Dura’s Impact on Lead Plaintiff Selection
In the securities fraud lawsuit arising out of the Comverse Technology options backdating scandal, a federal district judge, applying principles derived from the Supreme Court’s 2005 decision in the Dura case, has overturned a magistrate judge’s lead plaintiff ruling, resulting in the Lerach Coughlin firm's removal lead counsel in the case. (The background on the case can be found here.) The district judge’s ruling is interesting and potentially significant because of its implications about the factual determinations a district court must make under the Private Securities Litigation Reform Act (PSLRA) at the earliest stages of the case.
Judge Nicholas Garaufis had referred the lead counsel motions to the Magistrate Judge Ramon Reyes. Reyes selected the Plumbers and Pipefitters National Pension Fund ("P & P"), represented by the Lerach Coughlin firm, as lead plaintiff. Plaintiffs The Menorah Insurance Co. Ltd. and Mivtachim Pension Funds Ltd. (together, the "Menorah Group") represented by the Pomerantz Haudek Block Grossman & Gross law firm, objected to the Magistrate Judge’s ruling and appealed to the district court.
Reyes had found that P & P had purchased 534,471 shares that resulted in losses of approximately $2.9 million, exceeding the Menorah Group’s claimed loss of $343,242 on its 172,000 shares. Because Reyes determined that P & P had the greatest financial interest in the outcome of the case, he selected P & P as lead plaintiff.
The Menorah Group based its objection on the fact that most of P & P’s losses resulted from "in and out transactions," in that both the purchase and the sale of the shares took place before the alleged misrepresentations were disclosed. The Menorah Group argued that if the "in and out" shares were excluded, P & P did not suffer a $2.9 million loss, but instead actually realized a $132,722 gain. Judge Garaufis agreed, vacated the Magistrate Judge’s ruling, and appointed the Menorah Group as lead plaintiff.
Judge Garaufis based his ruling on the Supreme Court’s holding in Dura. He reasoned that because Dura provided that plaintiffs in a fraud-on-the-market securities case can recover only if a specific loss was proximately caused by a defendant’s misrepresentations, the plaintiffs in the Comverse case could not recover any losses they had incurred before Comverse’s conduct was disclosed. Specifically, losses incurred prior to the curative disclosure cannot be considered in the recoverable losses calculation that courts engage in when selecting a lead plaintiff.
In making this determination, Judge Garaufis rejected the argument that loss causation was a factual issue that should not be considered at the pre-discovery stage. Judge Garaufis reasoned that "where (as here) it is clear from the face of the pleading that most of P & P’s losses were suffered before any alleged corrective disclosure, the Court would be abdicating its responsibility under the PSLRA if it were to ignore that issue."
It may be true, as Judge Garaufis states, that his ruling is a logical extension of Dura’s requirements, but this consequence of the Dura decision was not immediately apparent when the Dura case first came down. After all, Dura involved a motion to dismiss; it did not involve a lead plaintiff motion.
Judge Garaufis’s ruling is also somewhat unexpected for its conclusion that courts must in effect reach some factual conclusions about a prospective lead plaintiff’s recoverable losses, and exclude losses that are not recoverable in calculating the plaintiff’s financial interest. In the Pomerantz Hudek law firm’s press release announcing its selection as lead counsel (here), Patrick Dahlstrom, one of the lawyers for the Menorah Group, is quoted as saying that the decision "reinforces the growing recognition that Courts must conduct such analysis of the facts…and eliminate those losses that are clearly not recoverable, in determining which movant has the largest financial interest."
The determination of allowable losses is not the only pre-discovery factual determination that courts have decided they are required to make under the PSLRA. As The D & O Diary noted (here) in its discussion of the Tellabs case now pending before the U. S. Supreme Court, many courts have also decided they must weigh alternative inferences, in order to determine whether a plaintiff’s complaint meets the PSLRA’s heightened pleading standard. The evolving case law under the PSLRA seems to be moving toward a series of successive early stage factual determinations, all pre-discovery and based on the pleadings alone. Whether or not these determinations are required under the PSLRA, there is a certain cart-before-the-horse feel to these procedures. There is something uncomfortable (for me at least) about a court determining at the earliest stages of a case and without evidence that a plaintiff’s losses are not recoverable and must be excluded. (On the other hand, it is pretty hard for P & P to argue that they have the most significant financial interest in the outcome if on a net basis they didn't even lose any money on their investment. )
A March 6, 2007 Law.com article entitled discussing the lead counsel decision in the Comverse Technology case can be found here.
More Bad News for the Lerach Coughlin Firm: The Lerach Coughlin firm’s removal from as lead counsel in the Comverse case is the firm’s second high profile removal as lead counsel in a matter of days. On February 27, 2007, Judge Barbara Lynn of Dallas granted the request of the lead plaintiff in the Halliburton securities lawsuit to replace the Lerach Coughlin firm with the Boies, Schiller firm. (The D & O Diary’s earlier post on the Halliburton lead plaintiff’s motion can be found here.) Judge Lynn also removed that Scott & Scott firm as co-lead counsel. The lead plaintiff had sought to remove the Lerach Coughlin firm because its relationship with the firm "deteriorated" after the criminal indictment of the Milberg Weiss law firm. (The Lerach Coughlin firm split off from the Milberg Weiss firm in 2004.) The Lerach Couglin law firm’s removal as lead counsel in the Halliburton case is discussed in greater detail on the Legal Pad blog, here.
But Not All the New is Bad: On the other hand, not all the news for the Lerach Coughlin firm these days is bad. For example, the firm is lead counsel in the securities lawsuit pending against First BanCorp and several of its directors and officers. On March 5, 2007, First BanCorp. announced (here) that it had settled the case for $74,250,000. The lead plaintiff in the case is the Plumbers & Pipefitters Local 51 Pension Fund (the Lerach Coughlin firm seems to be on good relationships with the organizations for plumbers and pipefitters). The Securities Litigation Watch blog has a detailed post about the First BanCorp. settlement here.
And the Lerach Coughlin firm also represented the University of California in its opt-out action against the Time Warner defendants. As The D & O Diary previously noted (here), on February 28, 2007, the University of California announced (here) that it had settled the opt-out action for $246 million. The University also announced that Lerach Coughlin firm’s fee was approximately $37 million.
As the WSJ.com Law Blog noted (here) about these developments, for the Lerach Coughlin firm, it has been "the best of times, the worst of times."
One Final Note: As described above, the Menorah Group, selected to serve as lead counsel in the Comverse Technology case, includes the Menorah Insurance Company, Ltd. This may be one more example that Adam Savett of the Securities Litigation Watch blog can add to his list (here) of cases where private institutional investors (like, for example, insurance companies) have served as lead plaintiff in a securities class action lawsuit under the PSLRA.
Judge Nicholas Garaufis had referred the lead counsel motions to the Magistrate Judge Ramon Reyes. Reyes selected the Plumbers and Pipefitters National Pension Fund ("P & P"), represented by the Lerach Coughlin firm, as lead plaintiff. Plaintiffs The Menorah Insurance Co. Ltd. and Mivtachim Pension Funds Ltd. (together, the "Menorah Group") represented by the Pomerantz Haudek Block Grossman & Gross law firm, objected to the Magistrate Judge’s ruling and appealed to the district court.
Reyes had found that P & P had purchased 534,471 shares that resulted in losses of approximately $2.9 million, exceeding the Menorah Group’s claimed loss of $343,242 on its 172,000 shares. Because Reyes determined that P & P had the greatest financial interest in the outcome of the case, he selected P & P as lead plaintiff.
The Menorah Group based its objection on the fact that most of P & P’s losses resulted from "in and out transactions," in that both the purchase and the sale of the shares took place before the alleged misrepresentations were disclosed. The Menorah Group argued that if the "in and out" shares were excluded, P & P did not suffer a $2.9 million loss, but instead actually realized a $132,722 gain. Judge Garaufis agreed, vacated the Magistrate Judge’s ruling, and appointed the Menorah Group as lead plaintiff.
Judge Garaufis based his ruling on the Supreme Court’s holding in Dura. He reasoned that because Dura provided that plaintiffs in a fraud-on-the-market securities case can recover only if a specific loss was proximately caused by a defendant’s misrepresentations, the plaintiffs in the Comverse case could not recover any losses they had incurred before Comverse’s conduct was disclosed. Specifically, losses incurred prior to the curative disclosure cannot be considered in the recoverable losses calculation that courts engage in when selecting a lead plaintiff.
In making this determination, Judge Garaufis rejected the argument that loss causation was a factual issue that should not be considered at the pre-discovery stage. Judge Garaufis reasoned that "where (as here) it is clear from the face of the pleading that most of P & P’s losses were suffered before any alleged corrective disclosure, the Court would be abdicating its responsibility under the PSLRA if it were to ignore that issue."
It may be true, as Judge Garaufis states, that his ruling is a logical extension of Dura’s requirements, but this consequence of the Dura decision was not immediately apparent when the Dura case first came down. After all, Dura involved a motion to dismiss; it did not involve a lead plaintiff motion.
Judge Garaufis’s ruling is also somewhat unexpected for its conclusion that courts must in effect reach some factual conclusions about a prospective lead plaintiff’s recoverable losses, and exclude losses that are not recoverable in calculating the plaintiff’s financial interest. In the Pomerantz Hudek law firm’s press release announcing its selection as lead counsel (here), Patrick Dahlstrom, one of the lawyers for the Menorah Group, is quoted as saying that the decision "reinforces the growing recognition that Courts must conduct such analysis of the facts…and eliminate those losses that are clearly not recoverable, in determining which movant has the largest financial interest."
The determination of allowable losses is not the only pre-discovery factual determination that courts have decided they are required to make under the PSLRA. As The D & O Diary noted (here) in its discussion of the Tellabs case now pending before the U. S. Supreme Court, many courts have also decided they must weigh alternative inferences, in order to determine whether a plaintiff’s complaint meets the PSLRA’s heightened pleading standard. The evolving case law under the PSLRA seems to be moving toward a series of successive early stage factual determinations, all pre-discovery and based on the pleadings alone. Whether or not these determinations are required under the PSLRA, there is a certain cart-before-the-horse feel to these procedures. There is something uncomfortable (for me at least) about a court determining at the earliest stages of a case and without evidence that a plaintiff’s losses are not recoverable and must be excluded. (On the other hand, it is pretty hard for P & P to argue that they have the most significant financial interest in the outcome if on a net basis they didn't even lose any money on their investment. )
A March 6, 2007 Law.com article entitled discussing the lead counsel decision in the Comverse Technology case can be found here.
More Bad News for the Lerach Coughlin Firm: The Lerach Coughlin firm’s removal from as lead counsel in the Comverse case is the firm’s second high profile removal as lead counsel in a matter of days. On February 27, 2007, Judge Barbara Lynn of Dallas granted the request of the lead plaintiff in the Halliburton securities lawsuit to replace the Lerach Coughlin firm with the Boies, Schiller firm. (The D & O Diary’s earlier post on the Halliburton lead plaintiff’s motion can be found here.) Judge Lynn also removed that Scott & Scott firm as co-lead counsel. The lead plaintiff had sought to remove the Lerach Coughlin firm because its relationship with the firm "deteriorated" after the criminal indictment of the Milberg Weiss law firm. (The Lerach Coughlin firm split off from the Milberg Weiss firm in 2004.) The Lerach Couglin law firm’s removal as lead counsel in the Halliburton case is discussed in greater detail on the Legal Pad blog, here.
But Not All the New is Bad: On the other hand, not all the news for the Lerach Coughlin firm these days is bad. For example, the firm is lead counsel in the securities lawsuit pending against First BanCorp and several of its directors and officers. On March 5, 2007, First BanCorp. announced (here) that it had settled the case for $74,250,000. The lead plaintiff in the case is the Plumbers & Pipefitters Local 51 Pension Fund (the Lerach Coughlin firm seems to be on good relationships with the organizations for plumbers and pipefitters). The Securities Litigation Watch blog has a detailed post about the First BanCorp. settlement here.
And the Lerach Coughlin firm also represented the University of California in its opt-out action against the Time Warner defendants. As The D & O Diary previously noted (here), on February 28, 2007, the University of California announced (here) that it had settled the opt-out action for $246 million. The University also announced that Lerach Coughlin firm’s fee was approximately $37 million.
As the WSJ.com Law Blog noted (here) about these developments, for the Lerach Coughlin firm, it has been "the best of times, the worst of times."
One Final Note: As described above, the Menorah Group, selected to serve as lead counsel in the Comverse Technology case, includes the Menorah Insurance Company, Ltd. This may be one more example that Adam Savett of the Securities Litigation Watch blog can add to his list (here) of cases where private institutional investors (like, for example, insurance companies) have served as lead plaintiff in a securities class action lawsuit under the PSLRA.
posted by Kevin LaCroix at 9:56 PM
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