In re HEXO Corp. Securities Litigation

Background

Two securities class actions were pending against HEXO Corp., Sébastien St. Louis, Ed Chaplin, Michael Monahan, and Steve Burwash. The complaints alleged violations of the Securities Exchange Act of 1934 on behalf of people and entities that acquired HEXO securities between January 25, 2019, and November 15, 2019, inclusive. The actions were docketed as 19 Civ. 10965 and 20 Civ. 00196.

Consolidation

The court consolidated the actions under Rule 42(a) of the Federal Rules of Civil Procedure because they concerned substantially the same factual and legal issues. Related securities actions pending or later filed in the Southern District of New York were to be consolidated with them. The filings were to be maintained under docket number 19 Civ. 10965 using the caption In re HEXO Corp. Securities Litigation.

Lead- Plaintiff Motions

Eleven applicants initially sought consolidation, appointment as lead plaintiff, and appointment of lead counsel. Nine later withdrew, leaving competing motions from Chi Fung Wong and the group of John B. Medley and Timothy Sweeney.

Under the Private Securities Litigation Reform Act of 1995, the court generally presumes that the most adequate plaintiff is the applicant with the largest financial interest who satisfies the relevant requirements of Rule 23. For this appointment, the court focused on Rule 23’s typicality and adequacy requirements. Typicality asks whether the proposed lead plaintiff’s claims arise from the same conduct as the other class members’ claims. Adequacy asks whether the plaintiff and counsel can fairly and vigorously represent the class without conflicts.

Wong claimed total losses of $863,443.56, while Medley and Sweeney claimed total losses of $661,789.41. The court acknowledged that Wong had the largest financial interest and had made an initial showing that his claims were typical. But Wong initially provided no information about his investment history, education, or other background. His later declaration stated that he resided in Reno, Nevada, held a Bachelor of Science degree in Engineering, was retired, had previously worked as an engineer, and had invested in securities for more than 25 years. The court found this information insufficient to resolve whether Wong had the sophistication and ability to oversee the litigation adequately.

Medley and Sweeney submitted a joint declaration providing more detail about their experience and ability to manage the case. Medley had founded and run an energy services company and regularly overseen attorneys, accountants, and other professionals. Sweeney had previously been a partner at the law firm now known as Pillsbury Winthrop Shaw Pittman LLP. They also provided information about how they would communicate and make decisions together.

The court concluded that Medley and Sweeney were presumptively the most adequate lead plaintiffs. Wong argued that they overstated their losses and that Medley was atypical because he allegedly day-traded HEXO stock. The court rejected both arguments as reasons to displace them. It concluded that, even under Wong’s calculation of their losses, Medley and Sweeney still had the largest financial interest among the remaining applicants. It also stated that day and momentum traders generally have the same incentive to prove defendants’ liability as other class members and that their presence does not create an internal class conflict in this case.

Lead Counsel and Disposition

The court granted Medley and Sweeney’s motion for appointment as lead plaintiffs and denied Wong’s motion. It approved their selection of Bernstein Liebhard LLP as lead counsel, finding that the firm had experience prosecuting securities class actions and that there was no reason to believe it could not adequately represent the class.

The court ordered the cases consolidated as In re HEXO Corp. Securities Litigation, 19 Civ. 10965 (NRB), appointed Medley and Sweeney as lead plaintiffs, and appointed Bernstein Liebhard LLP as lead counsel. It also directed the parties to submit an agreed schedule for filing an amended complaint and the response to that complaint. This order addressed case organization and leadership; it did not decide the merits of the alleged securities-law violations.