The benefits of institutional plaintiffs leading securities class actions are well documented, with higher recoveries and lower fees serving as the primary examples. Often, however, institutions remain as passive class members, stepping up to lead only where their exposure or unique circumstances compel action. In those cases, institutions rely on other institutions or individuals to run the litigation. Two recent decisions serve as a reminder that, in at least some jurisdictions, institutional investors taking a “wait and see” approach to lead plaintiff applications may see their claims evaporate before a case has scarcely begun. In Bosch v. Credit Suisse Grp. AG and Guo v. Tyson Foods, Inc., both filed in the U.S. District Court for the Eastern District of New York (“EDNY”), courts concluded that individual investors with modest losses should not be appointed as lead plaintiffs to represent the putative class, and the cases should proceed, if at all, as individual actions—extinguishing class recovery.[i]
The issues arise in interpreting and complying with the Private Securities Litigation Reform Act of 1995 (“PSLRA”), a piece of legislation that significantly raised pleading requirements for class action cases brought under the federal securities laws and changed the process that courts use to select a lead plaintiff to represent the class in such actions. The PSLRA requires courts to appoint, at the initial stages of federal securities class action cases, a “lead plaintiff.” Specifically, the PSLRA states that courts appoint as lead plaintiff the member or members of the purported plaintiff class that the court determines to be most capable of adequately representing the interests of other class members.
In reaching this determination, the PSLRA creates a rebuttable presumption that this “most adequate plaintiff” is the person or group of persons that step up to serve as lead, have “the largest financial interest in the relief sought by the class”; and otherwise satisfies the requirements of Fed. R. Civ. P. 23 (namely, are typical of other class members and can adequately represent the class).
In enacting the PSLRA, Congress sought to encourage the participation of institutional investors, who were seen to have the sophistication necessary to oversee the litigation and who would have financial losses substantial enough to incentivize them to vigorously pursue claims on behalf of the class. Nevertheless, courts have held that this preference for institutional investors does not amount to a requirement that only institutional investors serve as lead plaintiffs.
While the EDNY decisions do not go quite that far, they do hold that a lead plaintiff applicant’s status as an individual investor, in combination with small claimed losses, does not provide sufficient evidence that it could serve as an adequate representative for the putative classes in those cases—even if disqualifying these applicants meant that there could be no recovery for the class.
In the case against Credit Suisse, the complaint alleged, among other things, that the company and certain executives had a practice of lending money to Russian oligarchs subject to U.S. and international sanctions, which created a significant risk of violating rules pertaining to those sanctions and future sanctions, and that the disclosure of these risks resulted in harm to the asserted class. The sole lead plaintiff applicant, an individual investor, had losses of $621.
In the case against Tyson, the complaint alleged that defendants made materially false or misleading statements about the COVID-19 pandemic and failed to disclose adverse facts pertaining to Tyson’s business, operations, and financial results. The sole lead plaintiff applicants, a group of two individual investors, had collective losses of $323.20 in the litigation.
The courts in both cases rejected the applications of the sole lead plaintiffs, holding that they would not be adequate representatives for the putative classes because they had not demonstrated that they had sufficient incentive to vigorously oversee the litigation. While it is not unusual for courts to prefer, consistent with the PSLRA, to appoint lead plaintiff applicants with substantial losses, what is unusual about these cases is that the courts rejected individual investors with modest losses even when doing so the Court would prevent any class recovery.
This result has already drawn implicit criticism from other courts. In an order just weeks after the decision in Bosch, the U.S. District Court for the Southern District of New York rejected the suggestion that a plaintiff with $385 in losses could not adequately represent the class, observing that:
[d]eclining to appoint a movant as lead plaintiff simply because he has little at stake would also be inconsistent with a key purpose of aggregate litigation. The raison d’etre of the class action is to bring justice to individual plaintiffs who have meritorious claims but relatively little at stake.
To be sure, the decisions from the EDNY are outliers but institutional investors who are weighing participating in class action litigation must now take into account that they may receive no recovery if a lead plaintiff applicant with substantial losses does not step forward. While the benefits of institutional plaintiffs are clear, the risks associated with having only individual lead plaintiffs bid for lead plaintiff are growing.
[i] Bosch v. Credit Suisse Grp. AG, No. 22-CV-2477 (ENV), 2022 WL 4285377, at *2 (E.D.N.Y. Sept. 12, 2022) and Guo v. Tyson Foods, Inc., No. 21-CV-00552-AMD-JRC, 2022 WL 5041798 (E.D.N.Y. Sept. 30, 2022).