For the second time in a week, the judge presiding over a securities class action has picked a new investor to take over a case in which the court-appointed lead plaintiff sought to withdraw for personal reasons. On Monday, U.S. District Judge Richard Seeborg of San Francisco ruled that a previously passed-over candidate will now be in charge of a class action claiming that the backers of the $230 million Tezos cryptocurrency offering were selling unregistered securities, replacing a lead plaintiff whose social media posts might have created problems for the prospective class.
Judge Seeborg chose not to re-open the lead shareholder selection process to all shareholders. That’s a departure from the road traveled by U.S. District Judge Stephen Wilson of Los Angeles, who picked a new lead shareholder last week in a securities class action against Snap after his original choice for lead plaintiff backed out. I’ve predicted that these mid-case lead plaintiff contretemps are going to become a more common occurrence as institutional investors cede control of securities class actions to individual shareholders. If I’m right, these back-to-back decisions from Judge Seeborg in Tezos and Judge Wilson in Snap are going to leave securities litigators with more questions than answers about how the process should work.
The Tezos and Snap defendants deny the allegations in the underlying cases. Brian Klein of Baker Marquart, who represents key defendants in the Tezos suit, said it is “no surprise” that plaintiffs’ lawyers “are having a hard time finding credible lead plaintiffs,” Klein said in an email statement. “The class action lawsuit, which is frivolous and lacks any legal merit, is being driven entirely by plaintiff attorneys in pursuit of a windfall.”
Both the Snap and Tezos class actions had survived dismissal motions and were on the verge of class certification when court-appointed lead plaintiffs moved to withdraw. In both cases, lead counsel proposed swapping in new lead shareholders chosen by them. Lawyers for the Snap and Tezos defendants – who deny the underlying class allegations – argued that lead counsel can’t simply pick new clients to take charge of shareholder class actions. Citing the Private Securities Litigation Reform Act, the Snap and Tezos defendants called on the presiding judges to re-open the selection process.
That’s where Judge Seeborg and Judge Wilson parted ways. Judge Wilson agreed with Snap’s lawyers at Wilson Sonsini Goodrich & Rosati that all prospective lead shareholders must have a new opportunity to ask for appointment. He threw the selection process open to all Snap investors. In the end, six prospective lead plaintiffs moved for appointment, including one shareholder whom Judge Wilson had previously rejected; an institutional investor that had not participated in the initial lead plaintiff contest; and a new investor group represented by the plaintiffs’ firm that had been litigating the case for nearly two years, Kessler Topaz Meltzer & Check. Judge Wilson picked Kessler Topaz’s clients, even though they had lost less money than two other candidates.
Judge Seeborg decided not to re-open the selection process to all potential lead plaintiffs, holding that the PSLRA does not require all shareholders to be notified that leadership of the ongoing case is up for grabs. Following the analysis in a 2003 trial court order in In re Portal Software, in which a San Francisco federal judge denied a motion to add a new lead plaintiff to a securities class action, Judge Seeborg said there’s no need to relaunch the selection process because a previously-rejected candidate has stepped up.
“This case does not lack ‘willing plaintiffs with large financial stakes in the litigation,’” Judge Seeborg wrote, quoting In re Portal. The judge said that other judges have looked first to passed-over applicants in at least three shareholder class actions with problematic lead plaintiffs, including a California case against UCBH Holdings (682 F. Supp. 2d 1049) and a New York case against SLM Corp. (258 F.R.D. 112).
In the initial lead plaintiff contest in the Tezos case, the judge said, Trigon Trading alleged losses second only to the winning candidate. So now that the original lead is withdrawing, Judge Seeborg held, Trigon should be in charge.(Trigon’s lawyers at Block & Leviton filed a parallel securities class action in state court in California after losing the original lead plaintiff appointment but told Judge Seeborg they would drop the state court case.)
Interestingly, Judge Seeborg also said that one of the law firms for the original lead plaintiff, HGT Law, can stay in the case as co-lead counsel with Block & Leviton because the class of investors will benefit from the work HGT has already put into the case. In that regard, at least, Judge Seeborg aligned with Judge Wilson in the Snap case: Judge Wilson also found a way for the plaintiffs’ lawyers who had developed the litigation to remain in charge.
But I think the lasting impact of the Snap and Tezos cases will be the judges’ contrasting conclusions about the requisite process of selecting a new lead plaintiff in the middle of a case. Must all shareholders receive new notice or not? Judges Seeborg and Wilson gave new ammunition this week to each side of that debate.
Joel Fleming of Block & Leviton and Hung Ta of HGT declined to provide statements on Judge Seeborg’s ruling.