Opinion
Nos. 15 Civ. 00759(CM) 15 Civ. 00811(CM) 15 Civ. 00991(CM) 15 Civ. 01405(CM).
05-01-2015
Manishkumar KHUNT, Individually and on Behalf of All Others Similarly Situated, Plaintiff, v. ALIBABA GROUP HOLDING LIMITED, Jack Yun Ma, Joseph C. Tsai, Jonathan Zhaoxi Lu and Maggie Wei Wu, Defendants. Devorah Klein, Individually and on Behalf of All Others Similarly Situated, Plaintiff, v. Alibaba Group Holding Limited, Jack Yun Ma, Joseph C. Tsai, Jonathan Zhaoxi Lu and Maggie Wei Wu, Defendants. Claire Rand, Individually and on Behalf of All Others Similarly Situated, Plaintiff, v. Alibaba Group Holding Limited, Jack Yun Ma, Joseph C. Tsai, Jonathan Zhaoxi Lu and Maggie Wei Wu, Defendants. James and Christine Ziolkowski, Individually and on Behalf of All Others Similarly Situated, Plaintiffs, v. Alibaba Group Holding Limited, Jack Yun Ma, Joseph C. Tsai, Jonathan Zhaoxi Lu and Maggie Wei Wu, Defendants.
Mary Katherine Blasy, Samuel Howard Rudman, David Avi Rosenfeld, Robbins Geller Rudman & Dowd LLP, Melville, NY, for Plaintiffs. George S. Wang, Jonathan K. Youngwood, Simpson Thacher & Bartlett LLP, New York, NY, for Defendants.
Mary Katherine Blasy, Samuel Howard Rudman, David Avi Rosenfeld, Robbins Geller Rudman & Dowd LLP, Melville, NY, for Plaintiffs.
George S. Wang, Jonathan K. Youngwood, Simpson Thacher & Bartlett LLP, New York, NY, for Defendants.
MEMORANDUM DECISION AND ORDER CONSOLIDATING CASES, APPOINTING LEAD PLAINTIFF, AND APPOINTING LEAD COUNSEL
McMAHON, District Judge:
In autumn 2014, Defendant Alibaba Group Holding Limited (“Alibaba” or the “Company”), a China-based giant of online commerce, together with certain “selling shareholders,” raised more than $25 billion through an Initial Public Offering (“IPO”). In the early hours of January 28, 2015, various media reported that China's main corporate regulator had released a white paper publicly accusing Alibaba of complicity in various anticompetitive, fraudulent, and otherwise illegal business practices. By the close of business on January 29, 2015, Alibaba American Depository Shares (“ADSs”) had lost 25% of their value as compared with a November 13, 2014 high of $120 per ADS in intraday trading, erasing more than $11 billion in market capitalization.
In the weeks following the Chinese regulators' public accusations, investors filed seven putative security class actions against Alibaba and four of its officers (the “Individual Defendants”). The complaints are substantially identical; they seek to certify classes of purchasers of Alibaba ADSs between October 21, 2014 and January 28, 2015 (the “Class Period”), and pursue remedies under the Securities Exchange Act of 1934 (the “Exchange Act”). Four of the actions were filed in this Court, two were filed in the Central District of California, and one was filed in the Northern District of California.
A motion to transfer all seven cases to this Court is currently pending before the Judicial Panel on Multidistrict Litigation.
Now before this Court are seven competing motions for the appointment of a lead plaintiff and lead counsel, as well as unopposed motions to consolidate the four cases that are pending before me.
For the reasons that follow, the motions to consolidate are GRANTED as to the four cases before me. In these consolidated cases, William Tai and Christine Asia Co., Ltd. are appointed as co-lead plaintiffs. The Rosen law firm is appointed as lead counsel.
BACKGROUND
Alibaba is a China-based online and mobile commerce company that engages in retail and wholesale trade, as well as cloud computing and other services. The Company hosts an online sales platform for third parties and does not engage in any direct sales, compete with merchants or hold inventory.
The Company's stock is listed and trades on the New York Stock Exchange under the ticker BABA. The complaints allege that the defendants issued materially false and misleading statements regarding the soundness of the Company's business operations and the strength of its financial prospects, and concealed substantial ongoing regulatory scrutiny during the Class Period. Specifically, Alibaba failed to disclose that Company executives had met with China's State Administration of Industry and Commerce (“SAIC”) in July 2014, two months before Alibaba's $25 billion IPO. At that meeting, the complaints allege regulators informed Alibaba that they were actively trying to discourage business practices that Alibaba allegedly enabled or engaged in directly, including:
• The sale of counterfeit goods such as fake cigarettes, alcohol and branded handbags, by vendors on Alibaba's third-party marketplace platform;
• The sale of restricted weapons and other forbidden items on Alibaba's third-party marketplace platform;
• Alibaba staffers' alleged acceptance of bribes from merchants and others seeking to raise their search rankings and to get advertising space;
• Alibaba's alleged willful ignorance of the practice by some vendors of faking transactions to artificially inflate their sales volumes;
• Company officials' alleged failure to take actions to prevent merchants from using false and misleading advertising; and
• Alleged anticompetitive behavior, such as forbidding merchants to participate in rival sites' promotions.
Before the disclosure of those alleged facts, and from approximately October 2014 through January 27, 2015, Alibaba and certain “selling shareholders” sold more than 368 million ADSs in Alibaba's United States IPO, raising more than $25 billion. Through the Class Period, Alibaba's ADSs continued trading at ever-increasing, allegedly artificially inflated prices, reaching a Class Period high of $120 per ADS in intraday trading on November 13, 2014.
Before the market opened on January 28, 2015, media reported that SAIC had publicly accused Alibaba of the illegal practices discussed at the July meeting. On this news, the price of Alibaba ADSs declined by $4.49 per ADS on a volume of approximately 42 million shares trading.
The next day, January 29, 2015, before the market opened, Alibaba issued a press release announcing revenues of just over $4 billion for the fourth quarter of 2014 (ending on December 31, 2014). This missed the $4.45 billion target defendants led the investment community to expect through “bullish” statements throughout the Class Period concerning Alibaba's ongoing and purportedly strong revenue growth. The Company also disclosed that its profits had fallen to $964 million, a 28% decline from the fourth quarter of 2013. Alibaba attributed the decline to expenses from giving shares to employees, and to challenges with its mobile platforms, where advertising is less profitable than on personal computers, and which comprised a larger percentage of sales in the fourth quarter of 2014 than in the previous quarter.
Allegedly as a result of both of these disclosures, the price of Alibaba ADSs dropped another $8.64 per ADS on January 29, 2015, a one-day decline of approximately 9%, on a trading volume of more than 76.3 million shares trading. The two declines collectively reduced the price of Alibaba ADSs more than 25% from its Class Period high, eliminating more than $11 billion in market capitalization.
PROCEDURAL HISTORY
Seven substantially identical putative securities class actions have been filed against Alibaba and the Individual Defendants in connection with the facts described above. Four are pending in this Court, two were filed in the Central District of California, and one is before the Northern District of California. The Judicial Panel on Multidistrict Litigation is now considering a motion to transfer all pending matters to this Court. Defendants, together with three of four lead plaintiff movants, take the position that the three California actions against Alibaba and the Individual Defendants should be transferred here. The remaining lead plaintiff movant, the BABA group (described in greater detail below), has asked that all actions be transferred to the Northern District of California.
Beginning on March 31, 2015, aggrieved investors filed seven competing motions to be appointed Lead Plaintiff, with corresponding requests for the appointment of various lead counsel. All asked that the four actions before this Court be consolidated.
The original movants were: (1) Mr. Richard Houlihan (Docket 11–13
DISCUSSION
The Private Securities Litigation Reform Act (“PSLRA”) requires that courts presiding over putative securities class actions resolve questions of consolidation before appointing a lead plaintiff. 15 U.S.C. § 78u–4(a)(3)(B)(ii). I thus turn to that question first.
I. The Above–Captioned Actions Will Be Consolidated.
1 “Consolidation of cases is appropriate” where “actions before the court involve a common question of law or fact.” Quan v. Advanced Battery Techs., 2011 WL 4343802, at *1, 2011 U.S. Dist. LEXIS 102723, at *5 (S.D.N.Y. Sept. 9, 2011) (quoting Fed.R.Civ.P. 42(a)).
The four cases captioned above include substantially identical complaints. Each asserts claims under § 10(b) and § 20(a) of the Exchange Act, on behalf of purchasers of Alibaba ADSs, during the same Class Period, against the same defendants, and on virtually identical facts.
No one opposes consolidation.
The motions for consolidation are granted. Matters 15 Civ. 00759 (filed January 30, 2015), 15 Civ. 00811 (filed February 3, 2015), 15 Civ. 00991 (filed February 11, 2015); and 15 Civ. 1405 (filed February 25, 2015), are hereby consolidated for all purposes.
II. The Most Adequate Lead Plaintiff in the Consolidated Actions
“As soon as practicable” after consolidation, a court, “shall appoint the most adequate plaintiff as lead plaintiff for the consolidated actions.” 15 U.S.C. § 78u–4(a)(3)(B)(ii). 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 class members.” 15 U.S.C. § 78u–4(a)(3)(B)(i).
The statute creates a rebuttable presumption that the most adequate plaintiff is he who (1) either filed the complaint or moved to be appointed lead plaintiff; (2) has the largest financial interest in the relief sought by the class; and (3) otherwise satisfies the requirements of Federal Rule of Civil Procedure 23. 15 U.S.C. § 78u–4(a)(3)(B)(iii).
A. Tai and CAC Together Have the Largest Financial Interest in the Relief Sought by the Class.
The PSLRA provides little guidance in how to assess a party's financial interest. However, “Courts in this District tend to rely on the Lax/Olsten factors, derived from Lax v. First Merchants Acceptance Corp., 1997 U.S. Dist. LEXIS 11866, 1997 WL 461036 (N.D.Ill., August 11, 1997) and In re Olsten Corp. Sec. Litig., 3 F.Supp.2d 286, 295 (E.D.N.Y.1998).” Beckman v. Ener1, Inc., No. 11 Civ. 5794, 2012 WL 512651, at *2 (S.D.N.Y. Feb. 15, 2012). Those factors are: (1) the number of shares purchased; (2) the number of net shares purchased; (3) the total net funds expended during the class period; and (4) the plaintiffs' approximate losses. Id. The fourth factor is the most important. Id.
The parties have presented the Court with conflicting calculations of who has the greatest losses. All movants other than the Zhangs agree that the BABA has the greatest losses group if its members' losses are aggregated.
Notwithstanding the Zhangs' claims to the contrary, I agree with the majority of the movants that, if the BABA group investors' losses are aggregated, then the BABA group's losses are the largest.
The Zhangs' claim to have the largest loss relies on calculations that artificially inflate their losses in two ways.
2 First, the Zhangs' calculations include as “losses” sales that the Zhangs made before the January 28, 2015 revelation that SAIC was publicly accusing Alibaba of illegal activity. Under Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005) and its progeny, “any losses that [a plaintiff] may have incurred before [a defendant's] misconduct was ever disclosed to the public are not recoverable, because those losses cannot be proximately linked to the misconduct at issue in th[e] litigation.” In re Comverse Tech., Inc. Sec. Litig., No. 06 Civ. 1825(NGG)(RER), 2007 WL 680779, at *4 (E.D.N.Y. Mar. 2, 2007), adhered to on reconsideration, No. 06 Civ. 1825(NGG)(RER), 2008 WL 820015 (E.D.N.Y. Mar. 25, 2008).
The Zhangs discount Dura as a merits decision that should not control at this stage of the litigation, but they mistake its import. If a loss is not Dura eligible then it is not redressable through the putative class action the Zhangs seek to lead. If a lead plaintiff movant cannot recover a given loss in the action he seeks to lead, the loss cannot logically contribute to his financial stake in that action. Thus, in ruling on a lead plaintiff application, Judge Gardephe rejected a request to include trading losses realized from sales prior to a corrective disclosure. Sallustro v. CannaVest Corp., No. 14 CIV. 2900 PGG, 93 F.Supp.3d 265, 274–75, 2015 WL 1262253, at *6–7 (S.D.N.Y. Mar. 19, 2015). I reject the Zhangs' request that I include in my loss analysis any losses suffered prior to January 28, 2015.
The Zhangs' alleged losses are also inflated in that they derive from a “first-in, first out” (“FIFO”) accounting method. Over the years, courts have endorsed various approaches to calculating a plaintiff's approximate losses. Usually, a court chooses
between two distinct accounting methods: the ‘first-in, first out’ (‘FIFO’) and the ‘last-in, first out’ (‘LIFO’) techniques.... The FIFO method is often used by courts and the Internal Revenue Service to determine losses for tax purposes. Further, FIFO has historically been the preferred method of calculating losses where shares of stock cannot be identified with any particular lots purchased.
But more recently, courts have preferred LIFO and have generally rejected FIFO as an appropriate means of calculating losses in securities fraud cases. Moreover, in a number of instances where courts have used FIFO to calculate financial loss, they have done so reluctantly. LIFO, by contrast, has been used not only for lead plaintiff calculations, but also to determine compensation amounts for stockholders suffering losses due to securities fraud.
The main advantage of LIFO is that, unlike FIFO, it takes into account gains that might have accrued to plaintiffs during the class period due to the inflation of the stock price. FIFO, as applied by the Pension Fund and others, ignores sales occurring during the class period and hence may exaggerate losses.
In re eSpeed, Inc. Sec. Litig., 232 F.R.D. 95, 100–01 (S.D.N.Y.2005) (internal quotations and citations omitted). Thus,
most courts have adopted LIFO and have ‘generally rejected FIFO as an appropriate means of calculating losses in securities fraud cases' because LIFO, unlike FIFO, takes into account any gains that plaintiffs may have realized during the class period through sales of stock when the price allegedly was inflated. LIFO also more accurately reports profits or losses for investors who make identical trades during the class period, but who had different initial holdings.
McLaughlin on Class Actions § 4:34 (11th ed.). I adopt LIFO as the proper approach.
Using the LIFO method to analyze losses the Zhangs suffered prior to January 28, 2015 (i.e., Dura eligible losses), yields the result that the Zhangs lost $720,722. (See Docket # 37 at 19.) That places them within the following hierarchy of loss, as calculated by the BABA group: