Pack v. LuxUrban Hotels Inc.

Background

Janice Pack filed a proposed securities class action under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5. She alleges that LuxUrban Hotels Inc. and executives Brian Ferdinand and Shanoop Kothari falsely represented that LuxUrban had signed a lease for the Royalton Hotel in Manhattan. She also alleges that the defendants failed to disclose lawsuits against LuxUrban. According to the allegations, investors purchased LuxUrban securities at artificially inflated prices and suffered losses after the alleged truth emerged.

The proposed class covers people and entities that purchased or otherwise acquired LuxUrban securities between November 8, 2023, and February 2, 2024, inclusive. Pack alleges that the first disclosures concerning the Royalton Hotel and litigation appeared in LuxUrban’s November 8, 2023 quarterly report. She alleges that a January 17, 2024 report by Bleeker Street Research disclosed that LuxUrban had not signed a lease with the Royalton and faced multiple lawsuits. LuxUrban disputed that report in a press release. On February 2, 2024, LuxUrban announced that it was ending discussions to add the Royalton to its properties and withdrew its earlier statements about the hotel.

Lead-Plain­tiff Motions

The Private Securities Litigation Reform Act governs the selection of a lead plaintiff in a proposed federal securities class action. The lead plaintiff is the person or group appointed to represent the proposed class and supervise the litigation. The statute generally favors the movant with the largest financial interest who also satisfies the relevant preliminary requirements for typicality and adequacy under Federal Rule of Civil Procedure 23.

The LuxUrban Investor Group consists of Joshua Leckner, Evan Weiser, and Matthew Halpern. The zCap/Marchetta Group consists of zCap Equity Fund LLC and Ross Marchetta. Both groups timely moved for appointment.

The court applied four factors to compare their financial interests: total shares purchased, net shares purchased, net funds expended, and approximate losses. All four factors favored the zCap/Marchetta Group. The opinion states that the LuxUrban Investor Group reported approximate losses of $5,554, while the zCap/Marchetta Group reported approximate losses of $16,107. The court noted that the groups used different methods to calculate losses but did not need to resolve that methodological dispute because either method produced a substantially greater loss for zCap and Marchetta.

Group Composition and Rule 23

The LuxUrban Investor Group argued that zCap and Marchetta should be disqualified because they were unrelated shareholders. The court rejected that argument. It explained that the statute permits a group of people to serve as lead plaintiff and that a small group of unrelated investors may be appropriate when it best serves the proposed class.

The court found the zCap/Marchetta Group qualified based on its small size, evidence that its members could work cooperatively, and the absence of evidence that it was formed in bad faith. The group consisted of one institutional investor and one individual. The court also found that the members had demonstrated an intent to participate directly in the litigation and supervise counsel.

At this early stage, the court assessed only typicality and adequacy under Rule 23. Typicality asks whether the proposed representative’s claims arise from the same events and legal theories as the class’s claims. Adequacy asks whether the representative’s interests conflict with the class and whether the proposed counsel is capable of representing the class. The court found both movants sufficiently typical and adequate for this preliminary assessment. It did not resolve the LuxUrban Investor Group’s concerns about possible unique defenses at this stage.

Rebuttal Argument

The LuxUrban Investor Group argued that zCap’s purchase of 2,250 shares on January 22, 2024—after the January 17 report—created unique defenses based on reliance. The court rejected that argument. It noted that zCap had already held 3,750 LuxUrban shares purchased after the alleged misrepresentation but before the first alleged corrective disclosure. The January 17 report was also disputed by LuxUrban itself. The court distinguished cases involving investors who bought all or nearly all of their shares after a corrective disclosure.

The court therefore concluded that the LuxUrban Investor Group had not overcome the zCap/Marchetta Group’s presumptive status as the most adequate plaintiff. The opinion also rejected arguments that zCap’s loss calculation or alleged fiduciary-duty violation made the group inadequate.

Appointment of Counsel and Disposition

The court approved the zCap/Marchetta Group’s selection of Pomerantz LLP as lead counsel after reviewing the firm’s background and experience in securities class actions. The court appointed the zCap/Marchetta Group as lead plaintiff and Pomerantz LLP as lead counsel, requested termination of all pending motions, and directed the parties to jointly propose a schedule for an amended complaint and briefing on any motion to dismiss. The order selected the litigation representatives and counsel; it did not decide whether the alleged securities-law violations occurred.