Opinion
Civil Action 01-949, Section "T"(5)
December 17, 2001
Before the Court is a Motion for Appointment of Lead Plaintiff and Approval of Selection of Co-Lead Counsel Pursuant to the Federal Securities Laws filed on behalf of the plaintiffs, Delmer Nimz, Thomas and Katherine Kowsky, First Unitarian Church of Baltimore, Dave Grage, and Richard Beltzhoover, Trustee of the Insulation Representatives Inc. Profit Sharing Plan (hereinafter collectively, the "Kowsky Group"). The parties waived oral argument and the matter was submitted for the Court's consideration on the briefs alone August 1, 2001. The Court, having considered the arguments of counsel, the evidence presented, the law and applicable jurisprudence, is fully advised in the premises and ready to rule.
ORDER AND REASONS
I. Background:
There are four consolidated securities fraud class action suits which form the basis for this case. The plaintiffs in each of these actions allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 on behalf of all persons who purchased or otherwise acquired the securities of Orthodontic Centers of America, Inc. ("OCA") during the period of April 27, 2000 through and including March 9, 2001 (the "Class Period"). Plaintiffs contend that defendants engaged in a scheme and course of conduct in which they artificially inflated the price of OCA stock through a series of false and misleading statements and omissions concerning the Company's financial condition and results of operations. Particularly, it is contended that defendants knowingly or recklessly overstated the Company's financial condition through the improper recognition of revenue by "front-loading," which was not in conformity with Generally Accepted Accounting Principles ("GAAP").
II. Private Securities Litigation Reform Act of 1995 ("PSLRA"):
A. Defendants Standing to Object:
In this case, the defendants have opposed the motion of this group of plaintiffs to be appointed lead plaintiffs. The plaintiffs however argue that the defendants do not have standing to object to their appointment as lead plaintiffs. As such, this issue must first be addressed before getting to the merits of the motion. Plaintiffs submit that the PSLRA vests the selection of lead plaintiff in securities class actions with the plaintiffs and the Court. Defendants however argue that it is incumbent upon them to ensure that the requirements of the Act are satisfied.
Defendants cite two Northern District of California cases in support of their argument that it has standing to object to the present motion. InHoward Gunty Profit Sharing v. Quantum Corp., Civ. No. 96-20711 SW, slip op. (N.D.Cal. Feb. 6, 1997), the Court found that the defendants had limited standing whereby they were allowed to point out the deficiencies relevant to the Court's application of the rebuttable presumption for the "most adequate plaintiff." The Court stated that normally there would be competing groups of plaintiffs seeking the lead plaintiff designation, but in cases where there is no other potential lead plaintiff to challenge a moving party,
the Court must rely on the defendants to insure that the requirements of §§ 78u4 (a)(3)(B)(ii)(I)(aa),(bb), and (cc) are satisfied. Once the court adopts the rebuttable presumption, then the statute makes clear that defendants no longer have standing to object to the appointment of lead counsel.Id. Likewise, in In re: Read-Rite Corp. Securities Litigation, No. C-97-20059 RMW, slip op. (N.D.Cal. May 28, 1997), the Court found that the defendants could facially challenge whether the most adequate presumption should be adopted by the Court.
The plaintiffs however have cited our brethren in the Northern District of Texas for the proposition that only potential plaintiffs may be heard regarding appointment of a lead plaintiff. (Gluck v. Cellstar Corp., 976 F. Supp. 542 (N.D.Tex. 1997). In that case, the defendants argued that the record was insufficient for the Court to determine the most adequate plaintiff and sought discovery on the satisfaction of the Rule 23 requirements. The Court held that the Rule 23 arguments could be raised at the class certification stage and that to allow a full evidentiary hearing at the lead plaintiff stage of the proceedings would only result in unnecessary expense and a waste of judicial resources.Gluck, 976 F. Supp. at 550. Moreover, in Netsky v. Capstead Mortgage Corp. 2000 WL 964935 (N.D.Tex. 2000), the Court opined that the defendants lacked standing to oppose a motion for the appointment of lead plaintiff, but retained the right to challenge the Rule 23 requirements at the class certification stage. The Netsky case however is distinguishable from the case herein based upon the fact that in this case there are no competing motions for appointment as lead plaintiff, whereas in Netsky, there were several groups competing for the designation as lead plaintiff.
While not ruling on the issue of standing, the Court in In re: the First Union Corp., Sec. Litig., 2000 U.S.Dist. LEXIS 2267 (W.D.N.C. Jan. 28, 2000) determined that there was nothing in the Reform Act which would prevent the Court from considering the arguments raised by the defendants, especially in that case where there was no adversarial presentation of the issue. The Court finds said case persuasive in the situation presented herein. As such, the Court will consider the arguments asserted by the defendants as there are no competing claims to ensure compliance with the Act by other plaintiffs. The Court however will limit its consideration to the arguments relative to the application of the presumption. Thereafter, defendants may assert whatever arguments deemed appropriate at the class certification stage of the proceedings. In this way, the Court can effectuate Congress' intent to provide for a speedy lead plaintiff determination.
B. Notice Requirement for Selection of Lead Plaintiff:
The procedure for the selection of a lead plaintiff to oversee class actions brought under the Federal securities laws is set forth in Section 21D(a)(3)(A)(i) which provides that within twenty (20) days after the date on which a class action is filed:
the plaintiff or plaintiffs shall cause to be published, in a widely circulated national business-oriented publication or wire service, a notice advising members of the purported plaintiff class-
(I) of the pendency of the action, the claims asserted therein, and the purported class period; and,
(II) 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.15 U.S.C. § 78u-4 (a)(3)(A)(i).
The Kowsky Group published the required notice on April 20, 2001, on the Business Wire, which is a widely circulated national business-oriented wire service, in connection with the filing of the complaint in the Bay action April 9, 2001. See, Netsky, supra. As such, the notice was published within twenty days of filing the initial action. The present motion was filed on June 19, 2001, which was therefore filed within 60 days of the publication of the notice, as required by 15 U.S.C. § 78u-4 (a)(3)(A)(i). Accordingly, the Kowsky Group has fulfilled the procedural requirement set forth in the PSLRA.
Defendants have argued that the notice published was fatally defective because it failed to provide sufficient detail for an interested class member to make an informed decision as to whether he should seek appointment as lead plaintiff. Specifically, defendants argue the notice failed to disclose the caption of the case, the docket number, the Court's address, and judge to whom it is assigned. Additionally, the notice failed to disclose the possibility of intra-class conflicts, which defendants contend is of particular importance in this case due to the considerable increase in OCA's stock price in the ninety (90) days following the March 16, 2001, restatement. Defendants further contend the notice issued herein was merely an advertising tool for counsel to recruit clients.
This Court has reviewed the notice published and find it to be in compliance with the Act. The notice advises of the purported class, the pendency of the action, the claims asserted, and the purported class period. Additionally, the notice not only advises that a member may move to serve as lead plaintiff, but also explains what a lead plaintiff is, and provides the specific date in which such a motion must be filed. The notice further states that any questions, concerning the notice, rights or interests with respect to this matter, maybe directed to the law firm of Wechsler, Harwood, Halebian, Feffer. The Court finds this to be in complete compliance with the Act, and in no way merely serves as advertisement for counsel. The additional information defendants suggest should have been included are not required by the law and jurisprudence. As such, the Kowsky Group has satisfied the notice requirement.
C. Presumption of Most Adequate Plaintiff:
The Court is to appoint the "most adequate plaintiff" to serve as the lead plaintiff. In making this determination, a presumption is applied where that plaintiff is a "person or group of persons" that:
(aa) has either filed the complaint or made a motion in response to a notice . . .;
(bb) in the determination of the court, 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.15 U.S.C. § 78u-4 (a)(3)(B)(iii)(I).
The Kowsky Group has moved for appointment as lead plaintiff in a timely fashion. The motion was filed within the 60 day period following publication of notice of the pendency of the action over Business Wire, satisfying the fast prong of the "most adequate plaintiff" test. Next, the Kowsky Group submits that it has the largest financial interest. 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: (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. See, Netsky, supra. The Kowsky Group purchased more than 8,530 shares of OCA common stock during the Class Period and suffered damages estimated at approximately $45,808.01. There has been no evidence presented that the Kowsky Group does not have the largest financial interest in the relief sought; therefore, the second prong has likewise been met.
Finally, it is the finding of this Court that the Kowsky Group satisfies the requirements of Rule 23 of the Federal Rules of Civil Procedure. In deciding a lead plaintiff motion, only a preliminary showing is required that Rule 23's requirements of typicality and adequacy are satisfied. See Gluck v. CellStar Corp., supra. Typicality is satisfied when "the claims or defenses of the representative parties are typical of the claims or defenses of the class." Tarica v. McDermott International, Inc., 2000 WL 377817 (E.D.La.). The test "focuses on the similarity between the named plaintiffs' legal and remedial theories and the theories of those whom they purport to represent." Id. citing Mullen v. Treasure Chest Casino, LLC, 186 F.3d 620, 625 (5th Cir. 1999). In this case, typicality exists as movants, like other class members, purchased shares of OCA during the Class Period at inflated prices and were damaged thereby. Since the claims of the Kowsky Group and the claims of other class members arise out of the same course of events, typicality is satisfied.
Rule 23(a) provides that a party may serve as a class representative if the following four requirements are satisfied: (1) the class is so numerous that joinder of all members is impracticable, (2) there are questions of law or fact common to the class, (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class, and (4) the representative parties will fairly and adequately protect the interests of the class.
Adequacy is met where (1) the lead plaintiffs claims are not antagonistic to or conflict with those of other class members; (2) lead plaintiffs have a sufficient interest in the outcome of the case to ensure vigorous advocacy; and (3) lead plaintiffs must be represented by attorneys who are competent, experienced, qualified, and generally able to conduct the litigation vigorously. Lax v. First Merchants Acceptance Corp., 1997 WL 461036 (N.D.Ill. 1997). Having considered these factors, the Court finds that the Kowsky Group is an adequate representative of the class. The interests of the Kowsky Group are aligned with the other members of the class, the claims share numerous common questions of law and fact, and the claims of the Kowsky Group are typical of the claims of other class members. As such, a prima facie showing of typicality and adequacy have been established and thus the Kowsky Group has satisfied the requirements of Rule 23 at this stage of the proceedings.
The defendants contend that the Kowsky Group comprised of four unrelated individuals and a church contravene the purpose of the PSLRA lead plaintiff requirement, arguing that "Congress hoped that the lead plaintiff would seek the lawyers, rather than having the lawyers seek the lead plaintiff" In re Donnkenny Inc. Sec. Litig., 171 F.R.D. 156 (S.D.N.Y. 1997). Defendants further submit that courts have recognized that it is difficult for multiple unrelated plaintiffs to effectively communicate with each other and make decisions regarding the prosecution of the case. See, In re Telxon Corp. Sec. Litig., 67 F. Supp.2d 803, 812-13 (N.D.Ohio 1999). Furthermore, our jurisprudence has found that when there are multiple plaintiffs involved, it is unlikely that any individual will monitor the attorneys, especially in cases, like this one, where multiple law firms seek to jointly represent the class. Id. Moreover, in In it Network Assoc., Inc. Sec. Litig., 76 F. Supp.2d 1017 (N.D.Cal. 1999), the court stated that a "group" should be appointed lead plaintiff only if it can provide effective control of the litigation, and that an aggregated group of unrelated investors would not satisfy that requirement.
The Court does not find merit to these arguments in the present case. While the group of plaintiffs in this case have no pre-existing relationship, there is no such requirement mandated by the Act.
[T]he Act provides that the court shall appoint as lead plaintiff "the member or members of the purported plaintiff class" that the court determines to be the most adequate plaintiff, which is the "person or group of persons" who meets certain requirements." It does not, as defendants argue, limit the most adequate plaintiff to a group of persons who jointly purchase stock or to including, along with the largest financial interest holder, another class member who offers attributes that would contribute to optimal management of the litigation. Nor does it limit lead plaintiff to an institutional investor.In re Read-Rite Corp. Securities Litig., supra. In this case, it should be noted that none of the purported class members have challenged the Kowsky Group's qualifications to serve as Lead Plaintiffs. Additionally, in appointing four plaintiffs as lead plaintiff in Tarica v. McDermott International, Inc., the Court stated,
that several courts have approved the appointment of more than one lead plaintiff in large securities class actions. See, e.g., Greebel, 939 F. Supp. at 64; In re Oxford, 182 F.R.D. at 46, 49 (noting that appointment of multiple lead plaintiffs provides the proposed class with benefits of joint decision-making and funding, is consistent with the language and purpose of the PSLRA, and allows plaintiffs as a group to wield more control over counsel).Tarica, 2000 WL 377817 *5. It is the finding of this Court that the discrete size of the Kowsky Group is small enough to ensure manageability, yet diverse enough to prevent exposure of the class to disruption at a later point in the litigation. Accordingly, this Court believes that this select group of seven investors with significant holdings who have suffered significant losses will satisfy the statutory goal of the PSLRA. Therefore, the Kowsky Group has shown its entitlement to the presumption of "most adequate plaintiff" to serve as lead plaintiff.
D. Motion for Lead Counsel
The PSLRA provides that the lead plaintiff is to select and retain, subject to the Court's approval, counsel to represent the Class. 15 U.S.C. § 78u-4 (a)(3)(B)(v). The Kowsky Group has selected the law firms of Wechsler, Harwood, Halebian Feffer, L.L.P. and Faruqi Faruqi, L.L.P. as co-lead counsel for the Class. The Court has reviewed the resumes of said firms and find that the firms chosen have extensive experience in successfully handling complex securities actions and that they possess the competence, qualifications, and experience necessary to represent the interests of the plaintiff class herein. The Kowsky Group also seeks appointment of Odom DesRoches, L.L.P. as liaison counsel for plaintiffs and the Class. The Court has likewise reviewed the firm resume of Odom DesRoches, L.L.P., finding it to be experienced in complex litigation. The Court therefore approves the selection of said firms to serve as counsel in this action provided that there will be no duplication of attorneys' services and that the use of co-lead counsel will not in any way increase the fees and expenses. See, Tarica v. McDermott International, supra; Lax v. First Merchants Acceptance Corp., supra; In re: Donnkenny, supra.
Accordingly,
IT IS ORDERED that the Motion for Appointment of Lead Plaintiff filed on behalf of the Kowsky Group, namely, Delmer Nimz, Thomas and Katherine Kowsky, First Unitarian Church of Baltimore, Dave Grage, and Richard Beltzhoover, Trustee of the Insulation Representatives Inc. Profit Sharing Plan, be, and the same is hereby GRANTED.
IT IS FURTHER ORDERED that the Motion for Approval of Selection of Co-Lead Counsel and Liaison Counsel filed on behalf of the Kowsky Group be, and the same is hereby GRANTED.