District Court Rejects Claim of Presumptive Lead Plaintiff's Inadequacy in Securities Class Action

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[author: William M. Regan, Jason F. Clouser]

Stockholder plaintiffs brought a purported class action against defendant China-Biotics, Inc. and certain of its officers and directors on behalf of all purchasers of China-Biotic shares during the period from February 9, 2011 and July 1, 2011.

In deciding two competing “lead plaintiff” motions submitted pursuant to the Private Securities Litigation Reform Act of 1995 (the PSLRA), the U.S. District Court for the Southern District of New York held that: (a) the size of the loss was the most significant factor in determining which plaintiff had the “largest financial interest”, and (b) a competing plaintiff could not overcome the presumption in favor of the plaintiff with the “largest financial interest” simply by speculating as to chosen counsel’s alleged lack of experience and resources.

Under the PLSRA, stockholder plaintiffs may, within 60 days of the first published notice of a securities class action, move to be appointed “lead plaintiff” and to have their counsel designated as “lead plaintiff’s counsel.” In the case of competing motions, the PLSRA provides that courts must presume that the stockholder with the “largest financial interest” (and who otherwise satisfies the class certification requirements of Rule 23) is the most appropriate lead plaintiff. The presumption can be overcome if another stockholder proves that the presumptive appointee would not fairly and adequately represent the interests of the class or would be subject to unique defenses.

Here, the court held that the question of which plaintiff had “the largest financial interest” was controlled by a four-factor test: (1) the total number of shares purchased; (2) the net number of shares purchased; (3) the net funds expended; and (4) the stockholder’s approximate loss. The last factor – the size of the loss – carries the greatest weight. Applying this test, the court found that the Blanck Investor Group, with the largest out of pocket loss, was the presumptive lead plaintiff, notwithstanding that another proposed plaintiff, Crist, purchased more total shares during the class period.

Proposed plaintiff Crist attempted to overcome the presumption by arguing that the Blanck Investor Group’s chosen counsel was inexperienced and lacked sufficient resources to pursue this case. The court rejected this argument on the grounds that (a) the PSLRA requires “proof” of inadequacy (not mere speculation), and (b) the proposed counsel had been approved by other courts in complex class action cases.

Casper v. Song Jinan, No. 12 Civ. 4202 (S.D.N.Y. Sept. 6, 2012).