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disaggregating a group of individual investors citing “a real threat of lawyer-driven litigation”
Summary of this case from Baxter v. MongoDB, Inc.Opinion
11 Civ. 5794 (PAC) 11 Civ. 5795 (PAC) 11 Civ. 6030 (PAC)
02-15-2012
MARK BECKMAN, Individually and on Behalf of All Others Similarly Situated, Plaintiff, v. ENER1, INC., CHARLES GASSENHEIMER, JEFFREY SEIDEL, ROBERT R. KAMISHKE, AND KENNETH BAKER, Defendants. RAYMOND NEUFELD, Individually and on Behalf of All Others Similarly Situated, Plaintiff, v. ENER1, INC., CHARLES GASSENHEIMER, JEFFREY SEIDEL, ROBERT R. KAMISHKE, AND KENNETH BAKER, Defendants. C. BICKLEY FOSTER, On Behalf of Herself and All Others Similarly Situated, Plaintiff, v. ENER1, INC., CHARLES GASSENHEIMER, JEFFREY SEIDEL, ROBERT R. KAMISHKE, AND KENNETH BAKER, Defendants.
MEMORANDUM AND ORDER Re: Securities Litigation :
Purchasers of Ener1, Inc. common stock have filed three class actions, alleging that Ener1 and four of its present and former officers and directors violated the Securities Exchange Act of 1934 by knowingly and/or recklessly disseminating false and misleading information regarding Ener1's accounting policies and overall financial condition. Specifically, the class actions allege that the defendants failed to disclose that Think Holding, AS, a company in which Ener1 was heavily invested, was suffering from significant capital issues. The market price of Ener1's common stock was thus inflated from January 10, 2011 through August 15, 2011, the class period. On May 10, 2011, Ener1 reported a $73.3 million loss relating to its investment in Thing Holdings, AS. On August 16, 2011, Ener1 disclosed that the company's financial statements for the year ended December 31, 2010 and the first quarter 2011 should not be relied upon and had to be re-stated.
On August 18, 2011, two of the above captioned class actions were filed; the third was filed on August 26, 2011. On October 17, 2011, three groups of plaintiffs moved for: (1) consolidation of the three class actions; (2) appointment as lead plaintiff; and (3) approval of lead plaintiff's selection of counsel.
I. Consolidation
The Private Securities Litigation Reform Act ("PSLRA") provides that if there is more than one action on behalf of a class with the same claim (as here), the Court should decide the motion to consolidate first. 15 U.S.C. § 78 U-4(a)(3)(B)(ii). All parties agree that these actions, which are based on almost identical allegations, involve common questions of law and fact, and should be consolidated pursuant to Fed R. Civ. P. 42(a)(2). Accordingly, the Court consolidates the three class actions.
II. Appointment of Lead Plaintiffs
Next, the Court must consider who is the "most adequate plaintiff" to be appointed "as lead plaintiff for the consolidated action." 15 U.S.C. § 78 U-4(a)(3)(B)(ii). One of the principal legislative purposes of the PSLRA was to replace lawyer-driven litigation with client-driven litigation. Thus, "the primary focus must always be, not on the selection of counsel, but on the selection of lead plaintiff." In re: Razorfish, Inc. Sec. Litig., 143 F. Supp. 2d 304, 308, 311 (S.D.N.Y. 2001).
The "most adequate plaintiff" is the "member or members of the purported plaintiff class that the Court determines to be most capable of adequately representing the interests of the class." 15 U.S.C. § 78 U-4 (a)(3)(B)(i). The PSLRA instructs the Court to presume 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 a notice under subparagraph (A)(i);15 U.S.C. § 78 U-4 (a)(3)(B)(iii).
(bb) in the determination of the Court who 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.
While the PSLRA expressly permits "groups" of persons to be appointed lead plaintiff, there is a lack of unanimity on whether an aggregation of unrelated investors is a suitable "group" for this purpose. Compare In re Donnkenny Inc. Sec. Litig.,171 F.R.D. 156, 157 (S.D.N.Y. 1997) ("To allow an aggregation of unrelated plaintiffs to serve as lead plaintiffs defeats the purpose of choosing a lead plaintiff."), with Weltz v. Lee,199 F.R.D. 129, 132-33 (S.D.N.Y. 2001) (noting that some courts "have permitted the aggregation of claims for the purposes of becoming lead plaintiff"). There is a danger that "allow[ing] lawyers to designate unrelated plaintiffs as a 'group' and aggregate their financial stakes would allow and encourage lawyers to direct the litigation," which vitiates the PSLRA's attempt to prevent lawyer-driven litigation. In re Donnkenny, 171 F.R.D. at 157-58. Courts thus tend to "permit[ ] unrelated investors to join together as a group . . . only on a case-by-case basis, if such a grouping would best serve the class." Vaghese v. China Shenghuo Pharm. Holdings, Inc., 589 F. Supp. 2d 388, 392 (S.D.N.Y. 2008).
Three groups contend for lead plaintiff status here. In addition to the three factors set out in 15 U.S.C. § 78 U-4 (a)(3)(B)(iii), the Court must also consider the composition of each group. Where the group is made up of unrelated individuals, as two of these groups are, the Court will decide whether the group is appropriate. The three groups are:
• The "Morris Group," consisting of husband and wife Junie L. Morris and Lisa G. Morris, which seeks to appoint Federman & Sherwood as lead counsel. (See Dkt. No. 10.)
• The "Hasson Group," consisting of Samuel Hasson, R. Marie Rauter, and Eric Selten, which seeks to appoint Faruqi & Faruqi, LLP as lead counsel. (See Dkt. No. 13.)
• The "Patel Group," consisting of Linda Carelle, Devang Patel, Jiten Patel, Juan Andres Botero R., and Henry Lima, which seeks to appoint Kaplan Fox & Kilsheimer LLP, Pomerantz Haudek Grossman & Gross LLP, and Glancy Binkow & Goldberg LLP as co-lead counsel. (See Dkt. No. 17.)
All docket references are to the 11 Civ. 5794 matter.
Two groups called themselves the "Ener1 Investors Group." (See Dkt. Nos. 13, 17.) One group has subsequently re-named itself the "Patel Group." For the sake of clarity, the Court refers to the remaining "Ener1 Investor Group" as the "Hasson Group."
Each group has filed a timely motion in response to notice, and therefore satisfies the first factor. Accordingly, the Court turns to the second factor, and considers which group has the "largest financial interest." Neither the PSLRA, nor the Second Circuit, declares how to calculate the largest financial interest. Courts in this District tend to rely on the Lax/Olsten factors, derived from Lax v. First Merchant Acceptance Corp., 1997 U.S. Dist. LEXIS 11866 (N.D. Ill., August 11, 1997) and In re Olsten Corp. Sec Litig., 3 F. Supp. 2d 286, 295 (E.D.N.Y. 1998). The four Lax/Olsten factors are:
(1) the total number of shares purchased during the class period;Kaplan v. Gelfond, 240 F.R.D. 88, 93 (S.D.N.Y.2007) (citations omitted). The fourth factor, the financial loss, is usually accorded the greatest weight. See id. How loss is calculated, however, varies depending on whether the FIFO or LIFO accounting method is chosen. Courts in this District have a very strong preference for the LIFO method in calculating loss.
(2) the net shares purchased during the class period (in other words, the difference between the number of shares purchased and the number of shares sold during the class period);
(3) the net funds expended during the class period (in other words, the difference between the amount spent to purchase shares and the amount received for the sale of shares during the class period); and
(4) the approximate losses suffered.
With this framework in mind, the Court turns to the three contending groups. There is no dispute that the Patel Group collectively purchased and held more shares, spent more money, and lost more money (under either a FIFO or LIFO analysis) than any other group; and that Junie Morris, of the Morris Group, individually suffered greater losses (under either a FIFO or LIFO analysis) than any other individual. The Hasson Group—both as a group, and as individual members—had purchased less shares, spent less funds, and suffered significantly less losses than any other group or, as individuals, any other individual. Accordingly, the Hasson Group (either as a group or individual members) does not have the largest financial interest and its application for lead plaintiff status is denied.
The Morris Group argues that the Patel Group is an un-related, lawyer-driven aggregation that runs afoul of PSLRA's purpose, and thus should not be recognized as a "group" by this Court. The Patel Group disputes this characterization; it claims that it is a small, five-person, cohesive group that is committed to prosecuting this action together. As proof, they assert that they participated in a single conference call with counsel to discuss joint prosecution. They do not specify who organized the call; how long it lasted; who put the group together; or make any suggestion of coherence or togetherness other than the single phone conference of unspecified duration.
While courts have, in certain cases, appointed a small group of unrelated individuals as lead plaintiff, the fact that an unrelated group is small does not, in and of itself, make it a more acceptable lead plaintiff than a competing cohesive group. See Vaghese, 589 F. Supp. 2d at 393-94 (rejecting conclusory assertion that because proposed group of four unrelated individual plaintiffs is "small and cohesive [ ] that coordinated decision making should not present any difficulties," and ultimately considering members of the group on an individual basis); Freudenberg v. E*Trade Fin. Corp., No. 07 Civ. 8538(RWS), 2008 U.S. Dist. LEXIS 62767, at *11-12 (S.D.N.Y. July 16, 2008) ("A group consisting of persons that have no pre-litigation relationship may be acceptable as a lead plaintiff candidate so long as the group is relatively small and therefore presumptively cohesive. . . . A group consisting of persons with a pre-litigation relationship [, however,] is more likely to be appointed lead plaintiff, on the logic that a more cohesive group is more likely to function smoothly.") Likewise, the fact that Devang and Jiten Patel are brothers does not change the fact that the "group as a whole shares only this lawsuit in common." Goldberger v. Pyre Grp., Ltd., No. 06 Civ. 3410 (KMK), 2007 WL 980417, at *5 (S.D.N.Y. Mar. 30, 2007) (holding that a group that shares only the lawsuit in common is "an inferior lead plaintiff" to an individual, even though "some of the group's members are . . . married"). While the Patel Group notes that it held one joint conference call, and each member signed a certification, it does not explain how the group was formed, and whether its members, excluding the Patel brothers, previously worked together. The fact that the Patel Group could not work together to pick a single lead counsel and instead urge the Court to approve three different firms as co-lead counsel for this relatively straight forward matter demonstrates a lack of cohesion. It also strongly suggests who is really in charge. It is more likely than not that the Patel Group is "simply an artifice cobbled together by cooperating counsel for the obvious purpose of creating a large enough grouping of investors to qualify as 'lead plaintiff', which can then select the equally artificial grouping of [three law firms] as '[co-]lead counsel . . . ." In re: Razorfish, 143 F. Supp. 2d at 308-09.
The Court perceives there to be a real threat of lawyer-driven litigation with the Patel Group, and therefore rejects the aggregation of Patel Group members for lead plaintiff status. The Court will disaggregate the Patel Group and consider Juan Andres Botero R., Linda Carelle, and Henry Lima, as individual contenders for lead plaintiff; further the Court will consider Devang and Jiten Patel, and the Morris Group, as groups for lead plaintiff, since both groups, which are composed solely of family members, present none of the concerns addressed above.
These contenders compare as follows:
| Movant | SharesPurchased | FundsExpended | SharesRetained | |
|---|---|---|---|---|
| Morris Group | 40,000 | $178,986 | 40,000 | $166,698 |
| Juan Andres Botero R. | 18,115 | $98,725 | 18,115 | $93,160 |
| Linda Carelle | 36,000 | $112,960 | 35,500 | $100,259 |
| Henry Lima | 92,865 | $93,679 | 92,865 | $65,151 |
| Devang & Jiten Patel | 71,545 | $209,453 | 44,837 | $79, 345 |
The Patel Group's calculations of each party's losses differ slightly from the Morris Group's calculations. The difference apparently results from a one-day discrepancy in the time period to calculate the losses. (See Morris Reply at 9 n.2 (Dkt. No. 22).) The difference, however, is insignificant for purposes of the Court's analysis. To be consistent, the Court lists only the Patel Group's calculation of losses. --------
Accordingly, the Court finds that the Morris Group has the largest financial interest in the class action litigation, and thus, is the presumptive lead plaintiff.
III. Rule 23 Requirements
The presumptive lead plaintiff must also satisfy the requirements under Federal Rule of Civil Procedure 23. 15 U.S.C. § 77z-1(a)(3)(B)(iii)(I)(cc). At this stage in the litigation, one need only make a "preliminary showing" that Rule 23's typicality and adequacy requirements have been satisfied. The most adequate plaintiff presumption "may be rebutted only 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. § 77z-1(a)(B)(iii)(II).
The typicality requirement is met here because the Morris Group's "claims and injuries arise from the same conduct from which the other class members' claims and injuries arise." In re Oxford Health Plans, Inc. Sec. Litig.,182 F.R.D. 42, 49-50 (S.D.N.Y. 1998).
The adequacy requirement is satisfied if "(1) the class counsel is qualified, experienced, and generally able to conduct the litigation; (2) the interests of the class members are not antagonistic to one another; and (3) the lead plaintiff has a sufficient interest in the outcome to ensure vigorous advocacy." In re Olsten Corp. Sec. Litig., 3 F. Supp. 2d at 296. The Morris Group also satisfies the adequacy requirement: its proposed counsel, Federman & Sherwood, is qualified and experienced in class action litigation; the Morris Group has no conflicts of interest with other class members; and the Morris Group's losses provide it with a sufficient interest in the outcome to ensure vigorous advocacy.
IV. Lead Counsel
Under the PSLRA, the lead plaintiff shall select counsel to represent the class, subject to the Court's approval. The Morris Group has selected Federman & Sherwood as lead counsel for the class. As mentioned previously, the firm has substantial experience litigating securities class actions, and is well qualified.
CONCLUSION
I. Consolidation
The Clerk of the Court is ORDERED, pursuant to Fed. R. Civ. P. 42(a), to consolidate: 11 Civ. 5794, 11 Civ. 5795, and 11 Civ. 6030. These actions are consolidated as In re Ener1, Inc. Securities Litigation, Master File No. 1:11-cv-05794 (PAC). After being consolidated, the following cases and any pending motions in these cases shall be terminated: 11 Civ. 5795 and 11 Civ. 6030. Any pending motions in 11 Civ. 5794 shall also be terminated, but the case shall remain open as it has been designated as the master file number.
II. Lead Plaintiff & Lead Counsel
Pursuant to PSLRA, 15 U.S.C. § 78u-4(a)(3)(b) and 78-u-4(a)(3)(B)(v), the Morris Group's motion (Dkt. No. 10 in 11 Civ. 5794) for appointment as lead plaintiff is GRANTED, and its choice of lead counsel is approved. The Clerk of Court is further ORDERED to list the following as lead plaintiff: The Morris Group, consisting of Junie L. Morris and Lisa G. Morris. It is further ORDERED that the Clerk of Court list the law firm of Federman & Sherwood as lead counsel for the class. All other applications for designation as lead counsel and selection of counsel are DENIED.
III. Final Procedures
The parties are directed to meet and confer and to prepare and submit a Civil Case Management Plan with due allowance for time to file an amended class action pleading and to answer, or otherwise respond to, the amended complaint. Dated: New York, New York
February 15, 2012
SO ORDERED
/s/_________
PAUL A. CROTTY
United States District Judge