The Private Securities Litigation Reform Act (“PSLRA”) establishes special rules in securities class actions. One such rule, found in 15 U.S.C. Sect. 78u-4(a)(3)(B)(vi) and known as the “Five-in-Three Provision,” prevents a “person” from serving as a lead plaintiff in “more than 5 securities class actions” during any three-year period. Does that rule, though, apply to institutional investors? The plain words of the statute certainly suggest so—it is difficult to argue that an institutional investor is not a “person,” and had Congress wanted to exclude institutional investors from this prohibition, it could easily have done so. The Arkansas Teacher Retirement System, an active lead plaintiff, lost this issue in the Eastern District of Virginia last fall, when Judge Ellis found that the statutory language was clear. See Knurr v. Orbitral ATK, Inc., No. 1:16-cv-1031, 2016 WL 661157 (E.D. Va. Nov. 10, 2016) (noting that “it is doubtful that Congress would have hidden a major exemption in a single word,” echoing Justice Scalia’s phrase that “Congress . . . does not . . . hide elephants in mouseholes”).

But, as Judge Ellis also acknowledged, “one purpose of the [PSLRA] is to encourage institutional investors to serve as lead plaintiff.” And the House Conference Report pertaining to the PSLRA states that “institutional investors seeking to serve as lead plaintiff may need to exceed [the limit of lead plaintiffs] and do not represent the type of professional plaintiff this legislation seeks to restrict.” H.R. Conf. Rep. 104-369, at 35 (1995). So how to square this tension?

Recently, in Ollila v. Babcock & Wilcox Enterprises, Inc., No. 3:17-cv-109 (W.D.N.C. May 25, 2017), Judge Cogburn acknowledged these competing lines of authority but ultimately side-stepped the issue. Arkansas Teacher Retirement System, which had lost its argument to serve as lead plaintiff in Knurr, had better success with Judge Cogburn. Judge Cogburn found Knurr “persuasive,” but found “similarly persuasive” “the number of other district court cases that have held that institutional investors are not subject to the ‘five-in-three’ limitation.” Indeed, Judge Cogburn cited case law emphasizing that “the ‘majority’ view is that institutional investors are not subject to the professional plaintiff ‘three-in-five’ bar.”

Ultimately, Judge Cogburn took refuge in a section of the PSLRA that permits the court to override the “professional plaintiff limitation.” See15 U.S.C. Sect. 78u-4(a)(3)(B)(vi). The putative financial losses of ATRS, which exceeded $5 million in the case, “dwarf[ed] those alleged by the competing institutional plaintiff,” leading the court to exercise its discretion to appoint ATRS as lead plaintiff even in the face of its activism in shareholder class actions across the country.

It remains to be seen whether the textual argument of Judge Ellis will ultimately hold sway in the Fourth Circuit.