In re Luckin Coffee Inc. Securities Litigation

Background

The case is a proposed securities class action against Luckin Coffee Inc. and other defendants. The complaints allege violations of the Securities Act of 1933 and the Securities Exchange Act of 1934, including that Luckin failed to disclose material information and made false or misleading statements about its sales, revenue, and financial condition. The court had consolidated related actions from the Southern District of New York and the Eastern District of New York.

Five eligible applicants or groups sought appointment as lead plaintiff: the Luckin Investor Group, the AP7 Group consisting of Sjunde AP-Fonden and Louisiana Sheriffs’ Pension & Relief Fund, Teamsters Local 710 Pension Fund, Wai Chun Shek, and Chaile Steinberg. The court ranked their claimed financial interests from largest to smallest as $9.4 million for the Luckin Group, $6.9 million for the AP7 Group, $2.1 million for Local 710, $0.7 million for Shek, and $5,044 for Steinberg. Chesi Assets Limited Group had previously claimed a larger loss but withdrew its motion after the court ordered it to provide documents concerning a conviction of one of its key members.

Legal standard

The Private Securities Litigation Reform Act requires the court to presume that the most adequate lead plaintiff is the timely applicant or group with the largest financial interest that also satisfies the requirements of Federal Rule of Civil Procedure 23. At this stage, the court considers whether the proposed lead plaintiff has made a preliminary showing of typicality and adequacy. Typicality means that the proposed lead plaintiff’s claims arise from the same conduct and injuries as the other class members’ claims. Adequacy includes the absence of conflicts, a sufficient interest in the case, and qualified counsel.

The court also applied factors for deciding whether a group of investors can function cohesively and independently of its lawyers. These factors include any pre-litigation relationship, involvement in the case, plans for cooperation, sophistication, and whether the investors—not their lawyers—selected counsel.

Luckin Investor Group

The court found that the Luckin Group did not satisfy these group-functioning requirements. It consisted of unlike individuals and a company, with little evidence of a prior relationship, sophistication, involvement in the litigation, or meaningful plans for communication and cooperation. The court also found no sufficient evidence that the group independently selected its counsel rather than being assembled by counsel. Because the Luckin Group did not qualify, the court considered the AP7 Group, which had the next-largest financial interest.

AP7 Group

The AP7 Group had no demonstrated pre-litigation relationship, but the court stated that this was not disqualifying. The court found that both members were sophisticated institutional plaintiffs with experience in securities litigation. The court also credited their plans to communicate with one another, attend proceedings and other litigation events as needed, review important documents, and supervise counsel.

The court found that the AP7 Group had provided a logical explanation for selecting its proposed counsel, based on the members’ prior experience with those firms. The group also asserted that its members together would have standing to bring claims under both securities statutes. The court concluded that the group satisfied the applicable group-functioning standards.

The court further found that the AP7 Group made a preliminary showing of typicality and adequacy under Rule 23. The group claimed that it purchased Luckin American Depositary Shares during the class period at artificially inflated prices caused by defendants’ false or misleading statements or omissions, and that it suffered losses. The court found that these injuries were of the same kind and arose from the same facts as the other class members’ injuries.

The court rejected arguments that AP7 faced a unique defense involving recognition of United States judgments in Sweden, that AP7 lacked standing, and that AP7 violated the statutory limit on serving as lead plaintiff in more than five securities class actions filed during a three-year period. The court held that the competing applicants had not provided the required proof to overcome AP7’s presumed adequacy. Because the AP7 Group qualified, the court did not evaluate the remaining applicants with smaller financial interests.

Class counsel and disposition

The court approved the AP7 Group’s selection of Bernstein Litowitz Berger & Grossman LLP and Kessler Topaz Meltzer & Check, LLP as class counsel, finding both firms highly experienced in securities class action litigation.

The court granted the AP7 Group’s motion, appointed the AP7 Group as lead plaintiff, and appointed its selected firms as class counsel. The court denied the remaining motions for appointment as lead plaintiff. It also directed the newly appointed lead plaintiff to meet and confer with defendants about a briefing schedule for a consolidated amended complaint and any motion to dismiss, with a proposed schedule due by June 26, 2020, at 5:00 p.m.