Lead Plaintiff Issues

Judge Scheindlin of the S.D.N.Y., who is presiding over the IPO allocation cases, continues to publish notable securities law decisions. This time the issue is lead plaintiff selection. Under the PSLRA, the lead plaintiff in a securities class action is presumptively the party with the largest financial interest in the relief sought by the class (i.e., the movant who alleges the most potential damages). In creating this provision, Congress sought to encourage the participation of institutional investors as lead plaintiffs. There is an ongoing debate over to what extent this legislative history, as opposed to the plain language of the “largest financial interest” presumption, should influence a court in its selection of a lead plaintiff.

In In re eSpeed, Inc. Sec. Litig., 2005 WL 1653933 (S.D.N.Y. July 13, 2005), the court addressed whether a group of individual investors (which included a family and one other individual) or a single insititutional investor should be named lead plaintiff. After surveying the relevant case law in the S.D.N.Y., the court found:

“[A] group of unrelated investors should not be considered as lead plaintiff when that group would displace the institutional investor preferred by the PSLRA. But where aggregation would not displace an institutional investor as presumptive lead plaintiff based on the amount of losses sustained, a small group of unrelated investors may serve as lead plaintiff, assuming they meet the other necessary requirements.”

Based on this standard, the relevant question was whether the family members (i.e., the related members of the individual investor group) had greater losses than the institutional investor. In making that evaluation, the court was forced to address another controversial issue: whether the “first-in, first-out” (FIFO) or “last-in, first-out” (LIFO) methods for estimating losses should be used. The court decided to apply the LIFO method, which matches the last purchases made during the class period with the first sales made during the class period, noting that “it takes into account gains that might have accrued to plaintiffs during the class period due to the inflation of the stock price.” Under the LIFO method, the family members had greater losses than the institutional investor. Accordingly, the court named the entire individual investor group as the presumptive lead plaintiff.

The New York Law Journal has an article (via law.com – free regist. req’d) on the decision. Another recent decision applying the LIFO method is Arenson v. Broadcom Corp., 2004 WL 3253646 (C.D. Cal. Dec. 6, 2004), where the court granted summary judgment against certain plaintiffs who could not establish damages under this method.

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