02 Civ. 865 (WK)(FM)
December 3, 2002
By Memorandum and Order dated July 29, 2002, Judge Knapp consolidated more than thirty securities class actions against defendant Elan Corporation ("Elan"), an Irish pharmaceutical company, and its officers, directors, and accountants. (See Docket No. 37). Judge Knapp then referred these consolidated actions to me for general pretrial supervision and any dispositive motions requiring a report and recommendation. (See Docket No. 35). The first such matter to come before me relates to the applications of various putative class members to be appointed as Lead Plaintiff and for the appointment of their chosen counsel as Lead Counsel. Following a review of the motion papers and oral argument held on September 6, 2002, I have determined, for the reasons set forth below, that plaintiffs ST Investment Company and Dr. Norman Lefkovitz (the "ST/Lefkovitz Group") shall jointly serve as Lead Plaintiff, and that the law firms of Milberg, Weiss, Bershad, Hynes Lerach, LLP, and Pomerantz, Haudek, Block, Grossman Gross, LLP, shall jointly serve as Lead Counsel.
II. Relevant Facts
Each of the complaints in the consolidated actions alleges, in substance, that Elan issued false and misleading financial statements and press releases to the investing public and engaged in various impermissible accounting practices. Chief among the improprieties alleged is that, without making full disclosure, Elan would invest money in joint research and development ventures, and that these ventures would, in turn, use a large portion of the invested money to purchase a medical technology license from Elan. Elan would then record this amount both as revenue and as an investment asset. By these means, as an article published in The Wall Street Journal on June 30, 2002 explained, Elan allegedly was able to convert money that it had on hand into new revenue, thereby inflating its financial numbers. (See Compl. (02 Civ. 865) ¶¶ 3-4, 36). As is often the case, on the day following the publication of the article, the price of Elan's publicly traded shares dropped precipitously. (Id. ¶ 5).
The plaintiffs comprising the putative class fall into three categories: (1) investors who purchased Elan shares through open market transactions; (2) investors in Liposome Corporation who acquired their Elan shares through a stock-for-stock merger between Elan and Liposome; and (3) investors who acquired their Elan shares through a stock-for-stock merger between Elan and Dura Pharmaceuticals, Inc.
Since the first action was instituted, eight motions for appointment as lead plaintiff have been filed. (See Docket Nos. 2, 3, 8, 10, 14, 18, 20, 25). Through a process of negotiation, most of those movants dropped their applications, ceding the Lead Plaintiff role to the ST/Lefkovitz Group. The only other plaintiffs continuing to seek appointment as Lead Plaintiff are certain investors who acquired their Elan shares through the Dura merger (the "Pope Plaintiffs Group").
A. ST/Lefkovitz Group
The ST/Lefkovitz Group consists of two proposed lead plaintiffs, ST Investment Company and Dr. Norman Lefkovitz, who allegedly sustained losses in the amounts of $1,321,670 and $1,419,589 respectively. (See Reply by ST/Lefkovitz Group in Further Support of Motions for Appointment of Lead Plaintiff and Lead Counsel, dated June 6, 2002, at 1). To garner support for their application to be appointed as Lead Plaintiff, the ST/Lefkovitz Group has agreed to the formation of a Plaintiffs' Executive Committee. (See letter from Samuel H. Rudman and Marc I. Gross, Esqs., dated July 24, 2002 ("Rudman Letter"), at 1). Among the investors intending to serve on the Plaintiffs' Executive Committee is Randy Spokane, a former Dura shareholder, who allegedly lost $9,666.57 as a result of his acquisition of 150 Elan shares during the Dura merger. (See Affidavit of Pamela E. Kulsrud, Esq., dated April 5, 2002, Ex. F). Michael Pennock, another proposed Plaintiffs' Executive Committee member, sustained losses of $1,129,464.78, as a result of the Liposome merger. (Id.).
B. Pope Plaintiffs Group
The Pope Plaintiffs Group consists of Grace Pope, in her individual capacity and as trustee of a trust, and Elizabeth Mueller. (See Pope Plaintiffs Group Suppl. Mem. in Support of Motion for Appointment of Lead Counsel, dated May 30, 2002 ("Pope Mem."), at 1). Although the monetary loss sustained by these proposed Lead Plaintiffs is not set forth in their papers, the Pope Plaintiffs exchanged 5,700 Dura shares for 3,755 Elan shares as part of the merger. (Id. at 19). Accordingly, the Pope Plaintiffs acquired 25 times more Elan shares than Mr. Spokane did as a result of the merger. (Id.). The Pope Plaintiffs Group seeks to serve as Lead Plaintiff for a subclass of shareholders who received Elan shares in exchange for their Dura shares as part of the Dura merger. (Id. at 1-2). The Pope Plaintiffs Group does not oppose the appointment of the ST/Lefkovitz Group as Lead Plaintiff for the other two categories of shareholders on whose behalf suits have been brought. (See 9/6/02 Tr. at 5, 11).
In an effort to avoid competing bids for appointment as Lead Plaintiff, the ST/Lefkovitz Group proposed that the Pope Plaintiffs Group be added to the Plaintiffs' Executive Committee. (See Rudman Letter at 2). As Executive Committee members, the Pope Plaintiffs would jointly prosecute the Dura merger related claims and jointly participate in the allocation of any recoveries between the former Dura shareholders and the balance of the class, but would not be entitled to participate directly in any settlement discussions with Elan. (Id.). After the Pope Plaintiffs indicated that they considered this an inadequate role in the litigation, the ST/Lefkovitz Group advised the Court that it opposed the appointment of the Pope Plaintiffs as Lead Plaintiff for the former Dura shareholders and would no longer consider having them serve as members of the Executive Committee. (See letter from Travis E. Downs, III and Marc I. Gross, Esqs., dated September 4, 2002, at 2).
A. Lead Plaintiff
The selection of one or more Lead Plaintiffs and Lead Counsel is governed by the Private Securities Litigation Reform Act ("PSLRA"). With respect to the selection of a Lead Plaintiff, the statute creates a rebuttable presumption that the "most adequate plaintiff" to serve as Lead Plaintiff is the "person or group of persons" that (1) has either filed the complaint or made a motion to serve as lead plaintiff in response to a notice published pursuant to 15 U.S.C. § 78u-4(a)(3)(A)(i), (2) "has the largest financial interest in the relief sought by the class," and (3) "otherwise satisfies the requirements of Rule 23 of the Federal Rules of Civil Procedure." See 15 U.S.C. § 78u-4(a)(3)(B)(iii)(I)(aa), (bb), (cc). The presumption may be rebutted by proof that the presumptively most adequate plaintiff "will not fairly and adequately protect the interest of the class" or "is subject to unique defenses that render such plaintiff incapable of adequately representing the class." Id. § (a)(3)(B)(iii)(II).
In this case, there is no dispute that both groups seeking appointment as Lead Plaintiff have complied with the statutory prerequisites set forth in § 78u-4(a)(3)(B)(iii)(I). Consequently, the narrow issue presented by their motions is whether investors who acquired their Elan shares through the Dura merger can adequately be represented by the ST/Lefkovitz Group, through Randy Spokane, a former Dura shareholder, as a member of its proposed Executive Committee, or must be separately represented by their own co-Lead Plaintiff. The Pope Plaintiffs Group contends that separate representation is required, both because their interests cannot otherwise adequately be protected and because the ST/Lefkovitz Group is subject to defenses not applicable to the former Dura shareholders alone. (See Pope Mem. at 22-24). If the former Dura shareholders constitute a subclass requiring separate representation at this early stage of the litigation, the Pope Plaintiffs Group would presumptively be entitled to appointment as Lead Plaintiff for the subclass since it is undisputed that it includes movants who suffered the greatest financial loss as a consequence of the Dura/Elan merger. (Id. at 19, 24).
The Pope Plaintiffs Group argues that it should be appointed as a separate Lead Plaintiff because the former Dura shareholders have claims under Section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(a), which are unavailable to the other class members and which do not require a showing of scienter. (Id. at 8-9, 11-12). The Pope Plaintiffs Group further notes that these claims give the former Dura shareholders the right to seek rescission of the Dura/Elan merger or a retrospective change in the exchange ratio used to effect the merger, forms of relief which are alleged to give rise to a "direct conflict" with the other categories of shareholders in whose name suits have been brought. (Id. at 10-11). Given the lower pleading and proof requirements applicable to its claims, the Pope Plaintiffs Group also contends that it may be able to prosecute its claims more quickly than other class members. (Id. at 11-13). Finally, the Pope Plaintiffs Group argues that it will have different, and quite likely inconsistent, goals during settlement negotiations. (Id. at 13-14).
Similarly, the Pope Plaintiffs suggest that the other class members have failed to allege facts sufficient to give them standing to bring claims on behalf of the former Dura shareholders under Sections 11 and 12(a)(2) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. § 77k, 771(a)(2). (See Pope Mem. at 9).
In In re Duke Energy Corp. Secs. Litig., 02 Civ. 3960, Judge Rakoff was confronted with similar arguments advanced by a plaintiff seeking to be appointed as co-lead plaintiff for a niche group of convertible preferred stock purchasers who had claims under Section 11 of the Securities Act. Judge Rakoff declined the invitation to appoint additional lead plaintiffs, reasoning that the presence of lead plaintiffs and lead counsel who were not in harmony might increase the cost of litigation. (See 02 Civ. 3960, 8/27/02 Tr. at 33) (remarks of Rakoff, J.). Judge Rakoff did, however, authorize counsel for the niche plaintiffs to submit supplemental briefs, if necessary, with respect to any issues that arose with respect to the Section 11 claims. (Id.).
The case that the Pope Plaintiffs Group suggests most strongly supports its position regarding the need for a co-Lead Plaintiff is In re Cendant Corp. Litig., 182 F.R.D. 144 (D.N.J. 1998). There, a group of "Public Pension Fund Investors" had claims that "dwarfed" the claims of other investors or investor groups seeking appointment as lead plaintiff. Id. at 147. Nevertheless, a clear conflict of interest loomed on the horizon because the Public Pension Fund Investors had substantial investments in Merrill Lynch, which had served as underwriter for one of four types of securities held by putative class members. Because of that role, Merrill Lynch was likely to become a defendant. Id. at 149. For that reason, the court appointed the non- conflicted party with the next largest holdings of that type of security as co-lead plaintiff to pursue the claims specifically related thereto. Id. at 149-50.
Here, there is no such clear conflict of interest. Moreover, by adding Randy Spokane to its proposed Executive Committee, the ST/Lefkovitz Group appears to have eliminated any issue of standing with respect to legal claims unique to the former Dura shareholders. Accordingly, the contentions of the Pope Plaintiffs Group amount to a suggestion that the members of their subclass would be represented more effectively if they had their own counsel. As the Cendant court noted, however, "every warrior in this battle cannot be a general." Id. at 148. For this reason, the Court declines to appoint the Pope Plaintiffs Group as co-Lead Plaintiff. Whether subclasses are necessary to advance the interests of the former Dura shareholders or anyone else, will, of course, be revisited in greater detail at the class certification stage.
The only remaining prerequisite to appointment of a presumptively most adequate plaintiff as Lead Plaintiff is a showing that the requirements of Rule 23 of the Federal Rules of Civil Procedure have been met. At this early stage, the proposed Lead Plaintiff need only establish that it meets the typicality and adequacy requirements of the Rule. See In re Crayfish Co. Secs. Litig., 2002 WL 1268013, at *4 (S.D.N.Y. June 6, 2002); In re Olsten Corp. Secs. Litig., 3 F. Supp.2d 286, 296 (E.D.N.Y. 1998). Typicality exists when the lead plaintiff's claims arise from the same series of events and are based on the same legal theories as the claims of all of the remaining class members. In re Drexel Burnham Lambert Group, Inc., 960 F.2d 285, 291 (2d Cir. 1992); In re Prudential Secs. Inc. Ltd. P'ships. Litig., 163 F.R.D. 200, 207-08 (S.D.N.Y. 1995). "Typicality, however, does not require that the situations of the named representatives and the class members be identical." In re Oxford Health Plans, Inc. Secs. Litig., 199 F.R.D. 119, 123 (S.D.N.Y. 2001).
The papers before me establish that all of the putative class members' claims arise out of their acquisition of Elan securities — trough purchase or otherwise — during the class period. Moreover, each of their claims alleges that the defendants withheld or falsified material information concerning those securities. The claims of the ST/Lefkovitz Group consequently are typical of the claims of the other class members.
To satisfy the adequacy requirement of Rule 23, "(1) there should be no conflict between the interests of the class and the named plaintiff nor should there be collusion among the litigants; and (2) the parties' attorney must be qualified, experienced, and generally able to conduct the proposed litigation." Jackson v. Foley, 156 F.R.D. 538, 543 (E.D.N.Y. 1994) (citing Eisen v. Carlisle Jacquelin, 391 F.2d 555, 562 (2d Cir. 1968)). As set forth above, notwithstanding the different means by which the Dura shareholders came to own their shares, there is no conflict of interest between the ST/Lefkovitz Group and the members of the putative class. Rather, both the class representatives and the members of the class are alleged to have suffered similar financial harm as a consequence of Elan's artificially-inflated price. Both the class representatives and the members of the class also share a common interest in maximizing their recovery for Elan's alleged misconduct. Finally, to further that goal, the class representatives have selected accomplished securities class action counsel to pursue their claims. This showing satisfies the limited adequacy inquiry that is appropriate at this early stage.
B. Lead Counsel
The ST/Lefkovitz Group proposes to engage the Milberg Weiss and Pomerantz, Haudek firms as co-Lead Counsel. Both firms are accomplished in the field of securities litigation and eminently qualified for this assignment. Consequently, the selection of these firms as counsel for the Lead Plaintiff is approved.
Having considered the applications for appointment as Lead Plaintiff and Lead Counsel, the Court:
A. Grants the motion of the ST/Lefkovitz Group for appointment as Lead Plaintiff, denies the motion of the Pope Plaintiffs Group for appointment as co-Lead Plaintiff, and denies the remaining motions for appointment as Lead Plaintiff as moot.
B. Directs that the law firms of Milberg, Weiss, Bershad, Hynes Learach, LLP, and Pomerantz, Haudek, Block, Grossman Gross, LLP, shall jointly serve as Lead Counsel.
A pretrial conference to discuss scheduling and any other issues that the parties may wish to raise will be held on December 11, 2002, at 9:30 a.m., in Courtroom 11C at 500 Pearl Street. Prior to the conference, Lead Counsel should submit a proposed order regarding the composition and role of the Plaintiffs' Executive Committee.