Hurst v. Enphase Energy, Inc.

Background

Gregory A. Hurst filed a securities class action against Enphase Energy, Inc., its chief executive officer Badrinarayanan Kothandaraman, and its chief financial officer Eric Branderiz. The complaint alleges that, from February 26, 2019, through June 17, 2020, the defendants made materially false or misleading statements, or failed to disclose material adverse facts, concerning Enphase’s domestic and international revenue, deferred-revenue accounting, and reported gross-margin expansion. The complaint identifies a Prescience Point Capital Report published on June 17, 2020, as the alleged corrective disclosure and alleges that Enphase’s stock price fell from $52.76 to $39.04 per share that day.

Hurst moved for appointment as lead plaintiff and for approval of his proposed lead counsel, Block & Leviton LLP. Harish Varma Patchametla and Renuka Indukuri, who jointly moved for the same relief, filed a competing motion.

Legal Standard

The Private Securities Litigation Reform Act requires the court to appoint the class member or members most capable of adequately representing the class. The court uses a three-step process: it identifies the applicant with the largest financial interest, determines whether that applicant meets the relevant adequacy and typicality requirements under Federal Rule of Civil Procedure 23, and gives other applicants an opportunity to rebut the resulting presumption. The lead plaintiff may select counsel, subject to court approval, and the court generally approves a reasonable choice.

Financial Interest

The court chose the recoverable-loss method rather than the approximate-loss method to compare the applicants’ financial interests. The recoverable-loss method focuses on losses traceable to the alleged fraud rather than losses attributable to ordinary market movements. Because the complaint alleged a single corrective disclosure and the stock price sharply declined on that date, the court found this method appropriate.

Under that method, Patchametla and Indukuri had the greatest financial interest, while Hurst had the second greatest. Patchametla and Indukuri had collectively bought and sold 154,261 shares during the class period and often traded within the same day. They sold all but 3,000 of the Enphase shares they purchased during the class period before June 17, 2020.

Typicality and Adequacy

The court initially treated Patchametla and Indukuri as the presumptive lead plaintiffs because of their greater financial interest and found that their claims appeared typical of the class and that they appeared adequate to represent it. Hurst argued that their post-disclosure purchases and day-trading activity created unique defenses and made their claims atypical.

The court rejected Hurst’s first objection at that stage, declining to determine which of the couple’s June 17 transactions were made with knowledge of the corrective report. The court accepted his second objection. Because the complaint alleged only one corrective disclosure, the court reasoned that investors who sold before that disclosure generally would not have suffered losses caused by the alleged fraud. The court found that Patchametla and Indukuri’s sales before June 17, combined with their day-trading activity, raised serious concerns about their exposure to defenses based on trading in response to information other than the alleged misstatements and omissions.

The court therefore concluded that Patchametla and Indukuri were subject to unique defenses and that Hurst had rebutted their presumptive status. The court then examined Hurst, who had the second-largest financial interest, and found that his claims were presumptively typical and that he appeared adequate to represent the class.

Lead Counsel

No party objected to Hurst’s selection of Block & Leviton LLP. After reviewing the firm’s materials, the court found that Hurst had made a reasonable choice and approved the firm as lead counsel.

Disposition

The court GRANTED Hurst’s motion to appoint lead plaintiff and approve his selection of lead counsel. The court DENIED Patchametla and Indukuri’s competing motion.