The United States District Court in In re Oxford Health Plans, Inc. Securities Litigation, 191 F.R.D. 369 (S.D.N.Y. Feb. 28, 2000), reached several noteworthy conclusions involving class certification in securities fraud class action litigation involving claims under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and the interaction of class certification rules with the lead plaintiff rules provided for by the Private Securities Litigation Reform Act of 1995 (the "PSLRA"). The decision was written by Judge Charles L. Brieant.
First, the court rejected a contention that a class could not be certified due to what defendants described as "an inherent conflict between individuals who buy stock and individuals who sell stock during the class period" that "arises out of sellers' presumed desire to minimize price inflation at the time of sale, as opposed to the presumed purchaser's desire to maximize price inflation on the date of purchase." According to the court, "[t]he chief role of price inflation remains its function in determining each plaintiff's damages" and "common questions [of fact and law] . . . bind class members with more force than the varying questions related to price inflation drive them apart."
Second, the court rejected a contention that a class could not be certified due to defendants' contention that a conflict exists between class members who retained their shares and class members who sold their shares upon learning of the alleged fraud because, according to defendants, "class members who still own shares do not want an excessively large verdict, which may injure the economic health of the company." The court quoted Herbst v. ITT, 495 F.2d 1308, 1314 (2d Cir. 1974):
[W]e do not perceive any conflict of interest between those who have retained their ITT shares and those who have since sold them. The personal interest of those who still hold ITT stock in gaining more from the exchange than they did far outweighs their concern that any award could damage ITT.
Third, the court rejected a contention that the class could not be certified because the court had appointed three groups of plaintiffs to serve as lead plaintiffs under the PSLRA and none of the lead plaintiffs in one of the groups had sought certification as a class representative. The court stated that being a lead plaintiff under the PSLRA is not the same as being a class representative under Federal Rule of Civil Procedure 23 and "there will be actions brought under the PSLRA by multiple plaintiffs which do not qualify for class action treatment under Rule 23." The court stated that "[t]here is no requirement found in the plain meaning of the statute that a lead plaintiff accept designation of class representative under Rule 23, and the statute does not provide for any specific action by the Court should it turn out after a Lead Plaintiff has been appointed . . . that the Lead Plaintiff should on further examination fail to meet all of the requirements of Rule 23, or simply withdraw his or her expression of willingness to serve as Class Representative, in order to avoid the risk of a possible adjudication to that effect, or for any other reason."
Fourth, the court denied a motion by North River Trading Co., LLC., a plaintiff not previously designated as a lead plaintiff, for an order appointing it a lead plaintiff and adding its law firm to the three law firms previously selected as lead counsel for plaintiffs, and certifying it as a class representative. The court noted North River's contention that "there is no authority that a person can be a Lead Plaintiff and direct a case, while not accepting the fiduciary responsibility under Rule 23 as a Class Representative" and North River's assertion that "there was 'something totally illogical about that.'" The court responded that "[o]f course, many things in the law are illogical, especially where a 'reform' statue is concerned." The court noted that two of the lead plaintiffs who had not previously sought class certification now had expressed a willingness to do so, and granted North River permission to renew its motion if those two lead plaintiffs failed to qualify as class representatives.
The court concluded that it "probably has the power to designate a Class Representative under Rule 23 who is not a Lead Plaintiff, simply because there is nothing in the statute which prevents it" but acknowledged that "to do so would be somewhat anomalous from a structural point of view." The court emphasized, however, that the substitution of a new lead plaintiff at this stage of the litigation would likely cause "dislocation and delay" and "[d]esignating another firm as Lead Counsel either in addition to the existing Lead Counsel or in substitution of any of them would seem to promise mere delay and unjustifiable additional expense."
First, the court rejected a contention that a class could not be certified due to what defendants described as "an inherent conflict between individuals who buy stock and individuals who sell stock during the class period" that "arises out of sellers' presumed desire to minimize price inflation at the time of sale, as opposed to the presumed purchaser's desire to maximize price inflation on the date of purchase." According to the court, "[t]he chief role of price inflation remains its function in determining each plaintiff's damages" and "common questions [of fact and law] . . . bind class members with more force than the varying questions related to price inflation drive them apart."
Second, the court rejected a contention that a class could not be certified due to defendants' contention that a conflict exists between class members who retained their shares and class members who sold their shares upon learning of the alleged fraud because, according to defendants, "class members who still own shares do not want an excessively large verdict, which may injure the economic health of the company." The court quoted Herbst v. ITT, 495 F.2d 1308, 1314 (2d Cir. 1974):
[W]e do not perceive any conflict of interest between those who have retained their ITT shares and those who have since sold them. The personal interest of those who still hold ITT stock in gaining more from the exchange than they did far outweighs their concern that any award could damage ITT.
Third, the court rejected a contention that the class could not be certified because the court had appointed three groups of plaintiffs to serve as lead plaintiffs under the PSLRA and none of the lead plaintiffs in one of the groups had sought certification as a class representative. The court stated that being a lead plaintiff under the PSLRA is not the same as being a class representative under Federal Rule of Civil Procedure 23 and "there will be actions brought under the PSLRA by multiple plaintiffs which do not qualify for class action treatment under Rule 23." The court stated that "[t]here is no requirement found in the plain meaning of the statute that a lead plaintiff accept designation of class representative under Rule 23, and the statute does not provide for any specific action by the Court should it turn out after a Lead Plaintiff has been appointed . . . that the Lead Plaintiff should on further examination fail to meet all of the requirements of Rule 23, or simply withdraw his or her expression of willingness to serve as Class Representative, in order to avoid the risk of a possible adjudication to that effect, or for any other reason."
Fourth, the court denied a motion by North River Trading Co., LLC., a plaintiff not previously designated as a lead plaintiff, for an order appointing it a lead plaintiff and adding its law firm to the three law firms previously selected as lead counsel for plaintiffs, and certifying it as a class representative. The court noted North River's contention that "there is no authority that a person can be a Lead Plaintiff and direct a case, while not accepting the fiduciary responsibility under Rule 23 as a Class Representative" and North River's assertion that "there was 'something totally illogical about that.'" The court responded that "[o]f course, many things in the law are illogical, especially where a 'reform' statue is concerned." The court noted that two of the lead plaintiffs who had not previously sought class certification now had expressed a willingness to do so, and granted North River permission to renew its motion if those two lead plaintiffs failed to qualify as class representatives.
The court concluded that it "probably has the power to designate a Class Representative under Rule 23 who is not a Lead Plaintiff, simply because there is nothing in the statute which prevents it" but acknowledged that "to do so would be somewhat anomalous from a structural point of view." The court emphasized, however, that the substitution of a new lead plaintiff at this stage of the litigation would likely cause "dislocation and delay" and "[d]esignating another firm as Lead Counsel either in addition to the existing Lead Counsel or in substitution of any of them would seem to promise mere delay and unjustifiable additional expense."