What if they had a securities fraud lawsuit and nobody came?

In 1995, the Private Securities Litigation Reform Act revamped the procedures applicable to class action lawsuits alleging claims under the federal securities laws.

Concerned about frivolous, attorney-driven litigation, Congress mandated that once a class action complaint is filed, the court must appoint a “lead plaintiff” to take control of the case.  This, it was believed, would be preferable to the old tradition of simply giving control of the case to the first plaintiff to file a complaint.  The lead plaintiff would be selected based on factors similar, but not quite identical, to those involved in selecting a class representative, using a more preliminary, less searching inquiry than might be expected for class certification.  See 15 U.S.C. §78u-4; Topping v. Deloitte Touche Tohmatsu CPA, 95 F. Supp. 3d 607 (S.D.N.Y. 2015).

In enacting the scheme, Congress left a number of questions unanswered.  Like, what is the relationship between the lead plaintiff and the class rep?  Does the lead plaintiff position disappear once class reps are appointed?  It’s not an issue that comes up often, since most lead plaintiffs seek class rep status, and those that don’t tend to cooperate with any class reps who are eventually appointed. 

Another unanswered question was, what if there’s no suitable lead?  See In re Cavanaugh, 306 F.3d 726, 731 n.7 (9^th Cir. 2002) (raising the possibility).  You might say, then the case can’t proceed as a class action, but class certification is supposed to be a different process; it’s one thing to use the lead plaintiff selection process to find – as the statute puts it – the “most adequate plaintiff”; it’s quite another to use the process to deny class certification without so much as a Rule 23 hearing.

Which brings me to the curious case of Finocchiaro et al v. NQ Mobile, Inc. et al, Docket No. 1:15-cv-06385 (S.D.N.Y.).   The original class action complaint identified several named plaintiffs – all individuals, rather than institutional investors – but only one person sought lead plaintiff status.  That applicant was rejected by the court, on the grounds that he had previously sent obscene and threatening letters to the defendants.  The same attorneys sought, and received, an extension of time to find a second lead plaintiff, and recently filed a new motion seeking lead plaintiff status for another one of the individuals named in the complaint.  That motion is (unsurprisingly) opposed by the defendants, who argue that the substitute lead is also unsuitable.

I have no idea how the court will come out on that argument; possibly the court will accept the new lead and all awkward questions will be averted.  But it does beg the question: if no suitable lead plaintiff can be found, what happens to the case?