AGUILAR v. VITAMIN SHOPPE, INC. et al

Filing 15

OPINION. Signed by Judge Kevin McNulty on 4/25/18. (DD, )

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY

WAN I. AGUILAR, individually and

on behalf of all others similarly
situated,
Civ. No. 2:17-cv-6454-KM-MAH
Plaintiff,
OPINION
vs.
VITAMIN SHOPPE, INC., RICHARD
L. MARKEE, COLIN F. WATTS, and
BRENDA M. GALGANO,
Defendants.

KEVIN MCNULTY. U.S.D.J.:

Before the court in this putative federal securities class action are the
competing motions of:
(1) a group of individual plaintiffs consisting of Richard Schubert, Daniel E.
Onishuk, Jr., and Mohammed Kayyal (collectively, the “SOK plaintiffs”)
(ECF No. 4); and
(2) plaintiff Corpus Christi Firefighters’ Retirement System (“CCFRS”) (ECF
No. 5).
Each seeks appointment as lead plaintiff and appointment of its counsel as
lead counsel.

1

I.

BACKGROUND AND ALLEGATIONS’

The underlying federal securities class action is brought on behalf of
purchasers of Vitamin Shoppe, Inc. (“Vitamin Shoppe”) common stock between
March 1, 2017 and August 8, 2017, inclusive (the “Class Period”). The plaintiffs
allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, 15 U.S.C.

§

78j(b), 78t(a), as amended by the Private Securities

Litigation Reform Act of 1995 (the “PSLRA”), 15 U.S.C.

§

78u-4, et seq., and of

the Securities and Exchange Commission (the “SEC”) Rule lOb-5 promulgated
thereunder, 17 C.F.R.

§

240.lOb-5.

Defendant Vitamin Shoppe is a specialty retailer and direct marketer of
nutritional products. (CC

¶11

2, 22). Its common stock was taken public in an

initial public offering (“IPO”) in 2009. (CC

¶

2). Defendant Richard L. Markee

(“Markee”) served as a Director of Vitamin Shoppe from the start of the Class
13). He previously served as the CEO and

Period until June 7, 2017. (CC

¶

Chairman of the Board. (CC

13). Defendant Cohn F. Watts (“Watts”) served as

¶

the CEO and a Director of Vitamin Shoppe throughout the class period. (CC

¶

14). Defendant Brenda M. Galgano (“Galgano”) served as Executive Vice

President and the Chief Financial Officer (“CFO”) of Vitamin Shoppe during the
Class Period. (CC

¶

15).

Named plaintiff Ivan I. Aguilar, on behalf of the putative class, alleges
that from March 1, 2017 to August 8, 2017 Vitamin Shoppe issued materially
false statements and failed to disclose adverse facts known about Vitamin
Shoppe. (CC ¶11, 11-17). More specifically, plaintiffs allege that defendants

Certain citations to the record are abbreviated as follows:
CC = Corrected Complaint (ECF No. 3)
SOK Motion = Memorandum of Law in Support of Richard Schubert, Daniel E.
Onishuk, Jr. and Mohammed Kayyal’s Motion for Appointment as Lead
Plaintiff and Approval of Counsel (ECF No. 4)
CCFRS Motion = Memorandum of Law in Support of the Motion of Corpus
Chrisfi Firefighter’s Retirement System for Appointment as Lead Plaintiff
and Approval of Selection of Counsel (ECF No. 5-1)
0

represented that Vitamin Shoppe’s financial statements were prepared in
conformity with Generally Accepted Accounting Principles (“GAAP”). (CC

¶1

23-25). Plaintiff alleges that these representations were materially false

because, in violation of GAAP, defendants allegedly delayed the recognition of a
goodwill impairment charge of more than $168 million for Vitamin Shoppe’
retail segment, thereby’ inflating the company’s income and assets during the
class period. (CC

¶1

23-28).

A. March 1, 2017 Press Release

The Class Period starts on March 1, 2017. (CC

¶IJ

29). On that date,

before the opening of trading, Vitamin Shoppe issued a press release
announcing its financial results for the fourth quarter of 2016, the period that
ended December 31, 2016. (CC

¶

29). The press release reported $304.9 million

total net sales, up 3.9% from the same period of the prior year, and a “fully
diluted loss per share [ol] $0.49, compared to fully diluted earnings per share
of $0.22 in fourth quarter 2015.” (CC

¶

29). The release stated that the

company had more than $210.6 million in goodwill. (CC

¶

29). It also provided

a fiscal year 2017 guidance of “[t]otal comparable sales growth of flat to low
single digit negative,” with “[flully diluted earnings per share in the range of

$ 1.95-2.20.”

(CC

¶

29). The release quoted defendant Watts, who stated that

Vitamin Shoppe’s “reinvention strater,” “growth initiatives,” “accelerated
progress in our cost reduction and margin enhancement initiatives,” and
“long-term prospects for sustainable, profitable growth” supported this
guidance. (CC

29).

B. March 1, 2017 Conference Call

Vitamin Shoppe held a conference call for analysts and investors on the
same day as the March 1, 2017 press release. (CC

¶

30). Defendants spoke

positively about the ongoing “reinvention strategy” and the company’s
businesses and prospects. (CC

9

30). Defendant Watts promised a “more

in-depth update on the progress we made on our company reinvention
strategy, giving some early indications of what we expect to see on key
3

initiatives for 2017.” (CC

1

30). He also stated that cost savings and improved

margin opportunities “will begin to be reflected in our profit performance later
in 2017” and that, because of the reinvention strate, “our company is well
positioned to grow profitably and to increase shareholder value by the
back-half of 2017.” (CC

¶

30). Defendant Galgano stated, in pertinent part, that

Vitamin Shoppe expected an approximately $17 million year-over-year increase
in cost reduction, longer-term growth opportunities, and continued progress on
company initiatives. (CC

¶

31).

C. March 1, 2017 Form 10-K

On March 1, 2017, Vitamin Shoppe filed its Form 10-K with the SEC,
Markee, Watts, and Galgano, and certified pursuant to

which was signed b

the Sarbanes Oxley Act of 2002 by Watts and Galgano. (CC

¶

32). The 2016

10-K stated that the company’s audited financial statements had been
prepared in accordance with GAAP and that the company possessed more than
$210.6 million in goodwill. (CC

¶

32). The form stated that Vitamin Shoppe

operated three business segments (i.e., retail, direct, and manufacturing) and
that the company had allocated $165.3 million and $45.3 million of its
recorded goodwill to the retail and direct segments, respectively. (CC
form recorded its process for evaluating goodwill. (CC

¶

¶

32). The

32).

Plaintiff alleges that the actions of March 1, 2017 caused Vitamin
Shoppe’s stock to rise more than 8% from its close of $21.30 on February 28,
2017 in intraday trading, reaching a Class Period high of $23.25 per share on
March 1, 2017. (CC

¶

33). Several Vitamin Shoppe senior executives and

directors sold approximately 82.4 million of their personally held stock at this
peak time. (CC

¶

34). Defendant Markee sold 100,000 shares on March 3, 2017

alone, for $2,224,000 in gross proceeds. (CC

¶

34).

D. May 10, 2017 Press Release
On May 10, 2017, Vitamin Shoppe announced its first quarter financial
results for 2017. (CC

1

35). Vitamin Shoppe reported “GAAP fully diluted

earnings per share of $0.35” for the first quarter. (CC
4

¶

35). The company also

reduced its fiscal year 2017 guidance by more than 45% to “GAAP fully diluted
earnings per share in the range ofSl.03-$1.28.” (CC

¶

35). The release stated

that the company had more than $210.6 million in goodwill as of April 2017.
(CC

¶

35). Defendant Watts was quoted in the release, stating that “[w]hile the

start of the year ha[d] been challenging, I am encouraged by the progress we
have made on our major reinvention and cost reduction initiatives that we
began developing and piloting over the last several months,” and that
“[c]ustomer response to our pilots has given us confidence that these new
initiatives should have a positive impact on our business trends starting in the
back half of this year.” (CC

¶

35).

E. May 10, 2017 Conference Call
Vitamin Shoppe held a conference call on May 10, 2017. (CC ¶ 36).
Defendant Watts acknowledged that Vitamin Shoppe was “disappointed” by its
first quarter results and that the second quarter was “shaping up to be another
difficult quarter.” (CC

¶

36). Nonetheless, he reassured investors that the

company had fully “adjusted [its] guidance to reflect this.” (CC

¶

36). Defendant

Galgano also assured investors that Vitamin Shoppe was returning to
profitability. (CC

¶

36). She also provided specific second quarter 2017

guidance, stating in pertinent part, “We currently estimate that the second
quarter GAAP EPS will be in the range of a loss of $0.07 to earnings of $0.03 a
share.” (CC

¶

37).

The price of Vitamin Shoppe shares declined by about one-third on May
10, 2017. (CC

¶

38). The share price decreased by more than $6 to close at

$12.70 per share. (CC

¶

38). Plaintiffs allege that this reduction occurred in

response to the unexpected 45% reduction in fiscal year 2017 earnings
guidance. (CC

¶

38).

F. May 10, 2017 Form 10-Q
On May 10, 2017, Vitamin Shoppe filed with the SEC its Form lO-Q,
which was signed and certified pursuant to the Sarbanes Oxley Act of 2002 by
defendants Watts and Galgano. This form stated that the company still had
b

more than $21O6 million in goodwill on the books as of April 1, 2017, but now
stated that all “210.6 million of its recorded goodwill” was being “allocated” to
the retail segment. (CC

¶

39). This added more than $45 million in goodwill to

the retail segment. (CC

‘

39). The Form 10-Q stated that the “interim financial

statements reflect all adjustments, which [were], in the opinion of management,
necessan’ for a fair presentation in conformity with GAAP” and that they
“should be read in conjunction with the audited financial statements and notes
thereto included in the Form 10-K for the fiscal year ended December 31, 2016,
as filed with the Securities and Exchange Commission on March 1, 2017.” (CC

¶

39).
G. August 9, 2017 Announcement

On August 9, 2017, Vitamin Shoppe announced that it was taking a
$168.1 million impairment charge on the goodwill associated with its retail
segment. (CC

¶

41). Vitamin Shoppe would thus report a “GAAP loss per share

of 56.73” in the second quarter of 2017. (CC

¶

41). Vitamin Shoppe also

dropped its fiscal year 2017 guidance altogether, citing “the potential increase
in variability of the Company’s results due to the number of initiatives being
launched in the back half of the year.” (CC

¶

41).

Vitamin Shoppe’s common stock price again decreased. (CC
$3.50 per share to close at $6.10 per share. (CC

¶

¶

42). It fell

42). Plaintiffs claim that

Vitamin Shoppe’s common stock was traded on an open, well-developed, and
efficient market at all times during the Class Period. (CC

¶

42).

H. Causes of Action

Plaintiffs allege that defendants made several materially false and
misleading statements during the Class Period. (CC

¶

40). Specifically,

plaintiffs allege that the company’s retail segment was continuing to
dramatically decline and the “reinvention strate’” was not successful; the
ongoing changes from the “reinvention strategy” had significantly impaired the
more than $168 million in goodwill being carried on Vitamin Shoppe’s retail
segment; Vitamin Shoppe improperly delayed in recognizing the impairment to
6

the retail segment’s goodwill; Vitamin Shoppe’s financial statements were not
prepared in conformity with QAAP; the value of the retail segment’s goodwill
did not increase by more than $45 million during the first quarter of 2017; and
that defendants thus lacked a reasonable basis for their positive statements
about the success of Vitamin Shoppe’s reinvention plan and financial
prospects. (CC

¶ 40). Defendants also aflegedly did not have a reasonable basis

to claim that Vitamin Shoppe would return to profitability during fiscal year
2017. (CC

¶ 40).

Plaintiffs allege that defendants acted with scienter. (CC

¶

47).

Furthermore, plaintiffs claim that defendants are not entitled to the protection
of the statutory safe harbor for “fonvard-looking statements.” (CC

¶ 50). They

claim that defendants’ actions perpetrated a fraud on the market and that the
plaintiffs should be joined in a class. (CC

¶1J 48, 51-56).

Count I alleges violation of Section 10(b) of the Exchange Act and Rule
lOb-S promulgated thereunder. (CC

¶jJ 57-61). Count II alleges violation of

Section 20(a) of the Exchange Act. (CC

¶1J 62-63). Plaintiffs seek compensatory

damages, including interest; reasonable costs and expenses incurred in the
action, including counsel fees and expert fees; and any other appropriate relief.
Now before the court are the competing motions of the 50K plaintiffs and
CCFRS. (ECF Nos. 4, 5). Each seeks appointment as lead plaintiff and approval
of its selection of counsel as lead counsel. (ECF Nos. 4, 5).
II.

LEGAL STANDARD

The PSLRA governs the appointment of the lead plaintiff in “each private
action arising under the [Exchange Act] that is brought as a plaintiff class
action pursuant to the Federal Rules of Civil Procedure.” 15 U.S.C.

§ 78u-4(a)(1). The PSLRA directs courts to adopt a rebuttable presumption that
“the most adequate plaintiff is the person or group of persons that has
(1) either filed the complaint or made a motion in response to the notice to the
class; (2) has the largest financial interest in the relief sought by the class; and
(3) otherwise satisfies the requirements of Federal Rule of Civil Procedure 23.”
7

Lewis v. Lipocine ma, No. 16-cv-4009-BRM-LHG, 2016 WL 7042075, at *4
(D.N.J. Dec. 2, 2016) (citing Fields v. Biomatrix, Inc., 198 F.R.D. 451, 456
(D.N.J. 2000) and 15 U.S.C.

§ 78u-4(a)(3)(B)(iii)(I)).

At this stage, in the context of the PSLRA, Rule 23 requires that the party
or parties seeking to represent a class (1) have claims or defenses that are
typical of the claims or defenses of the class, (the “typicality requirement”) and
(2) be able to fairly and adequately protect the interests of the class, (the
“adequacy requirement”). See Fed. R. Civ. p. 23(a); In re Cendant Corp. Litig.,
264 F.3d 201, 263 (3d Cir. 2001); Lewis, 2016 WL 7042075, at *4 A more
thorough analysis, of course, will occur at the class certification stage.
“Once a presumptive lead plaintiff is located, the court should then turn
to the question 1o9 whether the presumption has been rebutted.” In re Cendant,
264 F.3d at 268. 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.” 15 U.S.C.

§ 78u-4(a)(3)(B)(iii)(II); see also In

re Cendant, 264 F.3d at 268 (“[T]he question is not whether another movant
might do a better job of protecting the interests of the class than the
presumptive lead plaintiff; instead, the question is whether anyone can prove
that the presumptive lead plaintiff will not do a ‘fair[] and adequate[]’job.”
(citation omitted)).
Thus, one way a movant may rebut the presumption is with “proof that
the presumptively most adequate plaintiff is ‘subject to unique defenses that
render such plaintiff incapable of adequately representing the class.”’ Grodko u.
Cent. European Distribution Corp., No. 12-cv-5530, 2012 WL 6595931, at *3
(D.N.J. Dec. 17, 2012) (quoting 15 U.S.C.

§ 78u—4(a)(3)(B)(iii)(Ifl(bb)). As the

United States Court of Appeals for the Third Circuit has recognized, “the
challenge presented by a defense unique to a class representative [is thatl the
representative’s interests might not be aligned with those of the class, and the
8

representative might devote time and effort to the defense at the expense of
issues that are common and controlling for the class.” Beck v. Maximus, Inc.,
457 F.3d 291, 297 (3d Cir. 2006). “A proposed class representative is neither
typical nor adequate if the representative is subject to a unique defense that is
likely to become a major focus of the litigation.” Id. at 301; see also Grodko,
2012 WL 6595931, at *3
Judge Arleo of the District of New Jersey has usefully explained that the
proof required to rebut the presumption at this early stage of litigation “need
not definitively establish” the allegedly unique defense; “Rather, the competing
plaintiff must show simply that there is some degree of probability that the
defense might ‘become a major focus’ in the case.” In re Enzymotec Ltd. Sec.
Litig., No. 14-cv-5556, 2015 WL 918535, at *2 (D.N.J. Mar. 3, 2015) (quoting
Steamfitters Local 449 Pension Fund u. Cent. European Distribution Corp., Nos.
11-6247, 11-7085, 2012 WL 3638629, at *9 (D.N.J. Aug.22, 2012)); cf Roofers’
Pension Fund v. Papa, No. 16-cv-2805, 2017 WL 1536222, at *4 (D.N.J. Apr.
27, 2017) (explaining that movants seeking to rebut the presumption “do[j not
have to prove the defense, but [t]he[yj must provide enough evidence to show
that it is not speculative or meritless”).
III.

DISCUSSION

As stated above, the PSLRA directs courts to adopt a rebuttable
presumption that “the most adequate plaintiff is the person or group of persons
that has” (A) “either filed the complaint or made a motion in response to the
notice to the class”; (B) “has the largest financial interest in the relief sought by
the class;” and (C) “otherwise satisfies the requirements of Federal Rule of Civil
Procedure 23.” Lewis v. Lipocine Inc., No. 16-cv-4009, 2016 WL 7042075, at *4
(D.N.J. Dec. 2, 2016) (citing 15 U.S.C.

§ 78u-4(a)(3flBfliii)(I); Fields v. BiornatHx,

Inc., 198 F.R.D. 451, 456 (D.N.J. 2000)). Considering both the 50K plaintiffs
and CCFRS in light of elements A, B, and C, I conclude that the 50K plaintiffs
are presumptively the most adequate plaintiffs. Following that analysis, I then

9

(D) evaluate whether CCFRS can rebut that presumption and (E) determine the
appointment of lead counsel.
A. Timely Motion in Response to Notice of the Class

The SOK plaintiffs and CCFRS have both submitted timely motions to be
appointed as lead plaintiff. (50K Motion; CCFRS Motion). The PSLRA provides
that once a complaint is filed, the pendency of the action must be publicized in
a widely circulated national business-oriented publication or wire service
within 20 days. 15 U.S.C.

§ 78u-4(a)(3)(A)(i). The notice shall advise members

of: (1) the pendency of the action; (2) the claims asserted therein; (3) the
purported class period; and (4) the right to move the court to be appointed as
lead plaintiff within 60 days of notice. Id. In this case, adequate notice was
published through Business Wire on August 28, 2017. (ECP No. 4-1, ex. A).
The SOK plaintiffs and CCFRS filed their motions on October 27, 2017. (SOK
Motion; CCFRS Motion). Both of these motions were filed within the 60-day
deadline after publication and both therefore meet this first requirement.
B. Largest Financial Interest
The SOK plaintiffs and CCFRS disagree as to which party has the larger
financial interest in the relief sought by the class. Together, the 50K plaintiffs
claim an $86,454 loss. (50K Motion at 5; CCFRS Motion at 1-2). Schubert has
a $54,748 loss; Onishuk an $18,616 loss; and Kay al a S 13,089 loss. (SOK
Motion at 5; CCFRS Motion at 1-2). CCFRS reports a $27,990 loss.2 (SOK
Motion at 5; CCFRS Motion at 1-2). I rank the losses, aggregate and individual,
by size in table format:
Claimed Loss

Movant(s)
Schubert, Onishuk, & Kayyal Total

$86,454

Schubert

$54,748

Onishuk and Man-al Total

$31,705

The parties agree on these losses. The 50K plaintiffs include cents in their
figures; CCFRS does not. The losses of Schubert, Onishuk, and Kayyal do not add up
to exactly $86,454 because of rounding.
2

10

CCFRS

$27,990

Onishuk

$18,616

Kayyal

$13,089

(SOK Motion at 5; CCFRS Motion at 1-2).
If the three 50K plaintiffs’ claimed losses are aggregated, the 50K
plaintiffs clearly have the larger financial interest. CCFRS argues, however,
that the 50K plaintiffs’ losses cannot be aggregated because: (I) Schubert has
not proven that he has a direct financial stake in the loss and thus lacks
standing; and (ii) the 50K plaintiffs are an unrelated group of individuals. I
note, however, that Schubert’s loss, standing alone, is larger than that of
CCFRS, and that Onishuk and Kayyal’s interests, if aggregated, would still be
larger than CCFRS’s interest. To establish that its loss is the largest, then,
CCFRS must establish both that Schubert is disqualified and that the losses of
Onishuk and Kayyal cannot be aggregated.
i. Schubert’s Standing3
Plaintiff Schubert did not purchase Vitamin Shoppe stock, the security
that is the subject of this action. (ECF No. 4-2). Catherine Prehn purchased the
stock and Schubert holds Prehn’s power of attorney. (ECE No. 4-2). In a
supplemental filing submitted after the 60-day deadline, Schubert claims that
Catherine Prehn is his elderly grandmother who assigned him the right and
ability to pursue these legal claims. (ECF No. 9-2). Schubert reports that
Catherine Prehn assigned her Vitamin Shoppe stock to Schubert during the
Class Period. (ECE No. 4-2). He filed this exhibit on October 27, 2017—i.e.,
after the 60-day post-notice deadline.
Those circumstances suggest raises three issues: (1) whether the power
of attorney provides Schubert with standing; (2) whether the assignment
provides Schubert with standing; and, if so, (3) whether the evidence of the

Whether Schubert has standing relates whether his claims can be aggregated
with Onishuk and Kayyal’s interests, and also whether Schubert has unique legal
issues that would prevent him from satisfying the Rule 23 requirements.
11

assignment, submitted after the 60-day deadline, should be considered by this
court.
1. Power of Attorney and Standing

Schubert’s power of attorney does not provide Schubert with standing to
sue. Article III standing consists of three “irreducible” elements:
(1) injury-in-fact, which is a “concrete and particularized” harm to a “legally
protected interest”; (2) causation in the form of a “fairly traceable” connection
between the asserted injury-in-fact and the alleged actions of the defendant;
and (3) redressabilitv, or a non-speculative likelihood that the injury can be
remedied by the requested relief. See Lujan v. Defs. of Wildlzfe, 504 U.S. 555,
560-61 (1992). These requirements ensure that a plaintiff has a sufficiently
personal stake in the outcome of the suit so that the parties are adverse. Cf
Baker u. Can-, 369 U.S. 186, 204 (1962) (“Have [plaintiffs] alleged such a
personal stake in the outcome of the controversy as to assure that concrete
adverseness which sharpens the presentation of issues upon which the court
so largely depends for the illumination of difficult constitutional questions?”).
To satisfy the injury-in-fact requirement, “the injury must affect the plaintiff in
a personal and individual way.” See Lujan, 504 U.S. at 560 n.1.
In this context, a power of attorney does not endow the attorney-in-fact
with injury-in-fact. The Second Circuit has found that an investment advisor
with the power of attorney—but not an ownership stake in the claims—does
not have standing to pursue federal securities claims. WR. HuffAsset Mgmt.
Co., LLC v. Deloitte & Touche LLP, 549 F.3d 100, 108-10 (2d Cir. 2008). The
person with power of attorney is empowered to act on behalf of a principal, but
does not personally suffer any drop in value of the securities owned by the
principal.
District courts in the Third Circuit once allowed “investment advisors” to
bring suit on behalf of their clients. See, e.g., Marden v. Select Medical Corp.,
246 F.R.D. 480 (E.D. Pa. 2007). But more recent case law has challenged the
premise that an individual without legal title to the claim has suffered an
12

injury-in-fact in the context of a federal securities litigation. In 2008 the
Supreme Court held that an assignee has legal standing because it possesses
legal title to the claim, and therefore has legal title to, and has suffered, the
injury-in-fact that occurred. Sprint Commc’ns Co., L.P. v. APCC Serus., Inc., 554

U.S. 269 (2008). After Sprint, the Second Circuit held that an investment
advisor, who has authority to make investment decisions and a power of
attorney, does not have standing to bring securities lawsuits when he or she
does not own the underlying securities. W.R. Huff Asset Mgmt. Co., LLC a
Deloitte & Touche LLP, 549 F.3d 100, 103 (2d Cir. 2008). “Sprint makes clear
that the minimum requirement for an injury-in-fact is that the plaintiff have
legal title to, or a

proprietary

interest in,

the claim.” Id. at 108. The Second

Circuit continued:
does not confer standing to sue in
[A] mere power-of-attorney
the holder’s own right because a power-of-attorney does not
transfer an ownership interest in the claim. By contrast, an
assignment of claims transfers legal title or ownership of those
claims and thus fulfills the constitutional requirement of an
...

injury-in-fact.

Id.; see also Steamfitters Local 449 Pension Fund v. Cent. European Distrib.
Corp., Nos. ll-cv-6247, 11-cv-7085, 2012 WL 3638629, at *10 (D.N.J. Aug. 22,
2012).
Second Circuit decisions do not bind district courts in the Third Circuit.
Nonetheless, Judges of the Eastern District of Pennsylvania and the District of
New Jersey have been persuaded by Sprint and Huff that plaintiffs must have
some type of proprietary interest in the claim they are litigating. See, e.g.,
Steamfitters Local 449 Pension Fund, 2012 WL 3638629, at *10; In re Herley
Indus. Sea Litig., No. 6-cv-2596, 2009 WL 3169888 (E.D. Pa. Sept. 30, 2009). I
am likewise persuaded, and join them in holding that a power of attorney, in
itself, does not grant standing in federal securities cases.
There are prudential exceptions to the injury-in-fact requirement if a
plaintiff can demonstrate (1) a “close relationship” to the injured party and (2) a

13

barrier to the injury party’s ability to assert its own interest. Huff 549 F.3d at
109 (citing Kowaiski v. Tesmer, 543 U.S. 125, 130 (2004)). Courts have found a
“close relationship” between trustees and their trusts, guardians ad litem and
their wards, receivers and their receiverships, assignees in bankruptcy and the
bankrupt estates, and foster parents and their foster children. Id.; see also
Sprint, 554 U.S. at 287-88; Smith v. Org. of Foster Families for Equality &
Reform, 431 U.S. 816, 841 n.44 (1977). Schubert argues that he satisfies this
prudential exception. Schubert argues that (1) he has a close relationship to
Catherine Prehn as her grandson and (2) there is a barrier to Catherine Prehn’s
involvement given her age and preference not to be involved in the litigation.
(ECF No. 9, at 7). Schubert’s family relationship with Prehn, however loving
and affectionate, is not typical of those found to be “close” for purposes of the
exception to prudential standing; those “close relationships” tend to be legally
created bonds. Schubert has not cited precedent that a grandmother-grandson
relationship qualifies. Nor has Schubert demonstrated that Catherine Prehn is
disabled from litigating this claim; he merely states that his grandmother is
older and does not wish to be involved.
2. Assignment
Nonetheless, there is evidence that Catherine Prehn assigned her
Vitamin Shoppe stock to Schubert during the Class Period. (ECF No. 4-2). The
Supreme Court has held that an assignee who holds legal title to an injury
party has standing to pursue that claim—even if the assignee has agreed to
remit all proceeds from the litigation back to the assignor. Sprint, 554 U.S. at
285-86. The Second Circuit applied this principle in Huff 549 F.3d at 108-09.
The assignment of stock to Schubert therefore would provide Schubert with
standing. I have to consider, however, whether the court will accept the
belatedly-submitted eyidence of that assignment.
3. Post-Deadline Submissions
Schubert was assigned the stock during the Class Period and thus had
an injury when the litigation commenced. (ECE No. 4-2). Evidence of the
14

assignment to Schubert, however, was submitted after the 60-day post-notice
deadline. Nevertheless, Courts have permitted supplemental evidence after the
60-day deadline in an appropriate case. See, e.g., In re Merck & Ca, Inc. v. Sec.,
Derivative & ERISA Litig., MLD No. 1658 (SRC), 2015 WL 3823912, at *5
(D.N.J. June 19, 2015) (permitting parties to file amended complaints, after the
60-day PSLRA deadline, to “assert facts that make their standing to bring suit
clear based on the assignments given by the beneficial owners of the
[defendant’s] stock at issue”); In re Vivendi Universal, S.A. Sec. Litig., 605 F.
Supp. 2d 570, 586 (S.D.N.Y. Mar. 31, 2009) (permitting plaintiffs, after the
60-day deadline, to amend their complaints to allege assignment, ratification,
or substitution by entities with standing to bring suit in a PSLRA action).
Defendants cite a Tenth Circuit case for the proposition that a movant for
lead plaintiff status in a PSLRA action must demonstrate its financial interest
within the 60-day deadline. See In re Bard Assocs., Inc., No. 9-6243, 2009 WL
4350780, at *3 (10th Cir. Dec. 2, 2009). In Bard, the district court held that a
movant must establish Article III standing by the time the motions to appoint a
lead plaintiff are due. Id. The Tenth Circuit was hesitant to accept this finding.
Id. Nonetheless, the court of appeals declined to hold that the district court
“acted wholly without jurisdiction or so clearly abused its discretion as to
constitute usurpation of power.” Id. (citation omitted). Therefore, the Tenth
Circuit did not itself adopt an inflexible deadline; it merely held that a district
court could do so.
Seeing no prejudice, I will exercise some flexibility. Like the Southern
District of New York and District of New Jersey Judges, I will permit Schubert’s
post-deadline evidence showing the assignment of stock. Schubert therefore
has established his standing to pursue PSLRA claims against defendants. Even
standing alone, Schubert has the greatest financial claim of any parW that has
sought to be appointed lead plaintiff. In the next section, I will consider
whether Schubert’s losses can be aggregated with those of Onishuk and
Kayyal.
15

ii. Aggregation of Unrelated Persons

The text of the PSLRA permits the appointment of a “person or group of
persons” to be the plead plaintiff. 15 U.S.C.

§ 74u-4(a)(3)(B)(iii)(I); see In re

Gentiva Sec. Litig., 281 F.R.D. 108, 118-19 (E.D.N.Y. 2012) (“[Ijt is clear that
the express language of the PSLRA permits the appointment of a person or
group ofpersons to be lead plaintiff.”). The group of persons does not need to be
“related” in some manner; but any such group must be able to “fairly and
adequately protect the interests of the class.” In re Cendant Corp. Litig., 264
F.3d 201, 266-67 (3d Cir. 2001). 1 analyze whether this group can fairly and
adequately represent the class in connection with the Rule 23 requirements.
C. Rule 23 Requirements

There are four requirements for class certification under Rule 23(a): the
class must be “so numerous that joinder of all members is impracticable,”
“there are questions of law or fact common to the class,” “the claims and
defenses of the representative parties are typical of the claims or defenses of
the class,” and “the representative parties will fairly and adequately protect the
interests of the class.” Fed. R. Civ. P. 23(a). These four requirements are
frequently referred to as numerosity. commonality, typicality, and
representation.
“[O]f the four requirements for class certification under Rule 23(a), only
two—typicality and adequacy of representation—directly address whether a
lead plaintiff movant is the ‘most adequate plaintiff.”’ Chao Sun u. Han, No.
15-cv-703, 2015 WL 2364937, at *3 (D.N.J. May 14, 2015) (citation omitted). At
this stage of the litigation, the parties need only make a prima facie showing of
typicality and adequacy; the analysis is less rigorous than at the class
certification stage. See In re Cendant, 264 F.3d at 263.
i. Typicality

16

The 50K plaintiffs’ claims are typical of the class. As explained by Chief
Judge Linares in Chao Sun:
A proposed lead plaintiffs claims are typical of the class when the
proposed lead plaintiffs claims and injuries arise from the same
event or course of conduct that gave rise to the claims of the other
class members and are premised on the same legal theory. In re
Party City Sec. Litig., 189 F.R.D. 91, 107 n.13 (D.N.J. 1999). The
Rule 23(a)(3) typicality requirement “is to ensure that ‘maintenance
of a class action is economical and that the named plaintiffs
claims and the class claims are so interrelated that the interests of
the class members will be fairly and adequately protected in their
absence.”’ Cromer Fin. Ltd. v. Berger, 205 F.R.D. 113, 122 (S.D.N.Y.
2001) (quoting General Telephone Co. of the Southwest v. Falcon,
457 U.S. 147, 157 n.13, 102 S.Ct. 2364, 72 L.Ed.2d 740 (1982)).
Chao Sun, 2015 WL 2364937, at 5. Here, the SOK plaintiffs’ claims arise from
the same event, practice or conduct that gives rise to the other class members’
claims; their claims are based on the same legal theory. The 50K plaintiffs
allege that defendants made material misstatements and omissions concerning
Vitamin Shoppe, in violation of federal securities laws. They allegedly
purchased Vitamin Shoppe securities on reliance of these purported
misstatements and omissions—and were allegedly damaged thereby.
ii. Adequacy of Representation

The 50K plaintiffs have also shown that they will adequately represent
the class. As stated in Chao Sun:
Rule 23(a)(4)’s requirement of “[a]dequacy, for purposes of the lead
plaintiff determination, is contingent upon both the existence of
common interests between the proposed lead plaintiffs and the
class, and a willingness on the part of the proposed lead plaintiff to
vigorously prosecute the action.” In re Nice Sys. Sec. Litig., 188
F.R.D. 206, 219 (D.N.J. 1999). “The Third Circuit explained that
when assessing the adequacy of representation, courts should
consider whether the proposed lead plaintiff has the ability and
incentive to represent the claims of the class vigorously, [whether
it] has obtained adequate counsel, and [whether] there is [a]
conflict between [the movant’s] claims and those asserted on behalf
17

of the class.” Id. (quoting In re Cendant Corp., 264 F.3d at 265)
(internal citation omitted).
Chao Sun, 2015 WL 2364937, at *3 (bracketed material in original). The SOK
plaintiff have selected counsel with experience in securities litigation. See (ECF
Nos. 4-4, 4-5, 4-6). There are no known conflicts between the 50K plaintiffs
and the members of the class, and the lead plaintiffs appear to have a
sufficient interest in the outcome of the case to ensure vigorous advocacy.
D. Rebuttable Presumption
The 50K plaintiffs thus entitled to the presumption that they are the
most adequate plaintiffs. They made a timely motion, have the largest financial
interest in the relief sought by the class, and satisfy the typicality and
adequacy prongs of Rule 23. Once a movant is presumptively the most
adequate plaintiff, this 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.
15 U.S.C.

§ 74u-4a(3)(B)(iii)(l1). In accordance with the statute, the burden falls

on CCFRS to support these two rebuttal factors with proof.
i. Fairly and Adequately Represent Class Interests
To evaluate whether the movant will “fairly and adequately” represent the
class’s interests, courts may consider: (a) the sophistication of the plaintiffs,
(b) the qualifications of their counsel, (c) whether the group was created by the
efforts of lawyers for the purpose of obtaining lead plaintiff status, and
(d) whether the group is too large to adequately represent the class. In re
Cendant, 264 F.3d at 266-69.
(a) CCFRS has not provided any proof that the SOK plaintiffs are not
sophisticated. (b) CCFRS has questioned why the 50K plaintiffs seek to

18

appoint two law firms as co-lead counsel, but they have not produced evidence
that these law firms are not qualified to represent the putative class.4
(c) While unrelated groups may be considered together as plaintiffs
under the PSLRA, there are circumstances where such groups may not be
appropriate:
If, for example, a court were to determine that the movant “group”
with the largest losses had been created by the efforts of lawyers
hoping to ensure their eventual appointment as lead counsel, it
could well conclude, based on this history, that the members of
that “group” could not be counted on to monitor counsel in a
sufficient manner. See, e.g., In re Razorfrsh, Inc. Sec. Litig., 143 F.
Supp. 2d 304, 307-08 (S.D.N.Y. 2001) (refusing to appoint as lead
plaintiff a group that, in the court’s view, was “simply an artifice
cobbled together by cooperating counsel for the obvious purpose of
creating a large enough grouping of investors to qualify as ‘lead
plaintiff,’ which can then select the equally artificial grouping of
counsel as ‘lead counsel”).
In re Cendant, 264 F.3d at 267. “Allowing unrelated plaintiffs to band together
in order to manufacture a larger financial interest” does not further the goals of
the PSLRA. In re Petrobras Sec. Litig., 104 F. Supp. 3d 618, 62 1-22 (S.D.N.Y.
2015). Congress intended that the lead plaintiff be appointed on the basis of
financial interest to ensure that investors, not lawyers, take charge of the
litigation. Id.; see also Soto u. Hensler, 235 F. Supp. 3d 607, 620-21 (D. Del.
2017). Moreover, the aggregation of unrelated plaintiffs can create problems of
coordination, risks duplication of effort, and reduces the incentive of each
individual plaintiff in carrying out duties. See [nrc Petrobras Sec. Litig., 104 F.
Supp. 3d at 621-22.
Nonetheless, there is insufficient evidence that Schubert, Onishuk, and
Kayyal have been “cobbled together” in the manner discussed in the cases
above. In a joint declaration submitted to the court, the 50K plaintiffs explain
that they discussed a joint motion for appointment before the motion was filed
Whether two law firms should be appointed co-lead counsel will be addressed in
subsection III.E, infra.

4

19

on their behalf; they discussed the respective responsibilities of counsel and
lead plaintiff; established protocol for maintaining regular contact with each
other and with counsel; incorporated a method of decision-making during the
course of litigation; and have each other’s contact information so the lead
plaintiffs can communicate without counsel. (ECF No. 6-1). The 50K plaintiffs
attested to their capabilities in participating in the action, committed
themselves to the zealous prosecution of the case and active involvement, and
agreed to monitor the litigation’s progress. (ECF No. 6-1).
Other courts have relied on similar declarations to find that proposed
groups will be able to function as lead plaintiffs—particularly if the proposed
lead plaintiffs provided some details on how they will coordinate their efforts.
See, e.g., Soto a Hensler, 235 F. Supp. 3d 607, 62 1-22 (D. Del. 2017); In re
Enzymotec Ltd. Sec. Litig., No. 14-cv-5556, 2015 WL 918535, at *4 (D.N.J. Mar.
3, 2015); Cook a Atossa Genetics, Inc., No. C13-1836, 2014 WL 585870, at *6
(W.D. Wash. Feb. 14, 2014); In re Molycorp, Inc. Sees. Litig., No. 12-cv-292,
2012 U.S. Dist. LEXIS 89191, at *89 (D. Cob. May 29, 2012); In re Bank of
Am. Corp., No. MDL 09-020 14, 2009 WL 2710413, at *3 (N.D. Cal. Aug. 26,
2009); hi re Nature’s Sunshine Prods., Inc. Sec. Litig., No. 2:06-cv-267, 2006 WL
2380965, at *1 (D. Utah Aug. 16, 2006).
Additionally, even if the SOK plaintiffs were not considered as a group,
Schubert’s financial loss, standing alone, is greater than CCFRS’s loss.
Schubert reports a $54,748 loss, while CCFRS reports a $27,990 loss. This
eases concerns about plaintiffs coming together solely to aggregate losses; the
fact that Schubert would have been the shareholder with the largest financial
loss regardless of Onishuk and Kayyal’s participation suggest that other
considerations (beyond merely demonstrating the largest loss) motivate the
50K plaintiffs. See Soto a Hensler, 235 F. Supp. 3d 607, 62 1-22 (D. Del. 2017).
(d) Courts must inquire whether a movant group is too large to represent
the class adequately. At some point, a group may become too large for its
members to operate effectively as a unit. See hi re Cendant, 264 F.3d at 267.
20

Such unwieldiness would vitiate the PSLRA’s purpose of having active and
engaged plaintiffs supervise the conduct of the litigation. Id. “[T}he larger [the
size of a proposed lead plaintiff groupj, the greater the dilution of control that
[the members of that group] can maintain over the conduct of the putative
class action.” Chill v. Green Tree Fin. Corp., 181 F.R.D. 398, 408-09 (D. Minn.
1998) (internal quotation marks and citations omitted)). In Chill v. Green, for
instance, a court declined to confer presumptive lead status upon a “group”
with almost 300 members, because doing so “would threaten the interests of
the class, would subvert the intent of Congress, and would be too unwieldly to
allow for the just, speedy and inexpensive determination of this action.” Id. at
408.
The Third Circuit has not established a hard-and-fast rule; thus the “rule
of reason prevails.” In re Cendunt, 264 F.3d at 267. There are indications that
the Third Circuit generally presumes that groups with more than five members
are too large to work effectively. Id. This group of three, however, is too small to
raise such concerns.
ii. Unique Defenses
CCFRS claims that Schubert is subject to a unique defense. CCFRS
argues that Schubert does not have standing to pursue these claims. I
addressed this in subsection III.B.i. Schubert has standing. CCFRS has not
provided any further evidence of unique defenses regarding the 50K plaintiffs.
These three SOK plaintiffs established the rebuttable presumption that
they are the most adequate lead plaintiff. CCFRS failed to provide sufficient
evidence to rebut this presumption. Richard Schubert, Daniel E. Onishuk, Jr.,
and Mohammed Kayyal are therefore appointed co-lead plaintiffs.
E. Appointment of Legal Counsel
The PSLRA vests authority in the lead plaintiff to select and retain
counsel, subject to the approval of the court. See 15 U.S.C.

§

78u-4(a)(3)(B)(v).

The court will not disturb the plaintiffs’ choice of counsel unless it is
“necessary to protect the interests of the class.” See In re Cendant, 264 F.3d at
21

273. The court should generally employ a deferential standard in reviewing the
lead plaintiff’s choices for counsel. See id. at 274; see also Topping

ii.

Deloitte

Touthe Tohmatsu cPA, 95 F. Supp. 3d 607, 623 (S.D.N.Y. 2015) (“There is a
strong presumption in favor of approving a properly-selected lead plaintiffs
decision as to counsel.”).
The 50K plaintiffs have selected Glancy Prongay & Murray LLP and
Scott+Scott, Attorneys at Law, LLP as lead counsel, and Schnader Harrison
Segal & Lewis LLP as liaison counsel, for the class. Some courts have
expressed concern that the appointment of multiple law firms is not necessary
for effective representation. See, e.g., Arciaga v. Barrett Bus. Sen’s., Inc., Nos.
C14-5584, C14-5903, C14-59l2, 2015 WL 791768, at *2 (W.D. Wash. Feb. 25,
2015) (finding, among other issues, that the appointment of two law firms to be
co-lead counsel “raises the concern that the Iplaintiffs’] group is less likely to be
in control of the litigation”); In reReliant Sec. Litig., No. 2-2292, 2002 U.S. Dist.
LEXIS 27777, at *1016 (S.D. Tex. Aug. 27, 2002) (finding that the
appointment of co-lead counsel is “not necessary for the effective
representation of the proposed class”). Other courts have permitted plaintiffs to
appoint co-lead counsel. See, e.g., Chao Sun v. Han, No. 15-cv-703, 2015 WL
2364937, at *5 (D.N.J. May 14, 2015) (permitting co-lead counsel); Richman v.
Goldman Sachs Gip., Inc., 274 F.R.D. 473, 479 (S,D.N.Y. 2011) (same);
Sgalambo u. McKenzie, 268 F.R.D. 170, 177 (S.D.N.Y. 2010) (same).5
The court’s role is generally limited to “‘approv[ing or disapprov[ingj lead
plaintiffs choice of counsel;’ and

...

it is not the court’s responsibility’ to make

that choice itself.” In re Cendant, 264 F.3d at 274. “[Tjhe question is whether
judicial intervention is ‘necessary to protect the interests of the plaintiff class.”’
Id. “[T]he question is not whether the court believes that the lead plaintiff could
have made a better choice or gotten a better deal.” Id. at 276. Plaintiffs have
chosen firms with significant securities litigation experience. See (ECF No. 4-4,
In fact, Carella. Byrne, Cecchi, Olstein, Brody & Agnello, P.C—counsel for
CCFRS—has sen’ed as co-lead counsel in similar securities litigation. See, e.g., Chao
Sun u. Han, No. 15-cv-703, 2015 WL 2364937, at *5 (D.N.J. May 14, 2015).

5

22

4-5, 4-6). The appointment of co-lead counsel may not be ideal, but my
concerns at this stage are not so severe as to overcome the general principal of
deference to plaintiffs’ choice of counsel. It is unnecessary for the court to
intervene to protect the interests of the plaintiff class. Whether, if and when the
time comes, the Court will approve fees it regards as unnecessary or redundant
is of course another matter.
IV.

CONCLUSION

For the foregoing reasons, the motion of Richard Schubert, Daniel E.
Onishuk, Jr., and Mohammed Kayyal to be appointed lead plaintiffs (ECF No.
4) is granted. Their choice of Glancy Prongay & Murray LLP and Scott+Scott,
Attorneys at Law, LLP as lead counsel and Schnader Harrison Segal & Lewis
LLP as liaison counsel for the class is approved.
The motion of the Corpus Christi Firefighters’ Retirement System (ECF
No. 5) is denied.
An appropriate order accompanies this opinion.

Dated: April 25, 2018

KEVIN MCNULTY
United States District Ju

23