Faris et al v. Longtop Financial Technologies Limited et al
Filing
42
OPINION AND ORDER: Danske-Local One is appointed lead plaintiff in this action; Kessler Topaz Meltzer & Check LLP is appointed lead counsel; and Grant & Eisenhofer P.A. is appointed liaison counsel. The Clerk of the Court is directed to close the out standing lead plaintiff motions (Docket Entry Nos. 4, 8, 11, 14, 17 and 19 in Case No. 11 Civ. 3658 and Docket Entry Nos. 7, 10 and 13 in Case No. 11 Civ. 3661). The Clerk of the Court is further directed to close Case No. 11 Civ. 3661. A conference is scheduled for October 18, 2011, at 4:30 p.m., in Courtroom 15C. re: (4 in 1:11-cv-03658-SAS) MOTION to Appoint Ramesh Patel to serve as lead plaintiff(s) , for consolidation, and approval of Lead Plaintiff's selection of Lead and Liaison C ounsel. filed by Ramesh Patel, (8 in 1:11-cv-03658-SAS, 8 in 1:11-cv-03658-SAS, 8 in 1:11-cv-03658-SAS) MOTION to Consolidate Cases 11-cv-3658; 11-cv-3661. MOTION to Appoint City of Pontiac General Employees' Retirement System and City of P ontiac Police and Fire Retirement System to serve as lead plaintiff(s). MOTION to Appoint Counsel. MOTION to Appoint City of Pontiac General Employees' Retirement System and City of Pontiac Police and Fire Retirement System to serve as lead pl aintiff(s). filed by City of Pontiac General Employees and Police and Fire Retirement Systems, (19 in 1:11-cv-03658-SAS, 19 in 1:11-cv-03658-SAS, 19 in 1:11-cv-03658-SAS) MOTION to Appoint Counsel Kaplan Fox & Kilsheimer LLP. MOTION to Appoin t Bradley D. Kair and Peter Yahr to serve as lead plaintiff(s). MOTION to Consolidate Cases 1:11-cv-3658; 1:11-cv-3661. MOTION to Appoint Bradley D. Kair and Peter Yahr to serve as lead plaintiff(s). filed by Peter Yahr, Bradley D. Kair, (14 in 1:1 1-cv-03658-SAS, 14 in 1:11-cv-03658-SAS, 14 in 1:11-cv-03658-SAS) MOTION to Appoint Counsel Rosen Law Firm. MOTION to Appoint Lead Plaintiff. MOTION to Consolidate Cases. filed by Kowalczyk Group, (11 in 1:11-cv-03658-SAS) MOTION to A ppoint Norfolk County Retirement System to serve as lead plaintiff(s) Notice of Motion of the Norfolk County Retirement System for Consolidation, Appointment as Lead Plaintiff, and Approval of Its Choice of Lead Counsel. MOTION to Appoint Nor folk County Retirement System to serve as lead plaintiff(s) Notice of Motion of the Norfolk County Retirement System for Consolidation, Appointment as Lead Plaintiff, and Approval of Its Choice of Lead Counsel. filed by Norfolk County Retirement System. (Signed by Judge Shira A. Scheindlin on 10/4/2011) (jfe)
Ir:" . .
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
-------------------------------------------------------)(
JOSEPH F. FARIS, Individually and on
Behalf of All Others Similarly Situated,
OPINION AND ORDER
Plaintiff,
11 Civ. 3658 (SAS)
- againstLONGTOP FINANCIAL TECHNOLOGIES
LIMITED, HUI KUNG KA a/kla
)(IAOGONGJIA, WAI CHAU LIN a/kla
WEIZHOU LIAN, and DEREK
PALASCHUK,
Defendants.
-------------------------------------------------------)(
-------------------------------------------------------)(
BRAD LEY D. KAIR, on behalf of himself
and all others similarly situated,
Plaintiff,
11 Civ. 3661 (SAS)
- againstLONGTOP FINANCIAL TECHNOLOGIES
LIMITED, WAI CHAU LIN (a/kla LIN
WAI CHAU and WEIZHOU LIAN), and
DEREK P ALASCHUK,
Defendants.
-------------------------------------------------------)(
SHIRA A. SCHEINDLIN, U.S.D.J.:
I.
INTRODUCTION
These federal securities class actions are brought pursuant to sections
10(b) and 20(a)1 of the Securities Exchange Act of 1934 (the “Exchange Act”), as
amended by the Private Securities Litigation Reform Act of 1995 (“PSLRA”),2
and Securities and Exchange Commission (“SEC”) Rule 10b-5. 3 Defendants
include Longtop Financial Technologies Limited (“Longtop” or the “Company”)
and certain officers and/or directors of Longtop (collectively, the “defendants”).
Plaintiffs bring these actions on behalf of themselves and all persons who
purchased Longtop securities, including Longtop American depository shares
(“ADS’s”), between October 25, 2007 and May 17, 2011 (the “Class Period”).
Plaintiffs seek remedies under the Exchange Act.
On July 22, 2011,4 the following six groups of movants submitted
competing applications seeking appointment as lead plaintiff and approval of their
1
15 U.S.C. §§ 78j(b) and 78t(a).
2
Id. § 78u-4(a)(3)(B).
3
17 C.F.R. § 240.10b-5.
4
July 22, 2011, was the due date for the filing of motions for
consolidation, appointment of lead plaintiff, and approval of lead plaintiff’s
selection of lead counsel. Opposition papers were due by August 5, 2011, and
reply papers were due by August 12, 2011. See Memo-endorsed letter dated July
11, 2011, from David A. Rosenfeld of Robbins Geller Rudman & Dowd LLP
(Docket Entry # 6).
2
respective selection of lead counsel: Danske Invest Management A/S (“Danske”)
and Pension Funds of Local No. One, I.A.T.S.E. (“Local One”) (collectively
“Danske-Local One”); Joseph Kowalczyk, Platinum Partners Value Arbitrage
Fund, L.P. (“Platinum Arbitrage”), Platinum Partners Liquid Opportunity Master
Fund, L.P. (“Platinum Opportunity”) (together, the “Platinum Funds”), and James
Casolo (collectively the “Kowalczyk Group”); Ramesh Patel;5 Norfolk County
Retirement System (“Norfolk”);6 Bradley D. Kair and Peter Yahr (“Kair and
Yahr”);7 and the City of Pontiac General Employees’ and Police and Fire
Retirements Systems (the “Retirement Systems”).8
5
Patel withdrew his motion for appointment as lead plaintiff and
approval of lead counsel. Patel now supports the appointment of Danske-Local
One as lead plaintiff. See 8/8/11 Notice of Withdrawal of Motion for Appointment
as Lead Plaintiff.
6
Norfolk concedes that several other movants assert larger financial
interests than Norfolk but is able and willing to serve as lead plaintiff if this Court
declines to appoint one of the other movants. See 8/4/11 Memorandum of the
Norfolk County Retirement System in Response to Competing Motions for
Appointment as Lead Plaintiff.
7
Kair and Yahr concede that they do no possess the largest financial
interest in the relief sought by the class. Kair and Yahr recognize that DanskeLocal One possesses the largest financial interest. Kari and Yahr remain able and
willing to serve as lead plaintiff if this Court declines to appoint one of the other
movants. See 8/5/11 Response of Movants Bradley D. Kair and Peter Yahr to
Competing Motions for Appointment as Lead Plaintiff.
8
The Retirement Systems concede that they do not possess the largest
financial interest in the relief sought by the class but are able and willing to serve
3
In light of the concessions made by Patel, Norfolk, Kair and Yahr, and
the Retirement Systems, the Court must decide between Danske-Local One, its
selection of the law firm of Kessler Topaz Meltzer & Check LLP as lead counsel,
and its selection of the law firm of Grant & Eisenhofer P.A. as liaison counsel, and
the Kowalczyk Group and its selection of The Rosen Law Firm, P.A. and Wohl &
Fruchter LLP as co-lead counsel.9 Both movants argue that the other is subject to
unique defenses, thereby rendering each group incapable of adequately
representing the class. For the reasons stated below, Danske-Local One is
appointed lead plaintiff and its selection of the law firm of Kessler Topaz Meltzer
& Check LLP as lead counsel is approved as is its selection of the law firm of
Grant & Eisenhofer P.A. as liaison counsel.
II.
BACKGROUND
A.
Facts10
Longtop is a Cayman Islands corporation with principal executive
as lead plaintiff if this Court declines to appoint one of the other movants. See
8/5/11 City of Pontiac General Employees’ and Police and Fire Retirement
Systems’ Response to Competing Motions for Appointment as Lead Plaintiff.
9
The Kowalczyk Group did not select a law firm to serve as liaison
counsel.
10
The facts in this section are taken from the Complaint and are
presumed true for purposes of this motion.
4
offices in Hong Kong and a principal operations office located in the People’s
Republic of China (“China”). Longtop, together with its subsidiaries, provides
software and information technology products and services to financial institutions
operating in China. Until the Company’s trading was suspended on May 16, 2011,
Longtop’s ADS’s traded on the New York Stock Exchange under the ticker symbol
“LFT.”
The Complaints allege that during the Class Period, defendants
misrepresented and overstated the financial condition of the Company and issued
materially false and misleading statements regarding the Company’s financial
statements and related filings. The Company made materially false and misleading
statements to investors by misrepresenting and failing to disclose that: (1)
defendants falsified certain financial records in relation to cash reserves, loan
balances, and sales revenue; (2) management interfered with the audit process and
improperly detained audit files of the Company’s auditor; (3) defendants
improperly understated expenses, thereby artificially inflating profit margins; and
(4) the Company’s financial statements were not presented in accordance with
Generally Accepted Accounting Principles (“GAAP”) and were false and
misleading at all relevant times. As a result of defendants’ false and misleading
statements, Longtop securities traded at artificially inflated prices during the Class
5
Period, reaching a high of $42.73 per share on November 10, 2010.
On April 26, 2011, a financial analysis firm called Citron Research
released a report, Citron Reports on Longtop Financial (NYSE:LFT) (the “Citron
Report”). The Citron Report raised serious issues regarding the legitimacy of
Longtop’s financial statements dating back to its initial public offering.
Specifically, the Citron Report stated that the Company’s high profit margins were
the result of fraudulent and improper balance sheet transfers with a related party,
Xiamen Longtop Human Resources Services Co. (“XLHRS”), a staffing company.
The Citron Report attributed the Company’s success to its use of an
“unconventional staffing model” whereby the Company used XLHRS to take its
largest expenditure, staffing costs, off the Company’s books in an improper offbalance sheet transaction. The Citron Report also called into question the integrity
of Longtop’s key management, pointing to various undisclosed misdeeds. For
example, the Citron Report revealed that Longtop’s Chairman and its Chief
Executive Officer had been found liable for violations of Chinese unfair
competition law and other deceptive conduct. In response to the negative news
revealed in the Citron Report, the price of Longtop shares declined substantially,
closing at $22.24 per share.
6
The next day, April 27, 2011, another financial analysis firm, Bronte
Capital, issued a report that questioned Longtop’s representations and financial
statements. Longtop’s ADS price continued to plummet, dropping more than
twenty percent to close at $17.73 per share. Analysts continued issuing negative
reports on Longtop; on May 3, 2011, Bronte Capital reported that Longtop’s
purported fifty percent revenue growth was highly questionable. Then, on May 9,
2011, Citron Research published a follow-up report, Longtop Financial (NYSE:
LFT) Final Proof of Undisclosed Related Party Transactions (the “Second Citron
Report”). The Second Citron Report indicated that a research company named
OLP Global determined that Longtop used an off-balance-sheet transaction with a
related party to hide certain expenses. The Second Citron Report further revealed
the Company’s connection to XLHRS and how that connection materially
impacted Longtop’s financial condition. Longtop’s stock price continued its
dramatic fall.
On May 10, 2011, Longtop issued a press release that refuted the
allegations of both Citron Research and OLP Global. On May 17, 2011, all
trading in Longtop’s ADS’s was halted. At the time trading was suspended,
Longtop’s stock was trading at $18.93 per share. On May 19, 2011, Longtop
issued another press release announcing that the Company would not announce its
7
fourth quarter and fiscal year 2011 financial results as previously scheduled. Then,
on May 23, 2011, Longtop issued a third press release announcing that its
independent auditor had resigned and that the SEC was conducting an investigation
of the Company. The Company also announced that its Chief Financial Officer
had tendered his resignation several days earlier.
In sum, plaintiffs allege that statements made by defendants regarding
the Company’s financial performance and expected earnings were false and
misleading and lacked a reasonable basis when made. As a result of defendants’
materially false statements, Longtop’s securities traded at inflated levels during the
Class Period. Because of the precipitous decline in the market value of Longtop’s
securities, plaintiffs and the putative class members suffered significant losses and
damages.
B.
Procedural History
On May 27, 2011, two similar class actions were filed in this district
on behalf of all persons who purchased Longtop securities during the Class Period:
Faris v. Longtop Financial Technologies Limited, 11 Civ. 3658 (SAS), and Kair v.
Longtop Financial Technologies Limited, 11 Civ. 3661 (DAB) (hereinafter referred
to as the “Actions”). Three similar actions, including the first-filed action, are
8
pending in the United States District Court for the Central District of California.11
In both Actions, plaintiffs allege that Longtop and certain of its officers and/or
directors violated sections 10(b) and 20(a) of the Exchange Act, as amended by the
PSLRA, and Rule 10b-5 promulgated thereunder.
Following the filing of the first-filed action in the Central District of
California, the first notice that a class action had been initiated against the
defendants was published on May 23, 2011, on Business Wire, a widely circulated
national business-oriented wire service.12 The notice advised members of the
proposed class of their right to move to be appointed lead plaintiff. All movants
filed their lead plaintiff motions within the sixty-day period following publication
of the May 23, 2011 notice.
III.
LEGAL STANDARDS
A.
Lead Plaintiff
The PSLRA establishes procedures for selecting the lead plaintiff in
11
Mikus v. Longtop Financial Technologies Limited, Case No. 2:11-cv04402 (C.D. Ca. May 23, 2011); Washtenaw v. Longtop Financial Technologies
Limited, Case No. 2:11-cv-04714 (C.D. Ca. June 2, 2011); and Sanjay Maadan v.
Longtop Financial Technologies Limited, Case No. 2:11-cv-05182 (C.D. Ca. June
21, 2011).
12
See 15 U.S.C. § 78u-4(a)(3)(A)(i).
9
class action lawsuits alleging violations of the federal securities laws.13 Under the
PSLRA, the movant or group of movants with the largest financial interest in the
relief sought by the class, who also makes a prima facie showing of typicality and
adequacy, is the presumptively “most adequate plaintiff.”14 The PSLRA requires
that the “most adequate plaintiff” be determined by a two-step competitive
process.15 The process is sequential and does not leave any room for a relative
comparison of the movants by the court.16
The first step establishes the presumptively most adequate plaintiff as
the “person or group of persons” who meet(s) the following three criteria: (1) the
candidate must have “filed the complaint or made a motion in response to a
notice;”17 (2) the candidate must have “the largest financial interest in the relief
sought by the class,”18 and (3) the candidate must “otherwise satisf[y] the
13
See Sgalambo v. McKenzie, 268 F.R.D. 170, 173 (S.D.N.Y. 2010).
14
See In re eSpeed, Inc. Sec. Litig., 232 F.R.D. 95, 97 (S.D.N.Y. 2005).
15
See 15 U.S.C. § 78u-4(a)(3)(B)(iii).
16
See In re eSpeed, Inc., 232 F.R.D. at 98-99 (“The lead plaintiff
determination does not depend on the court’s judgment of which party would be
best lead plaintiff for the class, but rather which candidate fulfils the requirements
of the Act.”).
17
15 U.S.C. § 78u-4(a)(3)(B)(iii)(I)(aa).
18
Id. § 78u-4(a)(3)(B)(iii)(I)(bb).
10
requirements of Rule 23 of the Federal Rules of Civil Procedure.”19 At the lead
plaintiff stage of the litigation, in contrast to the class certification stage, “a
proposed lead plaintiff need only make a ‘preliminary showing’ that it will satisfy
the typicality and adequacy requirements of Rule 23.”20 “Typicality ‘requires that
the claims of the class representatives be typical of those of the class, and is
satisfied when 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.’”21 “The adequacy requirement is satisfied where the proposed Lead
Plaintiff does not have interests that are antagonistic to the class that he seeks to
represent and has retained counsel that is capable and qualified to vigorously
represent the interests of the class . . . .”22
The second step provides class members an opportunity to challenge
the presumptively most adequate plaintiff chosen in the first step. Once the
19
Id. § 78u-4(a)(3)(B)(iii)(I)(cc).
20
In re Bank of America Corp. Sec. Deriv. & ERISA Litig., 258 F.R.D.
260, 268 (S.D.N.Y. 2009) (quoting Kaplan v. Gelfond, 240 F.R.D. 88, 94
(S.D.N.Y. 2007)).
21
Central States Se. & Sw. Areas Health & Welfare Fund v. MerckMedco Managed Care, L.L.C., 504 F.3d 229, 245 (2d Cir. 2007) (quoting
Robinson v. Metro-N. Commuter R.R. Co., 267 F.3d 147, 155 (2d Cir. 2001)).
22
Glauser v. EVCI Ctr. Colls. Holding Corp., 236 F.R.D. 184, 189
(S.D.N.Y. 2006) (citing Dietrich v. Bauer, 192 F.R.D. 119, 124 (S.D.N.Y. 2000)).
11
presumption attaches, a class member seeking to rebut the designation of the
presumptively most adequate plaintiff must come forward with “proof”23 that either
the presumptively most adequate plaintiff “will not fairly and adequately protect
the interests of the class” or “is subject to unique defenses that render such plaintiff
incapable of adequately representing the class.”24 If the presumptively most
adequate plaintiff is disqualified on these grounds, the candidate’s position is
forfeited and the court returns to the first phase to determine a new presumptively
most adequate plaintiff. The process repeats itself until a candidate succeeds in
both the first and second phases of inquiry. However, the lead plaintiff
determination does not depend on the court’s judgment of which party would be
the best lead plaintiff for the class, but rather which candidate fulfills the
requirements of the PSLRA.25
B.
Consolidation
The PSLRA provides that “[i]f more than one action on behalf of a
class asserting substantially the same claim or claims arising under this title have
23
See 15 U.S.C. § 78u-4(a)(3)(B)(iii)(II)
24
Id. § 78u-4(a)(3)(B)(iii)(II)(aa), (bb).
25
See In re Cavanaugh, 306 F.3d 726, 729 (9th Cir. 2002) (“While the
words ‘most capable’ seem to suggest that the district court will engage in a
wide-ranging comparison to determine which plaintiff is best suited to represent
the class, the statute defines the term much more narrowly.”).
12
been filed,” courts shall not appoint a lead plaintiff until “after the motion to
consolidate is rendered.”26 Under Federal Rule of Civil Procedure 42,
consolidation is appropriate where the actions involve common questions of law
and/or fact.27 District courts have “broad discretion” in determining whether to
consolidate cases.28 The party moving for consolidation bears the burden of
showing the commonality of factual and legal issues.29 “Differences in causes of
action, defendants, or 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.”30 Although consolidation may enhance judicial economy,
“[c]onsiderations of convenience and economy must yield to a paramount concern
26
15 U.S.C. § 87u-4(a)(3)(B)(ii).
27
See In re Tronox, Inc. Sec. Litig., 262 F.R.D. 338, 344 (S.D.N.Y.
2009) (citing Fed. R. Civ. P. 42(a)).
28
Johnson v. Celotex Corp., 899 F.2d 1281, 1284 (2d Cir. 1990); Seidel
v. Noah Educ. Holdings Ltd., Nos. 08 Civ. 9203, 08 Civ. 9427, 08 Civ. 9509, 08
Civ. 9427, 2009 WL 700782, at *1 (S.D.N.Y. Mar. 9, 2009).
29
In re Repetitive Stress Injury Litig., 11 F.3d 368, 373 (2d Cir. 1993)
(“A party moving for consolidation must bear the burden of showing the
commonality of factual and legal issues in different actions[.]”).
30
Kaplan, 240 F.R.D. at 91.
13
for a fair and impartial trial.”31
IV.
DISCUSSION
Because four movants have withdrawn their motions to be appointed
lead plaintiff, this Court is confronted with two lead plaintiff motions filed by
Danske-Local One and the Kowalczyk Group. The losses for these movants, and
their constituent members, are summarized in the chart below.
MOVANT
APPROXIMATE LOSSES
1. Danske-Local One Group
1.
$3,513,477.89
1a. Danske Invest Management
1a.
$2,783,389.46
1b. Pension Fund of Local No. One
1b.
$730,088.43
2. The Kowalczyk Group
2.
$1,741,976.52
2a. Joseph Kowalczyk
2a.
$1,042,489.50
2b. The Platinum Funds
2b.
$485,598.00
2c. James Casolo
2c.
$213,889.02
As shown above, Danske-Local One has the largest financial interest.
If Danske is excluded, however, the remaining loss of Local One is smaller than
both the collective losses of the Kowalczyk Group and the losses of Joseph
Kowalczyk individually. Both Danske-Local One and the Kowalczyk Group
accuse each other of being subject to unique defenses, thereby making each group
31
Johnson, 899 F.2d at 1285.
14
allegedly incapable of adequately representing the class. For the following
reasons, I find that the Kowalczyk Group is subject to unique defenses while
Danske-Local One is not.
A.
Danske-Local One
1.
Danske Has a Valid Assignment
The Kowalczyk Group argues that Danske is an investment manager
and, as such, lacks Article III standing unless there is a valid and enforceable
assignment from the investment funds that actually purchased Longtop securities.32
Dankse did not submit an assignment from its funds (or “associations”) when
Danske-Local One originally moved for appointment as lead counsel. The
Kowalczyk Group characterizes Danske’s decision not to present such assignment
with its moving submission as “inexplicable” and rejects Danske’s “proffered
interpretation of a legal agreement that readily could have been, but has not been,
submitted.” However, in its reply submission, Danske-Local One did provide the
Assignment of Claims and Power of Attorney received by Danske from its Funds,
Investeringsforeningen Danske Invest and Den Professsionelle Forening Danske
32
See Memorandum of Law of the Kowalczyk Group in Opposition to
Competing Lead Plaintiff Motions at 5-9 (“Kowalczyk Opp. Mem.”).
15
Invest Institutional.33
The Assignment transfers to Danske “for purposes of prosecution and
collection, all rights, title and interest of the Funds in the Funds’ claims, demands
or causes of action against any defendant relating to any security issued by
Longtop Financial Technologies Limited.”34 The Assignment is virtually identical
to the assignment found to be valid by the Supreme Court in Sprint
Communications Co., L.P. v. APCC Services, Inc.35 The Assignment conclusively
establishes Danske’s standing.
2.
The Assignment Is Valid Under Danish Law
The Kowalczyk Group argues that even if the Assignment is sufficient
to satisfy Article III standing concerns, “there is a substantial question whether
Danske Invest has legal authority to receive such an assignment of claims from the
Danish investment associations that actually purchased Longtop securities.”36
33
See Assignment of Claims and Power of Attorney, Ex. A to the
8/15/11 Declaration of Deborah A. Elman, Liaison Counsel to Danske-Local One,
in Support of Danske Invest Management A/S and Pension Fund of Local No. One,
I.A.T.S.E.’s Reply in Further Support of Its Motion for Appointment as Lead
Plaintiff (the “Assignment”).
34
Id. at 1.
35
554 U.S. 269 (2008).
36
Kowalczyk Opp. Mem. at 9.
16
Danske obtained the Assignment out of an abundance of caution, to moot
arguments challenging its standing, given that Danish law already gives managers
like Danske the right to initiate legal proceedings on behalf of associations like the
Funds identified in the Assignment. Under Danish law, a manager’s authority to
prosecute legal claims on behalf of associations is an inherent power and one of the
manager’s core functions. Thus, a manager like Danske has the inherent power to
prosecute an association’s claims as a matter of right, without an assignment of
claims. Because the Assignment merely memorializes Danske’s inherent power
under Danish law, the Assignment is fully compliant and valid under Danish law.
The Kowalczyk Group’s arguments to the contrary are not well
founded. The Kowalczyk Group assumes that Danish law (Section 10(2) of the
Financial Business Act) limiting a manager’s ability to act as a custodian also
limits, by extension, a manager’s ability to receive an assignment to pursue
claims.37 However, Section 10(2) of the Financial Business Act says nothing about
the acquisition of rights to pursue claims.38 Actual ownership of an underlying
37
See Report of Jørgen Reimer Jensen, Esq., Ex. 4 to the 8/8/11
Declaration of Phillip Kim in Opposition to Competing Lead Plaintiff Motions at
2-3.
38
See Declaration of Jens Rostock-Jensen, Esq., Ex. B to the 8/15/11
Declaration of Deborah A. Elman, liaison counsel to Danske-Local One, in
Support of Danske Invest Management A/S and Pension Fund of Local No. One,
I.A.T.S.E.’s Reply in Further Support of Its Motion for Appointment as Lead
17
investment is wholly unrelated to a manager’s ability to secure the right to
prosecute claims relating to the investment.39 Moreover, legal ownership of an
investment is not necessary to pursue claims related to an investment.40 As
explained by Michael Steen Jensen, Danske-Local One’s expert on Danish law:
the Assignment here does not relate to traditional custody
services and does therefore not in any event fall within
Section 10, subsection 2, of the Financial Business Act.
The Assignment is instead related to legal proceedings
arising from investments made by the two associations and
thus forms part of the management, which Danske is
undertaking on behalf of the associations as their appointed
manager. The Assignment is therefore part of the core
activities, which Danske is undertaking on behalf of the two
associations and not related to traditional custody services,
and is thus an activity, which Danske may undertake in
accordance with Section 10, subsection 1, of the Financial
Business Act. The Assignment is not required as a matter
of Danish law and is . . . entered into in order to satisfy
certain procedural requirements under US law.41
Accordingly, as part of its core management duties, Danske has the
right to litigate the claims of its associations under Danish law.42 Moreover, the
Plaintiff (“Elman Reply Decl.”) ¶ 22.
39
See id.
40
See id.
41
Report of Michael Steen Jensen, Esq., Ex. C to the Elman Reply
Decl., at 5.
42
See id. (“The Assignment is in our opinion valid as a matter of Danish
law and neither the Investment Associations Act nor the Financial Business Act
18
Kowalczyk Group ignores the fact that three United States district courts have
permitted Danske to pursue claims upon receipt of an assignment and two of those
courts appointed Danske lead plaintiff.43 In sum, the Assignment is valid and there
is no question as to Danske’s legal authority to receive an assignment of claims
from the investment association-assignors.
3.
The Champerty Arguments Are Baseless
Finally, the Kowalczyk Group asserts that even if the Assignment is
sufficient for purposes of Article III standing and within the scope of Danske’s
authority under Danish law, there is still a question as to whether the Assignment is
valid and enforceable under state law. Assuming that New York law applies to the
Assignment, the Kowalczyk Group argues that Danske’s individual claims will be
imposes any restrictions on the activities of Danske, which would impact on the
ability of Danske to receive the assignment from Investeringsforeningen Danske
Invest and Den Professsionelle Forening Danske Invest Institutional and to act in
accordance with the Assignment.”).
43
See In re SunPower Sec. Litig., No. 09-cv–5473-CRB (N.D. Cal. Mar.
5, 2010) (Docket Entry # 70 appointed Danske as lead plaintiff); In re Vivendi, S.A.
Sec. Litig., 605 F. Supp. 2d 570, 586 (S.D.N.Y. 2009) (allowing Danske to replead
claims upon receiving an assignment of claims from the funds on whose behalf suit
was brought); Minneapolis Firefighters’ Relief Ass’n v. Medtronic, Inc., No. 086324, 2009 WL 1458234, at *2 (D. Minn. May 26, 2009) (“Finally, the Court finds
that the City of Los Angeles has not effectively rebutted the presumption favoring
the Medtronic Group with regard to a contention that the Union and Danske
plaintiffs are subject to unique defenses regarding their Article III standing in this
matter because those funds lack an ownership interest in the claims of their
clients.”).
19
subject to the defense of champerty. New York’s champerty statute provides, in
relevant part, as follows:
[N]o corporation or association . . . shall . . . take an
assignment of . . . a . . . thing in action, or any claim or
demand, with the intent and for the purpose of bringing an
action or proceeding thereon . . . . Any corporation or
association violating the provisions of this section shall be
liable to a fine of not more than five thousand dollars; any
person or co-partnership, violating the provisions of this
section, and any officer, trustee, director, agent or employee
of any . . . co-partnership, corporation or association
violating this section who, directly or indirectly, engages or
assists in such violation, is guilty of a misdemeanor.44
Historically, courts have interpreted the proscription of the champerty
statute narrowly.45 For example, the New York Court of Appeals analyzed the
champerty statute and held that “‘[t]he doctrine of champerty developed to prevent
or curtail the commercialization of or trading in litigation.’”46 The Court of
Appeals further stated that “the prohibition of champerty has always been ‘limited
in scope and largely directed toward preventing attorneys from filing suit merely as
44
N.Y. Judiciary Law § 489(1).
45
See Richbell Info. Servs., Inc. v. Jupiter Partners, 723 N.Y.S.2d 134,
139 (1st Dep’t 2001).
46
Trust for the Certification of Merrill Lynch Mortg. Investors, Inc. v.
Love Funding Corp., 13 N.Y.3d 190, 198 (2009) (quoting Bluebird Partners v.
First Fid. Bank, 94 N.Y.2d 726, 729 (2000)).
20
a vehicle for obtaining costs.’”47 As recently explained by this Court,
the Court of Appeals in Love Funding Corp. held that the
statute “does not apply when the purpose of an assignment
is the collection of a legitimate claim.” Id., 13 N.Y.3d at
201. Rather, “if a party acquires a debt instrument for the
purpose of enforcing it – that is not champerty simply
because the party intends to do so by litigation.” Id., 13
N.Y.3d at 200. The Court of Appeals further emphasized
the distinction between acquiring a right in order to make
money from litigating it and acquiring a right in order to
enforce it, with the former acquisition being the kind that
implicates the anti-champerty statute. See id., 13 N.Y.3d at
200. The court explained that “[t]he champerty statutes are
directed at preventing the ‘strife, discord and harassment’
that would be likely to ensue ‘from permitting attorneys
and corporations to purchase claims for the purpose of
bringing actions thereon.’” Id., 13 N.Y.3d at 199 (quoting
Fairchild Hiller Corp. v. McDonnell Douglas Corp., 28
N.Y.2d 325, 329 (N.Y. 1971)). “In short, the champerty
statute does not apply when the purpose of an assignment
is the collection of a legitimate claim. What the statute
prohibits, as the Appellate Division stated over a century
ago, ‘is the purchase of claims with the intent and for the
purposes of bringing an action that . . . may involve parties
in costs and annoyance, where such claims would not be
prosecuted if not stirred up . . . in [an] effort to secure
costs.’” Id., 13 N.Y.3d at 201 (quoting Wightman v. Catlin,
98 N.Y.S. 1071 (N.Y. App. Div. 2d Dep’t 1906)).48
47
Id. at 199 (quoting Bluebird Partners, 94 N.Y.2d at 734).
48
In re Imax Sec. Litig., No. 06 Civ. 6128, 2011 WL 1487090, at *5
(S.D.N.Y. Apr. 15, 2011) (alteration and second ellipsis in original, parallel
citations omitted).
21
Here, Danske is not a stranger to this suit but rather is seeking to
enforce the claims of the associations resulting from investments in Longtop
securities, investments for which Danske is ultimately responsible as the
investment manager. Thus, the Kowalczyk Group’s argument that the Assignment
constitutes a prohibited “commercialization of litigation”49 is without merit.
Accordingly, the Assignment is not prohibited by the New York champerty statute.
In sum, Danske and Local One are sophisticated institutional investors
collectively responsible for overseeing billions of dollars in investments. These
highly sophisticated institutional investors represent the largest financial interest of
any movant and can adequately represent the class, as determined above.
Moreover, Danske-Local One has demonstrated its commitment to protecting the
members of this putative class action.50 Accordingly, the presumption in favor of
Danske-Local One has attached and the challenges thereto are dismissed.
49
Id. at *6.
50
See The Longtop Investor Group’s Joint Declaration in Support of
Their Motion to Consolidate Related Actions, for Appointment as Lead Plaintiff
and Approval of Lead Counsel, Ex. F to the 7/22/11 Declaration of Deborah A.
Elman in Support of Danske Investment Management A/S and Pension Fund of
Local No. One, I.A.T.S.E.’s Motion for Consolidation, Appointment as Lead
Plaintiff and Approval of Selection of Lead Counsel and Liaison Counsel (“Elman
Decl.”).
22
B.
Kowalczyk Group
Given that the above arguments challenging Danske’s ability to
adequately represent the class have been found to be without merit, the Kowalczyk
Group has failed to rebut the presumption that Danske-Local One is the most
adequate plaintiff. Accordingly, the two-step process is complete and the inquiry
can stop here, now that the Court has determined that Danske-Local One has the
largest financial interest and is otherwise typical and adequate. However, in an
abundance of caution, the following issues, which weigh against the Kowalczyk
Group as the presumptively most adequate plaintiff, will be addressed briefly.
1.
Unusual Trading
Three members of the Kowalczyk Group – Kowalczyk, Platinum
Arbitrage and Platinum Opportunity – collectively account for approximately
$1.52 million of the Kowalczyk Group’s approximate $1.74 million losses, which
is roughly eighty-seven percent. These three members, however, purchased all of
their shares in Longtop after April 26, 2011: Kowalczyk, who asserts
$1,042,489.50 in losses, purchased all of his Class period shares of Longtop on
May 11, 2011; the Platinum Funds, which assert $485,598.00 in losses, purchased
all of their shares on May 6 and 9, 2011. These post-disclosure purchases suggest
that these three members invested in Longtop securities notwithstanding notice of
23
defendants’ misstatements and omissions. These unusual trading patterns may
well undermine the ability of these three members to assert the fraud-on-themarket presumption of reliance, thereby rendering them inadequate class
representatives.51 The Kowalczyk Group argues that this purported defense is not
“unique” in that it is applicable to all class members who purchased shares
between April 26, 2011 and May 17, 2011. But this Court sees no reason to
subject the class to this potential defense where there is another movant, DanskeLocal One, that purchased the vast majority of its Longtop shares before the first
corrective disclosure was made on April 26, 2011.52
2.
Involvement in a Ponzi Scheme
A second problem detracting from the Kowalczyk Group as lead
plaintiff is the fact that Platinum Arbitrage is currently involved in a lawsuit for its
role in a $1.4 billion Ponzi scheme orchestrated by Scott Rothstein, a disbarred
51
See, e.g., Gary Plastic Packaging Corp. v. Merrill Lynch, Pierce,
Fenner & Smith, Inc., 903 F.2d 176, 179 (2d Cir. 1990) (holding that it was not an
abuse of discretion for the district court to find the proposed class representative
inappropriate because its claim would be subject to the unique defenses of having
purchased the securities despite having notice of, and having investigated, the
alleged fraud); In re Cardinal Health, Inc. Sec. Litig., 226 F.R.D. 298, 310 (S.D.
Ohio 2005) (finding movant subject to a unique defense because it purchased its
shares after the company’s public disclosures of investigations by the Securities
and Exchange Commission and the United States Attorney’s Office for the
Southern District of New York into the company’s accounting methods).
52
See Exs. B and C to the Elman Decl.
24
Florida attorney.53 The Chapter 11 Trustee appointed by the court in the Rothstein
action alleges that Platinum Arbitrage knowingly received $261 million from the
fraudulent scheme. Whether or not the Trustees’ claims are eventually proven to
be true is irrelevant. The Trustee’s allegations that Platinum Arbitrage knowingly
profited from victims of a Ponzi scheme certainly subjects it to a unique defense
atypical of the conduct expected of a lead plaintiff.54 Moreover, the willingness of
the other members of the Kowalczyk Group to seek lead plaintiff appointment with
Platinum Arbitrage raises questions about the adequacy of the entire group.
C.
Lead and Liaison Counsel
The PSLRA provides that “[t]he most adequate plaintiff shall, subject
to the approval of the court, select and retain counsel to represent the class.”55
Danske-Local One, has selected the law firm of Kessler Topaz Meltzer & Check
LLP as lead counsel and the law firm of Grant & Eisenhofer P.A. as liaison
counsel. As ascertained from each firm’s resume, both firms are qualified to
53
See In re Rothstein Rosenfeldt Adler, P.A., Case No. 10-03802-RBR
(S.D. Fla. Bankr. Dec. 20, 2010).
54
In re Marsh & McLennan Cos., Inc. Sec. Litig., No. 04 Civ. 8144,
2008 WL 2941215, at *6 (S.D.N.Y. July 30, 2008) (stating that many courts
“review information regarding investigations, charges, and determinations of
wrongdoing in deciding whether a proposed class representative will adequately
represent a putative class”).
55
15 U.S.C. § 77z-1(a)(3)(B)(v).
25
litigate this action. Therefore, Danske-Local One’s selection of Kessler Topaz
Meltzer & Check LLP as lead counsel is approved as is its selection of Grant &
Eisenhofer P.A. as liaison counsel.
D.
Consolidation
The above-captioned actions are hereby consolidated for all purposes
and will henceforth be referred to as: In re Longtop Financial Technologies
Limited Securities Litigation, Docket No. 11 Civ. 3658 (SAS). A separate Order
consolidating the related actions will be entered, setting forth the terms of
consolidation and the procedures to be followed in connection therewith.
V.
CONCLUSION
Danske-Local One is appointed lead plaintiff in this action; Kessler
Topaz Meltzer & Check LLP is appointed lead counsel; and Grant & Eisenhofer
P.A. is appointed liaison counsel. The Clerk of the Court is directed to close the
outstanding lead plaintiff motions (Docket Entry Nos. 4, 8, 11, 14, 17 and 19 in
Case No. 11 Civ. 3658 and Docket Entry Nos. 7, 10 and 13 in Case No. 11 Civ.
3661). The Clerk of the Court is further directed to close Case No. 11 Civ. 3661.
A conference is scheduled for October 18, 2011, at 4:30 p.m., in Courtroom 15C.
26
Dated:
New York, New York
October 4, 2011
27
-AppearancesFor Plaintiff Joseph F. Faris:
For Plaintiff Bradley D. Kair:
Curtis V. Trinko, Esq.
Jennifer E. Traystman, Esq.
Law Offices of Curtis V. Trinko, LLP
16 West 46th Street, Seventh Floor
New York, NY 10036
(212) 490-9550
Jeffrey P. Campisi, Esq.
Donald R. Hall, Jr., Esq.
Frederic S. Fox, Sr., Esq.
Joel B. Strauss, Esq.
Pamela A. Mayer, Esq.
Kaplan Fox & Kilsheimer LLP
850 Third Avenue, 14th Floor
New York, New York 10022
(212) 687-1980
Joseph E. White, Esq.
Christopher S. Jones, Esq.
Lester R. Hooker, Esq.
Saxena White P.A.
2424 North Federal Highway
Boca Raton, FL 33431
(561) 394-3399
For Movant Danske-Local One:
For Movant Kowalczyk Group:
Jay W. Eisenhofer, Esq.
Grant & Eisenhofer P.A.
485 Lexington Avenue, 29th Floor
New York, NY 10118
(212) 686-1060
Phillip C. Kim, Esq.
The Rosen Law Firm P.A.
350 5th Avenue, Suite 5508
New York, NY 10017
(646) 722-8512
For Movant Norfolk:
For Movant Retirement Systems:
Jeffrey C. Block, Esq.
Berman DeValerio
One Liberty Square, 8th Floor
Boston, MA 02109
(617) 542-8300
David A. Rosenfeld, Esq.
Robbins Geller Rudman & Dowd
58 South Service Road, Suite 200
Melville, NY 11747
(631) 367-7100
28
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