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Endochoice Holdings, Inc. v. Raczewski

Court of Appeals of Georgia, Third Division

June 28, 2019

ENDOCHOICE HOLDINGS, INC. et al.
v.
KENNETH T. RACZEWSKI et al. J.P. MORGAN SECURITIES, LLC et al.
v.
KENNETH T. RACZEWSKI et al.

          DILLARD, C. J., GOBEIL and HODGES, JJ.

          GOBEIL, JUDGE.

         In this securities fraud action, Kenneth T. Raczewski and Jesse L. Bauer sued EndoChoice Holdings, LLC ("EndoChoice") and certain of its executives and directors, [1] together with J.P. Morgan Securities, LLC, Merrill Lynch, Pierce, Fenner, & Smith, Inc., William Blair and Company, LLC, and Stifel, Nicolaus, & Company, Inc. (collectively, the "defendants") for violations of the Securities Act of 1933[2] in connection with EndoChoice's 2015 initial public offering ("IPO"). The defendants appeal from the certification of the class, arguing that the trial court abused its discretion in certifying the class under OCGA § 9-11-23 (a) (4) and (b) (3). After a review of the record, we affirm the Superior Court of Fulton County's grant of class certification.

         The record shows that EndoChoice is a medical device company specializing in products used by gastrointestinal medical providers. Its principal place of business is in Alpharetta, Georgia. EndoChoice's IPO took place on June 5, 2015. In connection with the IPO, EndoChoice filed a registration statement on Form S-1 and Form S-1/A and a Prospectus (collectively, the "offering materials") with the U.S. Securities and Exchange Commission ("SEC"), offering 6, 350, 000 shares of EndoChoice common stock at a price of $15 per share. The offering materials highlighted the "Fuse" endoscopy system, EndoChoice's "flagship" product. The offering materials also detailed EndoChoice's "world-class" sales force and a second generation version of the Fuse system.

         On November 5, 2015, EndoChoice reported its results for the third quarter of 2015, announcing that it had sold 21 Fuse units, a number that fell short of the projected 26-27 units. EndoChoice's stock price fell from $10.28 to $8.01 per share after this news. Following a series of public disclosures about the company's continued failure to meet projected sales goals, EndoChoice shares closed at $5.09 per share as of July 15, 2016. Thereafter, on September 27, 2016, EndoChoice agreed to be acquired by Boston Scientific for $8 per share. The merger closed in November of 2016.

         Bauer purchased 50 shares of EndoChoice stock on June 5, 2015, for $14.50 per share, and 50 shares on June 9, 2015, for $19.00 per share. He sold his shares on November 21, 2016, at a price of $8 per share. Raczewski purchased 750 shares of EndoChoice stock on June 10, 2015, for $17.40 per share. He sold his shares on October 12, 2016, at a price of $7.97 per share.

         Bauer and Raczewski (collectively, the "plaintiffs") filed the underlying complaint under §§ 11, 12 (a) (2), and 15 of the Securities Act of 1933 (the "Securities Act"), [3] alleging that the offering materials contained material misrepresentations and omissions in violation of the federal securities laws.[4] The plaintiffs allege the decline in sales was known at the time of the IPO and that the defendants failed to disclose this information. The plaintiffs allege that under § 11, the defendants are strictly liable for any material misrepresentations or omissions in the offering materials. They further allege the defendants breached their affirmative duty to provide adequate disclosures about risks, adverse conditions, and market uncertainties, thereby violating 17 CFR § 229.303 (a) (3) (ii). The plaintiffs contend their damages are traceable to the offering materials' allegedly false or misleading information pertaining to the quality and design of the Fuse system, the ability of EndoChoice's sales force to effectively market and sell the Fuse system, and the availability of the second generation Fuse system. The plaintiffs proposed a class of persons or entities who were damaged by purchasing or acquiring common stock pursuant or traceable to EndoChoice's June 5, 2015 IPO.

         The plaintiffs filed a motion for class certification on May 30, 2017. The trial court conducted a hearing on the motion on January 24, 2018. At the hearing, the parties stipulated that the putative class satisfied the numerosity requirement of OCGA § 9-11-23 (a) (1), the commonality requirement of OCGA § 9-11-23 (a) (2), and the superiority requirement of OCGA § 9-11-23 (b) (3). The trial court concluded that the plaintiffs satisfied the typicality, adequacy, and predominance requirements necessary to proceed on behalf of the proposed class.[5] The trial court limited the class to those who purchased shares of EndoChoice common stock prior to August 3, 2016.[6]

         In reviewing a trial court's decision to certify a class, we are mindful that trial courts are

vested with broad discretion to decide whether to certify a class, and absent an abuse of that discretion, we will not disturb the trial court's decision. Implicit in this deferential standard of review is a recognition of the fact-intensive basis of the certification inquiry and of the trial court's inherent power to manage and control pending litigation. Thus, we will affirm the trial court's factual findings unless they are clearly erroneous. Under the clearly erroneous test, factual findings must be affirmed if supported by any evidence.

Lewis v. Knology, Inc., 341 Ga.App. 86, 87 (799 S.E.2d 247) (2017) (citations and punctuation omitted). Moreover, "[t]he decision whether to certify a class depends in large part upon the description of the class, the claims raised and the evidence and arguments presented in support of class certification. Accordingly, we consider this case based upon the record before us[.]" Roland v. Ford Motor Co., 288 Ga.App. 625, 632 (2) n. 7 (655 S.E.2d 259) (2007). Because OCGA § 9-11-23 is based on Rule 23 of the Federal Rules of Civil Procedure, it is appropriate that we look to federal cases interpreting that rule for guidance. Lewis, 341 Ga.App. at 90 (1) n. 7.

         "In determining the propriety of a class action, the first issue to be resolved is not whether the plaintiffs have stated a cause of action or may ultimately prevail on the merits[, ] but whether the requirements of OCGA § 9-11-23 (a) have been met." Duffy v. The Landings Assn., 254 Ga.App. 506, 507 (1) (563 S.E.2d 174) (2002) (citation and punctuation omitted). That subsection requires plaintiffs to show:

(1) numerosity-that the class is so numerous as to make it impracticable to bring all members before the court; (2) commonality-that there are questions of law and fact common to the class members which predominate over any individual questions; (3) typicality-that the claim of the named plaintiff is typical of the claims of the class members; (4) adequacy of representation-that the named plaintiff will adequately represent the interest of the class; and (5) ...

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