Another lead plaintiff problem

A while back, I blogged about a securities fraud case where the only lead plaintiff applicant was rejected on the grounds that he had sent harassing letters to the defendants.  Ultimately, in that case, no alternative lead plaintiff ever completed a new application, and the case did not proceed as a class.  Instead, several investors proceeded on an individualized basis, and their claims were eventually dismissed.

Well, it happened again: in Bosch v. Credit Suisse Group, 22-cv-2477 (ENV), Magistrate Judge Roanne Mann held that the only proposed lead plaintiff – with a $621 stake – simply did not have enough interest in the case to justify appointment as lead. 

This is a bit more unusual than the earlier case I blogged about, though, because the denial wasn’t based on misconduct, but simply dollar value of losses.  The judge reasoned that, according to the PSLRA, the lead plaintiff must make a “prima facie showing that its claims satisfy the typicality and adequacy requirements of Rule 23,” and then held that a $621 loss rendered the plaintiff inadequate: “This Court is not satisfied that Jimenez has a sufficient interest in the litigation to vigorously pursue the claims of the class.”

The problem is, it’s pretty well established that a small financial stake by itself is not sufficient to render a plaintiff inadequate under Rule 23.  See Federal Practice & Procedure § 1767.  In other words, though Judge Mann purported to rely on Rule 23(a)’s adequacy requirement, she in fact created a much more stringent adequacy requirement that seems more to be rooted specifically in the PSLRA.  As she put it:

under the PSLRA, the lead plaintiff must have a substantial stake in the litigation to ensure it has the ability and incentive to control counsel. Institutional investors, in particular, were thought by Congress to have the sophistication and ability to control complex litigation.  Indeed, the principal focus of the PSLRA, as reflected in its legislative history, was that large institutional investors, and not class action counsel, would make the strategic decisions in the litigation….Although an institutional investor need not always be chosen as lead plaintiff, an individual investor should have comparable ability and motivation to control the litigation.

Though she cited other decisions where courts rejected small-dollar investors for the lead plaintiff spot, in all of those cases, there were other plaintiffs available; I am unaware of other decisions that simply refused to appoint any lead due to the perceived small stake of the only applicant.

As I mentioned in my prior post, this reveals one of the critical ambiguities in the PSLRA: it is unclear what the relationship is supposed to be between the lead plaintiff and the class representative, and it is concerning that class treatment might be denied without a full class certification hearing, and in the face of an available plaintiff who apparently satisfies Rule 23’s standards.

I am somewhat sympathetic to the idea that if there’s no one with a real interest in the case who wants the lead plaintiff spot, the case simply should not proceed as a class action, but on the other hand, the literal point of the class action device – its highest and best use – is to aggregate small dollar claims that would otherwise be impractical to bring. 

That said, Judge Mann did highlight an additional fact, beyond the applicant’s small stake, suggesting inadequacy:

in response to the Court’s Order of September 8, 2022, directing the movant to file a copy of his retainer agreement with Pomerantz LLP, see Scheduling Order (Sept. 8, 2022), Jimenez filed a retainer agreement bearing the same date as the Court’s Order, with a fee provision strongly favoring counsel over the putative class, see [Sealed] Retainer Agreement, DE #20. It may reasonably be inferred that no retainer agreement existed until the Court directed its production and that Jimenez failed to negotiate a fee arrangement that favors the class he seeks to represent. Simply put, Jimenez has not demonstrated that he would adequately represent the interests of class members.

And maybe that’s enough to tip it over the edge.