Leventhal v. Chegg, Inc.

Background

Steven Leventhal filed a securities-fraud class action under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5. The proposed class consists of people who purchased Chegg, Inc. common stock between May 5, 2020, and November 1, 2021.

The complaint alleges that Chegg made materially false or misleading statements about the main reasons for its growth during the COVID-19 pandemic. It alleges that Chegg attributed its success to its business model and management rather than to the pandemic and increased remote learning. The complaint further alleges that Chegg sold more than $1 billion of common stock at $102 per share in a February 2021 offering while its stock price was artificially inflated. On November 1, 2021, Chegg announced financial results, and its stock price fell from $62 per share to $32 per share, according to the complaint.

Nine motions for appointment as lead plaintiff and approval of lead counsel were initially filed. Three movants later withdrew, leaving six motions before the court: those filed by Ohio Carpenters Pension Fund, Nicolas Reiter, KBC Asset Management NV and The Pompano Beach Police & Firefighters’ Retirement System, David Kennedy, North Atlantic States Carpenters Pension Fund and Guaranteed Annuity Fund, and Randy Myles.

Legal standard

The Private Securities Litigation Reform Act requires the court to appoint the “most adequate plaintiff” as lead plaintiff in a consolidated securities action. The court applies a three-step process: it considers whether notice of the case was properly published, identifies the movant with the largest financial interest, and gives other movants an opportunity to rebut that person’s presumed suitability under Rule 23 of the Federal Rules of Civil Procedure.

At this stage, Rule 23 requires a preliminary showing of typicality and adequacy. Typicality generally means that the proposed lead plaintiff suffered the same kind of injury as the class from the same conduct and has claims based on the same legal issues. Adequacy requires consideration of whether the lead plaintiff’s interests conflict with the class and whether the selected counsel is qualified and experienced.

Court’s analysis

The parties did not dispute that the required notice had been published or that KBC and Pompano P&F met the procedural requirements. The court found that KBC and Pompano P&F had the largest financial interest among the movants: a combined loss of $6,067,129 using the last-in, first-out accounting method. They also purchased the most Chegg shares, 119,510, and spent more than $5.4 million in net funds on Chegg stock during the class period.

The court therefore treated KBC and Pompano P&F as the presumptive lead plaintiff. It found a preliminary showing of typicality because they alleged losses from purchasing Chegg securities at prices inflated by materially false or misleading statements or omissions, followed by a price decline after corrective disclosures.

North Atlantic Funds argued that KBC could face standing defenses because it relied on an assignment of claims from two funds that KBC managed. The court found that KBC and Pompano P&F submitted a declaration assigning the claims to KBC and authorizing KBC to pursue the lawsuit on the funds’ behalf. North Atlantic Funds provided no evidence challenging the assignment’s validity. The court found the assignment facially valid and concluded that speculation about its validity was insufficient to overcome the lead-plaintiff presumption.

For lead counsel, KBC and Pompano P&F selected Motley Rice LLC and Saxena White P.A. The court found both firms highly qualified and experienced in securities class litigation and concluded that the selection was adequate.

Disposition

The court granted KBC Asset Management NV and The Pompano Beach Police & Firefighters’ Retirement System’s motion for appointment as lead plaintiff and approval and selection of lead counsel. It appointed those entities as lead plaintiff and Motley Rice LLC and Saxena White P.A. as lead co-counsel. All competing motions for appointment of lead plaintiff and lead counsel were denied.

The order gave lead counsel responsibility for coordinating motions, discovery, depositions, pretrial work, trial preparation, settlement negotiations, communications among plaintiffs’ counsel, and other matters concerning prosecution, resolution, or settlement of the consolidated action. It also required plaintiffs to obtain lead counsel’s approval before initiating motions, discovery requests, or other pretrial proceedings, and required the parties to preserve relevant documents and electronically stored information.