The opinion of the court was delivered by: O'neill, J.
On February 15, 2008, plaintiffs John A. Malack, Michael R. Rosati, Virgil Magnon, S. S. Rajaram, M.D., Hayward Pediatrics, Inc. and Henry Munster filed a class action complaint alleging that defendant BDO Seidman, LLP violated Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78, and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. I have before me plaintiffs' motion for class certification, defendant's response, plaintiff's reply, defendant's surreply and plaintiff's response thereto. Oral argument was held on July 14, 2009.
Plaintiffs are purchasers of notes, subordinated debt securities, subordinated money-market notes and subordinated debentures (collectively, the "notes") issued by American Business Financial Services, Inc., ("ABFS") a diversified financial services organization, during the class period of October 3, 2002 to January 20, 2005.*fn1 According to plaintiffs' complaint, during the class period ABFS was in the business of originating, buying and securitizing or selling home mortgage loans and business loans and its customers were generally credit-impaired or subprime buyers who were not able to get loans from banks or savings and loan associations.
Plaintiffs allege that, to raise capital during the class period, ABFS used a financing technique known as a securitization. In each of its securitizations, ABFS transferred a pool of mortgage loans to a trust in exchange for certificates, notes or other securities issued by the trust that were then sold to investors for cash. Plaintiffs allege that ABFS would often retain the rights to service the loans for a fee and would retain an interest in the cash flows generated by the securitized loans (called an "interest-only strip" or "IO strip"). Because the IO strips represented expected future cash flow, if borrowers did not make payments the value of the IO strips declined. According to plaintiffs, IO strips and servicing rights were important assets and a major source of income for ABFS throughout the class period, representing approximately underwriters or brokers. The Notes were non-transferable except with ABFS' permission and noteholders could cash in the notes only upon maturity, so there was no market for their resale.
Plaintiffs allege that in purchasing Notes from ABFS during the class period they relied upon ABFS's 2002 and 2003 registration statements and prospectuses, which included defendant BDO's audit reports of ABFS. Plaintiffs allege that the registration statements informed investors that ABFS expected to pay back the notes and the promised interest, but that these representations lacked a reasonable basis because ABFS' loan portfolio was of poor quality, the value of the IO strips and servicing agreements was materially less than reported and ABFS' assets and operating results were overstated. For example, plaintiffs allege that ABFS fraudulently altered their loan delinquency ratio by engaging in improper practices to lower artificially the number of loans that were reported as delinquent. For example, plaintiffs allege that, though "delinquent loans" were defined as those loans more than thirty days past due, ABFS would label loans as "delinquent" only after they were sixty or ninety days past due. Plaintiffs further allege that ABFS engaged in re-aging techniques such as forbearance and deferment agreements in order to keep loans from being counted as delinquent.
Plaintiffs also allege that ABFS failed to state that its internal accounting controls were weak or nonexistent. For example, $4.8 million was at one point allocated to the wrong account. Additionally, ABFS employees with access to the general ledger could make entries into the accounting system with no apparent oversight, authorization or review.
Defendant BDO Seidman, LLP, a firm of certified public accountants and auditors that provides a variety of accounting, auditing and consulting services, served as ABFS' auditor and principal accounting firm during the class period. By virtue of its position as an independent accountant and auditor, defendant had access to files, key employees and ABFS' confidential corporate financial, operating and business information, so defendant had the opportunity to observe and review ABFS' business and accounting practices and internal control structure.
Pursuant to its agreements with ABFS, defendant was required to audit ABFS' financial statements in accordance with generally accepted auditing standards ("GAAS") and report its results to ABFS, its board of directors, its audit committee and the members of the investing public, including plaintiffs. During the class period, defendant issued unqualified opinions on ABFS' financial statements for the 2001, 2002 and 2003 fiscal years which were included in ABFS Registration Statements files with the SEC that became effective on October 3, 2002 and November 7, 2003.
Plaintiffs assert that in the registration statements BDO falsely represented that its audits of ABFS' 2002 and 2003 financial statements had been conducted in accordance with GAAS and improperly issued "clean" or unqualified opinions or certifications that those financial statements fairly represented ABFS' financial condition and results of operations in conformity with Generally Accepted Accounting Principles ("GAAP"). Plaintiffs allegedly depended on the reliability of defendants' opinions that ABFS' financial statements were fairly stated in accordance with GAAP. Plaintiffs allege that they could not and would not have purchased notes without these published opinions of BDO.
Plaintiffs seek to certify a class comprised of: All persons who suffered damage as a result of their purchase of Notes from American Business between October 3, 2002 and January 20, 2005 (the class period), pursuant to the 2002 and 2003 Registration Statements, including prospectuses included as Exhibits (the prospectuses) and all supplements thereto.
To prevail on a motion for class certification, plaintiffs must satisfy all of the requirements of Federal Rule of Civil Procedure 23(a) and the requirements of one of the subsections of Rule 23(b). See Johnston v. HBO Film Mgt., Inc., 265 F.3d 178, 183 (3d Cir. 2001). The four threshold requirements of Rule 23(a) are: (1) numerosity ("the class is so numerous that joinder of all members is impracticable"); (2) commonality ("there are questions of law or fact common to the class"); (3) typicality ("the claims or defenses of the representative parties are typical of the claims or defenses of the class"); and (4) adequacy ("the representative parties will fairly and adequately protect the interests of the class"). Wetzel v. Liberty Mut. Ins. Co., 508 F.2d 239, 246 (3d Cir. 1975), cert. denied, 421 U.S. 1011 (1975).
Plaintiffs seek certification under subsection (3) of Rule 23(b), which requires "that the questions of law or fact common to the members of the class predominate over any questions affecting only individual members," and that a class action be "superior to other available methods for the fair and efficient adjudication of the controversy." Fed.R.Civ.P. 23(b)(3); Amchem Prods. v. Windsor, 521 U.S. 591, 615 (1997). The Court of Appeals has recently clarified three key aspects of class certification procedure:
First, the decision to certify a class calls for findings by the court, not merely a "threshold showing" by a party, that each requirement of Rule 23 is met. Factual determinations supporting Rule 23 findings must be made by a preponderance of the evidence. Second, the court must resolve all factual or legal disputes relevant to class certification, even if they overlap with the merits-including disputes touching on elements of the cause of action. Third, the court's obligation to consider all relevant evidence and arguments extends to expert testimony, whether offered by a party seeking class certification or by a party opposing it.
In re Hydrogen Peroxide, 552 F.3d 305, 307 (3d Cir. 2009). "The interests of justice require that in a doubtful case . . . any error, if there is to be one, should be committed in favor of allowing class certification" Eisenberg v. Gagnon, 766 F.2d 770, 785 (3d Cir. 1985).*fn2
Predominance requires an evaluation of whether "proposed classes are sufficiently cohesive to warrant adjudication by representation." In re Hydrogen Peroxide, 552 F.3d at 310-11, citing Amchem, 521 U.S. at 623. Requiring more than a common claim, predominance requires that "issues common to the class must predominate over individual issues . . . ." In re Prudential, 148 F.3d at 313- 14. In In re Hydrogen Peroxide, the Court recognized that the Supreme Court has observed that "[p]redominance is a test readily met in certain cases alleging consumer or securities fraud or violations of the antitrust laws" but stated that it does not follow that a court should relax its certification analysis, or presume a requirement for certification is met, merely because a plaintiff's claims fall within one of those substantive categories. In re Hydrogen Peroxide, 552 F.3d 321-22, citing Amchem, 521 U.S. at 625; Fed.R.Civ.P. 23(b)(3) advisory committee's note, 1966 Amendment, noting that "[p]rivate damage claims by numerous individuals arising out of concerted antitrust violations may or may not involve predominating common questions." "Because the nature of the evidence that will suffice to resolve a question determines whether the question is common or individual, a district court must formulate some prediction as to how specific issues will play out in order to determine whether common or individual issues predominate." In re Hydrogen Peroxide, 552 F.3d 321-22. The "presence of individual questions . . . does not mean that the common questions of law and fact do not predominate." Eisenberg, 766 F.2d at 786, finding that, in the context of a securities class action, even the presence of individual questions as to the reliance of each individual class member did not negate the predominance of the class' common claims. However, more recently, the Court of Appeals noted that "[i]f proof of the essential elements of the cause of action ...