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In Thompson v. Shaw Group, Inc., 2004 WL 2988503 (E.D. La. Dec. 14, 2004), the court used FIFO, but it noted that it did not need to choose definitively between the methods to decide on the lead plaintiff in that case, and the court further stated that in the remainder of the litigation, "FIFO may be insufficiently accurate and jettisoned in favor of LIFO."
Summary of this case from Yellowdog Partners, LP v. Curo Grp. Holdings Corp.Opinion
Civil Action No. 04-1685 Section "C" (1).
December 13, 2004
Order and Reasons
This matter comes before the Court on the plaintiffs' competing motions for appointment of Lead Plaintiff and Counsel in the proposed class action involving allegations of securities fraud in the purchase of Defendant Shaw Group's stock. After considering the plaintiffs' briefs, supporting exhibits, methods of damages calculation, and the applicable law, the Court finds that the Institutional Investor Group ("IIG"), as the plaintiff-movant with the largest financial interest in the present litigation which is not subject to the statutory bar on repeat plaintiffs, should be appointed Lead Plaintiff.
I. Factual Background
This matter arises out of allegations of securities fraud in the purchase of Defendant Shaw Group's stock between October 19, 2000 and June 10, 2004 ("Class Period"). Defendants are Shaw Group, Inc. and various high-ranking corporate officers. The company provides comprehensive services to the power, process, and environmental and infrastructure industries. Plaintiffs' chief allegation is that the defendants made public misrepresentations in denying internal reasons for the declining price of their company's stock, when in reality they were knowingly shoring up its appearance of financial health by secretly shifting funds from a "contract loss reserve" and "gross margin reserve" to cover costs. Plaintiffs allege that the failure to disclose this means of covering costs, coupled with inaccurate public statements of corporate financial health, fraudulently induced the plaintiffs to purchase the stock at artificially inflated prices.
All plaintiffs recite similar facts as to the basis for these allegations: In November 2000, the defendants had established $83.7 million in a gross margin reserve and $36.4 million in a contract loss reserve. By mid-May 2001, the defendants, in connection with the acquisition of another company, swelled the aggregate amount of the reserve funds to approximately $228 million. With rumors about the possible financial weakness of the Shaw Group, the stock price fell from $60 per share in June 2001 to below $30 per share in August, then to $20 per share by December. During this consistent decline, the Shaw Group issued two public announcements, on June 21 and December 12, 2001, disavowing any knowledge of internal reasons for the stock's decline and expressing confidence in the accuracy of the company analysts' estimate of earnings, backlogs, and margins for fiscal 2002 and 2003. Plaintiffs allege these announcements were misrepresentations because the defendants knew that funds were being shifted from the reserves to "manage" earnings.
Meanwhile in late 2000 and 2001, company officers sold $80 million in stock, $60 million of which allegedly flowed directly to four of the named corporate officer-defendants. From 2001 to 2003, the defendants nevertheless continued to raise millions through the offering of common stock, liquid yield option notes ("LYONS") and senior unsecured notes at 10.75%. Defendants also acquired the IT Group, with its 1.67 million shares valued at $50 per share.
On June 1, 2004, the Securities and Exchange Commission ("SEC") launched an informal investigation, focusing on the accounting for the Shaw Group acquisitions. The market reaction to this news was unfavorable, and the Shaw Group stock bottomed out at $10.15 by June 13. On June 16, Milberg Weiss, counsel for Plaintiff New Jersey Building and Laborers Group ("NJBLG"), filed this class action suit, with publication of notice the following day in Business Wire on June 17. (Rec. Doc. 10, Ex. A, Publication of Class Action in Business Wire).
The plaintiffs of the proposed class are purchasers of Shaw Group securities during the Class Period.
II. Procedural Background
In late July 2004, the Court consolidated the complaints of various plaintiffs, which were both individual investors and fiduciaries of pension funds with similar fraud allegations as mentioned above (hereinafter "Securities Fraud Action"). ( See Rec. Doc. 4-7). The Court consolidated the derivative shareholder suit Jonathon Nelson (hereinafter "Derivative Suit") with the first filed case, Earl Thompson v. Shaw Group et al, 04cv 1685, on August 31, 2004. (Rec. Doc. 24.) On August 16, 2004 several plaintiffs requested appointment as Lead Plaintiff, six of which remain: (1) Policemen and Firemen Retirement System for Detroit ("Detroit PF"), (2) Institutional IIG, (3) the Dallal Group, (4) NJBLG, (5) Ann Arbor Employees' Pension System ("Ann Arbor"), and (6) Mike Bentzen.
The Court notes that Nelson brought the derivative suit against high ranking officials of the Shaw Group in their individual capacity in the name of the company whereas the plaintiffs here make fraud allegations against the company itself. In both instances, however, the factual allegations turn on the central issue of misrepresentations purportedly made by the Shaw Group, which artificially increased the stock price to the detriment of stock purchasers in the proposed fraud class actions and the shareholders in the derivative suit.
On October 20, 2004, the Court granted oral argument on the issue of the appointment of Lead Plaintiff and took the plaintiffs' briefs under submission. At that time, the undersigned requested that Detroit PF submit supplemental briefing on the following issues: (1) the Fund's "adjusted" calculation of its financial interest to take into consideration pre-Class Period purchases that were sold during the Class Period; and (2) the status of other pending securities fraud litigation which Detroit PG directs as Lead Plaintiff.
On November 10, 2004, the Court ruled after oral argument that Reusche v. Barfield et al, 04cv2213, a second derivative shareholder suit arising out of the same factual allegations, be consolidated with both the Nelson derivative suit and the Securities Fraud Action. (Rec. Doc. 92). The Court subsequently issued an Order imposing a limited stay on the Reusche action pending the selection of Lead Plaintiff in the Securities Fraud Action and/or the filing of an Amended Complaint. (Rec. Doc. 93).
The conditions of the limited stayed mirrored those in a stipulation agreement on October 4, 2004 between Derivative Plaintiff Nelson and the defendants. See Rec. Doc. 47.
III. Law and Analysis
The chief criterion for selection of Lead Plaintiff is the financial interest each plaintiff has in the litigation ( i.e. loss sustained due to the defendant's alleged fraud). Of the plaintiffs in the running, the approximate financial stakes are as follows in descending order: (1) Detroit PF, with losses of over $1.4 million; (2) IIG's interest in the litigation is $572,000; (3) the Dallal Group with losses of $378,607; (4) NJBLG with losses of $277,315; (5) Ann Arbor with losses of $152,706.45; and (6) Mike Bentzen with losses of $49,030. Despite the apparent straightforwardness of the selection process under 15 U.S.C. §§ 78-4(a)(3)(A), a determination of Lead Plaintiff in this case hinges on whether the statutory bar on plaintiffs which have been lead plaintiff in five or more actions in the previous three years applies to Detroit PF, an institutional investor.
As is discussed below, this figure is calculated under the "first-in/first-out" methodology ("FIFO") whose accuracy in measuring the genuine financial interest is questionable. Under alternate methods, Detroit PG's stake can be calculated as $841.625.70 or as a net gain of $409,737. See Order and Reasons, infra, Part III.C.1 n6.
A. Criteria for Selection of Lead Plaintiff in Securities Fraud Class Action
Section 21D(a)(3)(B) of the Private Securities Litigation Reform Act ("PSLRA") sets forth procedures for selection of lead plaintiff. First, the plaintiff filing the action must publish notice to the potential class within 20 days. 15 U.S.C. §§ 78-4(a)(3)(A)(i). Second, within 60 days of publication, any person or group may apply with the Court for appointment of lead counsel. 15 U.S.C. §§ 78-4(a)(3)(A)(i). Third, the Court shall consider any and all motions for appointment as lead plaintiff within 90 days of publication. 15 U.S.C. §§ 78-4(a)(3)(B).
1. Certification
"Under the PSLRA, parties filing complaints ( i.e., named plaintiff(s)) must file a certification that complies with subsection 78u-4(a)(2)(A)." See, e.g., Greebel v. FTP Software, Inc., 939 F. Supp. 57, 61-62 (D. Mass. 1996) (holding that only named plaintiffs, rather than all parties moving for appointment as lead plaintiff, need comply with the certification requirement); Gluck v. Cellstar Corp., 976 F. Supp. 542 (N.D. Tex. 1997). Subsection (a)(2)(A) provides:
Each plaintiff seeking to serve as a representative party on behalf of a class shall provide a sworn certification, which shall be personally signed by such plaintiff and filed with the complaint, that —
(i) states that the plaintiff has reviewed the complaint and authorized its filing;
(ii) states that the plaintiff did not purchase the security that is the subject of the complaint at the direction of plaintiff's counsel or in order to participate in any private action arising under this chapter;
(iii) states that the plaintiff is willing to serve as a representative party on behalf of a class, including providing testimony at deposition and trial, if necessary;
(iv) sets forth all of the transactions of the plaintiff in the security that is the subject of the complaint during the class period specified in the complaint;
(v) identifies any other action under this chapter, filed during the 3-year period preceding the date on which the certification is signed by the plaintiff, in which the plaintiff has sought to serve as a representative party on behalf of a class; and
(vi) states that the plaintiff will not accept any payment for serving as a representative party on behalf of a class beyond the plaintiff's pro rata share of any recovery, except as ordered or approved by the court in accordance with paragraph (4).15 U.S.C. § 78u-4(a)(2)(A). Each of the movant-plaintiffs filed with his complaint a sworn certification that complies with each of these six requirements, and the other proposed lead plaintiffs filed certifications with this motion. Therefore, the Court finds that movants have satisfied the certification provision.
2. Notification
Subsection 78u-4(a)(3)(A)(i) provides that no later than 20 days after the date on which the complaint is filed, the plaintiffs bringing the class action must publish "in a widely circulated national business-oriented publication or wire service, a notice advising members of the purported plaintiff class." Notice will include: (1) the pendency of the action, the claims asserted therein, and the purported class period; and (2) that not later than 60 days after the date on which the notice is published, any member of the purported class may move the court to serve as lead plaintiff of the purported class. § 78u-4(a)(3)(A)(i) (I-II). "If more than one action on behalf of a class asserting substantially the same claim or claims arising under this chapter is filed, only the plaintiff or plaintiffs in the first filed action shall be required to cause notice to be published in accordance with clause (i)." § 78u-4(a)(3)(A)(ii).
On June 16, 2004, Milberg Weiss, counsel for the plaintiff NJBLG, filed this class action suit, with publication of notice the following day in Business Wire on June 17. (Rec. Doc. 10, Ex. A). The June 17 notice named the pending action, enumerated the claims, set forth the purported class period (October 19, 2000 to June 10, 2004), and stated that any member of the purported class could move to serve as lead plaintiff within sixty days after the date of notice. Id.
Courts have repeatedly recognized Business Wire to be a business-oriented wire service within the meaning of the PSLRA and thus an acceptable means of publishing notice. See, e.g., Greebel, 939 F. Supp. at 62-63 (noting that reliance on Business Wire is not subject to happenstance of buying a newspaper on the day that notice appears, as press release remains accessible for substantial period of time); accord In re Nice Systems Sec. Litig., 188 F.R.D. 206, 216 (D.N.J. 1999).
Accordingly, first-to-file plaintiff NJBLG satisfies the notification requirement. Furthermore, the other movants are also in compliance with Section 78u-4(a)(3)(A)(iii) because they timely filed their Motions for Appointment as Lead Counsel.
3. Rebuttable Presumption
Under the "rebuttable presumption" established pursuant to the PSLRA, the Court will select the Lead Plaintiff based on the following criteria: (1) a plaintiff must have filed the complaint or a motion for appointment in response to published notice; (2) the plaintiff with the "largest financial interest in the relief sought by the class"; and (3) a plaintiff that otherwise satisfies the requirements of Fed.R.Civ.P. 23(a). 15 U.S.C. §§ 78-4(a)(3)(B)(iii) aaa-ccc.
Courts have concluded that the amount of the plaintiff's financial interest in the litigation is the defining criterion in the selection process:
[The statute] "provides in categorical terms that the only basis on which a court may compare plaintiffs competing to serve as lead is the size of their financial stake in the controversy. Once it determines which plaintiff has the biggest stake, the court must appoint that plaintiff as lead, unless it finds that he does not satisfy the typicality or adequacy requirements.In re Cavanaugh, 306 F.3d 726, 736 (9th Cir. 2002). Accord Tarcia v. McDermott Int'l Inc., 2000 U.S. Dist. LEXIS 5031, at *12 (E.D. La. April 13, 2000) (finding group of four plaintiffs with highest financial loss to be most adequate as Lead Plaintiff).
The PSLRA is silent on the method for calculating financial losses. Two competing methodologies have emerged: (1) the "first-in/first-out" ("FIFO"), and (2) the "last-in/first-out ("LIFO") method, for which some district courts have adopted a four-factor test. Under FIFO, the status quo method, shares sold during the class period are matched with the first shares held or purchased at the beginning of the class period, whichever comes first. Under the LIFO approach, a plaintiff's sales of the defendant's stock during the class period are matched against the last shares purchased, resulting in an off-set of class-period gains from a plaintiff's ultimate losses.
The four-factor test takes into account these plaintiff-investor transactions during the class period by assessing: (1) the number of shares purchased during the class period; (2) the number of net shares purchased during the class period; (3) the total net funds expended by the plaintiffs during the class period; and (4) the approximate losses suffered during the class period. In re Olsten Corp. Sec. Litig., 3 F.Supp. at 295. See also In re Orthodontic Ctrs. Of Am., Inc., Sec. Litig., 2003 U.S. Dist. LEXIS 25264 (E.D. La. Dec. 17, 2001) (Porteus, J.) ("While the PSLRA neither defines `largest financial interest' nor explains how such a determination should be made, several factors have been enumerated in our jurisprudence relevant to this inquiry.")
Many federal appeal courts and commentators regard FIFO, which the Internal Revenue Service ("IRS") consistently uses, as a firmly established methodology for calculating loss for tax purposes in the context of securities investments. See, e.g., 26 C.F.R. 1.1012-1(c)(1); Helvering v. Campbell, 313 U.S. 15, 20-21 (1941); Holmes v. Commissioner of Internal Revenue, 134 F.2d 219, 221 (3th Cir. 1943) ([FIFO] is so old and well known that any extended explanation . . . would be superfluous. It is incorporated in [the tax code]. It is sufficient to say that it establishes a presumption to be followed."); Wood v. Commissioner of Internal Revenue, 197 F.2d 859, 863 (5th Cir. 1952).
In this case, the competing methodologies affect only the calculation of Detroit PG's financial stake. However, the Court need not choose definitively among these methodologies at present because it is prepared to eliminate Detriot PG on alternative grounds under the statutory bar pursuant to 15 U.S.C. §§ 78-4(a)(3)(B)(vi). For the immediate narrow purpose of considering the financial stake of the other movants for Lead Plaintiff, the Court resorts to the traditional FIFO methodology. In ultimately deciding damages in future phases of this litigation, the Court notes that FIFO may be insufficiently accurate and jettisoned in favor of LIFO.
Under the FIFO method, Detroit PG provisionally has the largest financial stake, at more than $1.4 million. IIG has the second largest financial stake in the litigation with purported losses of $572,000. (Rec. Doc. 68 at 2). The Court adopts the persuasive authority of the Cavanaugh and Tarcia rulings that the financial stake is the determinative factor unless the presumptive lead plaintiff runs afoul of the requirements under Fed.R.Civ.P. 23(a). As mentioned above, the Court will disqualify Detroit PG under the statutory bar. Therefore, IIG is the presumptive lead plaintiff.
It should be noted that this figure is by no means settled. In response to the Court's request, Detroit PG re-calculated its financial interest as $841.625.70 in light of pre-Class Period purchases and overall sales during the Class Period. See Rec. Doc. 81 at 4, Ex. B. To further complicate matters, NJBLG asserts that Detroit PF experienced a net gain of $409,737 from transactions during the Class Period while the Shaw Group stock traded at artificially high prices. (Rec. Doc. 50 at 8).
2. Rule 23(a) Requirements
As to the third criterion, the Court looks at the typicality and adequacy requirements under Fed.R.Civ.P. 23(a) at the time of appointment of lead counsel. See, e.g., In re Oxford Health Plans, Inc. Sec. Litig., 182 F.R.D. 42, 49 (S.D.N.Y. 1998); In re Olsten Corp. Sec. Litig., 3 F.Supp.2d 286, 296 (E.D.N.Y. 1998). Typicality exists where plaintiffs' claims arise from the same series of events and are based on the same legal theories as the claims of all class members. Mullen v. Treasure Chest Casino, LLC, 186 F.3d 620, 625 (5th Cir. 1999) ("[The] test for typicality is not demanding. It focuses on similarity between the named plaintiffs' legal and remedial theories and the theories of those who they purport to represent.") Adequacy exists unless the Court finds (1) the presence of a potential conflict between the proposed lead plaintiff and the class members; or (2) or the proposed lead plaintiff's chooses counsel to represent the class who is unqualified, incompetent, or otherwise unable to vigorously conduct the contemplated litigation on behalf of the class members.
Once the Lead Plaintiff is appointed, it will then file for class certification such that the defendant may oppose class certification under all four elements of Rule 23(a) (numerosity, commonality, typicality, and adequacy of representation). See Gluck, 976 F. Supp. at 546.
IIG comports with the Rule 23(a) requirements of typicality and the adequacy of representation. It is clear that IIG's claims are typical of the claims brought by the other plaintiffs since all the allegations of fraud arise from the same circumstances involving the purported misrepresentations by members of Defendant Shaw Group.
As to the adequacy prong, the other plaintiffs have made no showing of any actual or potential conflicts of interest between IIG and the other plaintiffs. In regard to the competency of counsel, counsel for NJBLG objected to the "11th hour" withdrawal of the Alaska Fund from IIG's stable of plaintiffs as supposedly indicative of lacking oversight by counsel. The timing of the withdrawal notwithstanding, the Court is satisfied with IIG's explanation of the events and its apparent prompt removal of Alaska Fund as not to run afoul of the statutory bar under 15 U.S.C. §§ 78-4(a)(3)(B)(vi). See Rec. Doc. 68 at 1-2. Therefore, there is no convincing evidence before the Court that IIG would genuinely provide inadequate representation of the proposed class. Accordingly, IIG should be Lead Plaintiff considering that Detroit PG is disqualified as a repeat plaintiff. See Order and Reasons, infra, Part III.B.
IIG sought withdrawal because it was purportedly discovered on October 12, 2004 that Alaska Fund was plaintiff in Krispy Kreme Doughnuts, Inc., Sec. Litig., 04cv416, (M.D.N.C. Oct. 6, 2004). With inclusion of Alaska Fund in IIG, IIG would have been subject to the statutory bar on repeat professional plaintiffs.
B. Statutory Bar on Repeat Plaintiffs/Exemption for "Institutional Investor"
The PSLRA establishes "Restrictions on Professional Plaintiffs", which provide:
Except as a court may otherwise permit, consistent with the purposes of the section, a person may not be a lead plaintiff, or an officer, director, or fiduciary of lead plaintiff, in no more than 5 securities class actions brought as plaintiff class actions pursuant to the [Fed.R.Civ.P.] during a three-year period.
15 U.S.C. §§ 78-4(a)(3)(B)(vi).
Courts have the discretion to exempt institutional investors (such as public pension fund) from the statutory limitation. See, e.g., Smith v. Suprema Specialties, Inc. 206 F.Supp.2d 627, 640-641 (D.N.J. 2002) (characterizing the legislative history as indicative that securities class action reform was not aimed at institutional investors); In re Critical Path, Inc. Sec Litig., 156 F. Supp. 2d 1102, 1112 (N.D. Cal. 2001) (opining that institutional investors do not represent the type of professional plaintiff [the Reform Act] seeks to restrict); Piven v. Sykes Enters., Inc., 137 F. Supp. 2d 1295, 1304 (M.D. Fla. 2000) (finding clear statutory authority for court to permit institutional investor to exceed limit).
The exemption, however, is not absolute. See Aronson v. McKesson HBOC, Inc. 79 F.Supp. 2d 1146, 1156 (N.D.Cal. 1999) (deciding to bar repeat institutional investor because "[t]he text of the statute contains no flat exemption.") If a court determines that an institutional investor's participation in five or more litigations poses a risk of overstretch, the institutional investor may be disqualified under the statutory bar. See, e.g., Chiaretti v. Orthodontic Ctrs. Of Am., No. 03-1027, 2003 U.S. Dist. LEXIS 25264 (E.D. La. Aug. 28, 2003) (emphasizing prevention of over-representation as primary tenet of PLSRA where court enforced statutory ban against institutional investor); In re Unumprovident, 2003 U.S. Dist. LEXIS 24633, at *19 (E.D. Tenn. Nov. 6, 2003) (pointing to the risk of a repeat plaintiff spreading itself too thin to furnish adequate representation). In re Enron Corp. Sec. Litig., 206 F.R.D. 427, 455 (S.D. Tex. 2002) ("[S]imultaneous participation in securities class actions or applications for appointment as lead plaintiff could result in institutional investor having fewer resources available and being less able to police counsel's conduct, and thus undermine the purpose of the PSLRA").
NJBGL argues that the statute encompasses not only Detroit PG, but also its "officers and fiduciaries" when considering the applicability of the limitation on institutional investors. (Rec. Doc. 93 at 2-3) (citing 15 U.S.C. §§ 78-4(a)(3)(B)(vi)). Under this interpretation, Detroit PG's Ronald Zajac, as fiduciary and in-house counsel, is currently directing seven securities fraud class actions. Detroit PF responds that these other on-going lawsuits have varying procedural postures, making it unlikely that its resources would be insufficient, i.e. it is unlikely that two law suits will proceed to trial simultaneously. (Rec. Doc 81 at 4-7).
Any speculation aside, the Court rules simply that there is a risk of overstretch where Detroit PG would be directing a total of eight concurrent lawsuits were Detroit PG selected as Lead Plaintiff here as well. To eliminate the risk of overstretch, the Court deems that it is sounder to appoint IIG as Lead Plaintiff, which also has a substantial stake in the litigation if not equal to Detroit PG's financial interest. Although the legislative history appears to favor institutional investors, a policy of equal force is the general prevention of over-representation regardless of the plaintiff's status. See Chiaretti, 2003 U.S. Dist. LEXIS 25264, at *5 (finding that general counsel of institutional investor with oversight over six class actions fell within congressional intent to bar repeat plaintiffs). As mentioned above, the applicability of the statutory bar to Detroit PG obviates the relevance of the amount of its financial interest and, for the present time, the question of the proper method for calculating that interest.
Accordingly, with Detroit PG thus eliminated, IIG is confirmed as Lead Plaintiff.
D. Selection of Lead Counsel
The Court should interfere with the Lead Plaintiff's selection of counsel only when necessary "to protect the interests of the class." 15 U.S.C. §§ 78-4(a)(3)(B)(iii)(II)(aa). Unless the Court detects a conflict between the proposed Lead Counsel and the class members, Lead Plaintiff's selection is presumed to be proper. Because no plaintiff has made a persuasive showing that IIG's proposed Lead Counsel will be unable or unwilling to protect the interests of the class, the Court does not disturb IIG's selection of Lerach Coughlin Stoia Geller Rudman Robbins, LLP.
IV. Conclusion
Although Detroit PG purportedly has the largest financial stake in the litigation, its current participation in seven other class actions, as lead counsel or fiduciary, serves as grounds for disqualification due to a risk of over-representation pursuant to 15 U.S.C. §§ 78-4(a)(3)(B)(vi). With Detroit PG eliminated, IIG is the presumptive lead plaintiff, with the second largest financial interest of approximately $572,000. Finally, as IIG comports with the Rule 23(a) requirements of typicality and adequacy of representation, the Court holds that IIG should be appointed Lead Plaintiff.
IT IS ORDERED that IIG be appointed Lead Plaintiff, with authorization to select Lerach Coughlin Stoia Geller Rudman Robbins, LLP, as Lead Counsel and Waltzer and Associates as Liaison Counsel. The respective addresses of Lead and Liaison Counsel are as follows:
Lerach Coughlin Stoia Geller Rudman Robbins, LLP Darren Robbins 401 B Street, Ste. 1700 San Diego, CA 92101 (619) 231-1058 [Lead Counsel]
Waltzer and Associates Joel Waltzer 14939 Chef Menteur Hwy. Ste. D New Orleans, LA 70129 (504) 254-4400 [Liaison Counsel]
The Court will send all notices to Liaison Counsel.