Gumm et al v. Molinaroli et al

Filing 40

DECISION AND ORDER signed by Judge Pamela Pepper on 11/14/2016 GRANTING 18 the Motion of the JCI Shareholders' Group for Appointment as Lead Plaintiff and Approval of its Selection of Lead Counsel; DENYING 21 the Motion of John and Vivian Fifrick for Appointment as Plaintiff and Approval of Lead Counsel; and APPOINTING Lead Plaintiff, Lead Counsel and Liaison Counsel. (cc: all counsel) (pwm)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF WISCONSIN
______________________________________________________________________________
ARLENE D. GUMM, ET AL,

Case No. 16-CV-1093-PP

Plaintiffs,
v.
ALEX A. MOLINAROLI, ET AL,
Defendants.
______________________________________________________________________________
DECISION AND ORDER GRANTING THE MOTION OF THE
JCI SHAREHOLDERS’ GROUP FOR APPOINTMENT AS LEAD PLAINTIFF
AND APPROVAL OF ITS SELECTION OF LEAD COUNSEL (DKT. NO. 18);
DENYING MOTION OF JOHN AND VIVIAN FIFRICK FOR APPOINTMENT
AS PLAINTIFF AND APPROVAL OF LEAD COUNSEL (DKT. NO. 21); AND
APPOINTING LEAD PLAINTIFF, LEAD COUNSEL AND LIAISON COUNSEL
______________________________________________________________________________
JCI Shareholders Group and John and Vivian Fifrick have filed
competing motions seeking appointment as lead plaintiffs and approval of lead
counsel. Dkt. Nos. 18 (JCI), 21 (Fifrick). The motions are fully briefed. The
court finds that the JCI Shareholders Group is the most adequate lead
plaintiff, and approves Lockridge Grindal Nauen, P.L.L.P. as lead counsel and
Wagner Law Group, S.C. as liaison counsel.
BACKGROUND
Johnson Controls, Inc. (“JCI”) and Tyco International (“Tyco”) entered
into a plan of merger on January 24, 2016. Dkt. No. 1 at ¶1. In its January 25,
2016 announcement, JCI stated that the merger would be tax-free to Tyco
shareholders and taxable to JCI shareholders. Id. at ¶6. On August 16, 2016,
1

plaintiffs Arlene Gumm, Paul Pontier, Cynthia Pontier, Danny High, and
Michael Holtzhauer filed a complaint on behalf of themselves and all other
similarly situated stockholders of JCI against certain senior executive officers,
all members of the Board of Directors of JCI, JCI, Jagara Merger Sub LLC and
Tyco. Id. at 4. The complaint asserts that the merger1 specifically was
structured to allow JCI to gain tax benefits by reincorporating in Ireland—
Tyco’s legal domicile (referred to as an “inversion” or “tax inversion”).2 Id. at
¶¶3, 5. To gain these tax benefits, JCI allegedly diluted the stock to a point that
any tax liability for reincorporating in Ireland shifted to the shareholders. Id. at
¶¶11,12. Accordingly, the plaintiffs alleged that the merger hurts two classes of
shareholders: (1) public shareholders and (2) shareholders with potential
exposure to capital gain taxation. Id. at ¶1.
Also on August 16, 2016, in accordance with the statute governing the
procedure for private securities class actions (15 U.S.C. §78u-4(a)(3)(A)), the
plaintiffs published notice of the action to investors and informed potential
plaintiffs of the October 17, 2016 deadline to file lead plaintiff motions. Dkt.
No. 20-3. On October 17, 2016, Peter Smykla, Cathreen Clark, Cynthia Pontier,
Henry Nisiewicz, and Brian Ellison (collectively “the Group”) and John and
Vivian Fifrick filed competing motions now before the court, each seeking

1 In the complaint, the plaintiffs refer to the merger as “proposed.” It appears that the merger
was completed on September 2, 2016. See http://www.johnsoncontrols.com/merger
2 According to the plaintiffs, an “inversion” or a “tax inversion” is a process by which a U.S.
domiciled corporation becomes a subsidiary of a foreign parent corporation and the
shareholders of the U.S. corporation become shareholders of the new foreign parent in an
exchange of their U.S. corporation’s stock for stock in the new foreign parent. Dkt. No. 1 at ¶9.
This process reduces the U.S. corporation’s federal and state corporate income tax. Dkt. No. 1
at ¶9.

2

appointment as lead plaintiffs and each seeking approval of different lead
counsel. Dkt. Nos. 18, 21. The Group is composed of “five knowledgeable,
successful business executives, entrepreneurs, and professionals…who, in
addition to being substantial investors, will exert their influence in the
litigation and will effectively oversee counsel.” Dkt. No. 30 at 4. Collectively, the
Group holds 347,116 shares of JCI stock. Dkt. No. 20-2. John and Vivian
Fifrick are a married couple who own 203,424 shares of JCI stock. Dkt. No. 222; Dkt. No. 29 at 5.
For the reasons explained below, the court finds that the Group is the
most adequate lead plaintiff and approves the Group’s selection of Lockridge
Grindal Nauen, P.L.L.P. as lead counsel and Wagner Law Group, S.C. as liaison
counsel.
DISCUSSION
In an attempt to reform abusive securities class action litigation
practices, Congress passed the Private Securities Litigation Reform Act
(“PSLRA”) in 1995. In re Oxford Health Plans, Inc., Sec. Litig., 182 F.R.D. 42,
43-44 (S.D.N.Y. 1998). To prevent lawyer-driven litigation, the PSLRA directs
courts to determine the most adequate lead plaintiff or plaintiffs. 15 U.S.C.
§78u-4(a)(3)(B)(i); Asher v. Baxter Intern. Inc., 505 F.3d 736, 737 (7th Cir.
2007) (“‘Lead plaintiffs are supposed to counteract the dominance of lawyers
over class-action suits; the district judge should select a representative with a
financial stake large enough to make monitoring of counsel worthwhile, and
with the time and skills needed to make monitoring productive.”) Consequently,
3

the filing of a securities class action complaint triggers a cascade of deadlines
under the PSLRA: (1) the plaintiffs have twenty days to publish a notice of the
action informing class members of the deadline to file a motion to serve as lead
plaintiff (§78u-4(a)(3)(A)(i)); (2) potential class members then have sixty days
from the date of the notice to file lead plaintiff motions with the court (§78u4(a)(3)(A)(i)(II)); and finally (3) within ninety days of the date of the notice, the
court must consider any motions filed and appoint a lead plaintiff (§78u4(a)(3)(B)(i)).
When considering motions to serve as lead plaintiff, the court shall adopt
a presumption that the most adequate plaintiff is the “person or group of
persons” that (1) made a motion or filed the complaint, (2) has the largest
financial interest in the relief sought by the class, and (3) otherwise satisfies
the requirements of Fed. R. Civ. P. 23. 15 U.S.C. §78u-4(a)(3)(B)(iii). The
presumption is rebuttable, but in order to rebut it, a member of the purported
plaintiff class must provide proof that the presumptively most adequate
plaintiff either 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.” 15 U.S.C. §78u-4(a)(3)(B)(iii)(II).
In this case, the presumption arises in favor of the Group for the
following reasons: (1) it filed a timely motion; (2) it has the largest financial
interest; and (3) it satisfies the requirements of Rule 23. The Fifricks have not
submitted the kind of proof required to rebut the presumption.

4

A.

Both Motions Were Timely Filed.

The PSLRA requires that “not later than 60 days after the date on which
the notice is published, any member of the purported class may move the court
to serve as lead plaintiff of the purported class.” 15 U.S.C. §78u-4(a)(3)(A)(i)(II).
The plaintiffs published the notice on August 16, 2016. Dkt. No. 20-3.
Members of the purported class had until October 17, 2016 to file a motion to
serve as lead plaintiff. Id. Both the Group and the Fifricks filed their motion by
this deadline.3 Dkt. Nos. 18, 21.
B.

The Group Has the Largest Financial Interest.

In order for the rebuttable presumption to arise in favor of a person or
group of persons, the court must determine which movant has the largest
financial interest. 15 U.S.C. §78u-4(a)(3)(B)(iii)(I)(bb). The PSLRA does not
provide a formula for determining which plaintiff or plaintiffs has the largest
financial interest. Id. Many courts apply a four-factor test. See In re: Cendant
Corp. Litig., 264 F.3d 201, 262 (3d Cir. 2001)(“we agree with the many district
courts that have held that courts should consider, among other things: (1) the
number of shares that the movant purchased during the putative class period;
(2) the total net funds expended by the plaintiffs during the class period; and
While the Fifricks filed their motion on October 17, 2016, their supporting memorandum of
law did not appear on the court’s docket until October 18, 2016. Dkt. No. 23. For that reason,
the Group argues that the Fifricks’ memorandum in support was not timely. Dkt. No. 27 at 6.
The court ultimately finds that the Group is the most adequate plaintiff for other reasons. The
court notes several things, however. First the PSLRA does not require a memorandum of law in
support of a motion for appointment as lead plaintiff. See 15 U.S.C. §78u-4(a)(3)(A)(i)(II).
Second, while the Eastern District of Wisconsin’s Civil L. R. 7 requires a moving party to file a
supporting memorandum or certificate stating no memorandum will be filed, the rules are
enforced primarily upon the court’s own initiative, per General L. R. 1. Finally, the Fifricks
assert that their memorandum would have been filed on October 17 if not for an ECF error.
Dkt. No. 32 at 11. Thus, the court does not find it relevant that the Fifricks’ supporting
memorandum did not hit the docket until October 18, 2016.
3

5

(3) the approximate losses suffered by the plaintiffs”). In this case, it appears
that the parties agree that this is a unique case, and that the number of shares
held by each party is a key factor.4 Dkt. No. 19 at 5; Dkt. No. 29 at 5.
Consequently, the court will measure the movants’ financial interest by
reviewing the respective number of shares. See Plumbers & Pipefitters Local
562 Pension Fund v. MGIC Investment Corp., 256 F.R.D. 620, 623-24 (E.D.
Wis. 2009) (“[B]y not specifying a method for determining the largest financial
interest and stating instead that the determination is the court’s, the PSLRA
appears to discourage any [finely-calibrated] inquiry and prefer that the court
make the determination based on whatever factors seem most appropriate
under the facts of the case before it.”).
The Group has the largest financial interest in the relief sought. The
Group collectively owns 347,116 shares of JCI stock. Dkt. No. 27 at 1, 4. The
Fifricks own 203,424 shares. Dkt. No. 29 at 5. To counter the appearance that
the Group has the largest financial interest, the Fifricks raise objections to the
Group’s share count; they argue that (1) the court should not include the Clark
and Nisiewicz shares because those two individuals submitted certifications
with electronic signatures; (2) the court should reduce Cynthia Pontier’s share
count because it includes shares belonging to family members; and (3) the
court should not aggregate all the Group’s shares, because the Group was
“cobbled together by its counsel” and because there is no evidence of “pre-

The Group also asks the court to consider the potential capital gain tax estimates. Dkt. No.
30 at 10. The court declines to determine whether this is an appropriate consideration in the
financial interest analysis. All parties agree that the court should take the number of shares
into account, and the Group has the largest share count.
4

6

litigation relationship or cohesion.” Id. at 4. The court does not find these
arguments persuasive, and finds that the presumption arises that the Group
has the larger financial interest. Dkt. No. 32 at 3, 6.
1.

Clark and Nisiewicz Shares

The Fifricks ask the court not to include the shares belonging to Clark
and Nisiewicz because their certifications contain electronic signatures. Dkt.
No. 32 at 7. The PSLRA requires “personally signed” certifications. 15 U.S.C.
§78u-4(a)(2)(A). This phrase arguably could mean that the statute requires wet
signatures rather than electronic signatures. The Group, however, directs the
court to ¶II(C)2 of the Eastern District of Wisconsin’s ECF manual. Dkt. No. 30
at 8. This section allows an attorney to obtain a signature from his clients on
the original document, and then to electronically file a version of the document
bearing an electronic signature as long as the attorney maintains the original
document and can provide it for review upon request of the judge.5 Counsel for
the Group represents that he followed this procedure, Dkt. No. 30 at 8; the
court accepts that assertion as true, given that attorneys of record are officers
of the court. The court will include Clark and Nisiewicz shares in its financial
interest analysis.
2.

Pontier Shares

The Fifricks argue that Cynthia Pontier does not own the 57,8406 shares
she claims to represent, and that she is not authorized to act on behalf of the
people whose shares she claims to represent. Dkt. No. 29 at 5 n.3. Cynthia
5
6

http://www.wied.uscourts.gov/e-filing/ecf-policies-and-procedures#Signatures.
Dkt. No. 20-2.

7

Pontier’s affidavit attests that she inherited 6,000 shares from her father, and
that she sold 1,700 of those shares, which leaves her with 4,300 shares, Dkt.
No. 16-34 at 3 – 53,540 shares less that she indicates she represents.7
The Group responds that Pontier does not claim to own all of the shares
she represents, she has her mother’s power of attorney, and on this basis
represents her mother’s shares as well as her own. Dkt. No. 30 at 13-14.
Pontier’s brother Paul’s affidavit indicates that their mother owns 51,000
shares. Dkt. No. 35 at 3. Adding these to Cynthia Pontier’s shares yields a total
of 55,300 shares which Cynthia Pontier appears to be authorized to represent,
not counting those of her sister Patricia (who is ill), and her brother Paul (who
is a named plaintiff, although he has not sought to be named as a lead
plaintiff). On this basis, the court does not agree that Cynthia Pontier’s shares
are inflated.
Even if the court excluded the shares Pontier claims to represent (at
least, all but 4,300, which she herself owns), the Group’s remaining share
count still would be larger. The remaining share count would total 293,579,
and would include Smykla at 96,028 shares, Clark at 91,500 shares, Nisiewicz
at 53,000 shares, Ellison at 48,748 shares and Pontier at 4,300 shares. Dkt.
No. 20-2.
3.

Aggregation

The Fifricks also ask the court to refuse to aggregate the Group’s shares
(the Smykla, Clark, Nisiewicz and Ellison shares) because the Group’s counsel
The Fifricks indicate that Cynthia Pontier owns 7,257 shares, rather than the 4,300
referenced by the court. Dkt. No. 32 at 13. Either way, including only her shares and not those
of any other Pontier family member still makes the Group’s financial interest the greater one.
7

8

“cobbled together” a group of otherwise unrelated investors for the purpose of
creating a lead plaintiff. Dkt. No. 32 at 3. The plain language of §78u-4(a)(3)(B)
allows the court to appoint multiple persons as lead plaintiff, and the
presumption arises “that the most adequate plaintiff in any private action… is
the person or group of persons that… has the largest financial interest in the
relief sought by the class.” (emphasis added). The statute does not contain a
requirement of a pre-litigation relationship. 15 U.S.C. §78u-4(a)(3)(B)(iii)(I)(bb);
see also City of Sterling Heights General Employees’ Retirement System, et al.,
v. Hospira, Inc., 2012 WL 1339678, *6 (N.D. Ill. April 18, 2012) (holding that
the plain language of the PSLRA does not preclude aggregation of financial
interests). The Fifricks also assert – without any proof – that the Group’s
creation is “lawyer-driven,” and that the Group really contains more than the
five presumptive lead plaintiffs it names. Without proof, these assertions are
just that – assertions.
The court concludes that the Group has the largest financial interest in
the relief sought by the complaint.
C.

The Group Satisfies the Requirements of Federal
Rule of Civil Procedure 23 for the Purpose of
Seeking Appointment as Lead Plaintiff.

For the most adequate plaintiff presumption to arise, the plaintiff(s) must
satisfy the requirements of Rule 23 of the Federal Rules of Civil Procedure.
15 U.S.C. §78u-4(a)(3)(B)(iii)(I)(cc). Although Federal Rule of Civil Procedure 23
requires numerosity, commonality, typicality and adequacy, in the context of
motions for lead plaintiff inquiries, courts considering these factors for the
9

purpose of appointing a lead plaintiff do not engage in a “wide-ranging analysis
under Rule 23,” and generally focus on only typicality and adequacy.8 Lax v.
First Merchants Acceptance Corp., 1997 WL 461036, *6 (N.D. Ill. Aug. 11,
1997)(quoting North Carolina Bd. of Examiners v. North Carolina State Bd. of
Educ., 468 S.E. 2d 826 (N.C. App. 1996). Furthermore, the movants only need
to make a preliminary showing that the rules have been satisfied. Martingano
v. American Int’l Grp., Inc., Case Nos. 06cv1625, 06cv2014, 2006 WL 1912724
at *4 (E.D.N.Y. 2006).
Typicality is met when the claims arise from the same events or practice
or course of conduct that gives rise to the claims of the other class members.
Lax, 1997 WL 461036 at *6 (quoting DeLaFuente v. Stokely-VanCamp, Inc.,
713 F.2d 225, 232 (7th Cir. 1983)9). The Group’s claims arise from the alleged
ramifications of the merger, as do the claims of the rest of the purported class.
The court finds that the Group has met the typicality requirement for the
purposes of its motion to be appointed lead plaintiff.
Adequateness is satisfied when the presumptive lead plaintiff does not
have claims in conflict with other class members, has competent counsel and
has sufficient interest in the outcome of the case to ensure vigorous advocacy.
Lax, 1997 WL 461036 at *6 (N.D. Ill. Aug. 11, 1997) (citations omitted). As
indicated by the court’s finding on the financial interest requirement, the

8 The fact that the court makes preliminary class certification findings of typicality and
adequacy for the purposes of appointing a lead plaintiff does not preclude any party from
contesting those, or any other, class certification requirements for the purpose of ultimate class
certification in the future. Martingano v. American Intern. Group, Inc., 2006 WL 1912724, *4
(E.D.N.Y. July 11, 2006).
9 Overruled on other grounds by Green v. Mansour, 474 U.S. 64 (1985).

10

Group has a substantial financial stake in the litigation, which provides it with
the motivation to advocate vigorously on behalf of the class. The court has no
information before it to indicate that proposed lead counsel is not competent;
indeed, the pleadings thus far argue to the contrary. There is also no evidence
that the Group has any conflicts with other class members. The Fifricks have
provided no evidence, proof or argument to the contrary.
The court finds that the most adequate plaintiff presumption arises in
favor of the Group.
D.

The Fifricks Have Not Provided Evidence Sufficient
to Rebut the Presumption in Favor of the Group.

“The presumption described in subclause (I) may be rebutted only upon
proof by a member of the purported plaintiff class that the presumptively most
adequate plaintiff—(a)(a) will not fairly and adequately protect the interests of
the class; or (b)(b) 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);
In re Vonage Initial Pub. Offering (IPO) Sec. Litig., No. CIV A 07-177 FLW, 2007
WL 2683636, at *7 (D.N.J. Sept. 7, 2007) (“Once the presumption has been
established, the question is not whether another applicant might do a better
job of protecting the interests of the class than the presumptive lead plaintiff.
Rather, the question is whether anyone can prove the presumptive lead
plaintiff will not do a “fair [ ] and adequate [ ]” job.”) (citing In re Cendant, 264
F.3d at 268.)
The Fifricks argue that the Group will not fairly and adequately protect
the interests of the class because they are a group of unrelated plaintiffs
11

“cobbled together” to meet the financial interest requirement.10 Dkt. No. 32 at
3. As stated above, the PSLRA has no provision preventing multiple plaintiffs
from acting as lead plaintiff, in fact, the statute contemplates it in several
spots. Still, some courts have noted that “[a]llowing lawyers to designate
unrelated plaintiffs as a ‘group’ and aggregate their financial stakes would
‘allow and encourage lawyers to direct the litigation.’” Maiden v. Merge
Technologies, Inc., 2006 WL 3404777, *3 (E.D. Wis. Nov. 21, 2006) (citing In re:
Pfizer Inc. Sec. Litig., 233 F.R.D. 334, 337 (S.D.N.Y. 2005)). And “[a] single lead
plaintiff speaking on behalf of the class reduces potential conflicts in deciding
litigation and settlement strategy.” Zucker v. Zoran Corp., 2006 WL 3591156,
*2 (N.D. Cal. Dec. 11, 2006).
In this case, the court finds that the Group will adequately and fairly
protect the interests of the class. According to the reply brief in support of the
Group’s motion, the Group had a conference call on November 3, 2016 to
“adopt and implement a structure for consulting on a regular basis with their
counsel and overseeing this litigation.” Dkt. No. 30 at 5. The Group will meet at
least quarterly for the next twelve months, and has designed a plan of
communication and a fair method of achieving consensus. Id. at 6. This
proposed methodology demonstrates that the Group intends to work with and
on behalf of all plaintiffs, and that it is making efforts to reduce conflict. As the
Fifricks admit, other courts have approved group lead plaintiffs under similar
circumstances. Dkt. No. 32 at 4; In re Versata, Inc. Secs. Litig., 2001 U.S. Dist.
The Fifricks have not argued that there are any “unique defenses” that render the Group
incapable of adequately representing the class.
10

12

LEXIS 24270, *24 (N.D. Cal. Aug. 17, 2001). The Fifricks have not presented
evidence, compelling or otherwise, that the Group will not fairly and adequately
represent the class, and the presumption entitles the Group to act as lead
plaintiff. See In re Cavanaugh, 306 F.3d 726, 732 (9th Cir. 2002)(“So long as
the plaintiff with the largest losses satisfies the typicality and adequacy
requirements, he is entitled to lead plaintiff status.”).
The court will not conduct a detailed analysis of the Fifricks’ motion for
appointment as lead counsel, because the Group is entitled to the presumption
and the Fifricks have not rebutted that presumption.
E.

The Court Approves the Group’s Selection of Lead
and Liaison Counsel.

The PSLRA allows the lead plaintiff to select and retain class counsel,
subject to court approval. 15 U.S.C. §78u-4(a)(3)(B)(v). The decision to approve
selected counsel lies within the court’s discretion. See Plumbers & Pipefitters
Local 562 Pension Fund, 256 F.R.D. at 623-24 (citations omitted). The Group
has selected Lockridge Grindal Nauen, P.L.L.P. as lead counsel and Wagner
Law Group, S.C. as local liaison counsel. Lockridge Grindal Nauen, P.L.L.P. has
extensive experience with securities class actions and experience with a similar
type of inversion case. Dkt. No. 30 at 12-13. It appears to have the expertise,
resources, and experience needed to adequately represent the plaintiffs in this
case. Id. Proposed liaison counsel is a local law firm with experience practicing
before courts in Wisconsin, and thus, well situated to act as liaison counsel.
Dkt. No. 19 at 9. The court will approve the Group’s selection of lead and
liaison counsel.
13

CONCLUSION
The court GRANTS the motion of the JCI Shareholders’ Group for
Appointment as Lead Plaintiff and Approval of its Selection of Lead Counsel.
Dkt. No. 18.
The court DENIES the motion of John and Vivian Fifrick for Appointment
as Plaintiff and Approval of Lead Counsel. Dkt. No. 21.
The court ORDERS that Peter J. Smykla, Cathreen W. Clark, Cynthia
Pontier, Henry J. Nisiewicz, and Brian L. Ellison (“JCI Shareholders’ Group”)
are APPOINTED as lead plaintiffs in this case.
The court ORDERS that Lockridge Grindal Nauen P.L.L.P. is
APPOINTED as lead counsel, and that Wagner Law Group, S.C. is APPOINTED
as liaison counsel.
Dated in Milwaukee, this 14th day of November, 2016.

14