Bass, Berry & Sims attorney Chris Lazarini commented on a case involving guidance on the Private Securities Litigation Reform Act's (PSLRA) procedures for selection of lead plaintiffs in a securities class action. As outlined in the PSLRA, lead plaintiffs must be willing and able to select and supervise class counsel for the benefit of all class members. Under the PSLRA, a rebuttable presumption exists that the most adequate party to serve as lead plaintiff is one who has filed the complaint, or who has moved to be appointed; who has the largest financial interest in the relief sought by the class; and who otherwise satisfies the typicality and adequacy requirements of FRCP 23.

Chris provided the analysis for Securities Online Litigation Alert (SOLA). The full text of the analysis is below and used with permission from the publication.

Garbowski vs. Tokai Pharmaceuticals, Inc., No. 16-cv-11963 (D. Mass., 3/16/18)

*The PSLRA seeks to assure that securities class actions will be directed by lead plaintiffs who are willing and able to select and supervise class counsel for the benefit of class members.

**Under the PSLRA, a rebuttable presumption exists that the most adequate party to serve as lead plaintiff is one who has filed the complaint or moved to be appointed, who has the largest financial interest in the relief sought by the class and who otherwise satisfies the typicality and adequacy requirements of FRCP 23.

This is a consolidated class action in which two individuals (Maxon and Purohit) timely filed competing motions for consolidation, appointment as lead plaintiff and approval of their lawyers as lead counsel. Because Maxon had a larger financial stake in Tokai, Purohit withdrew his motion. While considering Maxon's motion, however, the Court grew concerned about his ability to serve as lead plaintiff and the suitability of Pomerantz LLP serving as lead counsel. Contrary to his written Certification, Maxon told the Court he had not read the complaint, did not know what a complaint was and had only spoken with the Pomerantz firm shortly before the hearing. When the Court ordered Maxon and Pomerantz to submit additional information, Maxon withdrew his motion and Pomerantz asked the Court to reopen the period for class members to seek appointment as lead counsel. The Court questions whether the PSLRA grants it authority to reopen the period and declines to do so, noting the passage of time and the absence of any investor coming forward after Maxon withdrew his motion. Instead, it finds Purohit and the other named plaintiffs to be eligible for consideration as lead plaintiff and directs any of those interested in serving to file a motion within 35 days.

In dicta, the Court explains at length why it would have found Maxon and Pomerantz inadequate to serve as lead plaintiff and lead counsel. Under the PSLRA, it is supposed to appoint as lead plaintiff the person who is "most capable of adequately representing the interests of class members." A rebuttable presumption exists that the most adequate plaintiff is one who has filed the complaint or moved to be appointed, who has the largest financial interest in the relief sought by the class and who otherwise satisfies the typicality and adequacy requirements of FRCP 23. When measuring typicality, the Court should consider whether the circumstances or the legal theories of the movant with the largest losses are different from those of the other class members. Assessing adequacy requires the Court to consider whether the movant has the ability and incentive to represent the class vigorously, whether he has retained adequate counsel and whether there is a conflict between his claims and those of the class. One test of the movant's incentive to represent the class is to examine his ability to select competent counsel and diligently negotiate a reasonable retainer agreement with that counsel.

Here, Maxon's Certification and related papers were insufficient because they lacked a declaration by Maxon that he is willing and able to represent the class vigorously and has negotiated a reasonable retainer agreement with Pomerantz. Moreover, when questioned by the Court, Maxon contradicted his Certification, and there were discrepancies between Maxon's Certifications regarding the amounts of his purchases and sales of Tokai stock. The Court concludes the lawyers did not succeed in their efforts to educate Maxon about his duties as lead plaintiff, Maxon did not select Pomerantz (instead, he responded to a web posting by another lawyer and was "handed off" to Pomerantz) and did not negotiate the fee arrangement with the firm (accepting their proposed fee without question). Maxon displayed a willingness to make false statements under oath and, had Maxon and Pomerantz been appointed, the case would have been conducted by unsupervised attorneys, a practice the PSLRA was designed to end.