Jiang v. Avaya Holdings Corp.

Background

This opinion concerns the selection of a lead plaintiff and lead counsel in a proposed securities class action. The proposed class consists of people who purchased or otherwise acquired Avaya Holdings Corp. securities between October 3, 2019, and November 29, 2022. The complaint alleges that Avaya and defendants James M. Chirico, Jr. and Kieran J. McGrath made materially false or misleading statements about Avaya’s strategic partnership with RingCentral, the Avaya Cloud Office product, the partnership’s financial effects, and Avaya’s internal controls.

Nine parties initially moved for appointment as lead plaintiff. By the time of the court’s decision, only the City of Pittsburgh Comprehensive Municipal Pension Trust Fund (Pittsburgh) and Paul Sweatt continued to pursue competing motions. The court’s decision addresses which of those two proposed class members had the largest qualifying financial interest and could adequately represent the class.

Financial Interest and Corrective Disclosures

The Private Securities Litigation Reform Act generally creates a rebuttable presumption that the proposed class member with the largest financial interest is the most adequate lead plaintiff, so long as that person satisfies the relevant class-representation requirements. Courts in this district commonly consider shares purchased, net shares purchased, net funds expended, and approximate losses, with particular emphasis on the approximate loss.

Pittsburgh acquired 59,550 Avaya shares during the class period and reported an approximate loss of $1,016,828.94. Pittsburgh sold all of those shares on June 27, 2022. Sweatt purchased Avaya shares during the class period, held 650,000 shares through the end of the class period and the November 30, 2022 disclosure, and later reported a qualifying loss of at least $438,944.96.

The court explained that securities-fraud losses incurred before a corrective disclosure generally are not recoverable because they are not shown to have been caused by the alleged misstatements. A corrective disclosure is an announcement that reveals to the market that an earlier statement was false.

The court rejected Pittsburgh’s argument that Avaya’s February 9, May 10, and June 24, 2022 announcements were corrective disclosures. The February and May announcements discussed disappointing financial results and the transition to a subscription-based revenue model, but did not mention RingCentral, Avaya Cloud Office, or defective internal controls. The June announcement concerning higher-cost debt refinancing likewise did not reveal the truth about the alleged RingCentral-related misstatements or internal-control defects. The court also rejected Pittsburgh’s reliance on stock-price declines and alleged earlier price inflation as insufficient, by themselves, to establish that those announcements revealed the alleged fraud.

Because Pittsburgh sold all of its shares before a corrective disclosure, the court ruled that Pittsburgh’s loss would not be considered in calculating recoverable loss or determining lead-plaintiff status. For that purpose, Pittsburgh’s loss was zero. The court agreed that Avaya’s November 30, 2022 announcement concerning defects in its internal reporting controls was a corrective disclosure, but made no finding about whether other post-June 24 disclosures qualified.

Sweatt’s Adequacy and Typicality

The court concluded that Sweatt had the largest qualifying financial interest and therefore was presumptively the most adequate plaintiff. Pittsburgh argued that Sweatt’s online investment-forum posts, option purchases, and possible margin-call concerns showed that his investment was speculative or that he might be an inadequate representative.

The court rejected those arguments. Sweatt was not a day trader, and the court found no evidence that he failed to rely on the integrity of the market price. His option purchases represented a small portion of his overall Avaya investment, and his loss calculation did not include those options. The court also concluded that Sweatt’s unfamiliarity with bankruptcy law, views about foreign aid, and use of profanity did not disqualify him.

For typicality, the court found that Sweatt purchased Avaya stock during the class period, alleged damages from the defendants’ allegedly false or misleading statements, and sought relief under the federal securities laws. For adequacy, the court found that Sweatt had retained experienced class-action counsel, had a significant stake in the case, had no apparent conflict with other class members, and was not shown to face unique defenses that would prevent him from representing the class.

Lead Counsel and Disposition

The court held that Sweatt could select class counsel and determined that Hagens Berman was qualified to serve as lead counsel based on the firm’s experience litigating securities class actions.

The court granted Sweatt’s motion for appointment as lead plaintiff and lead counsel. It appointed Paul Sweatt as lead plaintiff and Hagens Berman as lead counsel. It denied Pittsburgh’s competing motion and directed the clerk to terminate the listed motions. The parties were directed to meet and confer and submit a proposed schedule for the next steps, including an amended complaint and the defendants’ response.

Judge Paul G. Gardephe signed the memorandum opinion and order on March 5, 2024.