Securities Regulation Daily Court's ‘misgivings’ were not sufficient to reject presumptive lead plaintiff
Monday, July 26, 2021

Court's ‘misgivings’ were not sufficient to reject presumptive lead plaintiff

By Rodney F. Tonkovic, J.D.

The district court's rejection of a group as presumptive lead plaintiff was clear error.

A Ninth Circuit panel has granted a mandamus petition and ordered the district court to vacate an order appointing a lead plaintiff in a securities fraud class action. In this case, a group of investors had the largest financial interest in the matter and was thus the presumptive lead plaintiff. The district court, however, rejected the group because it had "misgivings" that it might have been formed for the purposes of the litigation. The decision was clear error, the panel said, because "misgivings" were not evidence providing proof that the group would not be an adequate lead plaintiff. The panel accordingly vacated the district court's order and remanded for the district court to redetermine the lead plaintiff (In re George Mersho, July 23, 2021, Gordon, A.).

Group rejected as lead plaintiff. Several proposed fraud class actions were filed against the Nikola Corporation alleging false statements made by the company's founder and in its advertising materials. The actions were filed in, or transferred to the United States District Court for the District of Arizona, and the plaintiffs filed eight motions to consolidate, with six movants vying to be named lead plaintiff.

The three petitioners in this action moved to be named lead plaintiff as a group under the name Nikola Investor Group II, asserting that the group had the largest financial interest in the litigation of $6,010,333. The panel noted that if the petitioners had moved individually, the respective plaintiffs would have the first, second, and fourth largest financial interest. Because the group had the largest financial interest and made a prima facie showing of adequacy and typicality, the district court concluded that it was the presumptive lead plaintiff.

After considering the arguments advanced by the competing movants to rebut the presumption, the court rejected the group as lead plaintiff. The court explained that the group members were from different states and appeared to have formed together solely for the purposes of litigation; the court also noted that it had "misgivings" about the influence of the group's counsel. The court ultimately selected an investor with the fourth largest losses of $700,000.

Writ of mandamus. The group then sought a writ of mandamus vacating the district court's order, appointing the group as lead plaintiff, and clarifying that groups are permitted to serve as lead plaintiff. In determining whether a writ of mandamus should be granted, courts in the Ninth Circuit weigh five factors set out in Bauman v. United States District Court (9th Cir. 1977). The analysis begins with the threshold issue of whether the district court's order is clearly erroneous as a matter of law, and in this case, the panel found that the district court clearly erred.

Clear error. To determine whether there was clear error, the court looked to the lead plaintiff appointment process set out in the PSLRA. There is a three-step process in which notice of the action is posted, the court determines the presumptive lead plaintiff (at this point, the one with the largest loss), and competing movants then seek to rebut the presumption. At issue was step three, and the panel observed that the statute requires proof that the presumptive lead plaintiff is not adequate.

The petitioners argued that the district court's clear error lay in its determination that the presumption had been rebutted by its "misgivings" rather than actual "proof." In this case, the district court placed the burden on the group to explain how the members found each other when that burden should have shifted to the other movants. Plus, "misgivings" are not evidence, the panel said.

The panel clarified that district courts are not precluded form considering a group's pre-litigation relationships or cohesion. The analysis, however, must conform to the legal standard prescribed by the statute, and a district court must articulate how the evidence proves inadequacy. Because the district court based its decision on speculation, it was clear error to find that the presumption had been rebutted.

Remaining factors. The court went on to find that four out of five of the Bauman factors weighed in favor of mandamus relief. Here, the court determined that the first and second factors, which focus on the availability of relief were satisfied because the petitioners had no other way to challenge the district court's decision. The fifth Bauman factor, which involved whether the petition raises issues of first impression weighed in favor because there are no Ninth Circuit cases guiding lower courts on how to consider group cohesion. Only the fourth factor, which concerns whether the case involves an "oft-repeated error" did not weigh in favor of granting relief.

The case is No. 20-73819

Attorneys: Jeffrey Craig Block (Block & Leviton LLP) and Jeremy Alan Lieberman (Pomerantz LLP) for George Mersho, Vincent Chau and Stanley Karczynski.

Companies: U.S. District Court for the District of Arizona, Phoenix

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