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noting that some courts have "expressed reluctance to permit aggregation of individual investors' claimed losses to confer lead plaintiff status absent some showing that the proposed group members have some relationship independent of the litigation or that they will be able to coordinate their efforts" while other courts have refused to allow investor groups to serve as lead plaintiff
Summary of this case from W. Palm Beach Police Pension Fund v. DFC Glob. Corp.Opinion
Case No.: SACV 06-31 CJC (RNBx), Case No.: SACV 06-82 CJC (MLGx), Case No.: SACV 06-45 CJC (RNBx), Case No.: SACV 06-106 CJC (RNBx), Case No.: SACV 06-145 CJC (RNBx), Case No.: SACV 06-91 CJC (RNBx), Case No.: SACV 06-128 CJC (RNBx), Case No.: SACV 06-1177 CJC (RNBx).
May 1, 2006
ORDER GRANTING PLAINTIFFS' MOTIONS FOR CONSOLIDATION OF RELATED CASES, APPOINTMENT OF LEAD PLAINTIFF, AND APPOINTMENT OF LEAD COUNSEL
This proposed class action involves alleged securities fraud and insider trading by directors and officers of Impac Mortgage Holdings, Inc. ("Impac"), a mortgage real estate investment trust. The Complaint alleges that, between May 13 and August 9, 2005, Impac's directors and officers carried out a fraudulent scheme artificially to inflate Impac's stock price by issuing misleading information about Impac's quarterly earnings in press releases and Forms 8-K and 10-Q. (Complaint, ¶¶ 2, 31-39.) The Complaint alleges that the directors and officers intentionally concealed material information from the public, specifically: (a) that Impac was suffering from "significant margin pressure because of a rise in short-term rates," (b) that Impac lacked adequate internal controls, (c) that Impac's positive projections lacked a reasonable basis, and (d) that the directors and officers were concealing or misrepresenting material adverse information to inflate the stock price so that they could sell their shares at a profit. ( Id., ¶ 37.) On August 9, 2005, Impac revealed that it was posting a net loss of $55 million, or $0.78 per share. ( Id., ¶ 38.) By the end of the next day, August 10, 2005, its share price had fallen approximately 40 percent, from $22.32 to $13.46. ( Id. ¶ 39.)
The Complaint alleges that the statements were "group published" through the collective acts of the Defendants. (Complaint, ¶ 20.)
Seven other cases — four class actions and three shareholders' derivative suits — have been filed against Impac and its officers and directors, containing substantially the same allegations set forth in the Complaint in this case. Those actions, which will be referred to collectively in this Order as the "related actions," have all been transferred to this Court. Various purported class members have filed motions in this case seeking to have the Court consolidate the related actions pursuant to Federal Rule of Civil Procedure 42(a). Several groups of putative class members in this case also have filed motions to be appointed lead plaintiff pursuant to the Private Securities Litigation Reform Act of 1995, ("PSLRA"), 15 U.S.C. § 78u-4, which amended the Securities Exchange Act of 1934. Because the related actions all involve common questions of fact and law, the motions for consolidation are GRANTED. Because the Court finds that the Jones Group is the group with the largest financial interest in the action that will fairly and adequately represent the class, the Court will appoint the Jones Group as the lead plaintiff and its chosen counsel, Lerach, Coughlin, Stoia, Geller, Rudman Robbins LLP, as lead counsel.
I. Motions for Consolidation
The PSLRA requires that, "[i]f more than one action on behalf of a class asserting substantially the same claim or claims arising under this chapter has been filed, and any party has sought to consolidate those actions for pretrial purposes or for trial, the court shall not [appoint a lead plaintiff] until after the decision on the motion to consolidate is rendered." 15 U.S.C. § 78u-4(a)(3)(B)(ii). Federal Rule of Civil Procedure 42(a) permits a court to consolidate cases for trial or other purposes when the actions "involv[e] a common question of law or fact." FED. R. Civ. P. 42(a). Although district courts have discretion to determine whether consolidation is appropriate, they must consider the interest of judicial economy as well as the parties' interest in a fair and impartial procedure. Johnson v. Celotex Corp., 899 F.2d 1281, 1284-85 (2nd Cir. 1990).
The related actions involve numerous common questions of law and fact. They each allege that particular statements were made about Impac's quarterly earnings in press releases and Forms 8-K and 10-Q, that Impac's directors and officers were made aware of the statements and had authority to prevent them from being disseminated to the public, that the actual situation at Impac was materially different than what was indicated in the press releases and forms, and that the directors and officers sold their own Impac shares at a profit during the class period and acted with intent to mislead investors. The class actions all assert that the directors' and officers actions violated the Securities Exchange Act ("Exchange Act") Section 10(b) and Rule 10b-5, and that the directors and officers are liable as control persons pursuant to Section 20(a) of the Exchange Act. The derivative actions allege state law fiduciary duty and other claims on substantially the same facts. Because the relevant allegations are the same in each of the related actions, and many of the related actions involve common legal questions, consolidation would promote efficiency and avoid duplication of evidence and motion filing. Therefore, the Court will consolidate the related actions.
II. Appointment of Lead Plaintiff
Under the PSLRA, a plaintiff has 20 days from the date the Complaint is filed to publish a notice of the putative class action's pendency, claims, and purported class period "in a widely circulated national business-oriented publication or wire service." 15 U.S.C. § 78u-4(a)(3)(A)(1). If more than one action is filed, only the plaintiff or plaintiffs in the first-filed action are required to publish the notice. 15 U.S.C. § 78u-4(a)(3)(A)(ii). Any member of the purported plaintiff class then has 60 days from the date on which the notice is published to file a motion to be appointed lead plaintiff. Id. Within 90 days of the published notice, the court must appoint 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" (the "most adequate plaintiff"). Id., § 78u-4(a)(3)(B)(i).
Such a notice was published in this case by the law firm Wechsler Harwood LLP in Primezone Newswire on January 10, 2006, the same day the Complaint was filed. (Norton Decl. in Support of IMH Investor Group's Motion for Consolidation and Appointment of Lead Plaintiff, Exh. C.)
In choosing a lead plaintiff, courts are required to adopt a 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 [the publication of notice of the action], (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)(I). The presumption may only be rebutted "upon proof by a member of the purported plaintiff class that the presumptively most adequate plaintiff — (aa) will not fairly and adequately protect the interests of the class; or (bb) is subject to unique defenses that render such plaintiff incapable of adequately representing the class." 15 U.S.C. § 78u-4(a)(3)(B)(iii)(II).
The Ninth Circuit has interpreted these provisions as setting forth a three-step process. In re Cavanaugh, 306 F. 3d 726, 729 (9th Cir. 2002). The first step involves publicizing the pendency of the action, the claims made, and the purported class period. Id. (citing 15 U.S.C. § 78u-4(a)(3)(A)). Second, "the district court must consider the losses already suffered by the various plaintiffs before selecting as the `presumptively most adequate plaintiff' — and hence the presumptive lead plaintiff — the one who `has the largest financial interest in the relief sought by the class' and `otherwise satisfies the requirements of Rule 23 of the Federal Rules of Civil Procedure.'" Id. at 729-30. Once the district court has compared the various plaintiffs' financial stakes and determined which one "has the most to gain from the lawsuit," the court "must . . . focus its attention on that plaintiff and determine, based on the information he has provided in his pleadings and declarations, whether he satisfies the requirements of Rule 23(a), in particular those of `typicality' and `adequacy.'" Id. at 730. If the plaintiff with the largest financial stake meets Rule 23's requirements, it becomes presumptively the most adequate plaintiff. Id. If it does not, "the court must repeat the inquiry, this time considering the plaintiff with the next-largest financial stake, until it finds a plaintiff who is both willing to serve and satisfies the requirements of Rule 23." Id. Third and finally, the court must "give other plaintiffs an opportunity to rebut the presumptive lead plaintiff's showing that it satisfies Rule 23's typicality and adequacy requirements." Id. Under Cavanaugh, courts must engage in "a straightforward application of the statutory scheme [which] provides no basis for comparing plaintiffs with each other on any basis other than their financial stake in the case." Id. at 732. "Once that comparison is made and the court identifies the plaintiff with the largest stake in the litigation, further inquiry must focus on that plaintiff alone and be limited to determining whether he satisfies the other statutory requirements," regardless of whether "the district court believes another plaintiff may be `more typical' or `more adequate.'" Id. Keeping these principles in mind, the Court turns to the various motions for appointment as lead plaintiff that have been filed in this action.
The following groups of putative class members have filed motions to be appointed lead plaintiff:
• The Impac Investors Group, claiming total damages of $770,524.29. The Impac Investors Group consists of Carolee R. Lynn Christensen, Johannes Christoffel Faber, Yeshayahu Eshkar, Billy Taylor, and Robert Zykofsky. The Impac Investor Group alleges that its members purchased a total of 97,058 Impac shares during the class period. (Thompson Decl., Exh. B.)
• The IMH Investor Group, claiming total damages of $719,467.57. The IMH Investor Group consists of David E. Laughlin, Democritos J. Veras, and David Karpeles, individually and on behalf of the Karpeles Manuscript Library Museums. The IMH Investor Group alleges that its members purchased a total of 137,900 Impac shares during the class period. (Norton Decl., Exh. B.)
• The Jones Group, claiming total damages of $410,491.60. (Corrected O'Mara Decl., Exh. B.) The Jones Group consists of Craig H. Jones and Dean Rasmussen. Mr. Jones and Mr. Rasmussen allege that they purchased a total of 71,600 Impac shares during the class period. (Corrected O'Mara Decl., Exh. A.)
• The Ross Group, claiming total damages of $137,152.52. The Ross Group consists of Ortho B. Ross, Jr., David J. Porzio, David Greenbaum, Anthony P. Tummarello, C.W. Stocks, Kay A. Eischeid, and Joseph Mathieu. The Ross Group alleges that its members purchased a total of 18,300 Impac shares during the class period. (Furukawa Decl., Exh. B.)
• Marshall and Jacqueline Dressel, ("the Dressel Group"), claiming total damages of $114,838.27. (Rogers Decl., Exh. C.) The Dressels claim to have purchased a total of 18,233 Impac shares during the class period. (Rogers Decl., Exh. B.)
The Impac Investor Group's total is broken down as follows: the Christensens: $238,665.92; Mr. Faber: $201,994.37; Mr. Eshkar: $159,484.00; Mr. Taylor: $117,990.00; Mr. Zykofsky: $52,390. (Thompson Decl., Exh. B.)
The IMH Investor Group's total is broken down as follows: Mr. Laughlin: $89,585.00; Mr. Veras: $71,426.57; Mr. Karpeles: $152,883.00; Karpeles Manuscript Library Museums: $405,573.00. (Norton Decl., Exh. B.)
Of the Jones Group's total, Mr. Jones claims individual damages of $319,612.33 and Mr. Rasmussen claims individual damages of $90,879.27. (Corrected O'Mara Decl., Exh. B.)
The Ross Group's total is broken down as follows: Mr. Ross: $38,811.00; Mr. Porzio: $21,991.67; Mr. Greenbaum: $18,730.00; Mr. Tummarello: $17,206.14; Mr. Stocks: $14,518.71; Ms. Eischeid: $16,731.67; Mr. Mathieu: $9,163.33. (Furukawa Decl., Exh. C.)
An additional group, the Johnson Group, also filed a motion for appointment as lead counsel. However, that motion has been withdrawn.
After the motions to be appointed lead plaintiff were filed, the Impac and IMH Investor Groups stipulated to combine into a single group. (Memorandum of Points and Authorities in Support of Stipulation and Proposed Order, pp. 2-3.) The new group is called the Impac/IMH Investor Group ("Impac/IMH Group"). The proposed new group would be represented by co-lead counsel Wechsler Harwood LLP and Labaton Sucharow Rudoff LLP, with a third law firm, Glancy Binkow Goldberg, LLP, serving as "liaison counsel." (Impac/IMH Investors Group Lead Plaintiff Stipulation and Proposed Order, ¶¶ 10, 11.)
Under the PSLRA, the Court must first determine which plaintiff has the largest financial interest in the relief sought by the plaintiff class. Although the Ninth Circuit has not established any mandatory formula to be used in determining which plaintiff has the largest financial interest, the Third Circuit has set forth three factors bearing on the inquiry: (1) the number of shares that the movant purchased during the putative class period; (2) the total net funds expended by the plaintiffs during the class period; and (3) the approximate losses suffered by the plaintiffs. In re Cendant Corp. Litig., 264 F.3d 201, 262 (3rd Cir. 2001). The PSLRA's presumption that the most adequate plaintiff is the plaintiff with the largest financial interest reflects a congressional intent that institutional investors should be appointed lead plaintiff wherever possible, as those investors are most likely to have the most at stake in the case and to be sophisticated and competent litigants for the class. In re Donkenny Securities Litig., 171 F.R.D. 156, 157 (S.D.N.Y. 1997) ("Appointing lead plaintiff on the basis of financial interest, rather than on a `first come, first serve' basis, was intended to ensure that institutional plaintiffs with expertise in the securities market and real financial interests in the integrity of the market would control the litigation, not lawyers."); Aronson v. McKesson HBOC, Inc., 79 F. Supp. 2d 1146, 1152 (N.D. Cal. 1999) ( quoting Ravens v. Iftikar, 174 F.R.D. 651, 661 (N.D. Cal. 1997)) ("The Framers of the [PSLRA] envisioned that established institutional investors would take control of securities litigation taking it away from `figurehead plaintiffs' who exercise no meaningful supervision of the litigation."); Yousefi v. Lockheed Martin Corp., 70 F. Supp. 2d 1061, 1066 (C.D. Cal. 1999) ("As Congress and academics have noted, institutional investors have incentives to monitor their suits closely because of their substantial stakes in the stock at issue, thereby eliminating frivolous tactics and settlements that inflate attorneys' fees.") No institutional plaintiffs have filed motions to be appointed lead plaintiff in this case.
No movant disputes that the Impac/IMH Group has the largest claimed aggregate damages, and claims to have purchased the largest number of shares during the putative class period. Thus, the Impac/IMH Group has the largest financial interest of all the movants and is presumptively the most adequate plaintiff if it meets the requirements of Rule 23. Rule 23(a) imposes four requirements: (1) the class is so numerous that joinder of all members is impracticable; (2) there are questions of fact and law common to the class; (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and (4) the representative parties will fairly and adequately protect the interests of the class. FED. R. CIV. P. 23(a). At the lead plaintiff appointment stage, the Rule 23 inquiry is not as searching as it would be on a motion for class certification; the prospective lead plaintiff need only make a prima facie showing that it meets the typicality and adequacy factors. In re Microstrategy Inc. Securities Litigation, 110 F. Supp. 2d 427, 435 (E.D. Va. 2000); Ferrari v. Girsch, 225 F.R.D. 599, 606-07 ( citing Erikson v. Cornerstone Propane Partners LP, 2003 WL 22232387, *3 (N.D. Cal. Sept. 15, 2003)) ("All that is required at this stage of litigation is a preliminary showing of typicality and adequacy.")
Although the Impac/IMH combined group would have the largest claimed losses of any group regardless of whether the Karpeles Manuscript Library Museums' losses are included in the total, the Court finds that Mr. Karpeles has not submitted sufficient evidence to establish that he has authority to join in a motion for appointment as lead plaintiff on behalf of the Karpeles Manuscript Library Museums. Although the Impac/IMH Group states, in a memorandum it submits in support of its stipulation to combine into one group, that Mr. Karpeles "is the founder and C.E.O. of the Karpeles Manuscript Library Museums and has discretionary authority for the investments made on their behalf and is properly authorized to make legal decisions on behalf of the Karpeles Manuscript Library Museums, including the decision to serve as a lead plaintiff in this action," this assertion is not supported by any declaration from Mr. Karpeles or by any other evidence indicating that Mr. Karpeles has such authority or what his relationship is to the museums. Normally, courts require that a party seeking to aggregate its losses with the losses of a party it seeks to represent produce evidence that it received permission from the represented party to move for appointment as lead plaintiff on its behalf, or that the representing party exercised unrestricted discretion in purchasing and managing securities on behalf of the represented party. See, e.g., Smith v. Suprema Specialists, 206 F. Supp. 2d 627, 634 (D.N.J. 2002) ( quoting EZRA Charitable Trust v. Rent-Way, Inc., 136 F. Supp. 2d 435, 441 (W.D. Pa. 2001)) ("[W]here a court appoints an asset manager as lead plaintiff, the plaintiff should provide evidence that it `acts as attorney-in-fact for its clients and is authorized to bring suit to recover for, among other things, investment losses.'"); In re Rent-Way Securities Litigation, 218 F.R.D. 101, 109 (W.D. Pa. 2003) (holding that Cramer Rosenthal, an institutional investment advisor, had standing to pursue a securities class action on behalf of its investor clients because it "independently determined which securities to purchase for its clients' accounts."); In re Able Laboratories Securities Litig., 2006 WL 851638 at *7 (D.N.J. Apr. 3, 2006) ( quoting Roth v. Knight Trading Group, Inc, 228 F. Supp. 2d 524, 529 (D.N.J. 2002)) (investment management company had standing to sue on behalf of its clients because it had presented evidence showing that it "ha[d] `complete investment authority over its trades, and [was] attorney-in-fact with full power and authority to act in connection with its investments.'")
The Impac/IMH Group has made a prima facie showing that it satisfies Rule 23's numerosity, typicality and commonality requirements: the putative class contains hundreds or perhaps thousands of members, so as to make joinder impracticable, and the Impac/IMH Group's claims pose common legal and factual questions with those presented by other class member because the Impac/IMH Group members' stock allegedly lost value as a result of the same statements that form the basis of other putative class members' claims. See Yousefi, 70 F. Supp. 2d at 1071 (proposed plaintiff class of 137 members satisfied Rule 23's numerosity requirement for purposes of the lead plaintiff inquiry, and the typicality requirement was satisfied because the proposed lead plaintiffs' claims arose from the same alleged statements and "course of conduct" as those of other class members.) The Impac/IMH groups' claims also are typical of class members' claims because they arise from the same course of conduct that gives rise to the claims of the class members and are based on the same legal theory. Ferrari v. Girsch, 225 F.R.D. 599, 606-07 (C.D. Cal. 2004) ( citing Baby Neal for and by Kanter v. Casey, 43 F.3d 48, 57-58 (3rd Cir. 1994)). Like other proposed class members, the Impac/IMH Group members allegedly "(1) purchased or acquired [Impac] securities during the [c]lass period, (2) at prices alleged to be artificially inflated by defendants' materially false and misleading statements and/or omissions, and (3) suffered damage as a result." Tanne v. Autobytel, Inc., 226 F.R.D. 659, 667 (C.D. Cal. 2005). That commonality, and the fact that the Impac/IMH Group members submitted sworn certifications stating that they purchased Impac securities and suffered losses during the class period, is sufficient to establish typicality for purposes of the lead plaintiff inquiry. Id. See also Cendant, 264 F.3d at 265 ( citing Hassine v. Jeffes, 846 F.2d 169, 177 (3rd Cir. 1988)) ("[I]n inquiring whether the movant has preliminarily satisfied the typicality requirement, [courts] should consider whether the circumstances of the movant with the largest losses `are markedly different or the legal theory upon which the claims [of the movant] are based differ[s] from that upon which the claims of other class members will perforce be based.'")
A more difficult question, however, is whether the Impac/IMH Group has made the required preliminary showing that it will adequately represent the class. The Ninth Circuit has stated that representation is "adequate" where the representative's interests are not antagonistic to those of absent class members, the action does not appear to be collusive, and counsel for the class is qualified and competent. In re Northern Dist. of California, Dalkon Shield IUD Liab. Prod. Litig., 693 F.2d 847, 855 (9th Cir. 1982)). See also Stanton v. Boeing Co., 327 F. 3d 938, 957 (9th Cir. 2003) (whether a proposed lead plaintiff is adequate depends on "(1) [whether the] representative plaintiffs and their counsel have any conflicts of interest with other class members, and (2) [whether the] representative plaintiffs and their counsel [will] prosecute the action vigorously on behalf of the class.") "In addition, the class representative must have a sufficient interest in the outcome of the case to ensure vigorous advocacy." Girsch, 225 F.R.D. 599 ( citing Riordan v. Smith Barney, 113 F.R.D. 60, 64 (N.D. Ill. 1986)).
The Jones Group, the only movant who opposes the Impac/IMH Group's appointment as lead plaintiff, argues that the Impac/IMH Group contains too many apparently unrelated members to provide vigorous and adequate class representation — that it is merely a lawyer-created amalgamation that exists for the purpose of claiming the lead plaintiff position and securing lead counsel status for its attorneys. For its part, the Impac/IMH Group argues that post-motion stipulations combining groups of plaintiffs are not objectionable and do not defeat the group with the largest financial interest's entitlement to lead plaintiff status, "as long as [the combination] does not aggregate the financial interests of two lead plaintiff groups to surpass a group with a larger financial interest in the litigation." (Impac/IMH Investors' Group Reply, p. 11.) Because, according to the Impac/IMH Group, the Impac Investors Group and the IMH Investor Group already were the two groups with the greatest financial interest, the combined group should be appointed lead plaintiff.
The Third Circuit has cautioned that appointing groups of unrelated investors as lead plaintiffs may result in lawyer-driven securities litigation and lack of client oversight, and that such a result would frustrate the PSLRA's goal that securities cases be controlled and managed by investors rather than lawyers:
Courts [determining who to appoint as lead plaintiff] must . . . inquire whether a movant group is too large to represent the class in an adequate manner. At some point, a group becomes too large for its members to operate effectively as a single unit. When that happens, the PSLRA's goal of having an engaged lead plaintiff actively supervise the conduct of the litigation and the actions of class counsel will be impossible to achieve, and the court should conclude that such a movant does not satisfy the adequacy requirement.Cendant, 264 F.3d at 267 (citations omitted). The Third Circuit has also stated that, as a general rule, courts should "presume that groups with more than five members are too large to work effectively.'" Id.
While courts take varying approaches on the extent to which groups of investors may serve as lead plaintiff, numerous courts have expressed reluctance to permit aggregation of individual investors' claimed losses to confer lead plaintiff status absent some showing that the proposed group members have some relationship independent of the litigation or that they will be able to coordinate their efforts. See, e.g., In re Gemstar — TV Guide International, Inc. Securities Litigation, 209 F.R.D. 447 (C.D. Cal., 2002); McKesson, 79 F. Supp. 2d at 1153-54 (summarizing various courts' approaches to aggregation of individual losses, and concluding that "the lead plaintiff must be an individual person or entity, or at most, a close-knit `group of persons.'"); Donkenney, 171 F.R.D. at 157-58 (rejecting request for appointment as co-lead plaintiffs of two groups of unrelated institutional and individual investors, and appointing only one of the groups). While some courts have flatly stated that investor groups cannot serve as lead plaintiff, Donkenney, 171 F.R.D. at 157-58, the majority apply a more flexible approach. This latter group of cases acknowledges that the PSLRA expressly provides that the lead plaintiff may be a "group of persons," and only refuse to appoint such groups where it appears that their unrelatedness and numerosity render them inadequate to represent the class. See, e.g., Cendent, 264 F.3d at 166 (disagreeing "with those courts that have held that the [PSLRA] invariably precludes a group of `unrelated individuals' from serving as lead plaintiff," and stating that unrelatedness is only relevant to the extent it bears on a group's ability fairly and adequately to represent the interests of the class); Gisch, 225 F.R.D. at 608 ("Since the [PSLRA] expressly authorizes the appointment of a `group' of persons to serve as Lead Plaintiffs, the key question is whether the proposed plaintiff group can effectively manage the litigation and direct lead counsel."); Yousefi, 70 F. Supp. 2d at 1068 (denying 137-member group's motion for appointment as lead plaintiff, and stating that "[a]lthough the [PSLRA's] legislative history stresses the need to place control of securities class actions in a small and finite number of plaintiffs . . . the Court finds that [the statute] contemplates the aggregation of unrelated plaintiffs as a permissible, albeit suboptimal, result.") Other courts have permitted groups, but only where the group shares a significant number of characteristics. See, e.g., McKesson, 79 F. Supp. 2d at 1152-54 (defining a "group" qualified to serve as lead plaintiff under the PSLRA as "a small number of members that share such an identity of characteristics, distinct from those of almost all other class members, that they can almost be seen as being the same person."); In re Waste Management, Inc. Securities Litig., 128 F. Supp. 2d 401, 413 (S.D. Tex. 2000) (stating that a group must be "at maximum a small group with the largest financial interest in the outcome of the litigation and a pre-litigation relationship based on more than their losing investment.")
In In re Gemstar — TV Guide International, Inc. Securities Litigation, the court rejected the application of a group of three institutional investors and four individual investors to be appointed lead plaintiff, despite the fact that it had the largest financial interest in the case. Gemstar, 209 F.R.D. at 450. The court reasoned that the group members were "largely unrelated and ha[d] few apparent connections beyond their common desire to be appointed lead plaintiffs in this action." Id. They also had failed to detail any procedures by which they would "provide for efficient prosecution of the action," conduct meetings, or participate in the discovery process given that its members and attorneys were scattered throughout the world. Id. at 451. "Most important," the court stated, it was not clear how the group would reach consensus among its members or resolve intra-group conflicts. Id. Overall, the court found that the group appeared to have been "created in an effort to have its members designated as lead plaintiffs and, more important, its counsel designated as class counsel," and the court was unclear why the group needed to be represented by two law firms, each of which appeared capable of prosecuting the action. Id. at 452.
The Court agrees with Gemstar and other cases holding that groups of unrelated investors, while not per se impermissible lead plaintiffs under the PSLRA, are not adequate class representatives absent a showing that they are able to coordinate their efforts in the litigation. For many of the same reasons cited in Gemstar, it appears to the Court that the Impac/IMH Group is too large and unrelated adequately to represent the class in this case. The Impac/IMH Group provides no explanation of why its members combined into groups in the first place, how they plan to coordinate their litigation efforts, or why the Impac and IMH Groups decided to consolidate. The only evidence of a relationship between the two groups concerns not the proposed group members but their proposed co-counsel, Wechsler Harwood and Labaton Sucharow Rudoff: Impac/IMH's Reply brief in support of its stipulation to combine into one group states that the two firms "have worked together successfully numerous times in the past." (Reply Statement, p. 5.) Moreover, a joint memorandum submitted by the combined group indicates that the decision to combine came from counsel rather than from group members: "[i]n an effort to avoid waste of judicial resources and minimize costs to the class, counsel for the two movants with the largest financial interest in this case, came to an agreement on a lead plaintiff structure." (Impac/IMH Stipulation, p. 3) (emphasis added.)
The fact that the decision to combine the Impac and IMH groups was made by the groups' counsel, with no apparent involvement by the group members, does not bode well for the members' ability to supervise their attorneys. The absence of any evidence of a relation among the nine proposed members, or between the two groups, suggests that the purpose of the combination was to secure lead plaintiff status for the group and appointment of lead counsel status for their attorneys. This lack of relation, combined with the absence of any explanation of how the group intends to conduct discovery or coordinate litigation efforts or strategy, poses a danger that the group will not be cohesive. Moreover, as in Gemstar, it is not apparent why the Impac/IMH Group needs to retain two law firms to represent it, either of which would appear to be sufficient in itself. The Court is concerned that this multiplicity of counsel could impede the progress of the litigation, complicate discovery and communication among the parties, and increase the potential for conflict among the plaintiff class. In sum, the Court finds that the Impac/IMH Group is not entitled to the presumption that it is the most adequate plaintiff because it has not made the required preliminary showing that it would adequately represent the class.
The Court concludes that the total number of members in the combined group is nine, rather than ten, because as explained above in footnote 8, the Court finds that Mr. Karpeles has not submitted sufficient evidence to show that he is authorized to file a motion for appointment as lead plaintiff on behalf of the Karpeles Manuscript Library Museums.
At the hearing on this motion, counsel for the Impac/IMH Group conceded to the Court that neither the consolidated Impac/IMH Group nor its constituent groups had presented any evidence supporting the group's adequacy, cohesiveness, or ability to coordinate the prosecution of this litigation. Counsel requested that the Impac/IMH Group be allowed to submit supplemental briefing to the Court to remedy that defect. The Court has decided not to allow such supplemental briefing, however, as there is no reason the Impac/IMH Group or its constituent groups could not have submitted such evidence in connection with their initial motions or stipulation to combine into one group.
At the hearing on this motion on April 24, 2006, counsel for the Impac/IMH Group stated to the Court that, if the Court were inclined not to appoint the combined Impac/IMH Group as lead plaintiff, it should consider appointing either the Impac Investors Group or the IMH Investor Group, or appointing Mr. Karpeles himself as lead plaintiff. While the Court appreciates the Impac/IMH Group's flexibility, the Court declines to follow its suggestion. As a preliminary matter, the IMH Investor Group has only the third largest claimed financial loss out of all the movants, after the Impac Investors Group and the Jones Group. This is because, as explained above in footnote 8, Mr. Karpeles has not shown that he is entitled to aggregate the losses of the Karpeles Manuscript Library Museums with his own losses. Without the losses of the Karpeles Manuscript Library Museums, the IMH Investor Group's claimed losses total only $313,894.57, less than the Impac Investors Group's total of $770,524.29 and the Jones Group's total of $410,491.60. Thus, the IMH Investor Group is not entitled to be considered before the Impac Investors Group or the Jones Group, both of which are addressed below. As Mr. Karpeles' claimed individual loss is only $152,883, he also is not entitled to consideration before the Impac Investors Group or the Jones Group.
Although the Impac Investors Group, which has six members, has the largest claimed financial loss, it has not made the required preliminary showing of adequacy. It presents no declarations by group members indicating how they intend to work together in the litigation to supervise their attorneys, outlining their qualifications, or indicating that they are even amenable to appointment as lead plaintiff as a separate group apart from the IMH Investor Group. Although such declarations may not be required in all cases, the circumstances surrounding the Impac and IMH Groups' request for consolidation and then for separate consideration in this case increases the Court's concern that the Impac Investors Group's members are unable effectively to monitor their counsel. No evidence has been presented that the members had any role in the decision to form or combine the groups or in the decision to preserve the option of keeping them separate. This absence of input, and the fact that the group consists of six apparently unrelated individuals who may lack experience managing attorneys or litigating securities cases, suggests that the Impac Investors Group's counsel will not be adequately supervised. Consequently, the Court declines to appoint the Impac Investors Group as lead plaintiff. See Smith v. Suprema Specialties, Inc., 206 F.Supp. 2d 627, 633 (D.N.J. 2002) ( quoting Cendant, 264 F.3d at 265-66) ("If the court determines that the way in which a group seeking to become lead plaintiff was formed or the manner in which it is constituted would preclude it from fulfilling the tasks assigned to a lead plaintiff, the court should disqualify that movant on the grounds that it will not fairly and adequately represent the interests of the class.")
See, e.g., Ferrari v. Gisch, 225 F.R.D. 599, 606 (C.D. Cal. 2004) (stating that, when determining whether a prospective lead plaintiff has made the required preliminary showing of typicality and adequacy, the court "must rely on the presumptive lead plaintiff's complaint and sworn certification.") Some courts, however, consider declarations submitted by members of proposed lead plaintiff groups to determine whether the group will adequately represent the class. See, e.g., Smith, 206 F. Supp. 2d at 635 ("[T]o sustain a group of proposed lead plaintiffs, courts have established protocols to insure that the group will be effective. Such protocols include requiring declarations or affidavits to demonstrate that the proposed lead plaintiffs can work effectively as a group."); In re Lernout Hauspie Sec. Litig., 138 F. Supp. 2d 39, 45 (D. Mass. 2001) (appointing group of three individuals as lead plaintiff where the group members submitted declarations showing their ability to work together in the litigation.)
Having rejected the Impac/IMH Group and Impac Investors Group as the most adequate plaintiff, the Court moves on to the Jones Group. The Jones Group's two members claim to have suffered losses of $319,612.33 (Mr. Jones) and $90,879.27 (Mr. Rasmussen) — an aggregate amount that exceeds that of any of the other movants except the Impac/IMH Group. (Corrected O'Mara Decl., Exh. B.) In addition, Mr. Jones' claimed individual loss exceeds the claimed individual loss of any other individual putative plaintiff described in a filed motion for appointment as lead counsel. Therefore, the Jones Group is entitled to the statutory presumption provided that it makes a preliminary showing that it satisfies the requirements of Rule 23(a).
Although the Impac/IMH Group argues that Mr. Karpeles' claimed loss exceeds that of Mr. Jones, that statistic is based on the combined losses claimed by Mr. Karpeles individually ($152,883.00) and as the representative of the Karpeles Manuscript Library Museums ($405,573.00). (Norton Decl., Exh. B) As explained in footnote 8, above, Mr. Karpeles has not submitted sufficient evidence to permit the Court to conclude that he is authorized to seek appointments as lead plaintiff on behalf of the Karpeles Manuscript Library Museums. Excluding the Karpeles Manuscript Library Museums' claimed loss, Mr. Karpeles' individual loss is smaller than Mr. Jones' loss.
Like the Impac/IMH Group, the Jones Group satisfies Rule 23(a)'s numerosity, commonality, and typicality requirements: its members purchased Impac stock within the class period and allegedly sustained losses due to the same alleged misrepresentations as the other putative class members. The only question is whether Mr. Jones and Mr. Rasmussen will adequately represent the class. It appears that they will: Mr. Rasmussen and Mr. Jones are not alleged to have any conflicts with class members, and their interests in fact appear perfectly aligned with class members' interests because they seek a recovery based on the same alleged material misstatements and/or omissions and for the same types of losses as those members. In addition, Mr. Jones and Mr. Rasmussen have retained a competent and experienced securities litigation law firm, Lerach Coughlin Stoia Geller Rudman Robbins LLP ("Lerach Coughlin"), to serve as its counsel. Both Mr. Jones and Mr. Rasmussen state that they have college degrees, and Mr. Rasmussen states that he gained experience supervising professionals during forty years he spent owning and operating a general engineering contracting business that employed as many as "1000-plus employees." (Joint Jones, Rasmussen Decl., ¶¶ 2-3.) Because the Jones Group has only two members — a manageable number — and one law firm representing it, there is no significant potential for miscommunication, delay, intra-group conflict, or lack of supervision of group counsel. Indeed, Mr. Jones and Mr. Rasmussen have submitted a joint declaration stating that they have already begun to confer with each other regarding the joint prosecution of the litigation, and have conferred with their counsel concerning the preservation of documents, the status of the case, plans for filing a consolidated complaint, and direction to counsel concerning the issuance of subpoenas to preserve relevant evidence. (Joint Jones, Rasmussen Decl., ¶¶ 6.) They state that they have "implemented procedures to ensure that we are able to confer with each other and with counsel on short notice to ensure that we are able to make timely decisions." ( Id.) No party has presented evidence to rebut a finding that their representation will be adequate, or that it satisfies the other requirements of Rule 23. Based on the Jones Group's small number of members, the qualifications of its members and selected counsel, and its members' stated ability and willingness to coordinate in the prosecution of this action, the Court concludes that the Jones Group is the most adequate plaintiff and will appoint it as such.
The Court's conclusion that the Jones Group would adequately represent the class is supported by the fact that Mr. Jones himself appeared at the hearing on this motion with his counsel. His appearance indicates that he is committed to involving himself in this litigation and supervising class counsel.
III. Appointment of Lead Counsel
The PSLRA requires that the lead plaintiff shall, subject to court approval, select and retain counsel to represent the putative class. 15 U.S.C. § 78u-4(a)(3)(B)(v). A court may only override the lead plaintiff's choice of counsel where the court believes it necessary to "protect the interests of the class." Gisch, 225 F.R.D. at 610 ( citing Cavanaugh, 306 F.3d at 734 n. 11); Autobytel, 226 F.R.D. at 673; Cavanaugh, 306 F.3d at 734 (citing 15 U.S.C. § 78u-4(a)(3)(B)(v)) ("While the appointment of counsel is made subject to the approval of the court, the [PSLRA] clearly leaves the choice of class counsel in the hands of the lead plaintiff.") The Jones Group has selected the law firm of Lerach Coughlin Stoia Geller Rudman Robbins LLP ("Lerach Coughlin") to serve as its counsel. Lerach Coughlin has extensive experience litigating securities class actions, and has been appointed lead counsel or co-lead counsel in several, including In re Enron Corp. Securities Litig., 206 F.R.D. 427 (S.D. Tex. 2002). There is no real dispute among the movants regarding Lerach Coughlin's qualifications to prosecute this action. Therefore, the Court appoints Lerach Coughlin as lead counsel.
IV. Conclusion and Order
For the foregoing reasons, the various motions to consolidate are GRANTED, and the following cases are consolidated under the caption In re Impac Mortgage Holdings, Inc. Securities Litigation:
• Saffir v. Impac Mortgage Holdings, Inc., et al., Case No. SACV 06-82 CJC (MLGx)
• Mathieu v. Impac Mortgage Holdings, Inc. et al., Case No. SACV 06-45 CJC (RNBx)
• Kelner v. Impac Mortgage Holdings, Inc., Case No. SACV 06-106 CJC (RNBx)
• Bardos v. Impac Mortgage Holdings, Inc. et al., Case No. SACV 06-145 CJC (RNBx)
• Green Meadows Partners, LLP v. Tomkinson, et al., Case No. SACV 06-91 CJC (RNBx)
• Gustafson v. Tomkinson, et al.,, Case No. SACV 06-1177 CJC (RNBx)
• Portillo v. Tomkinson, Case No. SACV 06-128 CJC (RNBx)
The files of the consolidated cases will be maintained under the master file number SACV 06-31 CJC (RNBx). This consolidation is for all purposes, including discovery, pretrial and trial proceedings. The Jones Group's motion for appointment as lead plaintiff is GRANTED, and the Jones Group is hereby appointed lead plaintiff. Its chosen counsel, Lerach, Coughlin, Stoia, Geller, Rudman Robbins LLP, is appointed lead counsel. Unless the parties otherwise agree, lead plaintiff shall file an amended and consolidated class action complaint on or before 45 days from the date of entry of this Order. Defendants shall file a responsive pleading on or before 45 days from the date the amended consolidated class action complaint is filed.