Garbowski et al v. Tokai Pharmaceuticals, Inc. et al
Filing
100
Judge Mark L. Wolf: "...V. ORDER 1. Garbowski, Buchansky, Doshi, and Purohit shall each, by April 20, 2018, either: (a) move, individually or as a group, to be appointed lead plaintiff and propose class counsel; or (b) state that he does not s eek to serve as lead plaintiff. If they wish to apply for appointment as a group, they shall address the factors discussed in In re Cendant Corp., 264 F. 3d at 266-67. 2. A hearing shall be held on April 30, 2018, at 2:00 p.m. Any person seeking to serve as lead plaintiff shall attend and be prepared to testify if necessary." ORDER entered. MEMORANDUM AND ORDER. Associated Cases: 1:16-cv-11963-MLW, 1:16-cv-11992-MLW(Bono, Christine)
UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS
MICHAEL GARBOWSKI, ET AL,
)
Plaintiffs,
V.
)
C.A. No. 16-CV-11963-MLW
TOKAI PHARMACEUTICALS, INC., ET AL,)
Defendants.
)
VAIBHAV DOSHI, ET AL,
Plaintiffs,
)
)
V.
)
)
)
C.A. No. 16-CV-11992-MLW
TOKAI PHARMACEUTICALS, INC., ET AL,)
Defendants.
)
MEMORANDUM AND ORDER
WOLF, D.J.
March 16, 2018
In these consolidated class actions, it is alleged that Tokai
Pharmaceuticals, Inc. and several of its officers, directors, and
underwriters committed securities fraud in connection with the
development of galeterone, an experimental drug. On September 30,
2016, Steven Maxon and Sanjiv Purohit timely filed competing
motions, pursuant to the Private Securities Litigation Reform Act
of 1995 ("PSLRA"), 15 U.S.C. § 78u-4{a)(3), seeking consolidation,
appointment as lead plaintiff for the class, and approval of their
respective selections of lead counsel. Maxon is a contractor for
the United States Department of Defense who is working in Djibouti.
Purohit subsequently withdrew his motion because Maxon has a larger
financial stake in the litigation. However, Purohit stated that he
intended the withdrawal to have "no impact on...his ability to
serve as a representative party should the need arise." C.A. No.
16-11992, Docket No. 51.
As explained in this Memorandum, a purpose of the PSLRA is
to assure that securities class actions will be directed by lead
plaintiffs who are willing and able to select and supervise class
counsel. It was intended to end the perceived practice of counsel
choosing
plaintiffs,
operating
without
supervision,
and
often
profiting greatly from settlements that provided little benefit to
class members.
On September 28 and October 10, 2017, the court held hearings
concerning Maxon's motion, which raised questions regarding his
suitability to serve as a lead plaintiff and the suitability of
Pomerantz LLP ("Pomerantz") to serve as lead counsel. Among other
things, although Maxon had previously certified under oath that he
had read the complaint, he informed the court that he did not know
what a complaint was and had not read anything except a notice on
a website before seeking to become lead plaintiff. In addition,
although he said he may have spoken to another law firm, Maxon did
not
know
that
Pomerantz
had
filed
the
motion
seeking
his
appointment as lead plaintiff and selection of it as class counsel
until the court expressed its intention to question him. He did
not hear from or speak to anyone at Pomerantz until just before
the
September
28,
2017
hearing
in
which
Maxon
attempted
to
participate by telephone from the United Arab Emirates.
On October 10, 2017, the court ordered that Maxon and the
law firms seeking to represent him provide additional information.
On October 17, 2017, Maxon filed a notice that he was withdrawing
his motion. Pomerantz proposes that the court reopen the period
for class members to apply to be appointed lead plaintiff.
For
the
reasons
explained
below,
the
court
is
denying
Pomerantz's request to reopen the period for class members to seek
to become lead plaintiff. Although other courts have reopened the
period after the withdrawal of a lead plaintiff, it is not clear
that the PSLRA grants the authority to do so. In any event, the
plaintiffs who filed these cases and Purohit are now eligible to
be considered for appointment. Because of the filing of multiple
cases, other class members had 103 days—much longer than the 60
days ordinarily provided by the PSLRA—to seek appointment. No
institutional
institutional
investor
or
expressed
individual
interest.
investor
Nor
expressed
has
interest
any
in
becoming lead plaintiff in the five months since Maxon withdrew
his motion. Reopening the notice period would further delay the
progress of the case, which defendants have a legitimate interest
in having resolved as promptly as possible. In these circumstances,
assuming that the court has the authority, it is not necessary or
appropriate to reopen the period for additional class members to
move for appointment as lead plaintiff.
It is appropriate to provide Purohit an opportunity to renew
his request. In addition, the plaintiffs in each case are also
eligible to be considered for appointment as lead plaintiff.
Therefore, Purohit and each plaintiff are being ordered to file,
by April 20, 2018, a motion for appointment in the form required
by the PSLRA or a statement that he does not seek to serve as lead
plaintiff.
To provide guidance to potential lead plaintiffs in this
case and their counsel, the court is explaining why it would have
found Maxon and Pomerantz to be inadequate as lead plaintiff and
class counsel respectively.
I.
APPLICABLE LAW
Before the enactment of the PSLRA, "[c]ourts traditionally
appoint[ed] lead plaintiff and lead counsel in class action
lawsuits on a first come first serve basis." S. Rep. No. 104-98
(1995)(reprinted in U.S.C.C.A.N. 679)(the "Senate Report"). "This
encouraged a 'race to the courthouse' among parties seeking lead-
plaintiff status." In re Cendant Corp. Litiq., 182 F.R.D. 144, 145
(D.N.J. 1998).
The
previous system also "spawned a cottage-industry of
specialized securities litigation firms that 'researched potential
targets for these suits, enlisted
plaintiffs, controlled the
litigation, and often negotiated settlements that resulted in huge
profits for the law firms with only marginal recovery for the
shareholders.'" Id. "Investors in the class usually ha[d] great
difficulty exercising
any meaningful direction
over
the
case
brought on their behalf" and "[t]he lawyers c[ould] decide when to
sue and when to settle, based largely on their own financial
interests, not the interests of their purported clients." Senate
Report at 6. "[P]laintiffs' counsel in many instances litigate[d]
with a view toward ensuring payment for their services without
sufficient
regard
to
whether
their
clients
[were]
receiving
adequate compensation in light of evidence of wrongdoing." Id.
Section 101(b) of the PSLRA, codified at 15 U.S.C. §74u-4,
now governs the appointment of lead plaintiffs in securities class
actions. As Judge Patti Saris succinctly explained, that section
recognizes that "the selection of the lead plaintiff and lead
counsel should rest on considerations other than how quickly a
plaintiff has filed its complaint." In re Lernout & Hauspie Sec.
Litig., 138 F. Supp. 2d 39, 43 (D. Mass. 2001)(Saris, D.J.). The
PSLRA aims:
"to increase the likelihood that institutional investors
will serve as lead plaintiffs by requiring courts to
presume that the member of the purported class with the
largest financial stake in the relief sought is the most
adequate plaintiff." [H.R. Conf. Rep. No. 104-369 ("House
Conference Report") at] 33-34 [1995]. This is predicated
upon the conclusion that "[i]nstitutional investors and
other class members
with large amounts at stake will
represent the interests of the
plaintiff class more
effectively than class members with small amounts
stake." Id. at 34. Expressing a jaundiced view
at
of
"unsupervised"
plaintiffs'
attorneys,
the
[House]
Conference Committee was most hopeful that "the plaintiff
will choose counsel rather than, as is true today, counsel
choosing the plaintiff." Id. at 35.
Id.; see also Arkansas Teacher Retirement System v. Insulet Corp.,
177 F. Supp. 3d 618, 621 (D. Mass. 2016)(Wolf, D.J.). In essence,
the PSLRA aims "to empower investors so that they—not their
lawyers—exercise
primary
control
over
private
securities
litigation." Senate Report at 4.
To achieve those goals, §101(b) establishes a process to
"locate a person or entity, whose sophistication and interest in
the litigation are sufficient to permit that person or entity to
function as an active agent for the class" and "actively supervise
the conduct of the litigation" of class actions alleging securities
fraud. In re Cendant Corp. Litiq., 264 F.3d 201, 266-67 (3d Cir.
2001)(Becker, J.). It requires that "not later than 20 days after
the
date
on
which
the
complaint is filed, the
plaintiff or
plaintiffs shall cause to be published, in a widely circulated
national business-oriented publication or wire service, a notice
advising members of the purported plaintiff class—
(I)
of the pendency of the action, the claims asserted
therein, and the purported class period; and
(II)
that, not later than 60 days after the date on
which the notice is published, any member of the
purported class may move the court to serve as
lead plaintiff of the purported class."
15 U.S.C. §77u-4(a)(3)(A)(i).
"Each plaintiff seeking to serve as a representative party
on behalf of a class [must] provide a sworn certification,"
"which [must] be personally signed by such plaintiff and filed
with the complaint, that:
(i)
states that the plaintiff has reviewed
complaint and authorized its filing;
the
(ii)
states that the plaintiff did not purchase the
security that is the subject of the complaint at
the direction of plaintiff's counsel or in order
to participate in any private action arising under
this chapter;
(iii)
states that the plaintiff is willing to serve as
a representative party on behalf of a class,
including providing testimony at deposition and
trial, if necessary;
(iv)
sets
forth
all
of
the
transactions
of
the
plaintiff in the security that is the subject of
the complaint during the class period specified
in the complaint;
(v)
identifies any other action under [the Securities
Act], filed during the 3-year period preceding the
date on which the certification is signed by the
plaintiff, in which the plaintiff has sought to
serve as a representative party on behalf of a
class; and
(vi)
states that the plaintiff will not accept any
payment for serving as a representative party on
behalf of a class beyond the plaintiff's pro rata
share of any recovery, except as ordered or
approved by the court..."
15 U.S.C. §78u-4(a)(2)(A).
Subsection (a)(3)(B)(i) & (ii) require that "no later than 90
days" after the notice is published, or as soon as practicable
after the court renders a decision on a motion to consolidate
related class actions:
the court shall consider any motion made by a purported
class member in response to the notice, including any
motion by a class member who is not individually named as
a plaintiff in the complaint or complaints, and shall
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
class members (hereafter in this paragraph referred to as
the "most adequate plaintiff") in accordance with this
subparagraph.
(emphasis added). "The most adequate plaintiff shall, subject to
the approval of the court, select and retain counsel to represent
the class." Id. at §78u-4(a)(3)(B)(v).
For the purposes of §77u-4(a)(3)(B)(i), "the court shall
adopt a presumption that the most adequate plaintiff in any private
action arising under this subchapter is the person or group of
persons that:
(aa) has either filed the complaint or made a motion in
response to a notice under subparagraph (A)(i);
(bb) in the determination of the court, has the largest
financial interest in the relief sought by the class;^ and
(cc) otherwise satisfies the requirements of Rule 23 of
the Federal Rules of Civil Procedure."
1 In considering who has the largest financial stake in the
litigation, courts have considered "(1) the number of shares
purchased during the class period; (2) the number of net shares
purchased during the class period; (3) the total net funds expended
during the class period; and (4) the approximate losses suffered
during the class period." Arkansas Teachers, 177 F. Supp. 3d at
622 (citing representative cases).
8
Id. at §77u-4(a)(3)(B)(iii)(I). "The presumption...may be rebutted
only upon proof by a member of the purported plaintiff class that
the presumptively most adequate plaintiff:
(aa) will not fairly and adequately protect the interests
of the class; or
(bb) is subject to unique defenses that render such
plaintiff incapable of adequately representing the
class."
Id. at (iii)(II).
"The [initial] determination of whether the movant with the
largest interest in the case 'otherwise satisfies' Rule 23 should
be confined to determining whether the movant has made a prima
facie showing of typicality and adequacy." In re Cendant Corp.,
264 F.3d at 263. This determination "should be a product of the
court's independent judgment." Id. "[I]n inquiring whether the
movant has preliminarily satisfied the typicality requirement,
[courts] should consider whether the circumstances of the movant
with the largest losses are markedly different or the legal theory
upon which the claims [of that movant] are based differs from that
upon which the claims of other class members will perforce be
based." Id. at 265. In assessing adequacy at this stage, the court
must also consider whether the proposed lead plaintiff "has the
ability and incentive to represent the claims of the class
vigorously, [whether he] has obtained adequate counsel, and
[whether] there is [a] conflict between [the movant's] claims and
those asserted on behalf of the class." Id.
In exercising its judgment, the court should consider "the
substantive policies of [the PSLRA]," which, as indicated earlier,
are to ensure that "securities class actions be managed by active,
able class representatives who are informed and can demonstrate
they are directing the litigation." Berger v. Compaq Computer
Corp., 257 F. 3d 475, 483 (5th Cir. 2001). Under the PSLRA, "one
of a lead plaintiff's most important functions is to 'select and
retain' lead counsel." In re Cendant Corp., 264
F. 3d at 265
(quoting 15 U.S.C. §78u-4(a)(3)(B)(v)). In addition, as also
indicated earlier, "active and able" representatives must be able
to ensure that counsel do not "litigate with a view toward ensuring
payment for their services without sufficient regard to whether
their clients are receiving adequate compensation in light of
evidence of wrongdoing." Senate Report at 6; see also In re Cendant
Corp., 264 F. 3d at 255.
"One of the best ways" for a court to ensure that a proposed
lead plaintiff will fulfill these functions is:
to inquire whether the movant has demonstrated a
willingness and ability to select competent class counsel
and to negotiate a reasonable retainer agreement with that
counsel. Thus, a court might conclude that the movant
with the largest losses could not surmount the threshold
adequacy inquiry if it lacked legal experience or
sophistication, intended to select as lead counsel a firm
that
was
plainly
incapable
of
undertaking
the
10
representation,
or
had
negotiated
a
clearly
unreasonable fee agreement with its chosen counsel.
Id. at 265-66. The question, however, is not "whether another
movant may have chosen better lawyers or negotiated a better fee
agreement," but "whether the choices made by the movant with the
largest losses are so deficient as to demonstrate that [he] will
not fairly and adequately represent the interests of the class,
thus disqualifying [him] from serving as lead plaintiff at all."
Id.
Whether the proposed lead plaintiff diligently negotiated a
fee agreement is especially important because the court, when
approving any request for attorney's fees, will presume that the
lead plaintiff's fee agreement is one that "a fully informed client
would negotiate" and is, therefore, reasonable. See id. at 282.
II.
PROCEDURAL HISTORY
On August 1, 2016, Pomerantz, on behalf of plaintiff Vaibhav
Doshi, filed a class action complaint against Tokai and certain of
its officers and directors in the United States District Court for
the Southern District of New York. The complaint alleges securities
fraud
in
connection
with
the
development
of
the
company's
galeterone drug. Doshi asserts claims under the Securities and
Exchange Act of 1934 (the "Exchange Act"), §§10(b) and 20(a). The
action
was
subsequently
transferred
11
to
the
District
of
Massachusetts as Doshi v. Tokai Pharmaceuticals, Inc. et al., C.A.
No. 16-11992 {the "Doshi Action").
Also on August 1, 2016, Pomerantz, among other law firms,
published a notice announcing the filing of the Doshi Action. See
Declaration of Matthew L. Tuccillo, Ex. A. The notice advised
investors of their right to file a motion to be appointed lead
plaintiff in the Doshi Action within 60 days, meaning by September
30, 2016. See id.
On
September
29,
2016,
Michael
Garbowski
and
Stephen
Bushansky filed a similar action. See C.A. No. 16-11963-MLW (the
"Garbowski Action"). They allege the same claims as Doshi under
§10(b) of the Exchange Act and also assert claims under §§11,
12(a)(2), and 15 of the Securities Act of 1933 (the "Securities
Act"), codified at 15 U.S.C. §§77k, 771(a)(2), and llo,^
On September 30, 2016, Purohit and Maxon each moved to be
appointed lead plaintiff. S^ Docket Nos. 7 & 8 ("Maxon's First
Motion"); Doshi Action, Docket Nos. 18 & 19 ("Purohit's Motion").
Maxon's motion represented that he had purchased 28,620 shares of
Tokai securities and suffered a loss of $390,105 in connection
with purchases he made during the class period. See Maxon's First
2 Other related actions are Wu v. Tokai Pharmas., C.A. No. 16-
12550 (the "Wu Action") and Anqelos v. Tokai Pharmas., 17-11365
(the "Angelos Action"). The Angelos Action has been consolidated
with these cases for pretrial purposes only.
12
Motion at 11-12; Lieberman Decl., Ex. C. Purohit represented that
he had acquired 1,720 shares and lost $8,386.76 in connection with
those purchases.
Purohit Motion, Ex. 3. Purohit later withdrew
his motion because Maxon had a larger financial stake in the
litigation. See Doshi Action, Docket No. 51. However, as noted
earlier, Purohit stated that he intended the withdrawal to have
"no impact on...his ability to serve as a representative party
should the need arise." Id.
On
October
14,
2016,
however,
Garbowski
and
Bushansky
opposed Maxon's motion to be appointed lead plaintiff, arguing
that it was premature. In particular, they asserted that the
previously-published notices to the class had concerned only the
Doshi Action. The Doshi Action alleged only claims under the
Exchange Act on behalf of a class of investors who purchased Tokai
securities in the 13 months between June 24, 2015 and July 25,
2016. In contrast, the Garbowski Action alleged claims under both
the Securities Act and the Exchange Act based on a longer class
period—the 22 months between September 17, 2014, the date of
Tokai's initial public offering, and July 25, 2016. As indicated
earlier, the PSLRA requires that the notice set forth "the claims
asserted" in the action and "the purported [class] period." 15
U.S.C. §77u-4(a)(3)(A)(i). Notice of the Garbowski Action was not
published until October 14, 2016. S^ 0pp. to Maxon's First Motion,
Ex. A {Docket No. 24-1). Therefore, Garbowski and Buchansky
13
requested that any decision on Maxon's motion to be appointed lead
plaintiff be deferred for 60 days, until December 13, 2016.
Maintaining that the August 1, 2016 notice was adequate and
that the deadline for moving to be appointed lead plaintiff was
September 30, 2016, Maxon nevertheless filed a new motion for
consolidation and appointment as lead plaintiff, with Pomerantz as
lead counsel, on
December 13, 2016. See
Docket Nos. 28
& 29
("Maxon's Second Motion") at 3.
Both of Maxon's motions raised questions concerning whether
Maxon is a suitable lead plaintiff. In particular, as explained
earlier, the PSLRA requires prospective lead plaintiffs to submit
a
sworn
certification
stating,
among
other
things, "that the
plaintiff has reviewed the complaint and authorized its filing,"
and listing "all of the transactions of the plaintiff in the
security that is the subject of the complaint during the class
period specified in the complaint." 15 U.S.C. §78u-4(a)(2)(A)(iv).
With
both
of
his
motions,
Maxon
submitted
a
Plaintiff's
Certification which appeared to be electronically signed by him.
See Declaration of Jeremy Lieberman, Ex. B (Docket No. 30-2)(the
"Certification").
The
Certification
stated
that
"plaintiff's
transactions in the security that is the subject of the complaint
during the class period specified in the complaint are as follows:
(see attached)." Id. at 54. The words "(see attached)" appeared
within
a
solid
black
box.
Id.
14
A
document
entitled
"List
of
Purchases and Sales" was attached. Id. at 3. It was unclear to the
court, however, whether the black box was a subsequent redaction
and whether the list had been attached to the Certification when
Maxon signed it.
In
any
event,
the
Certification
and
Maxon*s
other
submissions did not provide sufficient information for the court
to decide whether Maxon satisfied all of the PSLRA's requirements
for serving as lead plaintiff, as set forth in In re Cendant Corp.,
264 F. 3d at 263-67 and more recently by this court in Arkansas
Teachers, 177 F. Supp. 3d at 622-23. In particular, the memorandum
accompanying the motion stated that Maxon was an adequate class
representative because: (1) he had the largest financial interest
in the litigation between the two movants; (2) his claims were
typical; and (3) with respect to the adequacy requirement of Rule
23, (a) there was "no antagonism" between his interests and those
of the class" and (b) he "has retained counsel highly experienced
in...prosecuting securities class actions..." Docket No. 22 at 14;
Docket No. 29 at 18. However, the memorandum did not address
whether Maxon was willing and able "to represent the claims of the
class vigorously," including by managing the litigation and the
lawyers. In re Cendant Corp., 264 F.3d at 265-66; see also Arkansas
Teacher, 177 F. Supp. 3d at 623. It was not accompanied by a
declaration
explaining
whether
Maxon
had
"negotiate[d]
a
reasonable retainer agreement with that counsel," among other
15
things
relevant
to
assessing
his
adequacy
to serve
as
lead
plaintiff. In re Cendant Corp., 264 F.3d at 263-65.^
Therefore, on September 28, 2017, the court attempted to
hold a hearing concerning Maxon's motions.^ Maxon participated
briefly
by telephone from the
United
Arab
Emirates.
Jeffrey
Lieberman, Esq. of Pomerantz represented Maxon, and addressed some
of the court's questions. Mr. Lieberman stated that Maxon first
contacted Goldberg P.C. ("Goldberg"), and that Brian Schall, Esq.
of
Goldberg
"vigorously
[went]
through
[with
Maxon]
the
requirements of being a lead plaintiff and what is entailed."
Sept. 28, 2017 Tr. (Docket No. 78) at 71. Mr. Lieberman represented
that Pomerantz told Maxon that his duties were "to oversee counsel,
which is very important, to make sure that we are doing our job in
representing the class, to maximize recovery in this case for all
investors," and to testify in the United States when required. Id.
Mr. Lieberman stated that those requirements had been "explained
3 The memorandum, in support of Purohit's motion, by the Rosen Law
Firm, P.A., also did not address whether Purohit understood a lead
plaintiff's duties or had negotiated a fee agreement. See Doshi
Action, Docket No. 19 at 5-6.
4
At the
September 28, 2017
hearing, the
court also
heard
defendants' motions to consolidate these cases with the Angelos
Action and the Wu Action, and Wu's motion to remand her case to
state court. The court consolidated the Garbowski and Doshi Actions
for all purposes, and the Angelos action for pretrial purposes.
See Garbowski Action, Sept. 28, 2017 Order at 551-2.It stayed the
Wu Action pending a decision by the United States Supreme Court in
Cyan, Inc. v. Beaver County Employees Retirement Fund, S. Ct. Case
No. 15-1439. See Wu Action, Sept. 28, 2017 Order.
16
numerous times to Mr. Maxon" and offered to submit a declaration
by Maxon "confirm[ing] what he understands his duties to be[.]"
Id. at 74-75.
In response to an inquiry from the court, Mr. Lieberman also
stated that Maxon had not yet negotiated a fee agreement with
Pomerantz. See id. at 76-77. Instead, Mr. Lieberman explained,
Maxon "asked how fees worked, and we explained to him how generally
it applies." Id. at 76. According to Mr. Lieberman, Maxon was aware
that "we will not seek a fee above 30 percent." Id.
Maxon, however, was no longer connected to the hearing by
telephone when the court attempted to question him concerning
whether he would be a suitable lead plaintiff. Therefore, the court
could
not
then
determine
whether
Maxon
understood
the
responsibilities of a lead plaintiff and whether he was competent
to discharge them.
Accordingly, the court denied the motion to appoint Mr. Maxon
as lead plaintiff without prejudice. See Sept. 28, 2017 Order
(Docket No. 80) at 54. Maxon and Mr. Schall were ordered to file
additional declarations addressing whether Maxon understood and
satisfied all of the requirements of a lead plaintiff in a class
action under the PSLRA. I^ at 555-6. Another hearing on Maxon's
motion was scheduled for October 10, 2017, to be conducted by
teleconference because Maxon would be at his regular place of
business in Djibouti. On September 28, 2017, despite assuming Maxon
17
already had it, the court directed that Pomerantz give Maxon a
copy of the Certification submitted with his motions so that he
could respond to questions about it. See id. at 81.
Maxon and Mr. Schall filed the required declarations. See
Docket
No.
84.
Mr.
Schall's
declaration
stated
that
he
had
communicated with Maxon by telephone "on at least two occasions"
before Pomerantz filed Maxon's First Motion, including on July 27,
2016, "for approximately one and a half total hours" and advised
him of the duties of a lead plaintiff. See Oct. 5, 2017 Decl.
(Docket No. 84-2) at 54. In a subsequent declaration, Mr. Schall
revised this statement, stating that he spoke to Maxon at least
once before September 26, 2016, and is uncertain about whether he
spoke to Maxon on July 27, 2016. See Oct. 25, 2017 Aff. (Docket
No. 98) at 557, 12. Mr. Schall also stated that Maxon has
"contacted [him] regularly" since Maxon's First Motion was filed.
See Oct. 5, 2017 Decl. at 56.
Maxon's
declaration
stated
that
he
"underst[ood]
and
appreciat[ed] the lead plaintiff's obligation under the PSLRA to
select lead counsel and to monitor the action to ensure that it is
prosecuted efficiently." Oct. 5, 2017 Decl. (Docket No. 84-1), at
55. He believed he had "fulfilled this responsibility by selecting
and retaining" Pomerantz, which has "substantial experience in
achieving substantial recoveries in securities class actions." Id.
He stated that he had "signed a retainer agreement with Pomerantz
18
pursuant to which Pomerantz will not request a fee in excess of
30% of any settlement or judgment achieved." Id. at SI6. Finally,
he stated that he would "continue to supervise counsel and actively
oversee the prosecution of the action for the benefit of the class
by, among other things, reviewing pleadings, instructing counsel,
sitting for depositions, and/or attending hearings, as necessary."
Id. at S17. He also stated that he had "numerous" communications by
telephone and email with Mr. Schall "and/or" Alexander Hood, Esq.
of Pomerantz.
At the October 10, 2017 hearing, the court questioned Maxon
and
Mr.
Schall.
Maxon
stated
that
he
saw
Goldberg's
notice
concerning this litigation and contacted the firm by filling out
a form on a website. See Oct. 10, 2017 Tr. {Docket No. 89) at 10,
27,
37.
However,
it
is
unclear
whether
that
form
was
the
Certification submitted to the court with Maxon's motions. Maxon
stated that his attorneys sent the Certification to him on the
morning of the hearing, October 10, 2017, at the direction of the
court. Id. at 21-22. He had no memory of seeing it before and did
not remember signing it. Id. at 27-28. Instead, he testified that
he completed a form stating that Goldberg "would represent [him]
and that [he] wasn't dealing with any other firms." Id. at 12, 2829. When asked about the statement in the Certification that he
had "reviewed the complaint and authorized its filing," Maxon
stated that he had not read anything before signing the document
19
on the website and did not know what a complaint was. Id. at 20.
He testified that the "List of Purchases and Sales" reflected
information he obtained from Merrill Lynch and sent to Mr. Schall
around September 26, 2016. Id. at 24-25. Therefore, it could not
have been attached to any form he signed on August 3, 2016. See
MMaxon also testified that he communicated with Mr. Schall by
email starting in August 2016. Id. at 30-31. He stated that he did
not have any oral conversations with any lawyer regarding this
case except for Mr. Hood. Id. at 31, 34-35. Maxon said he first
spoke with Mr. Hood after the court ordered that Maxon participate
in the September 28, 2017 hearing, shortly before that hearing
began. Id. at 32-35. He also stated that Mr. Hood, not Mr. Schall,
explained the responsibilities of a lead plaintiff to him. Id. at
33-34. Maxon understood those responsibilities to be "to represent
the people involved in this litigation to the best that I can do
as
far
as
judgment
is
concerned,"
to
"look
at
everyone's
interests," to testify truthfully, and to attend hearings in the
United States if requested. Id. at 34. Maxon did not mention the
obligations to select competent class counsel, to negotiate a
reasonable retainer agreement with that counsel, or to actively
supervise the conduct of the litigation and the actions of class
counsel. See In re Cendant Corp., 264 F. 3d at 265, 267.
20
Maxon
testified
that
he
had
a
second,
10
to
15
minute
conversation with Mr. Hood before the October 10, 2017 hearing.
See Oct. 10, 2017 Tr. at 35-36. During that call, Mr. Hood sent
Maxon two documents: Maxon's October 5, 2017 declaration and an
attorney's fee agreement, both of which Mr. Hood had drafted. Id.
at 38. Mr. Hood told Maxon he should sign and return both. Id. at
36, 74-75. Maxon did so the following day. Id. at 37.
Maxon
stated
several
times
that
he
never
had
any
oral
conversation with Mr. Schall. Id. at 50-51. Mr. Schall, however,
reiterated
his
belief
that
he
had
extensive
telephone
conversations with Maxon before the motion for his appointment as
lead plaintiff was filed. Id. at 52.
The court orally ordered that, by October 17, 2017, Mr.
Schall file the telephone records of his conversations with Maxon
and inform the court of the dates of those calls. Id. at 64. The
court also ordered Mr. Schall to file, on October 10, 2017, a
supplemental declaration concerning when he first received Maxon's
"Plaintiff's Certification" (Docket No. 30-2), and providing his
copy of it. Id. at 61.
On October 10, 2017, Mr. Schall filed the Certification and
related declaration. S^ Oct. 10, 2017 Decl. & Exhibit (Docket
Nos. 88 & 88-1). These filings resolved some questions, but raised
others. Mr. Schall stated that he first received the Certification
on or after August 3, 2016 from Lundin Law P.C. See Oct. 10, 2017
21
Decl.
(Docket
No.
88-1)
at 553-4.
He
stated that
Maxon
had
submitted the Certification through Lundin Law's website, that
Maxon subsequently informed Mr. Schall by telephone that he wished
to retain Goldberg as counsel, and that Lundin authorized Mr.
Schall to retrieve the Certification from the website. Id. at 54.
The Certification attached to Mr. Schall's October 10, 2017
declaration is identical to the Certification previously filed
with Maxon's motions, except that paragraph four of the October
10, 2017 submission contains, in place of the black box, a list of
purchases and sales of securities. Oct. 10, 2017 Schall Decl., Ex.
A. Mr. Schall stated that "[t]he page following [the Certification
previously
filed
with
Maxon's
motions]
reflects
the
same
transaction history initially submitted by Mr. Maxon at paragraph
4 of his [original] Certification," which was the version filed on
October 10, 2017. Id. at 58.
However, the "List of Purchases and Sales" following the
Certification filed with Maxon's motions on September 30 and
December 13, 2016, Docket Nos. 9-2 & 30-2, is different from the
list contained in paragraph 4 of the original form filed in the
October 10, 2017 submission. First, the document filed with Maxon's
motions does not list his July 26, 2015, post-class-period sales
of 28,620 shares of Tokai securities.^ Those sales are listed in
5 Pomerantz may have omitted the July 26, 2015 sales from the
document filed with Maxon's motions because they occurred after
22
the October 10, 2017 submission. The Certification filed with the
motions also lists two purchases of 2,857 and 10,000 shares of
Tokai stock, respectively, as having occurred on December 22, 2015,
instead of on December 28, 2015 as listed in the October 10, 2017
submission. Compare Docket No. 30-2 at 3 with Docket No. 88-1 at
54.
As indicated earlier, on October 17, 2017, Mr. Lieberman
filed
a
Notice
Appointment
as
of
Lead
Withdrawal
Plaintiff
of
Motion
and
of
Approval
Steven
of
Maxon
Counsel
for
(the
"Notice") (Docket No. 91). The Notice requests that the court order
a "modified re-opening of the PSLRA lead plaintiff appointment
process" by ordering that another notice be published and providing
30 more days for class members to seek appointment as lead
plaintiff. Id. at 2.
Mr. Schall, however, did not comply with the order that he
file by October 17, 2017 the telephone records of his conversations
with Maxon and a declaration concerning the dates of those calls.
On October 23, 2017, the court issued an Order explaining that the
the class period ended. The certifications and attached list only
purport to list transactions within the class period. However, the
discrepancies make the Certification Pomerantz filed with Maxon's
motions
an
statements
incomplete
in
Maxon's
and
inaccurate
original
representation
certification.
It
of
was
the
not,
therefore, a "true and correct" copy of that certification, as Mr.
Lieberman represented in his declaration accompanying the
submission. Docket No. 30.
23
Withdrawal Notice did not relieve Mr. Schall of the obligation to
file those items. It also ordered Mr. Lieberman to file Mr. Maxon's
fee agreement with Pomerantz.®
On October 24, 2017, Mr. Lieberman filed the fee agreement,
reflected in a letter from Pomerantz to Maxon dated October 3,
2017. As stated in Maxon's declaration, but not in his October 10,
2017 testimony, the agreement states that Pomerantz will not seek
a fee in an amount greater than 30% of any settlement or judgment.
Though not mentioned in the prior submissions, the agreement also
provides that Pomerantz may recover "costs necessary for the
prosecution of this case...from any such recovery." Docket No. 931 at 3. This indicates that Maxon was authorizing Pomerantz to
seek more than 30% of the total settlement fund—that is, 30% in
attorneys' fees, plus an additional portion to cover Pomerantz's
expenses.
On October 25, 2017, Mr. Schall filed another declaration
and several attachments, including a record of the dates, times,
originating and destination cities, and durations of his calls
between May 21 and November 1, 2016. See Oct. 25, 2015 Aff. (Docket
No. 98). In his declaration, Mr. Schall stated that he was "nearly
certain that [he] talked to Mr. Maxon on the phone," but that he
6 As explained in the October 23, 2017 Order, the court
inadvertently failed at the October 10, 2017 hearing to order that
the agreement be filed.
24
had "not yet located [his] telephone calls with Mr. Maxon on [the]
phone records." Id. at SI2. He stated that he "believe[s] the reason
for this misunderstanding is due to the fact that certain calls
from military bases and calls from prepaid calling cards are not
reflected on the Verizon bill." Id. He confirmed this fact with
two Verizon representatives. Id. As evidence that he had telephone
conversations with Maxon, he submitted an October 10, 2017 email
from Maxon to Pomerantz in which Maxon stated that he had "forgot
about the calls from the Goldberg firm." Id. Ex. D. Mr. Schall
also gave detailed descriptions of the contents of telephone calls
with Mr. Maxon, see id. at S[3, and stated that Mr. Hood informed
him that while preparing for the October 10, 2017 hearing, Maxon
told Mr. Hood that he remembered talking to Mr. Schall on the
telephone. See id. at 59.
III. MAXON'S MOTION TO BE APPOINTED LEAD PLAINTIFF
Although Maxon has withdrawn his motion for lead plaintiff,
the court is giving the parties guidance concerning how it would
have applied the PLSRA and Rule 23 standards to Maxon's motion to
be appointed lead plaintiff to minimize the risk of problems in
the future. The court may have to decide a motion by Purohit,
Garbowski, Buchansky, and/or Doshi to be appointed lead plaintiff
in these
consolidated
actions.
However, as indicated earlier,
Pomerantz's memorandum on behalf of Maxon, and Rosen's memorandum
on behalf of Purohit, did not sufficiently address the standards
25
applicable to determining whether the movants would be "adequate"
lead
plaintiffs.
Any
future
motions
for
appointment
as
lead
plaintiff should comport with the court's guidance.
Despite the absence of a record, the court is satisfied that
Mr. Schall spoke to Maxon on the telephone at least once. However,
the fact that Maxon did not recall any conversation with him or
what
was
discussed
called
Maxon's
ability
to
supervise
this
litigation into serious question. See Oct. 10, 2017 Tr. at 67.
More
importantly,
as
indicated
earlier,
neither
the
conversations with Messrs. Schall and Hood nor the statements of
this
court
succeeded
in
educating
Maxon
to
understand
his
obligations to: (1) "select competent class counsel," to (2) "to
negotiate a reasonable retainer agreement with that counsel," and
to (3) "actively supervise the conduct of the litigation and the
actions of [that] counsel." In re Cendant Corp., 264 F. 3d at 265,
267. Therefore, the court is not satisfied that he would have been
willing or able to discharge those duties. Id.
Maxon's
testimony
regarding
his
fee
agreement
with
Pmomarantz illustrates the reasons for the court's conclusion that
Maxon would not have been an adequate lead plaintiff. As explained
earlier, "one of a lead plaintiff's most important functions is to
'select and retain' lead counsel."
Id. (citing 15 U.S.C. §78u-
4(a)(3)(B)(v)). Accordingly, "one of the best ways for a court to
ensure that it will fairly and adequately represent the interests
26
of the class is to inquire whether the movant has demonstrated a
willingness and ability to select competent class counsel and to
negotiate a reasonable retainer agreement with that counsel." Id.
This
ensures
that
"the
plaintiff
will
choose
counsel
rather
than...counsel choosing the plaintiff," House Conference Report at
35, and that the lawyers do not "litigate with a view toward
ensuring payment for their services without sufficient regard to
whether their clients are receiving adequate compensation," Senate
Report at 6.
In this case, Maxon did not select Pomerantz. Instead, Maxon
testified that less than one week after the close of the proposed
class period, when Tokai announced that it was discontinuing the
phase three trial of galeterone, Maxon committed to working only
with Goldberg. See Oct. 10, 2017 Tr. at 12, 28. Goldberg later
selected Pomerantz. It is permissible for outside counsel to "help
the class representative in carrying out its role as such and in
overseeing proposed class counsel." Feder v. Electronic Data
Systems Corp., 429 F. 3d 125, 132 {5th Cir. 2005). Goldberg,
however, did not "help" Maxon select Pomerantz. Rather, Maxon
stated that Goldberg "handed [Maxon] off" to Pomerantz without his
knowledge or approval. Oct. 10, 2017 Tr. at 44-45. Maxon never
heard of Pomerantz until "a few days before [his] first phone
conversation" with the court on September 28, 2017, when he "was
contacted by Mr. Hood." Id. Mr. Hood informed Maxon that Mr. Hood
27
"would be the lawyer that would be running the meetings with [the
court] and that [Maxon] was to talk to him...directly since he was
in New York." Id. This was one year after Pomerantz filed the
motion to appoint Maxon lead plaintiff and Pomerantz as class
counsel.
Maxon also made no attempt to negotiate for the class to
receive
a
higher
percentage
of
the
recovery
than
Pomerantz
proposed. Id. at 40 In response to a question from the court about
whether he had negotiations with Mr. Hood about what the fee would
be, Maxon responded, "No, none whatsoever." Id. Pomerantz filed
the motion to appoint Maxon lead plaintiff and Pomerantz as class
counsel in September 2016. However, there was no fee agreement
until
the
court
asked
Mr.
Lieberman
whether
there
was
one.
Subsequently, in a fifteen-minute conversation, Mr. Hood told
Maxon that "he would be sending [Maxon] two documents," Maxon's
declaration and the fee agreement, and that Maxon "needed to sign
them and then scan and e-mail them back to him..." Id. at 37. Maxon
asked no questions and made no counteroffer. Rather, he signed the
letter as drafted and e-mailed it back the following day. Id. He
never spoke to any law firm other than Goldberg and Pomerantz. In
addition, he stated that no one discussed the fee with him before
he signed the agreement, which he described as "a standard
agreement from a law firm." I^ at 41-42. Mr. Hood confirmed that
"no
one
at
the
Pomerantz
firm
28
to
my
knowledge
had
direct
communications with Mr. Maxon about the [fee] agreement prior to"
the week preceding the October 10, 2017 hearing. See id. at 76.
Maxon stated that no negotiation concerning fees was needed
because he believed that 30% of the recovery was a reasonable fee,
based on a suit he brought as an individual "quite a while ago" in
New York and "research" about a class action involving Exxon Mobil.
Id. at 20-21, 40. However, Maxon's further answers indicated that
he did not carefully review or understand the agreement sent to
him by Mr. Hood. For example, Maxon incorrectly believed that
although "the law firm usually gets 30% of the settlement,"
Pomerantz could "get all the money" "if the settlement for the
share price was low and [Pomerantz's] hourly rates ate up the rest
of the money." Id. at 41. However, under the proposed agreement,
Pomerantz would not have been entitled to seek compensation above
30% of the recovery plus costs necessary for the prosecution of
the case.
In
addition,
as
explained
earlier,
the
resulting
fee
agreement provides that Pomerantz is authorized to seek more than
30% of the settlement fund in
attorneys' fees and expenses.
Negotiations by an adequate representative might, for example,
have resulted in a concession by Pomerantz to pay its expenses
from any fee award of 30%, rather than charging the expenses to
the class fund. They could have also persuaded Pomerantz to lower
its fee.
29
Finally, Maxon's testimony regarding the Certification filed
with his motions in September and December 2016 raises questions
concerning the reliability of representations made by Maxon and
Pomerantz. As explained earlier. Docket No. 30-2 was not a "true
and accurate cop[y]...of the Shareholder Certification executed by
Maxon
(redacted
to
exclude
Mr.
Maxon's
personal
identifying
information)," as Pomerantz represented it to be on September 30
and December 13, 2016. See Sept. 30, 2016 Tuccillo Decl. at SI2;
Dec. 13, 2016 Lieberman Decl. at SI2. The form certified that a
list of Maxon's transactions in Tokai securities was attached,
when in fact the list was attached only after Maxon signed the
form. In addition, the attachment did not accurately and completely
reflect the transactions that Maxon had originally included in his
signed Certification."^
Moreover, on August 3, 2016, Maxon signed, under oath, a
"Plaintiff's
"Plaintiff
Certification,"
[meaning
Maxon]
which
has
stated
reviewed
in
the
paragraph
complaint
1,
and
authorized its filing." Docket No. 30-2. As explained earlier,
such a certification is required to be filed with a PSLRA class
If Pomerantz believed that the July 26, 2017 sales Maxon listed
on the original form were irrelevant because they were made after
the close of the class period, it could have left the information
unredacted, attached the List of Purchases and Sales in a separate
exhibit, and explained that the July 26, 2017 sales were outside
the class period. In any event, it should not have filed the
documents in a manner that misrepresented the contents of the
Certification.
30
action complaint. See 15 U.S.C. §78u-4(a)(2)(A)(i). However, Maxon
repeatedly testified that he did not known what a complaint was or
the name of the document that initiates a lawsuit. See Oct. 10,
2017 Tr. at 18-20. He also testified that he did not read anything
before signing the Certification under oath except for something
on a website that instructed him that he had to sign the document
"in order to go forward with the class action lawsuit." Id. at 18;
see also id. at 20. It is evident that Maxon had not, on August 3,
2016, read the complaints filed on behalf of Garbowski, Buchansky,
or Doshi. Nor did Maxon later read any amended complaint to be
filed on his behalf or authorize its filing.
Maxon's willingness to make false statements under oath
contributes to the court's conclusion that he would not have been
an adequate lead plaintiff. The willingness of Pomerantz to submit
to the court a statement that was obviously incorrect at least to
the extent that it represented that Maxon had authorized the filing
of a complaint heightens the court's concerns. Its failure to speak
to Maxon about whether he had read any of the complaints in these
actions
or
anything
else
before
submitting
Maxon's
misrepresentation to the court, reinforces the conclusion that
Maxon, with Pomerantz as his counsel, would not have represented
the putative class in the manner required by the PSLRA.
More specifically, the court would have found that Maxon did
not understand the obligations of a lead plaintiff, and would not
31
have been willing and able to satisfy them. As explained earlier,
he did not select proposed class counsel or negotiate their fee.
No one at Pomerantz ever spoke to Maxon, or communicated with him
directly, until the court expressed its intent to question him at
the September 28, 2017 hearing. Therefore, the court concludes
that if Maxon and Pomerantz had been appointed, this case would
have
been
conducted
by
unsupervised
plaintiffs'
attorneys—a
practice the PLSRA was intended to end. See House Conf. Report at
35; Berqer, 257 F. 3d at 483; Lernout, 138 F. Supp. 2d at 43;
Arkansas. Teachers, 177 F. Supp. 3d at 621.
IV.
REQUEST TO REOPEN THE LEAD PLAINTIFF APPLICATION PERIOD
Pomerantz requests that the court authorize it to issue a new
notice inviting class members other than the plaintiffs and Purohit
to move
within 30 days for appointment as lead plaintiff. As
explained earlier, in enacting the PSLRA lead plaintiff provision.
Congress intended put the investor "most capable of adequately
representing the interests of class members" in charge of the case.
15 U.S.C. §77u-4(a)(3)(B)(i). However, by establishing deadlines
for
motions for
lead
plaintiff
and
directing
that
the
court
consider any such motion promptly, the PSLRA also aims "to ensure
that the lead plaintiff is appointed at the earliest possible time,
and to expedite the lead plaintiff process." Coopersmith v. Lehman
Brothers, Inc., 344 F. Supp. 2d 783, 793 (D. Mass. 2004)(Gorton,
D.J.).
32
Although some courts have reopened the application period
after a lead plaintiff has withdrawn, see, e.g.. In re Neopharm
Sec. Litig., 2004 U.S. Dist. LEXIS 5814 (N.D. 111. 2004), it is
not clear whether the PSLRA authorizes reopening. In any event,
new notice is not required to be published when movants withdraw
their
motions
for
lead
plaintiff
because
"the PSLRA does
not
limit lead plaintiffs to those who have filed motions within 60
days of the publication of the notice. Rather, those presumed most
adequate to serve as lead plaintiffs include either those who have
filed a complaint or those who made a motion for appointment within
the 60 day period." Coopersmith, 344 F. Supp. 2d at 790. Therefore,
"[w]here
there
is
not
a
timely
motion
before
the
Court,
the PSLRA directs [the] Court's attention to the plaintiffs that
have 'filed
[a] complaint.'" Id. at 791 (quoting
Skwortz v.
Crayfish Co., Ltd., 2001 WL 1160745, at *5 (S.D.N.Y. 2001)).
This case includes class action complaints that were filed by
Garbowski, Buchansky, and Doshi. They are still each eligible to
request appointment as lead plaintiff. In addition, Purohit
withdrew his motion to be appointed lead plaintiff in deference to
Maxon, who had a larger financial stake in the litigation. It
would, therefore, be appropriate to consider whether Purohit would
be an adequate lead plaintiff if he is now willing to serve.
It is, however, neither necessary nor appropriate to issue a
new 30-day notice inviting others to seek to represent the class.
33
It is not necessary because Purohit and each of the original
plaintiffs is a potential lead plaintiff if he wishes to seek to
serve. It is not appropriate because the filing of multiple cases
resulted in 103 days, more than the usual 60 days, for individuals
or
institutions
to
consider
whether
to
try
to
become
lead
plaintiff. No institutional investor expressed interest. There is
no
reason
to
believe
that
a
new
notice
would
produce
an
institutional lead plaintiff.® Indeed, neither an institutional
investor nor anyone else has expressed interest in becoming lead
plaintiff in the five months since Maxon withdrew his motion.
The PLSRA process is intended to produce a lead plaintiff
within 90 days after notice of the filing of a class action suit
or promptly after multiple related class actions are consolidated.
See 15 U.S.C. §78u-4(a)(3)(B)(i) & (ii). Reopening the notice
period would further delay the progress of this case, which the
court expects will include the filing of a consolidated amended
complaint by anyone appointed lead plaintiff and a motion to
dismiss. Defendants have a legitimate interest in knowing as soon
8 At the September 28, 2017 hearing Mr. Lieberman stated that
institutional
investors
rarely
choose
to
participate
in
pharmaceutical class actions. See Sept. 28, 2017 Tr. at 75.
Therefore, he said, "it's very common to have a non-institutional
investor
[as
lead
plaintiff] in
a
pharmaceutical
case,
particularly where it is focused on one product [as in this case]."
Id.
34
as now possible whether this case will continue as a.putative class
action and the allegations against each of them.
Therefore, the court is ordering that, by April 20, 2018,
Garbowski, Buchansky, Doshi, and Purohit move, individually or as
one or more groups, for appointment as lead plaintiff or state
that they decline to do so. If one or more of these eligible
individuals moves to be appointed lead plaintiff, the court will
promptly conduct a hearing to determine whether his motion is
meritorious and to resolve any competing claims to the position.
V.
ORDER
1.
Garbowski, Buchansky, Doshi, and Purohit shall each, by
April 20, 2018, either:
(a) move, individually or as a group, to
be appointed lead plaintiff and propose class counsel; or (b) state
that he does not seek to serve as lead plaintiff. If they wish to
apply for appointment as a group, they shall address the factors
discussed in In re Cendant Corp., 264 F. 3d at 266-67.
2.
A hearing shall be held on April 30, 2018, at 2:00 p.m.
Any person seeking to serve as lead plaintiff shall attend and be
prepared to testify if necessary.
UNITED STATES DISTRICT JUDG
35
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