The Back-Up Plan

In a securities class action brought against Central European Distribution Corp., the court received applications for lead plaintiff from Harry Nelis (an individual investor) and the Prosperity Subsidiary Group (a grouping of four institutional investors). Nelis was represented by Pomerantz Haudek, while the Prosperity Subsidiary Group was represented by Robbins Geller. Apparently recognizing that the Prosperity Subsidiary Group’s application was problematic, however, Robbins Geller also submitted a “response” to the court on behalf of another investor, a Puerto Rico public pension fund, in which the fund expressed an interest in being named lead plaintiff if the Prosperity Subsidiary Group was not selected.

In Grodko v. Central European Distribution Corp., 2012 WL 6595931 (D.N.J. Dec. 17, 2012), the court addressed this unusual lineup. The court found that the Prosperity Subsidiary Group had the largest alleged losses, but faced a unique defense based on loss causation. All of the investors in the group had sold their shares well before the disclosures that allegedly revealed the defendants’ fraud. Accordingly, the court denied the Prosperity Subsidiary Group’s application. While the Puerto Rico fund had the next largest alleged losses, Nelis argued that it should not be selected because (a) the Puerto Rico fund had failed to file a timely application for lead plaintiff, and (b) Robbins Geller was engaging in “unethical gamesmanship” based on its representation of multiple plaintiffs.

The court rejected Nelis’ arguments. First, the Puerto Rico fund had filed a complaint in the action. Under the language of the PSLRA, the court held that the filing of an initial complaint is sufficient to entitle the party to consideration as lead plaintiff. Second, the court noted that “Nelis has not cited any legal authority supporting his contention that counsel in a securities class action are necessarily behaving unethically when they represent multiple plaintiffs.” Indeed, Pomerantz Hudek also represented both Nelis and a different investor who had filed one of the initial complaints. Nor was there any apparent conflict of interest between Robbins Geller’s various clients.

Holding: Appointing the Puerto Rico fund as lead plaintiff and Robbins Geller as lead counsel.