In an opinion reflecting her concerns about the role of the lead plaintiff’s law firm as well as concerns about the predominance of common issues among the proposed class members’ claims, a federal district court judge has denied the plaintiff’s motion for class certification in a lawsuit filed under the Securities Act of 1933. The opinion, which is strongly influenced by the U.S. Supreme Court’s recent class action case law, also reflects the interesting (and perhaps timely and topical) use of an event study in connection with a class certification motion. Northern District of Texas Judge Jane Boyle’s March 19, 2014 opinion in the Kosmos Energy Ltd. Securities Litigation can be found here.
As discussed in detail here, investors first sued the company, certain of its directors and officers, and its offering underwriters, based upon alleged misrepresentations in the offering documents in connection with the company’s May 10, 2011 IPO. The investors allege that the offering documents contained misrepresentations about the performance and expected production of an offshore oilfield in Ghana called the “Jubilee Field.” The investors allege that the failure to disclose the now-public production problems cost investors “hundreds of millions of dollars.”
After filing an amended complaint, the lead plaintiff (the Nursing Home and Related Industries Pension Plan) filed a motion for class certification; to appoint the lead plaintiff as Class Representative; and to appoint its counsel as Class Counsel. In support of their motion for class certification, the plaintiff submitted a declaration from its Board Chair. The defendants opposed the motion for class certification, arguing that the plaintiff had not established the adequacy of the proposed class representative or the predominance of common issues among the putative class members.
In opposing the motion, the defendants cited the Board Chair’s deposition testimony to show that the Board Chair was unfamiliar with basic facts about the case and therefore not an adequate class representative. The defendants also relied on an Event Study prepared by Glenn Hubbard, the prominent economist and current head of the Columbia Graduate School of Business (and former head of the Council of Economic Advisors) to contend based on a variety of public disclosures from the company about the problems at the Jubilee Field that the many potential class members likely had varying levels of knowledge or awareness about the problems, and accordingly because of these issues about individual knowledge the plaintiff could not show a predominance of common issues among the potential class members.
Judge Boyle opened her analysis of the plaintiff’s motion with a detailed review of what she called the “evolution” of recent class action case law , both at the U.S. Supreme Court (particularly in the Walmart and Comcast cases) and in the Fifth Circuit. Judge Boyle said that the case law reflects a shift from a “presumptively favorable approach toward class certification to a more skeptical view coupled with a more exacting review process” that requires plaintiffs to “produce actual evidence that they are entitled to class status.” She emphasized that the more exacting review process applies to securities class action lawsuits as well. The PLSRA in particular, she noted, focused on the importance of the determination of the adequacy of the class representatives.
In describing what is required, Judge Boyle said “plaintiffs seeking class certification must produce actual, credible evidence that the proposed class representatives are informed, able individuals who are themselves – not the lawyers—actually directing the litigation.” In addition, certification may be denied where the representative lacks a basic understanding of “what the suit is about.”
After reviewing the parties’ submissions, Judge Boyle found that, with reference to the Board Chair’s deposition testimony in which the Board Chair evinced little knowledge of the case, “a strong inference may be drawn” that the plaintiff and the plaintiff’s law firm “maintain the type of close affiliation that calls into question whether the firm or its counsel is the one actually pursuing the case.”
Judge Boyle was particularly concerned with the portfolio monitoring services the plaintiff’s law firm provides to the plaintiff pension fund. Judge Boyce said that the fact that the firm performs these services; recommended and then filed the lawsuit; and now seeks to be lead counsel “strongly suggests that this is a lawyer and not a client-driven suit.”
Judge Boyle said that in light of the Board Chair’s unfamiliarity with the case and the underlying facts and even with the substance of her own declaration, the plaintiff “simply failed to meet her burden to bring forth facts that establish” that the plaintiff pension fund is an adequate representative.
Judge Boyle also found that the plaintiff failed to establish that common questions predominate over individual questions, as required in order to the class certification requirements to be met. In reaching this conclusion, the referenced the defendants’ “unrebutted” evidence of investor knowledge of problems at Jubilee Field, which Judge Boyle found to show that the plaintiff had not established that common questions would predominate.
The Event Study on which the defendants’ relied showed that “the disclosure of information about production issues at the Jubilee Field following Kosmos’ IPO did not cause any decline in Kosmos’ stock price.” The study also identified fourteen occasions on which class members might have acquired varying levels of knowledge about the Jubilee Field production problems, which Judge Boyle found to be “more than adequate to show that individual inquires might be necessary” and therefore that the requirement that common issues predominate had not been met.
There are a number of very interesting aspects of Judge Boyle’s opinion. The first is her emphasis on how much the Supreme Court case law has changed the class certification analysis and the extent to which (she concluded) the evolving case law requires the plaintiff to come forward with evidence to support their class certification position. She seemed quite impatient with what she deemed plaintiff’s conclusory assertions and reliance on legal arguments. She expected the plaintiff to provide factual support to show that the class certification requirements had been met, and was quite critical of the plaintiff and its lawyers for not providing the requisite factual support.
Second, her commentary about the plaintiff’s law firm’s portfolio monitoring services and the plaintiff’s law firm’s role in the case are also interesting. Many of the leading securities plaintiffs’ firms provide these kinds of services for institutional investors, in the obvious hope that they will identify possible cases for the investors to bring, and in the related hope that the law firm might file the lawsuit on their portfolio monitoring client’s behalf. The plaintiffs firms have in the past faced sharp criticism for their alleged conflicts of interest in providing the services and bringing the cases. Indeed, in a harsh 2009 commentary, Southern District of New York Judge Jed Rakoff (whose ultimate written opinion in the case Judge Boyle cited) questioned the conflict involved in plaintiffs’ firms playing these various roles. (Refer here for a review of Rakoff’s commentary).
But though other judges have questioned these services, what makes Judge Boyle’s commentary here interesting is that the plaintiff’s law firm’s various roles were a substantial factor in her conclusion that the plaintiff had not satisfied the adequacy requirement, because the case appeared to be lawyer-driven rather than client-driven, and involved a client that was uninformed about the most basic aspects of the case and even about the content of her own declaration.
The defendants’ use of an event study is particularly interesting, and not just Judge Boyle cited it in her conclusion that the plaintiffs had not shown that common issues predominate.
Readers will recall that in the recent oral arguments in the Halliburton case now before the U.S. Supreme Court, the justices and the parties had debated the merits of possibly requiring event studies to show the “price impact” of alleged misrepresentations in order for plaintiffs to be able to rely on the “fraud on the market” theory to establish class-wide reliance.
The present case provides an example of what such an event study might look like and how it might be used – indeed, although it was not directly pertinent to the outcome of the class certification motion, the defendants’ event study purported to show that the supposedly withheld information about the production problems at the Jubilee Field did not affect the company’s share price. (Presumably if the Supreme Court winds up requiring plaintiffs to show “price impact,” plaintiffs in future cases will submit their own event studies, unlike the plaintiff here.)
Some readers may be quick to note that courts in the Fifth Circuit (where Judge Boyle’s court is located) are notoriously tough for securities class action plaintiffs and perhaps that Judge Boyle’s opinion can be best understood in that light. However, courts in other jurisdictions may well ask many of the same questions that she asked. Her perspective on the impact of the recent U.S. Supreme Court class action case law is particularly interesting as is her expressions of concern about the plaintiff’s firms various roles
In case you were wondering, Glenn Hubbard led the Council of Economic Advisors during George W. Bush’s first presidential term. Judge Boyle was appointed to the bench by George W. Bush.
Special thanks to a loyal reader for providing me with a copy of Judge Boyle’s opinion