Friday, October 20, 2023

Who gets to appeal a securities dismissal?

So here’s a bizarre little PSLRA procedural case out of the Ninth CircuitMark Habelt, a shareholder of iRhythm, filed a securities action on behalf of himself and a class of other investors, alleging the company committed fraud.  As is not uncommon in these cases, other class members moved to be appointed lead.  Habelt himself did not so move, and eventually, the Public Employees’ Retirement System of Mississippi was appointed lead, and its counsel – a different firm than Habelt’s – was appointed lead counsel.

Again, as is common, PERSM filed an amended complaint that continued to name Habelt in the caption, but did not include him as a named plaintiff in the substantive allegations.  Eventually, the case was dismissed on the pleadings, and PERSM did not appeal.

Habelt, however, did.  And the Ninth Circuit, 2-1, held that he did not have standing to do so.  The court reasoned:

“[a] person or entity can be named in the caption of a complaint without necessarily becoming a party to the action.”… Beyond an individual’s mere inclusion in the caption, the more important indication of whether she is a party to the case are the “allegations in the body of the complaint.” It is upon this ground that Habelt’s argument falters. While it is true that Habelt filed the initial complaint in this matter, that complaint has now been extinguished. …Nor does Habelt’s status as a putative class member give him standing to appeal. Although “an unnamed member of a certified class may be considered a party for the [particular] purpos[e] of appealing an adverse judgment,” the “definition of the term ‘party’” does not cover an unnamed class member “before the class is certified.”

The implication was that the only way Habelt could have become a party and advanced his appeal was if he had first moved to intervene at the district court level.

So, my thoughts.

First, at least in the securities space, this is an unusual situation because I, at least, was always under the impression that most dismissals on the pleadings are appealed – from the attorneys’ perspective, the incremental costs are negligible.  So I wonder why the lead plaintiff chose not to do so here. I have not studied the underlying case at all so I have no idea if this is correct, but an obvious reason not to do so would be fear of generating unfavorable precedent – lead counsel (and some lead plaintiffs) are repeat players in this space and might reasonably care about that.

Second, but Habelt did want to appeal!  Obviously, whatever PERSM’s counsel’s calculus, Habelt and/or his attorneys had a different calculus.  But he wanted to appeal on behalf of the class, and procedurally, that’s just … weird.  What would happen if he won?  Does the case get remanded for PERSM – which abandoned it – to continue litigating?  Is Habelt lead now?  Is the LP contest reopened?

All of this just highlights a real problem: lead plaintiff and lead counsel represent the class, but they do so even before a true Rule 23 process.  And they can really bind the class nonetheless, because even if Habelt had intervened, there’s a real possibility he could not have appealed on the class’s behalf without reopening lead plaintiff selection, see In re Merck Sec. Litig., 432 F.3d 261 (3d Cir. 2005).  And in many cases, a district court judgment may be issued before a potential intervenor even knows it’s necessary to intervene to preserve an appeal right.

Plus – as the Habelt dissent noted – the chances that Habelt could just file a new action – after all, he wasn’t formally a party to the original one, according to the Ninth Circuit – are slim to none.  Statutes of repose are not tolled during the pendency of a class action, see California Public Employees’ Retirement System v. ANZ Securities, 582 U.S. 497 (2017), and the limitations period is not tolled for successive class cases, see China Agritech v. Resh, 138 S. Ct. 1800 (2018), and since securities class actions take forever to resolve (months can pass before a lead plaintiff is appointed, years before the motion to dismiss briefing is complete and an opinion issued), that functionally gives a terrific amount of power to whoever is appointed lead to in fact bind the class, unless class members want to be preemptive enough to intervene on spec.

In any event, I’m not sure what the solution is (other than unwinding ANZ and China Agritech), and though the situation is rare, the Ninth Circuit’s grounds for dismissal strike me as elevating form over substance – a trap for the unwary, if you will.  Habelt filed a complaint, it was never dismissed, his name was on the case – of course he reasonably assumed he was still a party.  To hold otherwise only invites future jockeying.  Will all class members who filed complaints insist on having their names be included in subsequent pleadings?  File preemptory motions to intervene?  I can’t see what benefit there would be to encouraging such a system.  But again, if the LP process would circumvent Habelt’s right to represent the class on appeal anyway, a la Merck, then, I suppose, no harm no foul.

Ann Lipton | Permalink


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