Cullinan v. Cemtrex, Inc. et al
Filing
42
ORDER granting #20 Motion to Appoint Counsel ; denying #23 Motion to Appoint Counsel ; granting #23 Motion to Consolidate Cases; granting #11 Letter Motion regarding the Motion to Consolidate. For the reasons set forth herein, the Court (1) grants the motions to consolidate Cullinan v. Cemtrex, Inc., 17-cv-1067 (JFB)(AYS), Monteil v. Cemtrex, Inc., 17-cv-1070 (ADS)(AYS), and Guerrier v. Cemtrex, Inc., 17-cv-1071 (SJF)(AYS), (2) appoints Umang Khetarpal, Benjamin Webb, Gang Chen, Timothy Heath, and Minh Nguyen (collectively, the "Cemtrex Investor Group") as lead plaintiff, and (3) approves the Cemtrex Investor Group's selection of Levi & Korsinsky, LLP, as lead counsel. SO ORDERED. Ordered by Judge Joseph F. Bianco on 3/9/2018. (Baum, Sabrina)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
_____________________
No 17-CV-1067 (JFB) (AYS)
_____________________
THOMAS CULLINAN, ET AL.,
Plaintiffs,
VERSUS
CEMTREX, INC., ET AL.,
Defendants.
____________________
MEMORANDUM AND ORDER
March 9, 2018
____________________
JOSEPH F. BIANCO, District Judge:
Presently before the Court are two
competing motions requesting that the Court
(1) consolidate three related securities class
actions,1 (2) appoint movant as lead plaintiff,
and (3) approve movant’s selection of lead
counsel, pursuant to Section 21D of the
Securities Exchange Act of 1934 (the
“Exchange Act”), 15 U.S.C. § 78u–
4(a)(3)(B), as amended by the Private
Securities Litigation Reform Act of 1995 (the
1
The three securities class actions are Cullinan v.
Cemtrex, Inc., 17-cv-1067 (JFB)(AYS), Monteil v.
Cemtrex, Inc., 17-cv-1070 (ADS)(AYS), and Guerrier
v. Cemtrex, Inc., 17-cv-1071 (SJF)(AYS).
2
The Cemtrex Investor Group listed Mark Parella,
rather than Minh Nguyen, as one of the movants in the
group in in its first memorandum (ECF No. 21), but
Minh Nguyen’s name appears on the Cemtrex Investor
Group’s subsequent submissions.
“PSLRA”). The pending motions were filed
in Cullinan, the first-filed action, one by
Umang Khetarpal, Benjamin Webb, Gang
Chen, Timothy Heath, and Minh Nguyen
(collectively, the “Cemtrex Investor
Group”) 2 (ECF No. 20), 3 and the other by
Zarrin Nelson (“Nelson,” and together with
the Cemtrex Investor Group, “movants”)
(ECF No. 23). The Cemtrex Investor Group
and Nelson filed their motions on behalf of a
putative class of purchasers of Cemtrex, Inc.
3
All citations to the record in this case will be to the
Cullinan docket, unless otherwise indicated.
References to the Cullinan docket will be cited as
“ECF No. [docket number].” References to the
Monteil docket will be cited as “Monteil, ECF No.
[docket number].” References to the Guerrier docket
will be cited as “Guerrier, ECF No. [docket number].”
(“Cemtrex” or the “Company”) securities 4
during the period of defendants’ alleged
Exchange Act violations. 5 Defendants
include Cemtrex, as well as Cemtrex’s Chief
Executive Officer, Saagar Govil, Executive
Director, Aron Govil, and Vice President of
Finance and Principal Financial Officer,
Renato Dela Rama.
Compl.”) ¶¶ 2, 19-20; Monteil, ECF No. 1
(“Monteil Compl.”) ¶ 2; Guerrier, ECF No. 1
(“Guerrier Compl.”) ¶¶ 7, 16.) Plaintiffs
brought the instant actions on February 24,
2017, following the February 22, 2017
publication of a blog post entitled “Cemtrex:
Documents And Photos, All Signs Point To
Deception
And
Failure,”
on
SeekingAlpha.com (“Seeking Alpha”), a
popular investing website. (Cullinan Compl.
¶ 29; Monteil Compl. ¶ 28; Guerrier Compl.
¶ 20.) The Seeking Alpha post claimed that
Cemtrex was involved in conduct that the
U.S. Securities and Exchange Commission
(the “SEC”) had previously found, with
regard to other companies, to be fraudulent.
(Id.) The post discussed problematic conduct
and omissions including payments by
“Cemtrex insiders” that were not disclosed to
investors, and which had resulted in
securities fraud suits in similar cases; the
apparent failure to disclose insiders’ sales of
shares; and fraudulent conduct by Cemtrex’s
auditor. (Cullinan Compl. ¶ 29.) Plaintiffs
allege that, “on this news” (or “in reaction to
the shocking disclosures” in the Seeking
Alpha post), the price of Cemtrex common
stock fell $1.72 per share, or 33.5%, “on
unusually heavy trading volume” that same
day. 6 (Id. ¶ 30; Monteil Compl. ¶ 31;
Guerrier Compl. ¶ 21.)
First, because the Court finds that the
three class actions present common questions
of law and fact, and consolidation would
serve the interests of judicial economy, the
Court grants the motions to consolidate.
Second, based on its determination that the
Cemtrex Investor Group has the largest
financial interest, and that the presumption
under the PSLRA that the Cemtrex Investor
Group is “the most adequate plaintiff” to
represent the class has not been rebutted, the
Court appoints the Cemtrex Investor Group
as lead plaintiff. Finally, the Court approves
the Cemtrex Investor Group’s selection of
Levi & Korsinsky, LLP, as lead counsel. 15
U.S.C. § 78u-4(a)(3)(B)(v).
I. BACKGROUND
A. The Securities Class Actions
According to the complaints, Cemtrex is
a technology company, or a self-described
“world leading industrial and manufacturing
company”
that
provides
electronic
manufacturing services for “advanced
electric system assemblies, instruments &
emission monitors for industrial processes,
and industrial air filtration and environmental
control systems.” (ECF No. 1 (“Cullinan
Plaintiffs filed their complaints in the
three related actions on February 24, 2017,
claiming in each that defendants violated the
Exchange Act through their materially false
and/or misleading statements and failure to
disclose material adverse facts about
4
Cemtrex’s common stock is listed on the NASDAQ
Stock Market (“NASDAQ”) as “CETX.”
and SEC had terminated Cemtrex’s former dealermanager’s
registrations
“following
multiple
violations.” (Cullinan Compl. ¶¶ 3, 5.) Plaintiffs
allege that, “on this news” (referring to the news of the
FINRA and SEC registration terminations), on
February 21, 2017, the price of Cemtrex common
stock fell $0.65 per share, or 11.2%, “on unusually
heavy trading volume.” (Id. ¶¶ 4, 27-28.)
5
As discussed infra, plaintiffs in the three actions
propose different class periods spanning from 2016
through 2017.
6
Cullinan also alleges that the post “brought greater
publicity to the fact” that, on February 17, 2017, the
Financial Industry Regulatory Authority (“FINRA”)
2
wrongdoing; (2) that the Company
was utilizing paid stock promoters to
artificially inflate the price of the
Company’s stock; (3) that Aron
Govil, a member of the Company’s
Board of Directors, was secretly
paying stock promoters via an
undisclosed entity; (4) that Company
insiders were selling their stock
during the paid promotion, taking
advantage of the artificially inflated
stock price; (5) that the Company’s
purported audit firm claimed to
operate at a location that was actually
vacant; (6) that the controlling partner
behind the Company’s auditor was
banned by the SEC and [the Public
Company Accounting Oversight
Board (“PCAOB”)] for conducting
fraudulent audits or reviews of public
companies while performing little or
no work and without being licensed;
(7) that the Company’s auditor was
signing off on the Company’s
financial
disclosures
without
conducting a proper review; and
(8) that, as a result of the foregoing,
Defendants’
statements
about
Cemtrex’s business, operations, and
prospects, were false and misleading
and/or lacked a reasonable basis.
Cemtrex’s “business, operations, and
prospects” during the class period, in
violation of Section 10(b) of the Exchange
Act and Rule 10b-5 promulgated thereunder.
(Cullinan Compl. ¶¶ 26, 49-59; Monteil
Compl. ¶¶ 23, 53-63; Guerrier Compl.
¶¶ 19, 32-41.) Plaintiffs name the same
defendants in all three actions. (Cullinan
Compl. ¶¶ 14-17; Monteil Compl. ¶¶ 15-18;
Guerrier Compl. ¶¶ 7-10.) In addition to
their Exchange Act claim against all
defendants, plaintiffs in the three actions
bring a separate claim against the individual
defendants, whom they allege acted as
controlling persons and are liable for
violating Section 20(a) of the Exchange Act.
(Cullinan Compl. ¶¶ 60-63; Monteil Compl.
¶¶ 64-67; Guerrier Compl. ¶¶ 42-47.)
Plaintiffs in the three actions bring their
claims on behalf of a putative class of
investors (the “class”) who had acquired
Cemtrex securities during the class period
and suffered damages as “a direct and
proximate result of Defendants’ wrongful
conduct.” (Cullinan Compl. ¶¶ 31, 56, 59;
Monteil Compl. ¶¶ 32, 60, 63; Guerrier
Compl. ¶¶ 23, 38, 40.)
Plaintiffs’ factual allegations are largely
similar. All three complaints describe the
same alleged “scheme” to “deceive the
investing public,” through which defendants
caused the class to purchase Cemtrex’s
common stock at artificially inflated prices.
(Cullinan Compl. ¶ 50; Monteil Compl. ¶ 54;
Guerrier Compl. ¶¶ 35, 38.) Among other
overlapping allegations, the complaints all
point to the same alleged failure to disclose:
(Cullinan Compl. ¶ 7; Monteil Compl. ¶ 3,
30; Guerrier Compl. ¶¶ 19, 20.)7
Though largely similar, the three
complaints vary in certain respects. Most
significantly, the complaints all use different
class periods: Cullinan defines the class
period as February 11, 2016 through
February 22, 2017 (Cullinan Compl. ¶ 1),
(1) that Source Capital was at risk of
having its registrations terminated for
7
The three complaints contain similar, if not identical,
allegations. Rather than rephrase the Seeking Alpha
blog post allegations, the Guerrier complaint includes
excerpts from the post and explains: “Plaintiff’s
counsel independently corroborated the Seeking Alpha
article by obtaining Southern Steel & Construction
Inc.’s entity information from the New York State
Department of State, Division of Corporations,
Corporation and Business Entity Database.”
(Guerrier Compl. ¶ 20 n.1.)
3
in the other related cases) would have
consented to consolidation.” (ECF No. 12 at
1.)
Monteil defines the class period as December
7, 2016 through February 21, 2017 (Monteil
Compl. ¶ 1), and Guerrier defines the class
period as October 26, 2016 through February
22, 2017 (Guerrier Compl. ¶ 1).8
On April 25, 2017, four separate
plaintiffs or plaintiff groups filed motions
(1) to consolidate the related actions, (2) for
appointment as lead plaintiff, and (3) for
approval of their selection of lead counsel.
The following plaintiffs subsequently
submitted letters withdrawing their motions,
and expressing their support for another
potential lead plaintiff: (1) Ajith Chennadi,
Wei Cao, Mark Mitchell, Thanh Monat, and
Ben Webb 9 (“Cemtrex Investor Group 2”)
withdrew their motion for appointment as
lead plaintiff on May 8, 2017 (ECF Nos. 15,
25), and (2) Lewis Monteil withdrew his
motion on May 3, 2017 (ECF Nos. 17, 24).
The Court granted the motions to withdraw
on October 24, 2017. The Cemtrex Investor
Group and Nelson filed the two motions
B. Motions for Consolidation, Appointment
as Lead Plaintiff, and Approval of Lead
Counsel
On April 3, 2017, defendants filed a letter
informing the Court of their intention to
move to consolidate these three related
actions. (ECF No. 11.) Defendants have not
since moved for consolidation, but various
plaintiff groups have filed or acquiesced to
such a motion. Guerrier’s counsel, for
instance, submitted a letter in response to
defendants’ letter, stating that counsel was
“puzzled by Defendants’ request as
consolidation is routinely sought in cases like
this,” and, “[h]ad Defendants reached out to
the undersigned we (and likely the plaintiffs
8
The Cullinan class period begins on the day Cemtrex
issued a press release announcing its First Quarter
results (Cullinan Compl. ¶ 20), and runs through the
day of the blog post publication, on which the stock
price fell $1.72 per share, or 33.5% (id. ¶¶ 29-30). The
Monteil class period begins with Cemtrex’s
amendment to its Form S-1 registration statement
concerning the Rights Offering Source Capital
conducted (Monteil Compl. ¶ 24), and runs through the
day before the stock price allegedly dropped in
response to the blog post disclosures (id. ¶ 6). The
Guerrier class period begins on the day Cemtrex
issued a press release announcing its preliminary
Fiscal Year 2016 results (Guerrier Compl. ¶ 16),
and—like the Cullinan class period—runs through the
day of the blog post publication and alleged resultant
stock price drop (id. ¶¶ 20-21).
he was joining a different lawsuit than the one
at issue in this motion in order to increase his
chances of recouping his losses. Mr. Webb
was unaware that he had been referred by the
Goldberg firm to The Rosen Law Firm.
Having never directly spoken to anyone at the
Rosen firm, Mr. Webb was also unaware that
the Rosen firm was seeking his appointment
for lead plaintiff as part of the Cemtrex
Investor Group 2. Upon learning that the two
lawsuits were the same, Mr. Webb promptly
sought to withdraw as a client of the
Goldberg firm and, thus, from the Cemtrex
Investor Group 2. On May 8, 2017, the
Rosen firm withdrew the Cemtrex Investor
Group 2’s motion for appointment as lead
plaintiff and represented in the withdrawal
that its members did “not oppose the
competing lead plaintiff Motion of Nelson”
(the “Withdrawal”). Again, Mr. Webb was
unaware that the Withdrawal was being filed,
did not consent to its filing and, contrary to
the representations in the Withdrawal, does
oppose the Nelson motion . . . .
9
Benjamin Webb joined the Cemtrex Investor Group
that filed the motion currently before the Court, as well
as Cemtrex Investor Group 2. The Cemtrex Investor
Group explained that:
As set forth in the accompanying Declaration
of Benjamin Webb in Support of the Cemtrex
Investor Group’s Lead Plaintiff Motion
(“Webb Decl.”), Mr. Webb retained
Goldberg Law PC (“Goldberg”) on or about
April 6, 2017 under the mistaken belief that
(ECF No. 27 (“Cemtrex Investor Group Opp.”) at 6-7
n.5 (internal citations omitted).)
4
presently pending before the Court. On
withdrawal, Cemtrex Investor Group 2
indicated that it “does not oppose [Nelson’s]
competing lead plaintiff motion.” (ECF No.
25 at 3.) Monteil, in withdrawing, expressed
his support for the Cemtrex Investor Group’s
motion. (ECF No. 24 at 2.)
“considerations of judicial economy favor
consolidation,” on the other hand,
“[c]onsiderations of convenience and
economy must yield to a paramount concern
for a fair and impartial trial.” Id. at 1285. In
determining whether consolidation is
appropriate, the court must consider:
On May 9, 2017, Nelson and the Cemtrex
Investor Group filed their oppositions. (ECF
No. 26 (“Nelson Opp.”); ECF No. 27
(“Cemtrex Investor Group Opp.”).) Both
movants submitted replies on May 16, 2017.
(ECF No. 28 (“Cemtrex Investor Group
Reply”); ECF No. 30 (“Nelson Reply”).) On
July 17, 2017, Nelson submitted a notice of
supplemental authority, bringing to the
Court’s attention the decision in Galmi v.
Teva Pharmaceuticals Industries Ltd., No.
3:17-cv-558 (SRU), 2017 WL 7261318 (D.
Conn. July 11, 2017). (ECF No. 32 (“Nelson
Supp. Auth.”).) On December 20, 2017, the
Cemtrex Investor Group submitted a notice
of supplemental authority, bringing to the
Court’s attention the decision in In re Blue
Apron Holdings, Inc. Sec. Litig., No. 17-CV4846-WFK-PK,
2017
WL
6403513
(E.D.N.Y. Dec. 15, 2017). (ECF No. 36.)
Nelson responded to the Cemtrex Investor
Group’s notice of supplemental authority on
December 21, 2017. (ECF No. 37.)
[W]hether the specific risks of
prejudice and possible confusion
[are] overborne by the risk of
inconsistent
adjudications
of
common factual and legal issues, the
burden on parties, witnesses, and
available judicial resources posed by
multiple lawsuits, the length of time
required to conclude multiple suits as
against a single one, and the relative
expense to all concerned of the
single-trial,
multiple-trial
alternatives.
Id. (alterations in original) (citation omitted).
The Court has considered each of these
factors and finds that, in light of the highly
similar allegations and claims in the three
class actions against Cemtrex, consolidation
is appropriate in order to serve the interests of
judicial economy. See, e.g., Jacobs v.
Castillo, 612 F. Supp. 2d 369, 373 (S.D.N.Y.
2009) (“Consolidation would further the goal
of ‘judicial economy’ because discovery in
each case is likely to be identical, [and]
motion practice and trial in the two cases
would most likely cover the same facts and
some identical issues of law.”). In cases
involving common questions of law or fact,
courts favor consolidation “to avoid
unnecessary costs or delay,” Johnson, 899
F.2d at 1284, and to “expedite trial and
eliminate unnecessary repetition and
confusion,” Devlin v. Transp. Commc’ns
Int’l Union, 175 F.3d 121, 130 (2d Cir. 1999)
(citation omitted).
The Court has fully considered the
submissions of the parties.
II. DISCUSSION
A. Motion to Consolidate Related Cases
Rule 42(a) of the Federal Rules of Civil
Procedure provides that “[i]f actions before
the court involve a common question of law
or fact, the court may . . . consolidate the
actions; or . . . issue any other orders to avoid
unnecessary cost or delay.” Fed. R. Civ. P.
42(a). The district court has broad discretion
to determine whether consolidation is
appropriate. Johnson v. Celotex Corp., 899
F.2d 1281, 1285 (2d Cir. 1990). Although
Here, defendants submitted a letter
requesting permission to file a motion to
consolidate these actions (see ECF No. 11 at
5
consolidation is appropriate, as well as the
parties’ support for consolidation, the Court
grants the motions to consolidate.
1), and plaintiffs in two of the three actions
have expressed support for consolidation (see
ECF No. 12 (Guerrier’s response to
defendants’ letter) at 1; ECF No. 18
(Monteil’s memorandum in support of his
now-withdrawn motion) at 11-12). 10 The
Court finds that, as defendants thoroughly
articulate in their letter, the three actions
“have nearly complete overlap of factual and
legal issues.” (ECF No. 11 at 2.) As
discussed supra, these similarities include,
among others, that the complaints: (1) were
prompted by the publication of and alleged
market response to the Seeking Alpha blog
post, (2) challenge Cemtrex’s auditor’s
qualifications and criticize Cemtrex for
underpaying its auditor, (3) claim that
Cemtrex paid stock promoters to artificially
inflate the price of Cemtrex’s stock, and (4)
claim that Cemtrex insiders were selling their
shares, undisclosed, during the paid
promotion to take advantage of the
artificially inflated share price.
More
generally, plaintiffs in these three actions all
sued the same four defendants, on behalf of
essentially the same putative class,11 alleging
the same Exchange Act violations, based on
“largely
the
same”
material
misrepresentations and omissions. (Id. at 3.)
B. Motion to Appoint Lead Plaintiff
1. Applicable Law
The PSLRA sets forth the following
standard for selecting a lead plaintiff in a
federal securities class action: “the court . . .
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’).” 15
U.S.C. § 78u-4(a)(3)(B)(i). The PSLRA
establishes that courts shall adopt a
presumption that the “most adequate
plaintiff” is the class member or group 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.
For these reasons, the Court agrees with
the parties’ determination that the cases
present common questions of law and fact,
and finds that consolidation would serve the
interests of judicial economy. In light of the
Court’s independent determination that
Id. § 78u-4(a)(3)(B)(iii). This presumption
can be rebutted “only upon proof” by a class
member that the movant for appointment as
lead plaintiff: (1) “will not fairly and
adequately protect the interests of the class”;
10
Thomas Cullinan, one of the plaintiffs in the instant
action, is the only plaintiff who has not submitted a
letter or motion to the Court concerning consolidation;
however, Cullinan has also not filed anything in this
case after filing his complaint and summons.
consolidation. Kux–Kardos v. VimpelCom, Ltd., 151
F. Supp. 3d 471, 475 (S.D.N.Y. 2016),
reconsideration denied sub nom. In re VimpelCom,
Ltd., No. 1-15-CV-8672 (ALC), 2016 WL 5390902
(S.D.N.Y. Sept. 26, 2016) (“[D]ifferences in . . . the
class period do not render consolidation inappropriate
if the cases present sufficiently common questions of
fact and law, and the differences do not outweigh the
interests of judicial economy served by
consolidation.” (citation omitted)).
11
Although the different class periods alleged in the
three complaints could impact which putative class
members would, in fact, qualify, none of the parties
raises this issue or opposes consolidation on this basis.
Regardless, the Court notes that the different class
periods would not, on their own, preclude
6
losses for purposes of appointment as lead
plaintiff—the main issue that Nelson
disputes. The Court finds that the Cemtrex
Investor Group’s proposed aggregation is
appropriate.
or (2) “is subject to unique defenses that
render such plaintiff incapable of adequately
representing the class.” Id.
Additionally, the PSLRA provides that
(1) the plaintiff(s) who filed the complaint
shall publish a notice advising members of
the purported class of the pendency of the
action “[n]ot later than 20 days after the date
on which the complaint is filed,” and (2) “not
later than 60 days after the date on which the
notice is published, any member of the
purported class” may move to serve as lead
plaintiff. Id. § 78u-4(a)(3)(A)(i). In cases
where multiple actions were filed, only the
plaintiff or plaintiffs in the first-filed action
are required to publish a notice. Id. § 78u4(a)(3)(A)(ii).
Nelson argues that the Cemtrex Investor
Group “is an assortment of unrelated
plaintiffs cobbled together as a group by the
law firm” and “is not cohesive,” and that the
Court, therefore, should not permit the
proposed aggregation. (Nelson Opp. at 2; see
also Nelson Supp. Auth. (“[C]ourts will not
permit aggregation of [a proposed lead
plaintiff group’s] financial interests if it is
apparent that the group ‘has been assembled
as a makeshift by attorneys for the purpose of
[obtaining lead plaintiff status].’” (quoting
Teva, 2017 WL 7261318, at *4)).) Nelson
points to case law requiring that a plaintiff
group demonstrate that “such a grouping
would best serve the class,” and in which
courts have considered the following factors:
“(1) the existence of a pre-litigation
relationship between group members;
(2) involvement of the group members in the
litigation thus far; (3) plans for cooperation;
(4) the sophistication of its members; and
(5) whether the members chose outside
counsel, and not vice versa.” (Nelson Opp.
at 2 (quoting Khunt v. Alibaba Grp. Holding
Ltd., 102 F. Supp. 3d 523, 532 (S.D.N.Y.
2015)).)
2. Analysis
As a threshold matter, the notice of
pendency and motions for appointment as
lead plaintiff were timely filed in the instant
action. Cullinan, as the plaintiff in the firstfiled action, was the only plaintiff required to
publish a notice, and he satisfied the
requirement to publish within 20 days of
filing the complaint. (ECF Nos. 1, 22-1.)
Then, as required, the Cemtrex Investor
Group and Nelson both moved for
appointment as lead plaintiff within 60 days
of the date counsel for Cullinan published the
notice. (ECF Nos. 20, 23.)
Although the PSLRA clearly allows a
group of class members to join together for
selection as lead plaintiff, Nelson correctly
notes that courts have been resistant to
appointing lead plaintiff groups that appear to
lack a pre-litigation relationship and plans for
coordination, or to be lawyer-driven, among
other factors weighing against aggregation.
(Nelson Opp. at 4-7); see also Varghese, v.
China Shenghuo Pharm. Holdings, Inc., 589
F. Supp. 2d 388, 393 (S.D.N.Y. 2008). In
Peters v. Jinkosolar Holdings, Co., which
Nelson cites for the proposition that courts
a. Aggregating Plaintiffs for Selection
as Lead Plaintiff
The Cemtrex Investor Group and Nelson
both satisfied the first requirement for a lead
plaintiff by timely moving for appointment.
Thus, the Court must next determine which
of the two has “the largest financial interest
in the relief sought by the class.” 15 U.S.C.
§ 78u-4(a)(3)(B)(iii). Before turning to the
method of assessing financial interest, the
Court addresses the issue of whether the
Cemtrex Investor Group should be permitted
to aggregate individual members’ financial
7
will benefit from our supervision of
counsel. . . .
reject groups that were “‘cobbled together’
for the sake of litigation,” No. 11-7133, 2012
WL 946875, at *6 (S.D.N.Y. Mar. 19, 2012),
the court provides examples of the types of
evidence groups can present to demonstrate
cohesion:
[W]e will exercise joint decisionmaking and work together to actively
monitor the activities of counsel as set
forth herein. . . .
[E]vidence regarding why the
individual members chose to work as
a group; how the group intends to
function collectively, including how
they plan to communicate; the
protocol the group will use to address
disagreements;
background
information regarding individual
members of the group; and the
members’ willingness to accept the
role and responsibilities of lead
plaintiff.
We
have
implemented
communication procedures to enable
us to confer via phone and/or email on
short notice to ensure the Cemtrex
Investor Group is able to make timely
decisions. We have also directed
counsel to advise us of all
developments during the Actions,
including the Lead Plaintiff motion
proceedings. We will continue to
direct counsel and actively oversee
the prosecution of the Actions for the
benefit of the putative Class by,
among other things, reviewing
pleadings and conferring amongst
ourselves. We are also prepared to
personally
travel
to
court
proceedings,
depositions,
and
settlement mediations when our
presence will benefit the putative
Class.
Id. at *7 (citation omitted).
This Court recognizes the risk of
approving lead plaintiff groups without
evidence of their cohesion and plans for
involvement in the litigation, but finds that
the Cemtrex Investor Group is not the type of
lawyer-driven group that other courts have
cautioned against approving. Based on the
Court’s review of the Cemtrex Investor
Group’s submissions, the Court finds that the
Cemtrex Investor Group has sufficiently
demonstrated its group members’ plans for
cooperation and involvement in the litigation.
The Cemtrex Investor Group submitted a
joint declaration along with their opposition
to Nelson’s competing motion, in which they
stated the following:
(ECF No. 27-1 (“Cemtrex Investor Group
Decl. in Supp. of Opp.”) ¶¶ 9, 11, 12.) In
these and other affirmations, the Cemtrex
Investor Group members discuss past
communications,
plans
for
future
collaboration—including specific procedures
to ensure that they are able to “make timely
decisions”—and their commitment to
overseeing counsel’s activities.
[T]he members of the Cemtrex
Investor Group communicated, with
counsel, about the benefits of
working together jointly to prosecute
the litigation in a collaborative and
cohesive manner . . . as well as the
procedures and mechanisms for
communication and decision-making
that will ensure that the putative Class
In arguing that the Court should reject the
Cemtrex Investor Group’s motion, Nelson
urges that a proposed lead plaintiff group
must present evidence that the members of
the group “chose outside counsel, and not
vice versa” (Nelson Opp. at 3 (quoting Khunt,
102 F. Supp. 3d at 533)), and that the
Cemtrex Investor Group has failed to do so.
8
aggregation for purposes of appointing lead
plaintiff.
This purported requirement is, however,
simply one of the factors some courts have
considered in deciding these motions; it is not
an actual requirement. In Blue Apron, for
instance, the court not only did not include
the aforementioned factors discussed in
Khunt in its opinion, but the court also
approved a group that was clearly lawyerassembled: “none of the proposed lead
plaintiffs claim to have any relationship with
one another beyond their participation in this
litigation, much less a meaningful one.
Consequently, they appear to be equally
qualified to serve as lead plaintiffs on the
basis of their representations to the Court
. . . .”12 2017 WL 6403513, at *4. Regardless
of whether this Court considers this factor to
be significant, the Court finds that the
Cemtrex Investor Group members submitted
sufficient evidence of their involvement in
the formation of the group: “[i]n order to
formalize our joint leadership of the Actions,
the members of the Cemtrex Investor Group
communicated, with counsel, about the
benefits of working together jointly to
prosecute the litigation.” (Cemtrex Investor
Group Decl. in Supp. of Opp. ¶ 9.)
b. Largest Financial Interest
Although the PSLRA does not provide
guidance as to how to determine which
movant has the largest financial interest,
courts in the Second Circuit typically apply
the “Lax factors,” or “Lax/Olsten factors” in
making this assessment. See, e.g., Varghese,
589 F. Supp. 2d at 395 (citing Lax v. First
Merch. Acceptance Corp., Nos. 97 C 2715, et
al., 1997 WL 461036, at *5 (N.D. Ill. Aug.
11, 1997); In re Olsten Corp. Sec. Litig., 3 F.
Supp. 2d 286, 295 (E.D.N.Y. 1998)); Blue
Apron, 2017 WL 6403513, at *3. Under
Lax/Olsten, courts consider the following
factors: “(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.” In re
Olsten Corp., 3 F. Supp. 2d at 295 (citing
Lax, 1997 WL 461036, at *5). The last
factor, losses suffered during the class period,
is considered to be the most important. Blue
Apron, 2017 WL 6403513, at *3 (citing
Khunt, 102 F. Supp. 3d at 530); In re Fuwei
Films Sec. Litig., 247 F.R.D. 432, 437
(S.D.N.Y. 2008). This Court will also utilize
this framework in the instant case.
Based on its review of the record, the
Court finds that the Cemtrex Investor Group
is far from the type of makeshift, lawyerdriven group Nelson describes. The Cemtrex
Investor Group members have even attested
to their willingness to personally travel to and
participate in litigation proceedings. The
Cemtrex Investor Group has more than
adequately demonstrated that its members
“will be able to function cohesively and to
effectively manage the litigation apart from
their lawyers.” Id. (quoting Varghese, 589 F.
Supp. 2d at 392). The Court, therefore,
accepts Cemtrex Investor Group’s proposed
Here, based on movants’ submissions, it
is clear that the Cemtrex Investor Group has
the largest financial interest. The Cemtrex
Investor Group alleges that it acquired more
than 90,000 shares of Cemtrex securities
during the class period, and suffered a loss of
approximately $182,000 “as a result of the
revelations of the fraud.” (ECF No. 21
(“Cemtrex Investor Group Mem. of Law”) at
12
In stating that “none of the proposed lead plaintiffs
claim to have any relationship with one another,” the
Blue Apron court was discussing intra-group, rather
than inter-group relationships. In other words, the
court was explaining that none of the members of
either of the proposed lead plaintiff groups had
relationships with other members of their own group
outside of the litigation.
9
interest.
6-7; ECF No. 22-3 (“Summary Loss Chart of
the Cemtrex Investor Group”).) Nelson, by
comparison, alleges that she suffered a loss of
approximately $90,000 during the class
period. (ECF No. 23-1 (“Nelson Mem. of
Law”); ECF Nos. 23-4, 23-5 (“Nelson’s
Trades in CETX Securities”).) Nelson did
not put forward any arguments as to why the
Court should assign greater weight to a Lax
factor other than loss, and financial loss was
the only figure she included in support of her
motion for appointment as lead plaintiff. See
Blue Apron, 2017 WL 6403513, at *3
(determining “largest financial interest”
based on the parties’ representations as to
their approximate losses, which the court
found to be “an appropriate proxy for the
movants’ overall financial interest” because
the parties focused their arguments on those
figures and did not argue that any other factor
should weigh more heavily).
c. Rule 23 Requirements
In addition to meeting the first two
requirements, the Court finds that the
Cemtrex Investor Group has made a
preliminary prima facie showing that it
otherwise satisfies the requirements of Rule
23 of the Federal Rules of Civil Procedure
and is, therefore, presumptively the most
adequate plaintiff. Rule 23 establishes that a
class action may proceed only if:
(1) the class is so numerous that
joinder
of all
members
is
impracticable; (2) there are questions
of law or fact common to the class;
(3) the claims or defenses of the
representative parties are typical of
the claims or defenses of the class;
and (4) the representative parties will
fairly and adequately protect the
interests of the class.
In her opposition, Nelson argues that, due
to the timing of movant Khetarpal’s sales of
some of his Cemtrex shares, movant
Khetarpal’s individual loss during the class
period was actually $70,392.86 rather than
$98,282.66, as the Cemtrex Investor Group
alleges. (Nelson Opp. at 7-9 (arguing that,
based on Dura Pharm. Inc. v. Broudo, 544
U.S. 336, 344-45 (2005), the Court should
discount any alleged losses from shares sold
prior to the corrective disclosure).) Even if
the Court were to accept Nelson’s argument,
the Court would still find the Cemtrex
Investor Group’s loss to be significantly
greater than Nelson’s.
Additionally,
directing the Court to the other Lax factors,
the Cemtrex Investor Group submitted a table
comparing movants’ relative financial
interests, and demonstrating that its interest is
greater than Nelson’s under all four metrics.
(Cemtrex Investor Group Opp. at 1-2.) The
Court finds that, based on its assessment of
the fourth and most important factor, as well
as the four Lax factors together, the Cemtrex
Investor Group has the largest financial
Fed. R. Civ. P. 23(a). At this stage, movants
seeking appointment as lead plaintiff need
only make a “preliminary, prima facie
showing” that the typicality and adequacy
requirements would be met. Varghese, 589
F. Supp. 2d at 397 (quoting In re Fuwei
Films, 247 F.R.D. at 437); Blue Apron, 2017
WL 6403513, at *3.
The typicality requirement is met where
“each class member’s claim arises from the
same course of events, and each class
member makes similar legal arguments to
prove the defendant’s liability.” In re Drexel
Burnham Lambert Grp., Inc., 960 F.2d 285,
291 (2d Cir. 1992) (citations omitted).
Courts in this circuit have clarified, however,
that a lead plaintiff’s claims “need not be
identical” to the claims of the class, and that
“similarity of legal theory may control even
in the face of differences of fact.” Pirelli
Armstrong Tire Corp. Retiree Med. Benefits
Tr. v. LaBranche & Co., 229 F.R.D. 395, 412
(S.D.N.Y. 2004) (citation omitted). The
10
The Court finds that the Cemtrex Investor
Group has made a sufficient showing at this
stage of its adequacy to represent the class.
Cemtrex Investor Group argues that the
typicality requirements are satisfied because,
like the proposed class, (1) the Cemtrex
Investor Group claims that “defendants’
material misstatements and omissions
concerning Cemtrex’s business, operations
and financial prospects violated the federal
securities laws,” and (2) the Cemtrex Investor
Group “purchased Cemtrex securities in
reliance
on
defendants’
alleged
misstatements and omissions and was
damaged thereby.” (Cemtrex Investor Group
Mem. of Law at 8.) The Court finds that the
Cemtrex Investor Group has made the
requisite prima facie showing that the lead
plaintiff and class claims arise from the same
course of events—the purchase of Cemtrex
securities in reliance on defendants’ alleged
misstatements—and are based on similar
legal arguments surrounding defendants’
violation of the federal securities laws and the
resulting harms.
d.
Most
Adequate
Plaintiff
Presumption Has Not Been Rebutted
Nelson has not rebutted the presumption
that the Cemtrex Investor Group is the most
adequate plaintiff by demonstrating that the
Cemtrex Investor Group would not “fairly
and adequately protect the interests of the
class,” 15 U.S.C. § 78u-4(a)(3)(B)(iii), as
discussed supra.
Nor has Nelson
demonstrated that the Cemtrex Investor
Group “is subject to unique defenses that
render such plaintiff incapable of adequately
representing the class.” Id. Nelson focuses
primarily on the alleged issues with
aggregating the individual plaintiffs in the
Cemtrex Investor Group (discussed supra),
and fails to provide any persuasive argument
that Cemtrex Investor Group is not the most
adequate plaintiff.
In order for a lead plaintiff to satisfy the
Rule 23 adequacy requirement, “(1) there
should be no conflict between the interests of
the class and the named plaintiff nor should
there be collusion among the litigants; and
(2) the parties’ attorney must be qualified,
experienced, and generally able to conduct
the proposed litigation.” In re Fuwei Films,
247 F.R.D. at 436 (citation omitted). The
lead plaintiff should also “have a sufficient
interest in the outcome to ensure vigorous
advocacy.” Id. The Cemtrex Investor Group
argues that it satisfies both of the
aforementioned adequacy requirements
because (1) it “has demonstrated its adequacy
by retaining competent and experienced
counsel with the resources and expertise to
efficiently prosecute this action,” and (2) it is
unaware of any conflicts between its claims
and those of the class. (Cemtrex Investor
Group Mem. of Law at 8.) The Cemtrex
Investor Group also asserts that the financial
losses it suffered “ensure that it has sufficient
incentive to ensure vigorous advocacy.” (Id.)
C. Motion to Appoint Lead Counsel
The PSLRA states that “[t]he most
adequate plaintiff shall, subject to the
approval of the court, select and retain
counsel to represent the class.” Id. § 78u–
4(a)(3)(B)(v). As the Court now grants the
Cemtrex Investor Group’s motion for
appointment as lead plaintiff, it also
considers the Cemtrex Investor Group’s
selection of lead counsel, Levi & Korsinsky,
LLP. The PSLRA provides no further
instruction regarding the approval of lead
counsel. Courts have correctly found that the
PSLRA “evidences a strong presumption in
favor of approving a properly-selected lead
plaintiff’s decisions as to counsel selection
and counsel retention.” In re Adelphia
Commc’ns Corp. Sec. & Derivative Litig.,
No. 03 MDL 1529 (LMM), 2008 WL
4128702, at *2 (S.D.N.Y. Sept. 3, 2008),
aff’d sub nom. Victor v. Argent Classic
Convertible Arbitrage Fund L.P., 623 F.3d
11
82 (2d Cir. 20 I 0) (citation omitted). Here,
the Cemtrex Investor Group states that Levi
& Korsinsky, LLP "possesses adequate
experience in securities litigation and has
successfully prosecuted numerous securities
fraud class actions on behalf of injured
investors," and that the Court may, therefore,
" be assured that by granting the Movant' s
motion, the Class will receive the highest
caliber of legal representation." (Cemtrex
Investor Group Mem. of Law at 9.) Based on
the
Cemtrex
Investor
Group ' s
representations, the Court approves Levi &
Korsinsky, LLP, as lead counsel.
The Cemtrex Investor Group is represented
by Phillip Kim of The Rosen Law Firm, P.A.,
275 Madison Avenue, 34th Floor, New York,
NY I 0016; Lawrence P. Eagel and Melissa
Ann Fortunato of Bragar Eagel & Squire PC,
885 Third A venue, Suite 3040, New York,
NY I 0022; and Shannon Lee Hopkins of
Levi & Korsinsky LLP, 30 Broad Street, 24th
Floor, New York, NY 10004.
Nelson is represented by Thomas J.
McKenna of Gainey McKenna & Egleston,
440 Park Avenue South, 5th Floor, New
York, NY 10016.
III. CONCLUSION
Defendants are represented by Douglas W.
Greene of Baker & Hostetler LLP, 999 Third
Avenue, Suite 3600, Seattle, WA 98104.
For the foregoing reasons, the Court
grants the motions to consolidate Cullinan,
Monteil, and Guerrier, appoints the Cemtrex
Investor Group as lead plaintiff, and approves
the Cemtrex Investor Group ' s selection of
Levi & Korsinsky, LLP, as lead counsel.
SO ORDERED.
nited States District Judge
Dated: March 9, 2018
Central Islip, New York
***
Plaintiff Cullinan is represented by Lesley
Frank Portnoy of Glancy Prongay & Murray
LLP, 122 East 42nd Street, Suite 2920, New
York, NY 10168.
Plaintiff Monte ii is
represented by Steven Bennett Singer of
Saxena White P.A., 4 West Red Oak Lane,
Suite 312, White Plains, NY 10604. Plaintiff
Guerrier is represented by Laurence Matthew
Rosen and Phillip Kim of The Rosen Law
Firm, P.A., 275 Madison Avenue, 34th Floor,
New York, NY 10016.
12
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