By James J. Coster and Nelson Stewart
Duane Morris Takeways: The U.S. District Court for the Eastern District of New York recently declined to reverse a Magistrate Judge’s denial of a motion seeking to appoint two investors as lead plaintiffs, and their attorneys as class counsel, in a securities fraud class action where the combined losses alleged by the two investors totaled just $323.20. In Guo v. Tyson Foods, Inc., et al, 1:21-CV-00552 (E.D.N.Y. June 1, 2023), putative class members alleged Tyson Foods, Inc. had misled investors about the adequacy of its Covid-19 safety measures, which resulted in a decline of the company’s share price when the misleading information was publicly disclosed. Magistrate Judge James R. Cho found that the movants’ losses were not sufficient to demonstrate an interest in the outcome of the litigation that would ensure compliance with the vigorous advocacy requirements of Rule 23 of the Private Securities Litigation Reform Act of 1995 (“PSLRA”). In denying the motion on Rule 72 review, District Judge Anne M. Donnelly held that the decision was comprehensive, and not “clearly erroneous” or “contrary to law,” as required by the highly deferential standard of review for non-dispositive motions under Rule 72(a). The Court’s refusal to reverse the decision illustrates that a mere prima facie showing of certain damages may not be sufficient to satisfy the adequacy requirements of the PSLRA.
Background
Plaintiff Mingxue Guo filed a putative class action against Tyson asserting violations of the Securities Exchange Act of 1934. The complaint alleged that Tyson and certain officers and directors of the company had failed to disclose the financial implications of its purportedly inadequate Covid-19 safety protocols in publicly filed documents to the SEC between March 13, 2020 and November 16, 2020. On December 15, 2020, the Comptroller of New York City called on the SEC to investigate Tyson and its alleged failure to implement proper safety protocols. Tyson’s share price dropped 2.5%, or $1.78, per share on December 15, 2020.
Tyson investors Chen Porat and Keagan Marcus filed a motion that sought their appointment as lead plaintiffs, and approval of their attorneys as class counsel. Porat alleged losses in the amount of $156.25 and Marcus allegedly incurred losses of $166.95. None of the parties had identified a class member that suffered a greater financial loss and no other member of the class had filed a competing motion for appointment as lead Plaintiff within the required time frame. Porat and Marcus argued that courts typically approve lead Plaintiffs with losses similar to, or less than, the losses they incurred. As discussed in Judge Cho’s decision, a purported class member seeking appointment as lead Plaintiff in a securities class action must meet the typicality and adequacy requirements under Rule 23 of the PSLRA. Porat and Marcus were found to have met the typicality requirement because both parties asserted claims that were based on the same facts concerning the alleged misrepresentations as other class members during the same period. With respect to the adequacy requirement, however, they had not established that they would fairly and adequately protect the interests of the class. Judge Cho held that the PSLRA requires lead Plaintiffs to have a significant financial interest in a class action to avoid Plaintiffs from simply acting as an instrument of counsel, who may have recruited them for that purpose. This requirement incentivizes the lead Plaintiff to monitor and control the litigation in a fashion that will best serve the interests of all the class members. Because Porat and Marcus lacked a significant financial interest in the outcome of the litigation, the Court opined that they failed to satisfy the requirements of the PSLRA and their motion was denied. The ruling concluded that that the case should proceed on an individual basis.
The Court’s Decision
In denying the Rule 72 objections to reverse Magistrate Judge Cho’s decision, Judge Donnelly noted that the deferential standard of review for non-dispositive motions under Rule 72(a) created a heavy burden for a party seeking reversal. The decision of a Magistrate Judge denying or approving a lead Plaintiff is non-dispositive. Thus, a movant must demonstrate that the Magistrate Judge’s decision denying appointment of proposed lead Plaintiff was “clearly erroneous” or “contrary to law,” and the Court found that Porat and Marcus had not met that burden. Porat and Marcus had argued that Magistrate Judge Cho’s ruling was erroneous because it would preclude small class actions by appointing only lead Plaintiffs who had suffered a large loss, thereby creating a loss requirement that does not exist under the PSLRA. They further argued that a small loss should not preclude a prima facie showing of adequacy.
Judge Donnelly held that the lack of a specific minimum loss requirement in the PSLRA does not alter the broad discretion the statute grants to the courts in determining the adequacy of a lead Plaintiff. Judge Donnelly opined that the Magistrate Judge’s decision was comprehensive and in accordance with the exacting requirements of the PSLRA. The Court determined that the necessity of a significant financial interest advanced the historical purpose of the PSLRA, and the decision was in line with a number of prior case law authorities that denied motions of proposed lead Plaintiffs on similar grounds.
Key Takeaways
The existence of some measure of damages may not be sufficient to meet the adequacy requirements of the PSLRA unless a proposed lead Plaintiff can demonstrate an interest that will incentivize forceful advocacy on behalf of the entire class. Clearly, damages of $323 is not enough. The decision in Guo indicates that proving adequacy will often necessitate a substantial financial stake in a litigation to serve the restrictive purposes of the PSLRA. Class members who seek appointment as lead Plaintiff without the requisite financial interest will also face a very narrow standard of review if their motion is denied.