Opinion
Civ. No. 00-3605 (DRD).
November 16, 2000
Peter S. Pearlman, Esq., Cohn, Lifland, Pearlman, Herrmann Knopf, LLP, Saddle Brook, N.J., William S. Lerach, Esq., Arthur C. Leahy, Esq., Kathleen A. Herkenhoff, Esq., Denise M. Douglas, Esq., Milberg, Weiss, Bershad, Hynes Lerach, LLP, San Diego, CA, Steven G. Schulman, Esq., Samuel H. Rudman, Esq., Milberg, Weiss, Bershad, Hynes Lerach, LLP, New York, NY, for Local 144 Nursing Home Pension Fund, et al.
Seth R. Lesser, Esq., Bernstein, Litowitz, Berger Grossman, LLP, Hackensack, N.J., Daniel L. Berger, Esq., Douglas M. McKeige, Esq., Steven E. Mellen, Esq., Bernstein, Litowitz, Berger Grossman, LLP, New York, NY, for City of Miami General Employees' and Sanitation Employees' Retirement Trust
Joseph E. Saul, Esq., Gellerstein Saul, Esqs., Teaneck, N.J., Jacqueline Sailer, Esq., Rabin Peckel, LLP, New York, NY, Leo W. Desmond, Esq., Law Office of Leo W. Desmond, West Palm Beach, FL, for Butler Foundation Group.
John J. Francis, Jr., Esq., Drinker, Biddle Shanley, LLP, Florham Park, N.J., Yosef R. Riemer, Esq., Sarah O. Slover, Esq., Kirkland Ellis, New York, NY, Jonathan J. Lerner, Esq., Skadden, Arps, Slate, Meagher Flom, LLP, New York, NY, for Defendants.
OPINION
On October 23, 2000, argument was heard regarding motions for (1) consolidation, (2) appointment of lead plaintiff and (3) approval of lead plaintiff's counsel. Concluding that not enough information had been provided concerning the entities comprising the Local 144 Group, it was ordered that supplemental information be provided. For the reasons set forth below, the lawsuits against Honeywell International, Inc. will be consolidated, the Local 144 Group will be appointed as lead plaintiff, and the law firm of Milberg, Weiss, Bershad, Hynes Lerach, LLP will be appointed as lead plaintiff's counsel.
Background
Thirteen related class action lawsuits were filed in this District asserting claims for securities fraud pursuant to sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. The plaintiffs in each of these lawsuits allege that Honeywell made false and misleading statements concerning, among other things, the success of Honeywell's merger with Allied Signal, Honeywell's results for the first quarter of 2000, and Honeywell's growth and earnings forecasts for the remaining quarters and the full year of 2000.
Local 144 Nursing Home Employees Pension Fund, et al. ("Local 144 Group") has moved for consolidation of the thirteen actions. Additionally, the Local 144 Group and City of Miami General Employees' and Sanitation Employees' Retirement Trust ("Miami") have filed motions seeking appointment as lead plaintiff and approval of lead plaintiff's counsel. Butler Foundation Group ("Butler") had filed a motion seeking appointment as lead plaintiff, but has since withdrawn that motion and has supported the Local 144 Group in its motion for appointment.
Legal Standards
When multiple putative classes assert substantially the same claims under the 1934 Act, courts must resolve any motions to consolidate prior to considering the issue appointing a lead plaintiff. 15 U.S.C. § 78u-4(a)(3)(B)(ii). As soon as practicable after deciding whether to consolidate the actions, a court shall appoint "the most adequate plaintiff" to act as lead plaintiff for the litigation. Id. Courts shall presume that the most adequate plaintiff is the person or group of persons that: (1) has either filed the complaint or made a motion in response to a notice advising potential class members about the action; (2) has the largest financial interest in the relief sought by the class; and (3) otherwise satisfies the requirements of Federal Rule of Civil Procedure 23. 15 U.S.C. § 78u-(a)(3)(B)(iii)(I). The presumption may be rebutted by evidence that the person or group (1) will not fairly and adequately protect the interests of the class; or (2) is subject to unique defenses that would prevent adequate representation of the class. 15 U.S.C. § 78u-(a)(3)(B)(iii)(II).
Consolidation
The Local 144 Group proposes that the cases be consolidated. No other party has voiced an opinion on this issue. Because consolidation of the cases would promote judicial efficiency and conservation of resources, the cases will, therefore, be consolidated pursuant to Fed.R.Civ.P. 42(a).
Appointment of Lead Plaintiff
Three entities or groups filed motions to be appointed as lead plaintiff in this action: (1) the Local 144 Group, (2) Miami, and (3) Butler. Butler, however, has since withdrawn that motion and has supported the Local 144 Group in its motion for appointment.
The Local 144 Group is comprised of five institutional investors (Local 144 Nursing Home Employees Pension Fund, Boston Research Management, Congress Asset Management, Jefferson State Bank, and the City of Monroe Employees Retirement System), each of which purchased Honeywell securities during the class period. Miami is a public pension fund that purchased Honeywell securities during the class period.
The Private Securities Litigation Reform Act ("PSLRA") provides for the appointment as lead plaintiff
the member or members of the purported plaintiff class that the court determines to be most capable of adequately representing the interests of class members (hereafter in this paragraph referred to as the "most adequate plaintiff") in accordance with this subparagraph.15 U.S.C. § 78u-4(a)(3)(B)(i). The PSLRA creates a rebuttable presumption that the most adequate plaintiff is the person or group of persons that —
(aa) has either filed the complaint or made a motion in response to a notice under subpart (A)(i);
(bb) in the determination of the court, has the largest financial interest in the relief sought by the class; and
(cc) otherwise satisfies the requirements of Rule 23 of the Federal Rules of Civil Procedure.15 U.S.C. § 78u-4(a)(3)(B)(iii).
The Local 144 Group argues that because as a group it collectively suffered losses of over $1.4 million during the class period, it has the largest financial interest in the relief sought by the class and thus presumptively is entitled to appointment as lead plaintiff pursuant to 15 U.S.C. § 78u-4(a)(3)(B)(iii)(I). Miami argues that it has the largest financial interest, with losses of $875,000, and that the Local 144 Group is merely "an aggregation of five unrelated entities whose only common connection is the law firm seeking to have them named as lead plaintiff." (Miami Opp. at 1.) Specifically, Miami argues that aggregated unrelated entities do not constitute a group within the meaning of the PSLRA. (Miami Opp. at 6-11.) Moreover, Miami asserts that even when courts have appointed groups of investors as lead plaintiffs, there have been pre-existing relationships between the investors. (Miami Opp. at 9.) The Local 144 Group counters that Miami's position has no support in the language of the PSLRA, its legislative history, or case law. (Local 144 Opp. at 4-9, Local 144 Rep. at 4.)
The plain language of the PSLRA allows for the appointment of more than one plaintiff as lead plaintiff. The statute provides for the appointment as lead plaintiff "the member or members of the purported plaintiff class that the court determines to be most capable of adequately representing the interests of the class members." 15 U.S.C. § 78u-4(a)(3)(B)(i) (emphasis added). The statute also directs courts to treat as the presumptive lead plaintiff the "person or group of persons" that meet the criteria specified in the statute. 15 U.S.C. § 78u-4(a)(3)(B)(iii)(I).
Courts have adopted different interpretations of that language, diverging with respect to whether the PSLRA allows for multiple plaintiffs to be appointed as lead plaintiff. See, e.g., Sakhrani v. Brightpoint, Inc., 78 F. Supp.2d 845, 853 (S.D.Ind. 1999) (stating that selection of large group of investors with nothing in common as lead is not appropriate under PSLRA); In re Network Assoc., Inc. Sec. Litig., 76 F. Supp.2d 1017, 1023-27 (N.D. Ca. 1999) (concluding that large group of unrelated investors cannot serve as lead); Aronson v. McKesson HBOC, Inc., 79 F. Supp.2d 1146, 1154 (N.D. Ca. 1999) (stating that lead must be individual person or entity or a close-knit group of persons); cf. In re Party City Sec. Litig., 189 F.R.D. 91, 114 (D.N.J. 1999) (appointing institutional investor and individual investor as lead); In re Nice Sys. Sec. Litig., 188 F.R.D. 206, 220-21 (D.N.J. 1999) (appointing group of five individual investors as lead); In re Advanced Tissue Sciences Sec. Litig., 184 F.R.D. 346, 352-53 (S.D. Ca. 1998) (approving group of six plaintiffs as lead instead of group of 250 unrelated individual investors).
Generally, appointment of a group comprised of a small number of substantial shareholders as lead plaintiff is consistent with the language and purpose of the PSLRA. Although a group of many small shareholders might be unmanageable, a group of a small number of large shareholders would be capable of managing a litigation. See In re Party City, 189 F.R.D. at 114 ("[w]here the interests of the proposed lead plaintiffs are aligned, concerns regarding the division of authority and dilution of control are not paramount.").
The SEC has clarified the meaning of "group" in this respect: while joint applications by hundreds of investors are not entitled to the presumption of "most adequate plaintiff" status, that presumption does apply to a group that is small enough "to be capable of effectively managing the litigation and the lawyers. The [SEC] believes that ordinarily this should be no more than three to five persons, a number that will facilitate joint decisionmaking and also help to assure that each group member has a sufficiently large stake in the litigation." In re Baan Co. Sec. Litig., 186 F.R.D. 214, 216-17 (D.D.C. 1999) (quoting SEC amicus brief).
Miami relies upon Laborers Local 1298 Pension Fund v. Cambell Soup Co, No. Civ. A. 00-152, 2000 WL 486956 (D.N.J. April 24, 2000), for the proposition that "aggregated unrelated entities do not constitute a group within the meaning of the PSLRA, and lead plaintiff applications by such an `agglomeration' have been rejected in this District." (Miami Opp. at 2.) The court stated that it agreed "with those decisions which suggest that aggregating a group of unrelated individuals to create a plaintiff with the `largest financial interest' is contrary to the spirit of the law which seeks to replace lawyer driven litigation with client controlled litigation." Campbell, 2000 WL 486956, at *2, n. 4. However, in that case the court approved of three co-lead plaintiffs: the Treasurer of the State of Connecticut and two former employees of the defendant, in spite of the fact that there appeared to be no relationship whatsoever between the two former employees and Connecticut. Id. at *3;see also In re Cendant Corp. Litig., 182 F.R.D. 144, 147, 149 (D.N.J. 1998) (appointing as lead plaintiff group of three funds: two from New York and one from California, with no apparent relationship to each other).
Courts recognize the concern of the PSLRA that it be the investors, rather than the attorneys, that control private securities litigation.See, e.g., In re Lucent Tech. Inc. Sec. Litig. , 194 F.R.D. 137, 144 (D.N.J. 2000). That does not necessarily translate, however, into some requirement that a group of investors cannot be appointed lead plaintiff or that members of the group need have some relationship preceding the litigation. See In re Tyco Int'l, Ltd., No. 00-MD-1335-B, 2000 U.S. Dist. LEXIS 13390, *17 (D.N.H. Aug. 17, 2000) (declining to find in PSLRA requirement of pre-litigation relationship amongst proposed lead plaintiff group members); In re Baan Co. Sec. Litig., 186 F.R.D. 214, 216 (D.D.C. 1996) ("The text of the PSLRA does not limit the composition of a `group of persons' to those only with a pre-litigation relationship, nor does the legislative history provide a sound enough foundation to support such a gloss.").
The SEC has expressed concern over the appointment of "a large group of "unaffiliated persons . . . because this assemblage has the largest claimed loss" as lead plaintiff. (Miami Opp. at 9, quoting SEC amicus brief at 16, submitted in Moore v. United States District Court, No. 00-70006 (9th Cir. Feb 28, 20000).) However, that concern is certainly not a mandate against such an appointment. Rather, it is an advisory: a large group of individuals appointed as lead plaintiff should be capable of overseeing the litigation, as would an institution or single large investor. Id.; see also Elliot J. Weiss John S. Beckerman, Let the Money Do the Monitoring: How Institutional Investors Can Reduce Agency Costs In Securities Class Actions, 104 Yale L. J. 2053, 2108 (1995) (stating that early notice to institutional and other investors with substantial stakes in pending class actions provide "an opportunity to decide whether they were interested in participating in those actions,alone or with other investors, as lead plaintiffs. . . . Similarly, if several institutions were interested in becoming involved, they could either compete to become lead plaintiff or agree to work together." (Emphasis added). It is critical to note that the SEC's comments were made in the context of the appointment of a proposed group of over 1700 random individuals that were drawn into the group "based on notices to the court found to be defective, and do not even appear to have known who their fellow `group members were or who its proposed lead counsel were." (SEC amicus brief at 7, submitted in Moore.)
The Local 144 Group is not a large group of random individuals; this is a group of five institutional investors. Local 144 has assets of over $400 million, Monroe Pension Fund has assets of over $116, Boston Research and Management has assets of over $200 million, Congress has assets of over $3 billion, Jefferson State Bank has eight offices and has been in business since 1946. Moreover, through declarations, the Local 144 Group has advised of its sophistication, ability and inclination to actively oversee this litigation. Their declarations describe the past and continued meetings between the institutional investors and outside counsel, the institutional investors' involvement in the litigation thus far, and the fact that the investors chose the outside counsel (not vice versa). Additionally, it appears that a regular meeting schedule has been established, there is a procedure to convene emergency meetings, and the Local 144 Group has established a protocol to determine activity in the event that the Group cannot reach a consensus on a particular issue.
In sum, it is concluded that the Local 144 Group does constitute a "group" within the meaning of the PSLRA and that the PSLRA does not require that members of a group of investors have some sort of pre-litigation relationship in order to be appointed lead plaintiff. Rather, what is required when considering whether to appoint a group of investors is whether that group will be able to manage effectively the litigation. In addition to the fact that the Local 144 Group has the "largest financial interest in the relief sought by the class," 15 U.S.C. § 78u-4(a)(3)(B)(iii)(bb), it is concluded that the Local 144 Group will in fact be able to manage this litigation effectively.
Rule 23
At this early stage, the Local 144 group seems to satisfy the requirements of Federal Rule of Civil Procedure 23. See In re Milestone Sci. Sec. Litig., 183 F.R.D. 404, 414 (D.N.J. 1998) ("There is no need to require anything more than preliminary showing at this stage." (quotingGluck v. Cellstar Corp., 976 F. Supp. 542, 546 (N.D. Tx. 1997)); In re Oxford Health Plans, Inc. Sec. Litig., 182 F.R.D. 42, 49 (S.D.N.Y. 1998) ("Typicality and adequacy of representation are the only provisions relevant to a determination of lead plaintiff under PSLRA."). The Local 144 Group has sufficiently demonstrated, at this preliminary stage, the requisite typicality and adequacy. There are a number of questions of law and fact typical to the potential class members: whether Honeywell issued false and misleading statements during the class period; whether Honeywell acted knowingly or recklessly in issuing those statements; whether Honeywell's alleged conduct artificially inflated the market price of Honeywell's stock during the class period; whether proposed class members suffered damages. The Local 144 Group has, at this preliminary stage, demonstrated that it will adequately represent the class: it has stated its commitment to supervise and monitor the litigation.
Selection of lead counsel
The PSLRA instructs that "[t]he most adequate lead plaintiff shall, subject to approval of the court, select and retain counsel to represent the class." 15 U.S.C. § 77z-1(a)(3)(B)(v). Thus, the approval of lead counsel is not governed by the same statutory guidelines that control the lead plaintiff determination. In re Milestone Scientific Sec. Litig., 187 F.R.D. 165, 176 (D.N.J. 1999). A court's approval is subject to discretionary judgment that the lead plaintiff's choice of representative best suits the needs of the class. Id.
In the instant case, the Local 144 Group seeks approval of its selection of the law firm of Milberg, Weiss, Bershad, Hynes Lerach, LLP to serve as lead counsel. This firm has experience in prosecuting complex securities actions, has been appointed lead counsel in numerous consolidated litigations, and is qualified to represent the Local 144 Group in the instant action.
Presumably, the Local 144 Group will monitor fee requests, which in any event are subject to court review.