City of Omaha Police and Firefighters Retirement System v. Cognyte Software Ltd

Background

City of Omaha Police and Firefighters Retirement System (Omaha), on behalf of itself and others similarly situated, brought a proposed securities class action against Cognyte Software Ltd., Elad Sharon, and David Abadi. The complaint alleged violations of the Securities Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act. It alleged that Cognyte’s registration statement made misleading statements and omitted important information about the solutions and services it provided to customers.

The proposed class consisted of purchasers of Cognyte common stock during a class period running from February 2, 2021, through June 28, 2022. The complaint alleged that a December 2021 report by Meta disclosed that Cognyte allegedly participated in the surveillance-for-hire industry and that Cognyte’s stock price fell after the report and later disclosures.

Omaha moved to be appointed lead plaintiff and to have its attorneys appointed lead counsel. Clal, comprising Clal Insurance Company Ltd., Clal Pension and Provident Ltd., and Atudot Pension Fund for Employees & Independent Works Ltd., filed a competing motion.

Lead-Plainiff Selection

The Private Securities Litigation Reform Act requires the court to appoint the class member or members most capable of adequately representing the class. The court first considers whether a proposed lead plaintiff has the largest financial interest and preliminarily satisfies two relevant class-action requirements: typicality and adequacy. That selection receives a rebuttable presumption, meaning another class member may overcome it by showing that the proposed lead plaintiff cannot fairly and adequately represent the class or faces unique defenses.

The court found that Clal had the largest financial interest in the relief sought. It excluded 4.36 million Cognyte shares that Clal received as a dividend in connection with the spin-off from Verint. The court held that those shares were not “purchased” under Section 10(b) because Clal did not make an investment decision to acquire them. Verint shareholders did not need to take action, pay consideration, or surrender or exchange Verint shares to receive the Cognyte shares.

The court also accepted Clal’s use of a last-in, first-out method to estimate losses. Under that method, Clal had an approximate $2.2 million investment loss from its open-market purchases during the class period. The court rejected Omaha’s different calculation, which treated Clal as having approximately $1.9 million in investment gains.

Even with these calculations, the court concluded that Clal was a net seller and net gainer during the class period. Clal sold more shares than it purchased and received more proceeds than it spent. The court held that this status created unique defenses because Clal might have difficulty proving damages at trial and might have benefited from allegedly inflated prices. The court therefore concluded that Clal could not adequately represent the proposed class.

Omaha’s Qualifications

The court found that Omaha met the preliminary requirements for typicality and adequacy. Omaha purchased 104,330 Cognyte shares during the class period, retained 93,745 of them at the end of the period, and showed approximate losses based on a lookback price of $4.75. The court found that Omaha’s claims arose from the same alleged misrepresentations and omissions underlying the proposed class’s claims.

The court also found that Omaha’s selected counsel, Scott+Scott Attorneys at Law LLP, had substantial experience litigating securities-fraud class actions. The court found no antagonism between Omaha’s interests and those of the proposed class and concluded that Omaha had sufficient motivation to pursue recovery for the class.

Counsel and Disposition

The court approved Omaha’s selection of Scott+Scott as lead counsel, finding no reason to reject Omaha’s choice or to appoint different counsel to protect the class.

Judge Lorna G. Schofield’s order GRANTED Omaha’s application for appointment as lead plaintiff and approval of lead plaintiff’s counsel. It DENIED Clal’s motion for the same relief. Omaha was appointed lead plaintiff, Scott+Scott was appointed lead counsel, and the Clerk of Court was directed to close the two motions identified in the order.