In re DraftKings Inc. Securities Litigation

Background

Two proposed securities class actions were filed on behalf of people and entities that purchased DraftKings securities between December 23, 2019, and June 15, 2021. The plaintiffs alleged that DraftKings and four officers made false or misleading statements, or failed to disclose material information, about SBTech, a company acquired in a business combination. According to the allegations, SBTech had a history of unlawful operations and black-market gaming, exposing DraftKings to regulatory and criminal risks and causing DraftKings securities to trade at artificially inflated prices. The complaints asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5.

The opinion treated these facts as allegations only for purposes of deciding the pending motions. It did not decide whether the alleged statements were false, whether the defendants violated the securities laws, or whether the proposed class would ultimately prevail.

Consolidation

The court granted consolidation under Federal Rule of Civil Procedure 42(a). The two actions involved the same defendants, the same proposed class period, and substantially identical allegations concerning DraftKings’s disclosures about SBTech. The court found that consolidation would promote efficiency and that the relevant factors supported it.

Lead Plaintiff Selection

The Private Securities Litigation Reform Act requires the court to appoint the person most capable of adequately representing the proposed class. The statute generally creates a rebuttable presumption in favor of the movant who timely responds to the notice, has the largest financial interest, and satisfies the relevant preliminary requirements for class representation.

Six investors initially sought appointment as lead plaintiff: Tim Kaintz, Robert Downs, Walter Marino, Stephen Goering, Robert Mendoza, and Mario E. Ernst. Goering, Mendoza, and Ernst later filed notices of non-opposition. The court therefore focused on Kaintz, Downs, and Marino.

The court used the financial-interest factors commonly called the Lax factors: shares purchased, net shares purchased, net funds expended, and approximate loss. It gave the greatest weight to approximate loss and used the last-in-first-out method, which generally excludes losses from trades completed before the alleged corrective disclosure. The court found the movants’ losses, from highest to lowest, were Kaintz, Marino, and Downs. It credited Kaintz with a loss of $1,918,875 for this comparison, found Marino’s cognizable loss to be between $217,456 and $513,288, and found Downs’s cognizable loss to be lower than both.

The court nevertheless declined to appoint Kaintz. It found that errors and inconsistencies in his submissions raised serious concerns about his adequacy as a class representative. The court also found that his short-selling and day-trading history created a potential for unique defenses—individual issues that could distract from the class’s common claims and interfere with his ability to represent the class. The court found Downs and Marino typical and adequate for purposes of the preliminary Rule 23 analysis. Because Marino had the next-highest financial stake and no movant identified a reason he was unsuitable, the court appointed Marino as lead plaintiff.

Lead Counsel

The court approved Marino’s selection of Robbins Geller Rudman & Dowd LLP as lead counsel after reviewing the firm’s background and experience in securities class actions. The court appointed the firm as lead counsel.

Disposition and Next Steps

The court consolidated the two actions, appointed Marino lead plaintiff, and appointed Robbins Geller Rudman & Dowd LLP lead counsel. The clerk was directed to terminate the pending motions. The parties were ordered to meet and confer and submit a proposed schedule for a consolidated amended complaint and defendants’ response, including briefing dates if defendants intended to move to dismiss.