The 10b-5 Daily should have known better than to call a securities decision “rare.” For the second time in a month, an applicant with the third-highest claimed damages has been appointed lead plaintiff in a securities class action. The reasoning behind this decision, however, is quite different and illustrates the many ways an applicant can be rejected.
As previously noted, 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 and, once the court makes that determination, the contest is usually over. But not always. The court also has to find that the applicant meets the typicality and adequacy requirements of Federal Rule of Civil Procedure 23.
In Gelt Trading Ltd. v. Co-Diagnostics, Inc., 2021 WL 913934 (D. Utah March 10, 2021), the court determined that the top three applicants for lead plaintiff had the following claimed losses: Co-Diagnostics Investor Group (two individual investors) – $233,131, Tejeswar Tadi – $158,800, and Gelt Trading – $117,740. The court, however, had some questions surrounding the nature of the losses suffered by the Co-Diagnostics Investor Group and Tadi.
The original complaint filed by Gelt Trading proposed a class period of February 25, 2020 through May 15, 2020. Gelt Trading subsequently filed an amended complaint, however, proposing a shorter class period of April 30, 2020 to May 14, 2020. Courts often question whether changes like this have been made to game the lead plaintiff process and, as a result, apply the more inclusive class period in assessing approximate losses. In this case, however, the court found that “neither the Co-Diagnostics Investor Group nor any other movant has identified any material misstatements made by Co-Diagnostics before April 30, 2020.” As a result, the large majority of the Co-Diagnostics Investor Group’s claimed losses, which were based on share purchases made prior to April 30, 2020, could not be counted in assessing its application.
As for Tadi, his claimed losses were based entirely on a purchase of call options for Co-Diagnostics’ stock made on May 14, 2020 (the day before the alleged corrective disclosure that ended the proposed class period). The court found, consistent with the decisions of a number of other courts, that Tadi’s option trading would bring factual issues into the case that were irrelevant to the other class members and would subject him to unique loss causation defenses (i.e., he failed the typicality requirement).
That left Gelt Trading, the filer of the original complaint, but also the party that changed the proposed class period. The court rejected arguments by the other applicants that Gelt Trading should be excluded because (a) it failed to file a stock trading certificate with its original complaint (the filing was made in conjunction with the amended complaint) and (b) its changing of the class period was designed to favor its lead plaintiff application. On the second point, the court noted that the change was made before the lead plaintiff applications were submitted. Voila – another third place winner!
Holding: Consolidating cases and appointing Gelt Trading as lead plaintiff.