we thought it was.” Id. at 44:10–16.

Thus, Van Berkom may have known that there would not be much margin growth from 2013 to

2015, but Sirois’s testimony does not establish that Van Berkom knew that any margins,

including retail margins in particular, would constrict to the extent they did. The defendants also

cite an internal investment memorandum written before Van Berkom first purchased LSI shares,

which memorandum indicates that LSI’s “management recently lowered organic growth

expectations for the full year 2013.” See id. at 110:22–24. Similarly, the defendants cite a call

between Van Berkom and Mr. Angrick in 2013, during which Mr. Angrick confirmed that LSI

would see “slower organic growth,” id. at 51:3–24. Much like Sirois’s testimony, these

statements disclose only that margins were not expected to expand during the period—the

statements do not reveal the full extent of the margin trouble LSI faced. 10

10
The defendants also cite notes taken by Sirois’s colleague, Ammar Ali, during a call with Mr. Angrick on
May 6, 2013, and highlight that the notes state “zero growth @ existing client progs: not going to change.” Defs.’
Opp’n Pls.’ Mot. Class Cert. at 20–21; id., Ex. 2, Handwritten Notes re LQDT at VAN-BERKOM_000250, ECF
No. 81-3; see also Sirois Dep. at 54:24–25. Yet, this cherry-picked line is not as persuasive as the defendants urge
for several reasons. First, it is unclear from Ammar’s notes to which “clients” these notes refer, whether the notes
refer to the retail division at all, or the time period covered by the notes and thus how long the zero growth status
would persist. Second, the notes also contain the sentence “[w]e are a growth co[mpany]—every Q is better than
last.” Handwritten Notes re LQDT at VAN-BERKOM_000250. Finally, the defendants rely upon Sirois to interpret
Ammar’s handwritten notes, and Sirois testified that he did not know whether “zero growth” statement was
something that Mr. Angrick said, or where it came from. Sirois Dep. at 54:21–55:3. Considered with Sirois’s
statements that Van Berkom did not know the extent of the retail margin constriction, and that Van Berkom did care

32
The defendants again cite the Vivendi cases in support of their position that Van

Berkom’s decision to invest in LSI even though it knew the declines in retail margins renders

Van Berkom subject to unique defenses. The Vivendi cases, however, do not support the

defendants’ position. For example, in SAM, the investment analyst who made the decision to

purchase shares of Vivendi testified that, due to his own independent analysis, he was aware of

the subject of the alleged fraud—the liquidity crisis—when he made the purchasing decision.

123 F. Supp. 3d at 436 (citing the analyst’s testimony that “he was ‘right the whole time’ about

his calculations and assessments and ‘was not misled’ about Vivendi’s debt”). On this record,

the court concluded that “[e]ven had [the analyst] known about the fraud, it would not have

mattered to him.” Id. (noting the analyst’s testimony that none of the nine corrective disclosures

corrected anything he believed about Vivendi’s liquidity). Likewise, in Capital Guardian, the

investment analyst invested in Vivendi with an “understanding and acceptance of Vivendi’s

liquidity risks.” 183 F. Supp. 3d at 466–67 (noting that, prior to any of the corrective

disclosures, Capital Guardian’s analyst projected that Vivendi’s debt would increase from

approximately €23 billion to €29.8 billion in a short period of time and that the company “would

need to sell assets in order to address its liquidity needs”). Accordingly, the court in Capital

Guardian concluded that Vivendi had rebutted the Basic presumption because Capital Guardian

was “indifferent to the fraud.” Id. at 466 (emphasis added). Here, in contrast, the evidence

shows that Van Berkom did not know the extent of the issues allegedly concealed by LSI and

was not indifferent to the fraud. For all the foregoing reasons, the defendants’ argument that Van

Berkom knew the truth about the retail division margins fails.

about margins and growth in the retail division, these scrawled notes are insufficient to show that Van Berkom knew
that retail margins would stagnate.

33
(b) Van Berkom’s Sophisticated
Investment Strategy Does Not Rebut the
Basic Presumption

The defendants next argue that Van Berkom is subject to unique defenses involving the

Basic presumption, rendering Caisse atypical, because Van Berkom “did not regard the market

price of LSI’s shares as a proxy for the Company’s intrinsic value at the time it acquired LSI

shares.” Defs.’ Opp’n Pls.’ Mot. Class Cert. at 21. Instead, according to the defendants, Van

Berkom, a so-called “value investor,” 11 believed based on its own sophisticated models and

analysis that the market for LSI stock was inefficient and invested to exploit that inefficiency.

Id. at 21–22. The defendants emphasize that Van Berkom assessed LSI’s value using a

discounted cash flow model, which did not include stock price as a direct input, id. at 21–22

(citing Sirois Tr. at 11:23-13:18), and that Van Berkom invested only in companies it deemed to

be “‘mispriced or undervalued by the market,’” id. at 22 (quoting Sirois Dep. at 11:8) (emphasis

omitted). The plaintiffs respond that being a value investor or otherwise employing a

sophisticated investment strategy does not negate typicality “[a]s long as the investment decision

rests to some degree on public information.” Pls.’ Omnibus Reply at 5.

Sirois described Van Berkom’s investment model as follows: “Our goal is to be invested

in the very best and highest quality companies that we can find across our universe. So we

define such companies as companies that generate a significant return on capital over time, very

strong free cash flows, that maintain a very strong balance sheet that has sustainable competitive

advantages and that are run by a very, very strong management team. And we only buy these

companies when they are mispriced or undervalued by the market.” Sirois Dep. at 1123–12:8.

11
Value investors “believe[] that certain stocks are undervalued or overvalued and attempt[] to beat the
market by buying the undervalued stocks and selling the overvalued ones.” Halliburton II, 134 S. Ct. at 2410
(internal quotation marks omitted).

34
When asked what he meant by “mispriced or undervalued by the market,” Sirois explained:

“[F]or each investment candidate we go through a very extensive research process that involves

several steps, but . . . one of them is the building of a detailed financial model on Excel where we

will put several years of historical financial statements in the numbers that we restate according

to what we think are some adjustments required in any . . . of the financial statements released by

companies, and then we put forward between five and [ten] years of forecasts for the income

statement, cash flow statement and balance sheet, and from that we derive a discounted cash

flow evaluation to help us assess whether the company is fairly valued, overvalued, or

undervalued, using a variety of assumptions and inputs that we generate from the knowledge that

we acquire as we go through out research process.” Id. at 12:13–13:5.

As the Supreme Court noted in Halliburton II, in response to Halliburton’s argument that

price integrity is “marginal or irrelevant” for value investors, “there is no reason to suppose that

. . . the value investor . . . is as indifferent to the integrity of market prices.” Halliburton II, 134

S. Ct. at 2410–11. “Such an investor implicitly relies on the fact that a stock’s market price will

eventually reflect material information—how else could the market correction on which his

profit depends occur?” Id. at 2411. Recognizing that a value investor necessarily believes that

the market price does not accurately reflect public information at the time he transacts, the

Supreme Court held that Basic reliance requires only that the investor “trade stock based on the

belief that the market price will incorporate public information within a reasonable period of

time.” Id. The Court noted, moreover, that a value investor relies on the market price of an asset

insofar as he “presumably tries to estimate how undervalued or overvalued a particular stock is.”

Id. (emphasis in original). Thus, the mere fact that Van Berkom is a value investor does not

rebut the Basic presumption. See Willis v. Big Lots, Inc., Civ. No. 2:12-604, 2017 WL 1063479,

35
at *7 (S.D. Ohio Mar. 17, 2017) (“[N]o cases hold[] that the mere fact that a class member is a

value investor is, alone, enough to defeat Basic’s presumption of reliance.”); Saddle Rock

Partners v. Hiatt, Civ. No. 96 9474, 2000 WL 1182793, at *4 (S.D.N.Y. Aug. 21, 2000) (finding

a class representative typical even though he was a “sophisticated stockbroker” and a “gambler”

who purchased “stock based upon its trading history which he thought revealed short term

market inefficiencies”); In re Oxford Health Plans, Inc. Sec. Litig., 191 F.R.D. 369, 376

(S.D.N.Y. 2000) (“All of the usual smoke and mirrors and computer programs to rank stocks,

relied on by professionals, have at their foundation an assumption that there is an efficient public

market.”).

In arguing that Van Berkom’s investment strategy renders Caisse atypical, the defendants

continue to cite the Vivendi cases, but those cases, again, are distinguishable. In the first case,

GAMCO, the record demonstrated that the plaintiff–investor, GAMCO, “would have seen

Vivendi as a more attractive investment” had the liquidity situation been fully disclosed, 927 F.

Supp. 2d at 102 (emphasis in original), in light of GAMCO’s proprietary methodology used to

determine when to invest in a company, which was “completely independent of liquidity

concerns and market price,” id at 101. In other words, the Basic presumption was rebutted not

only because GAMCO employed a sophisticated, proprietary methodology in making its

investment decisions, but also because the fraud would have made Vivendi’s ADSs “more

attractive,” and because GAMCO “would have purchased Vivendi securities even had it known

of Vivendi’s alleged fraud.” GAMCO Inv’rs, Inc. v. Vivendi Universal, S.A., 838 F.3d 214, 218

(2nd Cir. 2016), cert. denied, 137 S. Ct. 1104 (2017); accord Todd v. STAAR Surgical Co., Civ.

No. 14-05263, 2017 WL 821662, at *5 (C.D. Cal. Jan. 5, 2017) (“Although Lead Plaintiff’s

decision-making may have been idiosyncratic, his testimony indicates that he relied on

36
information publicly available on the internet when deciding whether to purchase STAAR’s

stock. As the court in Diamond Foods explained, ‘[m]ost investors think they are a little smarter

than average and see opportunities others have missed. Still, they all rely on publicly available

data.’” (quoting In re Diamond Foods, Inc., Sec. Litig., 295 F.R.D. 240, 253 (N.D. Cal. 2013))).

Indeed, the GAMCO court was careful to emphasize that its holding “should not be taken

to suggest that sophisticated institutional investors or value-based investors are not entitled to the

[Basic] presumption,” and that it is easy to imagine a case in which an investor “used the market

price of a security merely as a comparator with a private method of valuation, but in which the

[Basic] presumption could not be fairly rebutted, because, but for the material misstatements,

that investor would not have transacted in the securities at issue. 927 F. Supp. 2d at 102. On

appeal, the Second Circuit affirmed, explaining that, “whereas one can imagine situations in the

abstract where a sophisticated investor, apprised of a fraud, would necessarily conclude that a

security was no longer a logical purchase, the district court did not clearly err in concluding, on

this record, that in this case, and with regard to this particular fraud, GAMCO would still have

viewed Vivendi’s securities as a profitable investment—even if it might have been concerned

about the hidden liquidity risks.” GAMCO, 838 F. 3d at 221 (emphasis in original). Here, there

is no evidence to suggest that if Van Berkom had known of the issues in the retail division, LSI

stock would have been a more attractive investment (or even that Van Berkom would have been

indifferent to the alleged fraud). To the contrary, Sirois testified that Van Berkom invested in

LSI on the expectation that the DoD contract would be renewed, “but also on the expectation that

commercial business would be more profitable[,] . . . that it was one of the major growth

drivers,” and that although the DoD business was “the cash cow,” “the retail and commercial

business is where you are going to get the growth.” Sirois Dep. at 32:9–24.

37
SAM and Capital Guardian, both of which involved post-certification motions for

summary judgment on the issue of reliance, are likewise distinguishable. First, in SAM, the court

found that Vivendi had rebutted the Basic presumption with respect to SAM because its analyst

both testified that “Vivendi’s declining stock price made investing in the company ‘more

attractive,’” and “admitted that . . . none of the nine corrective disclosures . . . ‘corrected’ any

misunderstanding by [him] concerning the value of Vivendi.” 123 F. Supp. 3d at 428 (emphasis

in original). In other words, the analyst testified that he was not misled about the subject of the

fraud and none of the corrective disclosures were corrective to him. See id. at 429 (citing

deposition testimony by the analyst that he “had it right the whole time . . . [and] was not misled

on the level of debt”). Like SAM, Capital Guardian understood and accepted Vivendi’s liquidity

risks and chose to invest anyway. Capital Guardian, 183 F. Supp. 3d at 461, 466–67 (noting

that, prior to any of the corrective disclosures, Capital Guardian’s analyst projected that

Vivendi’s debt would increase from approximately €23 billion to €29.8 billion in a short period

of time and that the company “would need to sell assets in order to address its liquidity needs”).

On these facts, the court concluded that Vivendi had rebutted the Basic presumption because

Capital Guardian was “indifferent to the fraud.” Id. at 466 (emphasis added). These facts are

plainly distinguishable from the facts in the instant case, where Sirois’s testimony demonstrates

that Van Berkom did not invest with full knowledge of the troubles facing the retail division.

See Sirois Dep. at 27:18–22 (“[W]e knew that the retail margins were weaker. We know they

were lower. We just didn’t know they were that bad. And when [LSI] lost the surplus contract

that proved to be the case.”).

38
(c) Van Berkom’s Private Meetings with
LSI Management Do Not Defeat Caisse’s
Typicality

The defendants’ final argument as to Caisse’s atypicality is that Van Berkom made its

investment decisions based on information obtained during private meetings with LSI

management. Defs.’ Opp’n Pls.’ Mot. Class Cert. at 22. The defendants point out that Sirois had

at least nine private meetings and calls with LSI management, including phone calls with Mr.

Angrick that lasted up to 45 minutes, and face-to-face meetings that lasted at least an hour. Id. at

23 (citing Sirois Dep. at 53:15–25). Moreover, many of Van Berkom’s stock purchases and sales

occurred immediately following these meetings, see Defs.’ Opp’n Pls.’ Mot. Class Cert at 23–24

(documenting Van Berkom contact with LSI and Van Berkom purchases of LSI stock), and

Sirois testified that it would be “logical” to conclude that shares were purchased “after [he] had a

meeting or a call with [LSI] management,” id. at 24 (quoting Sirois Dep. at 117:6–11). Caisse

contends that “‘[m]ere communication with corporate insiders will not render a class

representative atypical for class certification purposes absent the exchange of non-public

information.’” Pls.’ Omnibus Reply at 18 (quoting In re DVI, Inc. Sec. Litig., 249 F.R.D. 196,

202–03 (E.D. Pa. 2008)); accord In re Providian, Civ. No. 01-03952, 2004 WL 5684494, at *3

(N.D. Cal. Jan. 15, 2004); In re Intuitive Surgical, Civ. No. 5:13-01920, 2016 WL 7425926, at

*6 (N.D. Cal. Dec. 22, 2016); Beaver Cty. Emp. Ret. Fund v. Tile Shop Holdings, Inc., Civ. No.

14-786, 2016 WL 4098741, at *5 (D. Minn. July 28, 2016); Wallace v. IntraLinks, 302 F.R.D.

310, 316 (S.D.N.Y. 2014). The defendants respond that “[i]t does not matter whether plaintiffs

actually received inside information” because “‘the fact remains that [Caisse] will be required to

devote considerable time to rebut the unique defense.’” Defs.’ Opp’n Pls.’ Mot. Class Cert. at

22–23 (quoting Shiring v. Tier Tech., Inc., 244 F.R.D. 307, 314 (E.D. Va. 2007)).

39
Yet, clearly, private meetings conceivably threaten to become a focus of the litigation

only if a party could plausibly argue that insider information was exchanged. See, e.g., Shiring,

244 F.R.D. at 314 (“[T]he presence of an arguable defense is sufficient to find atypicality.

(emphasis added)). Here, however, even after extensive discovery, the defendants do not so

much as assert that Van Berkom received insider information not publicly available, and the

evidence refutes any such ideation. See Sirois Dep. at 54:8–19 (defense counsel questioning

Sirois about his visits to LSI, and moving on to a different subject after Sirois testified that,

during a meeting at LSI, he “[saw] [s]taffers and sales people, people on the collection side,

things like that. There wasn’t anything, frankly, too impressive to see. It was just a business

office.”). Thus, the defendants’ concern that the private meetings would become the focus of the

litigation appears entirely unfounded. See In re Intuitive Surgical Sec. Litig., 2016 WL 7425926,

at *6 (“Courts have consistently certified classes where there was no evidence that the named

plaintiff received non-public information from a corporate officer. In general, the cases hold that

if the plaintiff has received information from company insiders that confirms, reflects, repeats, or

even digests publicly available market information, that plaintiff is an appropriate class

representative.” (internal quotation marks omitted)).

Moreover, finding atypicality under these circumstances would frustrate the purpose of

the PSLRA. As other courts have recognized, “institutional investors, especially those with large

holdings, [commonly] communicate directly with corporate officials.” In re DVI, Inc. Sec. Litig.,

249 F.R.D. at 203. “Since the PSLRA clearly contemplates that institutional investors—who are

generally understood to communicate with corporate officers—will serve as class

representatives,” courts have “decline[d] to find that an investor will be precluded from serving

40
as class representative merely because of his private communications with corporate insiders

about publicly available information.” Id.

2. Pier Capital

Pier Capital, one of NNERF’s investment advisories, acquired its first shares of LSI in

January 2012, and purchased additional shares between February and July 2012. Pls.’ SMF

¶¶ 100–01. Pier Capital sold all its shares in LSI on November 28, 2012, for a profit of over $1.6

million, yielding a $69,270 profit for NNERF. Id. ¶¶ 102–04. 12 The defendants argue that

NNERF is subject to unique defenses and therefore atypical because Pier Capital was not misled

about the health of the retail division. Specifically, the defendants contend that Pier Capital’s

portfolio manager, Alexander Yakirevich, decided to invest in LSI on the “underst[anding] that

LSI retail margins were not going to grow,” Defs.’ Opp’n Pls.’ Mot. Class Cert. at 25 (emphasis

in original), and that Pier Capital’s decision to liquidate its position in LSI was due solely to

factor unrelated to retail division margins, id. at 27–28; Defs.’ Reply Supp. Mot. Summ. J. at 16.

(a) Pier Capital Did Not Know the Truth
About the Subject of the Fraud

The defendants’ argument that Pier Capital knew the truth about the retail margins is

belied by the record. Pier’s investor letter addressing performance in the second quarter of 2012,

issued on July 13, 2012, indicates that Pier knew about the problems with LSI’s DoD business

but was unaware of the issues in the retail division. The investor letter reports that “20% of

[LSI’s] business is from the government and recently this segment has stopped growing, which

together with lower prices for scrap metals has lowered their still high growth rate,” “knock[ing]

the stock down by about 15%” in early June 2012.” Abramowitz Decl., Pier Capital Q2 Investor

12
As the plaintiffs point out, NNERF was invested in LSI after November 28, 2012, through its investment
advisor NewSouth, and NNERF “suffered a loss based on its investment in LSI during the Class Period.” Id.

41
Letter, Ex. 32 at PIER_000053, ECF No. 88-5. Further, Pier Capital’s “take” on the stock price

drop “[wa]s that with commercial growth rates still very strong (and a very large market

opportunity), it simply does matter if their government business remains unchanged and becomes

an event smaller piece of the pie.” Id. (emphasis added). Indeed, as Pier communicated to its

clients, “[o]n the recent dip,” Pier Capital “added to [its] holdings so that this is now our largest

position at around 2.3%.” Id. (emphasis added). Thus, at least as of July 2012, Pier Capital

evinced no understanding that the retail margins were in decline. That conclusion is reinforced

by the deposition testimony of Alexander Yakirevich, Pier Capital’s analyst who made the

decision to invest in LSI. When questioned by defense counsel, Yakirevich acknowledged that

the he “understood that the government business had stopped growing in 2012” and then stated

that, “[a]s a story, we expected both—obviously you want both businesses—retail and

government business—to contribute and not, you know, slow down.” Yakirevich Dep. at

120:10–13 (emphasis added).

In support of their argument that Pier Capital knew that retail margins would not grow,

the defendants point to several of the alleged partial corrective disclosures, with which

Yakirevich was familiar. First, the defendants cite Mr. Rallo’s statement at a conference on June

22, 2012, “suggesting that margins—the pace of margin expansion would not be as robust going

forward.” Yakirevich Dep. at 143:13–16. In testifying about Mr. Rallo’s statement, Yakirevich

stated that he “understood” from Mr. Rallo’s statements that “‘the pace of margin expansion

would not be as robust,” but that he did not believe “that it was going to stop.” Id. at 143:14–15,

152:15–16. Thus, as the plaintiffs allege, Mr. Rallo’s statement conveyed a generalized

42
possibility of margin decline, but no particulars, and nothing about the retail division, which in

other statements was touted by the defendants. 13

The defendants also point to Yakirevich’s testimony about an email his colleague

received from an outside analyst and forwarded to Yakirevich concerning a June 2012 report by

Off Wall Street Consulting Group. Defs.’ Opp’n Pls.’ Mot. Class Cert. at 26. The email stated,

inter alia, that “margins in [the] commercial business are lower than people realize, therefore

they are unlikely to drive results.” Id. Yakirevich responded to the email by noting that it “d[id]

not appear to be raising any new issues with the story,” and that “the original investment thesis

still appears to be intact,” Defs.’ Opp’n Pls.’ Mot. Class Cert., Ex. 33, Yakirevich Email (dated

July 2, 2012), ECF No. 82-5. Yet, the fact that Pier Capital was aware to some extent that retail

margins would not continue to grow does not distinguish NNERF from other putative class

members. Indeed, NNERF fits neatly within the putative class, since the operative complaint in

this case acknowledges that “[a]lthough Defendants periodically disclosed the fact that, over

time, they expected margin growth to slow, they did not fully disclose the extent of, or reasons

for, these challenges.” Am. Compl. ¶ 64; accord, e.g., id. ¶ 11 (“Although Defendants finally

disclosed the fact that, over time, they expected margin growth to slow, they did not come

anywhere near the necessary level of candor with investors. Ultimately, deteriorating margins

was a tremendous problem, . . . a fact that Defendants were keenly aware of but stubbornly

refused to adequately disclose.” (emphasis added)); id. ¶ 68 (“Although as far back as 2012

Defendants mentioned that margins could impact Liquidity’s balance sheet in the near term,

13
Notably, moreover, Yakirevich testified that he was not present at the conference at which Mr. Rallo made
the relevant statements, and therefore “do[es]n’t know exactly what [Mr. Rallo] said.” Id. at 143:11–12. Further,
when asked by the defense counsel whether he “view[ed] the news that there were worries about margins going
forward and that that statement came from the CFO” as “new information,” Yakirevich responded, “to me, it was
new information.” Id. at 144:9–17. Thus, even if Mr. Rallo’s statements gave Pier Capital some indication that
retail margin growth would decelerate, Yakirevich’s testimony suggests that Pier Capital was unaware of “worries
about margins” when first purchasing shares of LSI in January 2012.

43
these were belated and soft-pedaled general references that hardly revealed the truth regarding

the known impact of competition on margins and profitability.”). 14

(b) Pier Capital Was Not Indifferent to
Retail Margins

The defendants’ second contention—that Pier Capital sold its stock in LSI for reasons

unrelated to retail division margins, Defs.’ Opp’n Pls.’ Mot. Class Cert. at 27–28—is undercut

by the record, and, even if it were true, would not be dispositive. The defendants first point to an

email that Yakirevich sent on October 16, 2012, at the same time he sold some of Pier Capital’s

LSI stock, in which he wrote that “[w]hile we continue to like the long-term growth story behind

[LSI], we are concerned about the cyclical deceleration in GMV growth.” Defs.’ Opp’n Pls.’

Mot. Class Cert., Ex. 35, Yakirevich Email (dated Oct. 16, 2012) at PIER_019271, ECF No. 82-

7. This email, however appears to explain why Pier Capital was scaling down to a 1% interest in

LSI from its then-current 2.3% interest. Although the email consists only of a single sentence,

the subject line reads “LQDT – selling to 1% scap smid.” Id. 15 The email is addressed to other

employees of Pier Capital. Id. During Yakirevich’s deposition, defense counsel inquired about

the October 16, 2012 email, asking “[a]nd the reason you are selling [the LSI shares] is because

of concern about deceleration in GMV growth trends?” Yakirevich Dep. at 259:10–12.

Yakirevich responded: “So, at the time we owned an oversized position. . . . And things ha[d]

been decelerating. Then basically, we are saying is that we need to reduce our exposure.” Id. at

259:14–21. Regarding Pier Capital’s “oversized position” in LSI, Yakirevich explained that

14
The defendants also take issue with the plaintiffs’ claim that LSI’s November 29, 2012 earnings report
constituted a corrective disclosure, since that earnings report was issued one day after Pier Capital sold its last shares
of LSI. Defs.’ Opp’n Pls.’ Mot. Class Cert. at 27. Accordingly, the defendants press, “Pier Capital (and thus
NNERF) has no loss attributable to that report.” Id. The defendants say nothing further about the legal significance
of this fact. The defendants also cite no caselaw indicating that a lead plaintiff is atypical if it did not suffer a direct
loss from every single alleged misrepresentation.
15
“Scap smid” refers to Pier Capital’s “small cap” portfolio. Yakirevich Dep. at 260:17–19.

44
“[t]ypically, we own between 75 and 100 names in a portfolio. I mean, our strategy is to

establish 1% positions.” Id. at 33:1–3. Thus, the email on which the defendants so heavily rely

appears to suggest that, at least in part, the sale of LSI stock down to a 1% position may have

been simply in keeping with Pier Capital’s “typical[]” practice. In addition, given the plaintiffs’

allegations that, at the time of the October 2012 sale, LSI was pumping the market with

incomplete information about the retail division, one would not expect Yakirevich to choose to

sell based on that information.

The defendants also cite Yakirevich’s testimony that Pier Capital decided to sell LSI

because “there w[ere] questions about the government business.” Defs.’ Opp’n Pls.’ Mot. Class

Cert. at 28 (emphasis in original). From this testimony, the defendants speculate that “[i]t was

this factor, and not any undisclosed facts or trend concerning retail margins, sales or product mix

that prompted Pier Capital to sell its LSI shares nearly two years before the May 8, 2014

announcement that supposedly revealed the truth about the Retail Division.” Id. (emphasis in

original). Yakirevich’s testimony simply does not establish that retail margins were irrelevant to

Pier Capital’s investment decisions, and that if the truth had been revealed, Pier Capital would

have been indifferent to it. In any event, Yakirevich testified that there were concerns about the

government business at the time, and that this was “one of the factors that basically impact[ed]

the company’s ability to grow,” Yakirevich Dep. at 125:2–11 (emphasis added).

In sum, the defendants’ arguments that Pier Capital was not misled by the defendants’

alleged misrepresentation fail, and NNERF is not atypical.

(c) NNERF Suffered an Overall Loss
Notwithstanding Pier Capital’s Gain

The defendants also contend that NNERF cannot represent a class of people that suffered

a loss by investing in LSI because “[i]t is undisputed that Pier Capital’s investment in LSI

45
yielded a $69,270 profit for NNERF.” Defs.’ Opp’n Pls.’ Mot. Class Cert. at 28; see also

Yakirevich Dep. at 95:9–15. In total, Pier Capital earned over $1.6 million on LSI. Yakirevich

Dep. at 304:22–305:18. Thus, according to the defendants, NNERF has not suffered the same

injury as the rest of the putative class, and so is an atypical representative. See Defs.’ Opp’n

Pls.’ Mot. Class Cert. at 28–29. The plaintiffs respond that “[t]his argument borders on the

disingenuous, for, as Defendants well know, despite making a small profit from the Class Period

trades made on its behalf by Pier Capital (one of its investment managers), the NNERF as a

whole suffered a devastating loss of $526,422 based on its’ overall LSI trades during the Class

Period.” Pls.’ Omnibus Reply at 20.

The defendants do not dispute that the NNERF suffered an overall loss through its

investments with LSI. NNERF’s small profit, through one of its investment advisors, while

suffering an overall loss, is a minor factual variation that does not defeat typicality. The

defendants do not cite any cases to the contrary, and indeed, appear to concede the point by

arguing that “[w]here the lead plaintiff makes a profit during the class period, ‘he has not

suffered a loss, his claim fails, and he is not a typical representative of his class.’” Defs.’ Opp’n

Pls.’ Mot. Class Cert. at 28 (quoting In re Organogenesis Sec. Litig., 241 F.R.D. 397, 403 (D.

Mass. 2007)). In other words, the caselaw relied upon by the defendants focuses on the lead

plaintiff’s overall experience with the stock—not the performance of the individual investment

advisors acting on behalf of the lead plaintiff.

In an analogous case, the plaintiff-investor had invested through two investment

advisories, one of which had purchased shares of the defendant’s stock during the class period,

and one of which had not. See Rosen v. Textron, Inc., 369 F. Supp. 2d 204, 208 (D.R.I. 2005).

The plaintiffs in that case conceded, and the court agreed, that “only purchases by” the advisory

46
who made investments during the class period would be “in issue.” Id. Here, the defendants

may wish to challenge which purchases of LSI stock are in issue, but a typicality challenge is

unavailing. Notably, other class members may very well have booked a profit on particular

trades or during particular time periods, even if they suffered overall losses. That Pier Capital

profited from a small portion of its investment is not sufficiently anomalous to affect adversely

NNERF’s typicality. 16

3. New South

The defendants argue that “NNERF is also subject to unique defenses based on the

testimony of its second investment advisor, New South.” Defs.’ Opp’n Pls.’ Mot. Class Cert. at

29. Echoing their arguments with respect to Van Berkom and Pier Capital, the defendants assert

that, unlike other investors, New South (1) “was not misled by or about any of the purported

material misstatements that form Plaintiffs’ core theory of fraud” because “retail margins and

organic growth were not material to New South’s investment decision;” (2) “had nearly a dozen

private calls and meetings with [LSI’s] senior management;” and (3) “purchased LSI shares

16
In a similar vein, the defendants assert that Pier Capital is atypical because it cannot prove loss causation,
i.e., that its losses are attributable to the fraud. In particular, the defendants contend that Pier Capital cannot “recoup
any price decline that occurred after November 28, 2012 because it no longer owned shares and thus cannot
demonstrate loss causation.” Defs.’ Opp’n Pls.’ Mot. Class Cert. at 28. For support, the defendants cite In re Flag
Telecom Holdings, Ltd. Sec. Litig., 574 F.3d 29 (2d Cir. 2009), in which an in-and-out trader that sold months before
the alleged corrective disclosure was deemed atypical and inadequate, and therefore not permitted to serve as a class
representative. Id. at 41. In re Flag Telecom Holdings, however, was decided on its unique facts, which are not
present in the instant case. In particular, the plaintiffs in In re Flag Telecomm Holdings, relied on a “leakage”
theory to establish loss causation, i.e., that “the truth regarding Flag’s financial condition began to leak into the
market prior to the February 13, 2002 announcement, causing the value of Flag common stock to decline,” since the
plaintiffs had sold their stock shares prior to the end of the class period on February 13, 2002. Id. at 40. The Second
Circuit held that the plaintiffs had “failed to demonstrate that any of the information that ‘leaked’ into the market
prior to February 13, 2002, revealed the truth with respect to the specific misrepresentations alleged.” Id.; accord
Silversman v. Motorola, Inc., 259 F.R.D. 163, 171 (N.D. Ill. 2009) (noting that the Second Circuit in In re Flag
Telecom Holdings “did not reject the leakage theory per se”). Here, in contrast, the defendants do not contest that
the partial corrective disclosures identified by the plaintiffs—the June 22, 2012 statement by Mr. Rallo, the July 2,
2012 Off Wall Street report, and a September 12, 2012 report projecting reduced earnings estimates—gave some
indication that retail margins were deteriorating but did not reveal the full extent of that decline.

47
because it believed that the market for LSI stock was inefficient.” Id. (emphasis in original).

Each of these arguments is addressed in turn.

(a) The Retail Division Was Not
Irrelevant to New South’s Investment
Thesis

First, citing testimony by Alexander McLean, New South’s portfolio manager who

oversaw LSI investments, the defendants contend that New South’s investment in LSI was

premised on the DoD contract and that the performance of the retail division was irrelevant. Id.

at 30 (“New South’s investment thesis was destroyed by the results of the DoD auction—not

revelation of any hidden problem with the Retail Division.”). Indeed, “New South began to

liquidate its LSI holdings almost a month before the final May 8, 2014 corrective disclosure.”

Id. (emphasis in original). The defendants focus on McLean’s testimony about an October 6,

2014 quarterly letter to investors, issued after LSI’s final May 8, 2014 corrective disclosure, and

argue that this letter “confirm[s] that its decision to sell had nothing to with Retail.” Id.

The letter in question states that that New South’s “initial experience with [LSI] was

quite a prosperous one,” McLean Dep. at 217:26, but that “[s]everal issues surfaced that were not

accounted for in the due diligence process, including more unprofitable accounts than expected,”

a statement which referred to LSI’s GoIndustry acquisition in the commercial capital assets

division, id. at 217:7–15. The following paragraph of the letter states that “more recent setbacks

with the DoD surplus contract will be of longer lasting detriment.” Id. at 219:1–6 (referencing

LSI’s loss of the rolling stock options contract to a competitor). The defendants emphasize that

this letter, issued after the full truth came to light, “had nothing to do with Retail.” Defs.’ Opp’n

Pls.’ Mot. Class Cert. at 30; compare McLean Dep. at 205:21–206:3 (“Q: And was that decision

[to sell LSI stock] primarily driven by the loss of a DOD contract, as we discussed? A: That

was—that was definitely—a major part of our decision.”). During his deposition, McLean

48
testified that the loss of the contract “was definitely a—a major part of our decision.” (emphasis

added)). Yet, just because New South sold its LSI stock upon the loss of the DoD contract (and

attributed its sale to the loss of that contract) does not establish that New South was indifferent to

the alleged fraud or the health of the retail division, and the defendants have simply adduced no

testimony to that effect. Compare Capital Guardian, 183 F. Supp. 3d at 466 (the Basic

presumption was rebutted because the defendant, Vivendi, had established that the plaintiff was

“indifferent to the fraud”).

The defendants also note that in April 2014, following LSI’s loss of the DoD contract,

New South revised its model, which “showed LSI’s EBITDA growth going to negative 23.8% in

2015 and projecting a negative EBIDTA in 2014.” Defs.’ Opp’n Pl.’s Mot. Class Cert. at 30

(citing McLean Dep. at 72:13–16). At the same time, this revised model “contained no change

in New South’s estimate for the Retail Division,” and, accordingly, it is clear that “all of the

positive year over year growth projections in the New South model were reversed by the loss of

one DoD contract and the increased costs associated with the DoD contract it retained, not

anything to do with the retail division.” Id. (citing McLean Dep. at 205:14–206:3). This model

does not prove as much as the defendants suppose. Although the model indicates that the loss of

the DoD business was catastrophic, it does not indicate that the retail division was irrelevant.

The defendants next assert that New South was not misled about competition because

McLean knew about LSI’s two major competitors, including Iron Planet, which outbid LSI for

the DoD contract. Id. According to the defendants, “[a] Plaintiff cannot possibly represent a

class adequately, much less be typical, if its own investment manager flat out contradicts claims

about the falsity of a statement that ‘when you look to the competition, there is a lot of it, but it’s

not very formidable.’” Id. at 31 (quoting Am. Compl. ¶ 165). The defendants mischaracterize

49
McLean’s testimony. McLean did not testify that the competition was not formidable but rather

that “at the time, we thought that Liquidity Services had advantages over their competition.”

McLean Dep. at 204:7–9 (emphasis added). Thus, contrary to the defendants’ argument,

McLean did not concede in his deposition that LSI’s competition was actually “not very

formidable,” but rather that, at the time, presumably based on statements by LSI management,

McLean was under the impression that LSI had a competitive advantage.

The defendants further argue that New South was not misled about LSI’s retail margins

and organic growth. Defs.’ Opp’n Pls.’ Mot. Class Cert. at 31. Again, the defendants twist

McLean’s testimony and misunderstand the plaintiffs’ allegations. For example, the defendants

state that, “[f]ar from being misled that margins would improve, . . . by June 21, 2012, McLean

expected that LSI’s margins would drop by 100 to 150 basis points.” Id. (emphasis in original)

(citing McLean Dep. at 130:9–13). Yet McLean’s testimony on this point suggests that he

understood that margins would drop 100 to 150 basis points “from the Go/Dove integration,”

McLean Dep. at 130:16–17, which occurred not in the retail division, but in the commercial

capital assets division, id. at 129:4–8. Likewise, the defendants point to McLean’s notes, dated

July 16, 2013, id. at 179:12–13, from what appeared to be an earnings call, id. at 180:5. The

defendants assert that McLean’s notes from this call “reflect discussion about ‘many disruptions

in retail.’” Defs.’ Opp’n Pls.’ Mot. Class Cert. at 31 (quoting McLean Dep. at 180:10–17). Yet,

the full notation reads “[m]any disruptions in retail in the past,” McLean Dep. at 180:13–14

(emphasis added), rather than any statement about retail margins in the future. Moreover, when

defense counsel asked McLean whether his notes referred to “something that was said on the

earnings call,” McLean responded, “I don’t remember,” and defense counsel did not press

50
further. Id. at 180:15–16. 17 As the plaintiffs point out, moreover, much of the other evidence

marshalled by the defendants concerns margins in general rather than retail margins in particular.

The defendants’ effort to show that “McLean understood LSI management to be issuing

warnings about the retail margins and understood that it would not see margin growth,” Defs.’

Opp’n Pls.’ Mot. Class Cert. at 31 (emphasis in original), is consistent with the allegations in the

complaint. As noted above, the main thrust of the plaintiffs’ claims is that, “[a]lthough as far

back as 2012 Defendants mentioned that margins could impact Liquidity’s balance sheet in the

near term, these were belated and soft-pedaled general references that hardly revealed the truth

regarding the known impact of competition on margins and profitability.” Am. Compl. ¶ 68.

Accordingly, the fact that McLean was generally aware that retail margins would not continue to

grow does not render New South and, by extension, NNERF, atypical.

(b) New South’s Private Meetings with
LSI Management Do Not Negate
Typicality

Next, the defendants argue that New South’s relationship with LSI management renders

NNERF atypical. Defs.’ Opp’n Pls.’ Mot. Class Cert. at 32. McLean testified that he met with

LSI management, including Messrs. Angrick and Rallo, before the initial investment was made,

McLean Dep. at 36:8–17, and “periodically” thereafter, id. at 39:2–5.

17
The defendants also cite New South’s reaction to third quarter 2011 earnings results, after the release of
which LSI management warned that “margins may be squeezed in coming quarters as consumer weakness pressures
volume and value of retail goods sold” in LSI’s marketplaces. McLean Dep. at 111:19–22. McLean testified that
one of New South’s “takeaway[s]” was that “margins were [not] going up, at this point in time, for [LSI’s] retail
business.” Id. at 112:5–13; see also id. at 112:14–17 (“Q: All right. But that’s what you understood management to
be doing, is issuing a warning about retail margins? A: Yes.”). This evidence falls short of establishing that New
South was not misled about margins in the retail division. First, LSI issued this statement in May 2011, eight
months before the start of the class period. Second, this “warning” appeared in public material issued by LSI, and so
cannot form the basis of a unique challenge to New South’s reliance, as opposed to all investors, with access to
public information.

51
“The presumption of reliance may be rebutted if a purchaser of stock relies on non-

market information that is not generally available to the public and, therefore, not available to the

unnamed class members.” Beach v. Healthways, Inc., Civ. No. 3:08-0569, 2009 WL 3245393, at

*3 (M.D. Tenn. Oct. 5, 2009). As the defendants acknowledge, however, McLean testified that

New South “w[as] not provided with material non-public information” in its private meetings

with LSI. Defs.’ Opp’n Pls.’ Mot. Class Cert. at 32. Indeed, when asked whether “New South

ha[d] any non-public information about Liquidity when it made investment decisions, at any

point, to purchase Liquidity stock,” McLean responded, “[n]ot that I’m aware of.” McLean Dep.

at 321:1–5. The defendants nevertheless argue that NNERF’s typicality is destroyed because

“New South admitted that its decision to invest was influenced by its private meetings and

discussions with management.” Defs.’ Opp’n Pls.’ Mot. Class Cert. at 33. The defendants rely

on Beck v. Status Game Corp., 1995 WL 422067, at *4 (S.D.N.Y. July 14, 1995), in which the

court held that a putative class representative was atypical because he would be subject to a

unique defense in light of his testimony that private meetings with the defendant influenced his

decision to buy the defendant’s stock. Beck, however, is simply not the majority rule, as

explained supra. 18 So long as insider information was not divulged during the private

meetings—as is the case here, in light of McLean’s unrebutted testimony—the NNERF will not

be subject to a unique defense on this basis. See, e.g., In re Intuitive Surgical, 2016 WL

18
Indeed, the caselaw that may be read to support the defendants’ position tends to be older, see, e.g., Grace
v. Perception Technology Corp., 128 F.R.D. 165, 169 (D. Mass. 1989) (“It is beyond reality to suggest that any
potential shareholder could meet with corporate officers to discuss information that was already available to the
public. Personal contact with corporate officers and special meetings at the company will render a plaintiff atypical
to represent the class.”), whereas more recent caselaw indicates that private meetings are insufficient, on their own,
to subject a plaintiff to unique defenses. Further, although on first blush Grace appears to hold that private meetings
render a plaintiff atypical, the court in that case operated under the assumption that private meetings could never be
cabined to exclusively public information—as the defendants have conceded is the case here. See Defs.’ Opp’n Pls.’
Mot. Class Cert. at 32 (acknowledging that neither New South nor Van Berkom were “provided with material non-
public information in these meetings”).

52
7425926, at *6 (“The fact that certain of Plaintiffs’ investment managers met with [Defendant]

on occasion does not, without more, render [Plaintiffs] atypical of the proposed class.”); O’Neil

v. Appel, 165 F.R.D. 479, 492 (W.D. Mich. 1996) (“Each plaintiff has filed an affidavit

indicating that he did not rely upon any information that was not a matter of public record. It

often happens that purchasers rely upon statements by brokers, and that brokers have some level

of access to corporate officials. This, without more, is insufficient to find a class representative

to be atypical.” (citing Kilpatrick v. J.C. Bradgord Co., 827 F.2d 718, 724 (11th Cir. 1987))). 19

(c) New South’s Investment Strategy Does
Not Defeat NNERF’s Typicality

Finally, as with Caisse, the defendants argue that NNERF is subject to a unique defense

because New South was a “value investor” and invested based on the notion that “the market for

(and thus stock price of) LSI was inefficient,” which rebuts the Basic presumption of reliance.

Defs.’ Opp’n Pls.’ Mot. Class Cert. at 34. As a general matter, New South questions the notion

of efficient markets, telling clients that “investment markets are neither rational nor efficient,”

and the “concept of market efficiency is completely invalid.” McLean Dep. at 292:4–21, 294:4–

295:9. In making investment decisions, New South constructs its own model “to determine a

value for the company.” McLean Dep. at 44:20–21. New South invests in companies it “thinks

are trading at significant discounts to what [New South] determine[s] their true intrinsic value

per share to be.” Id. at 45:9–12. McLean testified that New South “did not think the market was

accurately pricing the value of [LSI].” Id. at 285:5–13.

19
The defendants also argue that New South is subject to unique defenses because New South “proposed
business strategies to LSI.” Id. at 33 (citing New South’s proposal that LSI acquire GoIndustry and that LSI engage
FedEx as a client). Even if true, the defendants do not explain why this fact is relevant to the claims in this suit, nor
does Shiring, 244 F.R.D. at 314, the single case the defendants cite, hold that a securities plaintiff is atypical because
the plaintiff proposed business strategies to the defendant.

53
As explained above with respect to Van Berkom, a plaintiff’s status as a value investor is

not, in and of itself, sufficient to rebut the Basic presumption. See Halliburton II, 134 S. Ct. at

2410–11; Willis, 2017 WL 1063479, at *7; In re Diamond Foods, 295 F.R.D. at 252 (noting that

“courts have routinely rejected” the argument that institutional investors’ investment strategies

subject them to unique defenses concerning the Basic presumption and collecting cases). Here,

moreover, although New South utilized a sophisticated model in determining whether to invest in

LSI, McLean testified that there was “actually a . . . line item in [his] model for margins,”

McLean Dep. at 51:11–13, and, to derive input values for its model, New South looked at

historical information and “evaluated how the company had been growing in the past” and “what

sort of margins they could do,” id. at 51:1–10. Among the metrics considered by New South,

“top line growth,” which in this case was GMV, and “cash flow margins” were viewed as “the

most important ones.” Id. at 51:17–52:4. New South’s investment analysis was based on

publically available information, such as “10-Ks, Qs, proxy statements, . . previous earnings,

releases, [and] conference call transcripts.” Id. at 43:15–20. Accordingly, the defendants cannot

dispute that public information concerning margins factored into New South’s models and

resultant investment decisions with respect to LSI, and New South’s investment strategy thus

does not subject NNERF to unique defenses. 20

20
In addition to the non-reliance argument, the defendants contend that Caisse and NNERF are atypical
because “they are subject to [] unique defenses and arguments to a jury about spoliation.” Defs.’ Opp’n Pls.’ Mot.
Class Cert. at 35. According to the defendants, Caisse did not instruct Van Berkom to preserve documents
concerning LSI, and neither New South nor Pier Capital received a preservation notice from NNERF, creating a
possibility that highly material documents from the investment advisors have been lost. Id. at 35–36. As a threshold
matter, the caselaw cited by the defendants pertains to parties’ obligations to preserve evidence—not the
preservation obligations of third parties, like Van Berkom, Pier Capital, and New South. See id. at 35 n.15 (citing
Falcon v. Philips Electronics N. Am. Corp., 304 Fed. App’x 896, 897 (2d Cir. 2008); Fortress Bible Church v.
Feiner, 734 F. Supp. 2d 409, 521 (S.D.N.Y. 2010), aff’d, 694 F.3d 208 (2d Cir. 2012)). In any event, as the
plaintiffs point out, Pls.’ Omnibus Reply at 21, the defendants’ spoliation argument appears to be predicated on the
testimony of Yakirevich, who testified that he personally first learned of the litigation in 2016, Yakirevich Dep. at
46:16–22, and McLean, who testified that he never received a litigation hold notice, McLean Dep. at 33:14–18. In
fact, however, NNERF sent litigation hold notices to representatives at both Pier Capital and New South. See Pls.’
Omnibus Reply, Ex. 27, Document Retention Letter from NNERF to Pier Capital (dated Oct. 22, 2014) at

54
***

In sum, then, each of the defendants’ arguments concerning the co-lead plaintiffs’

typicality fails, and certification is not precluded under Rule 23(a)(3). The defendants also

argue, however, that certification is improper because the co-lead plaintiffs

[Text truncated at 120,000 characters. The full text is on the page linked above.]

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/4201531. Public record. Not legal advice.