Kusen v. Herbert, II

Background

This federal securities class action concerns alleged violations of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5 by certain First Republic Bank executives and the bank’s auditor, KPMG, LLP. The proposed class consists of people and entities who purchased or acquired First Republic Bank securities during a proposed period running from January 14, 2021, through May 1, 2023.

Three applicants remained in competition for appointment as lead plaintiff and approval of their selected lead counsel: Alecta Tjänstepension Ömsesidigt, Singh, and the First Republic Investor Group. Alecta is an institutional investor headquartered in Stockholm, Sweden. Singh is self-employed and operates several businesses. The First Republic Investor Group consists of Philippe D. Katz, Terumah Foundation, the United Equities Commodities Co., 111 John Realty Corp., and Marneu Holding Co.

Legal framework

The Private Securities Litigation Reform Act, or PSLRA, establishes a process for selecting the lead plaintiff in a securities class action. The court first determines whether notice of the action was properly published and whether the applications were timely. It then identifies the applicant with the largest financial interest that has made an initial showing of adequacy and typicality. Other class members may try to rebut that applicant’s presumed status by proving that the applicant cannot adequately represent the class or faces unique defenses.

The lead plaintiff generally chooses lead counsel, subject to court approval. Courts ordinarily defer to that choice when it is reasonable and is not tainted by conflicts of interest or self-dealing.

Analysis

The court found that the statutory notice was timely published and that all three remaining applications were timely filed. It therefore proceeded to compare the applicants.

Using reported losses calculated under a last-in, first-out method, Alecta claimed losses of $667,906,407. The First Republic Investor Group claimed collective losses of $7,985,467, and Singh claimed losses of $3,387,042.41. The court found that Alecta had the largest financial interest.

The court also found that Alecta made the required initial showing of adequacy. Alecta submitted a certification and declarations stating that it had not purchased the securities at counsel’s direction, was willing to serve as a class representative, understood its oversight responsibilities, intended to pursue the action actively, and would work with counsel for the class’s benefit. The court credited those sworn statements and found that Alecta was prepared to devote the necessary resources and oversee its lawyers.

The court separately found that Alecta satisfied the initial typicality requirement. Alecta, like the other proposed class members, purchased First Republic Bank securities and alleged financial losses resulting from the same alleged misrepresentations and omissions. The court therefore concluded that Alecta’s interests aligned with those of the class.

The First Republic Investor Group argued that Alecta was inadequate or atypical because it proposed using two law firms, because of events involving an earlier related action and a stay, and because Alecta had sold its shares before a later corrective disclosure. The court found that these arguments were not supported by the proof required to overcome Alecta’s presumed status. It also rejected the argument that selling shares before the final disclosure automatically prevented Alecta from serving as lead plaintiff.

Singh argued that Alecta might face unique defenses involving standing, its PSLRA certification, reliance, the termination of certain executives, and regulatory investigations. The court rejected these arguments. It found that Alecta’s declarations established that Alecta owned the relevant securities and had authority to sue in its own name. The court also credited the general counsel’s sworn statements about his authority to sign the certification and bind Alecta. Finally, the court found that Singh’s assertions about possible future evidence problems and regulatory developments were speculation rather than proof. The court concluded that Alecta remained adequate despite these challenges.

Because the competing applicants did not rebut Alecta’s presumed status, the court appointed Alecta as lead plaintiff. The court then approved Alecta’s selection of Kessler Topaz Meltzer & Check, LLP and Bernstein Litowitz Berger & Grossmann LLP as lead counsel. It found that the firms had extensive experience in securities litigation, had certified that they had no conflicts of interest, and had committed to prosecuting the case vigorously and providing the necessary resources.

Disposition

Alecta’s motion for appointment as lead plaintiff and approval of its chosen counsel was granted. The remaining motions were denied. To the extent the motions sought consolidation, those requests were denied as moot. The court adopted the longer proposed class period for purposes of appointing lead counsel but expressly did not otherwise resolve which class period should govern the consolidated action.