Creating Your Own Losses

Under the PSLRA, the presumptive lead plaintiff in a securities class action is the applicant with the “largest financial interest in the relief sought by the class.”  The largest financial interest is measured by assessing the approximate losses suffered, with courts generally holding that losses suffered as the result of “in-and-out” stock transactions that took place before any misconduct was revealed do not count.

With this background in mind, the court in Topping v. Deloitte Touche Tohmatsu, 2015 WL 1427317 (S.D.N.Y. March 27, 2015) faced a novel procedural twist in assessing competing lead plaintiff applications.  The applicant with the largest claimed losses actually sold all of its holdings before the corrective public disclosure alleged in the original complaint was made.  While that would normally be disqualifying, shortly after the lead plaintiff deadline, the applicant’s counsel filed a “Corrected Complaint” adding allegations about an earlier, partial disclosure that occurred prior to the applicant’s sales.  In its lead plaintiff briefing, the applicant argued that based on the Corrected Complaint, it was not an in-and-out trader and should be appointed.

The court rejected this argument on two grounds.  First, the court found that it could not look to allegations in a corrected or amended complaint filed after the lead plaintiff application deadline in assessing which applicant has the largest claimed losses.  Not only would doing so undermine the timeliness of the lead plaintiff process by inviting additional briefing, but it would prejudice other class members who had relied on the original complaint in determining whether and how to make their lead plaintiff applications.   Second, even if the court were to consider the Corrected Complaint, the alleged partial disclosure did not reveal anything about the alleged fraud and could not be used to demonstrate loss causation.

Holding: Appointed applicant with second-largest claimed losses as lead plaintiff.


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