Court: District Court, E.D. New York; January 25, 2012; Federal District Court
A consolidated securities fraud class action is underway regarding Gentiva Health Services, initiated by Steve Endress on November 2, 2010, on behalf of all individuals who purchased Gentiva's stock from July 31, 2008, to July 20, 2010. Endress accused Gentiva and its executives of inflating stock prices through fraudulent billing practices for unnecessary medical care, leading to significant stock price drops once the scheme was revealed.
On January 21, 2011, the Minneapolis Police Relief Association (MPRA) sought to intervene as a plaintiff and requested lead plaintiff status under the Private Securities Litigation Reform Act (PSLRA). While the defendants did not oppose MPRA's intervention, they contested its lead plaintiff request, citing unmet PSLRA requirements. The Court granted MPRA’s intervention but denied its lead plaintiff motion without prejudice on July 19, 2011. Following Endress's withdrawal as a named plaintiff on July 25, 2011, MPRA renewed its lead plaintiff request.
Subsequently, four other similar class actions were filed by different parties, all representing the same class of Gentiva investors and alleging identical violations. These plaintiffs supported consolidation, and on November 2, 2011, the Court permitted Endress's withdrawal and consolidated the five actions to streamline judicial and party resources. The Court also reopened the lead plaintiff selection process, allowing any plaintiff to apply for lead plaintiff status within 60 days of Endress's withdrawal.
Four motions were filed by five putative class members seeking appointment as lead plaintiff under the Private Securities Litigation Reform Act (PSLRA). The candidates include the Indiana Laborers Pension Fund, Los Angeles City Employees’ Retirement System (LACERS), Arkansas Teacher, Metropolitan Water Reclamation District Retirement Fund (collectively termed 'Arkansas Group'), and the International Union.
The PSLRA stipulates that the lead plaintiff designation occurs early in securities class actions, initiated by a notice from the plaintiff within twenty days of filing, outlining the claims and proposed class period. Putative class members have sixty days post-notice to move for lead plaintiff status, with the court appointing one within ninety days of the notice. The court evaluates all motions to determine which member can best represent the class’s interests, adhering to specific statutory criteria.
The PSLRA establishes a presumption that the most adequate plaintiff is the one who has filed the complaint or responded to the notice, has the largest financial interest in the class relief, and meets Federal Rule of Civil Procedure 23 requirements. This presumption can only be rebutted by demonstrating that the presumptive lead plaintiff cannot adequately protect class interests or faces unique defenses.
In this case, all proposed lead plaintiffs have complied with procedural requirements, granting them equal standing. The court must now assess which movant holds the largest financial interest in the class relief, aligning with the PSLRA's objectives. Although the PSLRA does not detail the methodology to determine financial interest, courts often employ a four-factor test known as the 'Olsten factors' or 'Lax test' for this purpose.
Four factors are considered in determining the adequacy of a lead plaintiff: (1) total shares purchased during the class period; (2) net shares purchased (purchases minus sales); (3) net funds expended (amount spent on purchases minus amount received from sales); and (4) approximate losses suffered, with courts primarily emphasizing the last factor. Under the Private Securities Litigation Reform Act (PSLRA), the most adequate plaintiff must also meet the requirements of Federal Rule of Civil Procedure 23, which includes numerosity, commonality, typicality, and adequacy. Courts focus on typicality and adequacy when selecting a lead plaintiff, requiring only a preliminary showing of these criteria at the initial stage of litigation, rather than a comprehensive analysis. The typicality requirement is met when claims arise from the same events and share similar legal arguments. The adequacy requirement is satisfied when class counsel is competent, class members' interests are aligned, and the class has a vested interest in the outcome. Additionally, there is a judicial preference for institutional investors as lead plaintiffs, supported by the PSLRA's legislative history, which argues that their involvement enhances representation quality in securities class actions, even if they have slightly lower losses than other candidates.
A $40,000 difference in financial losses among institutional investors does not negate the presumption that they make better lead plaintiffs under the PSLRA, as all movants in this case are institutional investors. The Court must establish a singular class period to evaluate the financial losses stemming from the alleged fraud. It is agreed that the class period should start on July 31, 2008, coinciding with a financial results press release from the Defendant. Discrepancies exist regarding the end date of the class period: the original complaint suggested July 31, 2008, to July 20, 2010, while two movants proposed an extension to September 30, 2011, and another suggested October 4, 2011, the date after an investigative report revealed potential fraud. Indiana does not specify an end date but presents losses through October 5, 2011. The Court decides to adopt the longest proposed class period, from July 31, 2008, to October 4, 2011, to include the widest array of potential class members, aligning with precedents that support utilizing the longest period identified for assessing financial interest. The Court finds the claims associated with this extended period credible and notes that the PSLRA does not restrict the class period to that initially identified. The specific end date is influenced by the fraud theory, which in this case is a "fraud-on-the-market" theory, asserting that the Defendants' conduct distorted the market's ability to accurately assess stock value.
A publicly available "corrective disclosure," such as a newspaper article, signifies the end of a class period when it enables an efficient market to adjust. Relevant case law supports that the class period begins with the first alleged misrepresentation and concludes with its correction. The court identifies October 4, 2011, as the end of the class period for the current motion, even though the final corrective disclosure occurred on October 3, 2011. This decision rests on the principle that the class period ends when the full truth is disclosed and the market has had adequate time to absorb and reflect this information in the security's price. The determination of when market forces have had sufficient time to react is a factual question.
In terms of lead plaintiff appointments, among the four movants, Indiana Laborers and International Union reported significantly lower losses compared to LACERS and the Arkansas Group. Indiana Laborers reported a loss of $451,974.49, and International Union reported $80,996, while LACERS and the Arkansas Group reported losses of approximately $2.2 million each. Consequently, the court's preliminary assessment appears to exclude Indiana Laborers and International Union from lead plaintiff consideration. However, Indiana Laborers argues for its appointment based on holding the largest number of shares through the class period's end, claiming that LACERS and the Arkansas Group improperly included regular trading losses from earlier sales. The court notes a reluctance in the Second Circuit to appoint "in-and-out traders" as lead plaintiffs due to complications in loss calculations.
Concerns regarding the adequacy and typicality of potential lead plaintiffs focus on their ability to establish a causal link between alleged fraudulent conduct and their financial losses. The Supreme Court in Dura Pharmaceuticals emphasizes the necessity of this causal connection for securities plaintiffs under the PSLRA, as codified in 15 U.S.C. 78u-4(b)(4). The court intends to address these issues early in the proceedings. Indiana Laborers presents a significant point regarding "in-and-out trading," as both LACERS and the Arkansas Group sold significant portions of their Gentiva stock before the end of the class period, which raises questions about their status as lead plaintiffs. Courts typically hesitate to appoint plaintiffs who sell the majority of their shares prior to a corrective disclosure, as seen in Bensley v. FalconStor Software.
In this case, the Fund is deemed inadequate as a lead plaintiff due to its total in-and-out trading, which complicates its ability to prove loss causation. Previous rulings have often excluded losses from such traders when assessing who has the greatest financial interest, especially when there is a lack of evidence for partial corrective disclosures. However, in this case, there are credible partial disclosures prior to the final corrective disclosure on October 4, 2011, which included significant investigations and financial guidance revisions by Gentiva, indicating potential awareness of issues before the final disclosure.
The initial securities fraud class action regarding Gentiva was filed on November 2, 2010, for individuals who purchased shares between July 31, 2008, and July 20, 2010. This supports the argument that the public was aware of the company's inability to meet revenue projections due to alleged fraud before the final disclosure on October 3, 2011. Typically, an earnings revision alone is not seen as a partial disclosure of fraud; however, Gentiva's August 4, 2011 announcement of its financial results, alongside prior disclosures of a Senate Finance Committee investigation, provides a context suggesting partial disclosure of issues prior to the official report.
The Court has a basis to find that movants have sufficiently alleged partial disclosure of Gentiva's problems before the October 3, 2011 announcement. The argument from Indiana Laborers that only losses after the Senate Finance Committee's report should be considered for causation is weak, given that the class action was initiated before this date. Other courts have indicated that a lead plaintiff who sold shares after a partial disclosure does not face the burden of proving loss causation to serve in that role. Loss causation can be established through partial disclosures that cause a decline in stock price, and this determination can be made at the lead plaintiff appointment stage.
Furthermore, selling shares during the class period does not disqualify a class member from being lead plaintiff, nor does prior divestiture of securities automatically render a plaintiff inadequate under the Private Securities Litigation Reform Act (PSLRA). The case law suggests that even if shares were sold before the class period ended, it does not necessarily imply that the plaintiff’s losses are unrelated to the alleged fraud.
Defendants’ argument that an in-and-out purchaser was an inadequate class representative, due to engaging in both purchases and sales at inflated prices, was rejected by the court. The court also dismissed Indiana Laborers' claim that other movants incorrectly included regular trading losses from prior stock sales, which are not recoverable under federal securities laws. Consequently, the financial interests of LACERS and the Arkansas Group will be considered, while Indiana Laborers' losses are deemed too minor to warrant the presumption of lead plaintiff status under the PSLRA. The court retains the discretion to modify the lead plaintiff structure as the litigation progresses, depending on circumstances like potential delays or unnecessary expenses.
The court applies the four Olsen factors to assess lead plaintiff suitability: (1) total number of shares purchased during the class period, (2) net shares purchased, (3) net funds expended, and (4) approximate losses suffered. Among these, financial loss is prioritized as the most significant element. While some argue for consideration of shares and expenditures, the court emphasizes that the primary metric for determining 'largest financial interest' should be the amount of loss alone. The Arkansas Group supports this view, arguing that financial loss is the crucial factor, particularly in cases with multiple corrective disclosures. Thus, following this rationale, LACERS emerges as the presumptive lead plaintiff based on its significant financial losses.
LACERS, with a loss of $2,176,430.63, holds the largest financial interest in the case, narrowly surpassing the Arkansas Group, which claims a smaller loss of $32,671.82. The Arkansas Group argues that this difference is negligible and highlights its superior metrics in the Olsten factors, specifically having purchased 50,412 more gross shares and 16,450 more net shares than LACERS, along with expending $17,216.94 more in net funds. However, the Court's calculations indicate the Arkansas Group actually spent $32,671.82 less in net funds than LACERS. For argument's sake, the Court considers the Arkansas Group’s figures valid, noting that the small financial difference diminishes LACERS' marginally greater loss's relevance in determining the lead plaintiff. The Court references previous rulings asserting that a $40,000 difference in losses was not determinative in similar contexts, with the current case reflecting only a 1.5% difference.
The Arkansas Group's aggregation of claims from its two members, Arkansas Retirement and Metropolitan Water, raises questions about whether unrelated class members can combine their claims to establish a greater financial interest. The Second Circuit has not conclusively addressed this issue, with courts in the circuit divided. Some courts disapprove of aggregating individual shareholder claims to designate a lead plaintiff, while others allow it under certain conditions. The PSLRA permits the appointment of a person or group as lead plaintiff, and the Court finds it appropriate to appoint the two-member group of Stichting and SURSI, both institutional investors, as lead plaintiffs, aligning with the PSLRA's intent to encourage such pairings. This pairing has been previously approved by other courts, affirming its legitimacy.
The Arkansas Group's motion for lead plaintiff status is permissible but raises concerns regarding its combination of two institutional investors, lacking a pre-existing relationship. The Court is skeptical of this amalgamation, noting that neither investor's losses exceed those of other potential lead plaintiffs. KSG, with three members, claims a longstanding relationship, but the losses of its individual members do not surpass those of LACERS, which has a significantly larger financial interest in the litigation. Specifically, Arkansas Teacher's loss is $1,292,808.54, while Metropolitan Water's loss is $850,950.27, both of which are considerably lower than LACERS’ loss. Furthermore, the arguments for the partnership lack compelling justification, especially since Arkansas Teacher previously initiated one of the consolidated actions independently. While the Arkansas Group emphasizes their shared goals and the importance of cooperation, these factors do not outweigh LACERS’s greater financial interest, leading the Court to favor LACERS as the lead plaintiff.
Stichting-SURSI's proposal to appoint two investors as lead plaintiffs is deemed unfeasible, as it could lead to conflicts that disadvantage the class. Allowing unrelated groups to aggregate losses may result in manipulation of the selection process by lawyers, counter to the intent of the Private Securities Litigation Reform Act (PSLRA), which aimed to prevent such manipulation. The PSLRA's goal is for lead plaintiffs to select their lawyers, rather than vice versa. The Arkansas Group's request to exclude certain sales of LACERS prior to August 4, 2011, in favor of a "net numbers" comparison for financial interest is rejected. The Court emphasizes that net shares purchased is only one of several factors and does not alone justify their position as lead plaintiffs. The Court recognizes that having more net shares at specific times does not necessarily equate to greater financial losses, dismissing the argument as akin to the in-and-out trader theory, which has previously been discredited. Consequently, the Court finds no basis to consider the Arkansas Group superior to LACERS for lead plaintiff designation.
The Court determines that LACERS holds the largest financial interest in the case, which is critical for establishing the lead plaintiff. Under Rule 23, LACERS must demonstrate typicality and adequacy. Typicality is satisfied as LACERS' claims arise from similar events and legal arguments as other class members, despite not being identical. Adequacy is assessed based on the qualifications of class counsel, potential conflicts of interest, and the motivation to pursue claims vigorously. LACERS' claims are aligned with those of other class members, and there are no conflicts of interest. They possess significant financial stakes and have retained competent counsel, Kaplan Fox, Kilsheimer LLP, to represent them. As there are no unique defenses against LACERS that would affect their ability to represent the class, the Court grants LACERS' motion to be appointed as lead plaintiff under the PSLRA. LACERS also selects Kaplan Fox as lead counsel, supported by the firm’s extensive experience in securities class actions.
Kaplan Fox has demonstrated substantial expertise in securities litigation, qualifying them to serve as lead counsel. The firm has a strong history of successfully prosecuting securities class actions, with significant involvement in over 25 cases that achieved recoveries exceeding $10 million. Based on this extensive experience, Kaplan Fox is approved as Lead Counsel. The motion by the Los Angeles City Employee’s Retirement System (LACERS) to be appointed as lead plaintiff is granted, along with their motion to appoint Kaplan Fox, Kilsheimer LLP as lead counsel.
