As courts have wrestled with the issue whether certain foreign shareholders can act as lead plaintiffs, or indeed can even be included in the plaintiff shareholder class, they have faced an ever-broader array of questions and challenges. The kinds of issues that foreign shareholder litigants present are illustrated in the February 13, 2008 lead plaintiff selection order (here) of Judge Saundra Brown Armstrong of the United States District Court for the Northern District of California in the BigBand Networks securities class action lawsuit. Refer here for background regarding the case.
BigBand, which is based on California, went public on March 14, 2007 (refer here). Its shares trade on Nasdaq. On September 27, 2007, the company announced (here) a revised revenue estimate for the third quarter of 2007. The company’s share price declined and several shareholders filed securities class action lawsuits against the company and certain of its officers and directors as well as the IPO offering underwriters and others.
The two leading contenders for the lead plaintiff role were Gwyn Jones, “a British citizen who resides in the Republic of Cyprus,” and Sphera Fund, an Israeli-based institutional hedge fund investor. The two would-be lead plaintiffs agreed that Jones has the largest financial interest in the case, having sustained losses of $438,617, whereas Sphera sustained losses of $374,889. Sphera nevertheless asserted three grounds on upon which it sought to rebut the presumption that Jones, with the largest financial interest in the case, was the most adequate plaintiff.
Sphera first argued that in enacting the Private Securities Litigation Reform Act, Congress sought to encourage institutional investors to serve as the lead plaintiff in securities class action lawsuits. Judge Armstrong found however that “a plaintiff’s mere status as an institutional investor does not provide any presumption that the institutional plaintiff is a more adequate plaintiff than an individual investor with a larger financial interest.” Judge Armstrong went on to note that Congress could have created a per se presumption in favor of institutional plaintiffs but did not do so.
Sphera next sought to overcome the presumption that Jones was the most adequate plaintiff by arguing that Jones was subject to a “unique defense.” Sphera argued that the judgment of the U.S. court in a class action securities lawsuit might not be given preclusive effect in Cyprus and that fact was sufficient to overcome the presumption. In making this argument, Sphera drew upon prior holdings in the Vivendi and GlaxoSmithKline cases that the most adequate plaintiff presumption can be rebutted where the presumptive lead plaintiff’s country may not give res judicata effect to a U.S. court’s class action judgment. (Refer here for my prior discussion of the GlaxoSmithKline case, in which the court rejected the lead plaintiff petition of a German investor with the most significant financial interest out of concern that a German court might not enforce the U.S. court’s judgment in the case.)
Sphera’s attempt to challenge Jones broke down on its attempt to substantiate its characterizations of Cypriot law. Judge Armstrong held that “the arguments and evidence presented …are a totally inadequate basis for this Court to form any opinion as to whether Cypriot courts would give binding effects to this Court’s judgments.” Judge Armstrong observed regarding Sphera’s attempt to establish the relevant Cypriot law that
Sphera Fund does not even so much as provide an authenticated version of the Cypriot Civil Procedure Rules, but instead provides only a link to a webpage that is primarily in Greek and appears to contain translations of various Cypriot laws….Moreover, the versions of the rules on this website appear to use idiomatic phraseology that is literally Greek to this Court….The Court therefore has no basis on which to render an informed opinion on this question.
Judge Armstrong went on to note that “on the evidence before this Court,” Sphera’s concern about the enforceability of the U.S. court’s judgment in Cypriot courts “applies equally to Sphera Fund, an Israeli entity as to Jones.” Sphera “provided no specific argument that an Israeli court would give preclusive effect to a securities class action judgment such as may be rendered in this case.” Although relegated to a footnote, a further observation of the court seems particularly relevant to the entire analysis; that is, the court notes that the country of Jones’ citizenship (U.K.) rather than the country of his residence (Cyprus) may be the more relevant consideration, and prior courts have found that U.S. judgments may be preclusive in U.K. courts.
Finally, Sphera’s third argument against the presumption that Jones is the most adequate plaintiff is that Jones is in any event unqualified to serve as lead plaintiff. Sphera’s arguments in this regard are, the court notes, “simply ad hominem attacks on Jones,” which the court dismisses as “sophomoric.”
While there is something more than slightly comical about Sphera’s attempt to present arguments based on Cypriot law in reliance on a partially translated webpage, the spectacle of a court making significant procedural determinations that potentially could affect the interests of absent class members based this kind of process is disheartening. Sphera’s attempt to introduce Cypriot law may have been particularly clumsy, but this kind of spectacle is the almost inevitable absurd extreme to which the courts have been led based on the process of U.S. courts making assessments of foreign laws and of the likelihood that foreign courts would honor U.S. courts’ judgments in class action lawsuits.
Even with respect to jurisdictions such as the U.K. where the law is relatively accessible, the U.S. courts are nevertheless making assumptions that may or may not be valid about what a court in another jurisdiction might do in applying its own laws. And for countries where English translations of relevant legal provisions are unavailable, the entire exercise can simply break down. The inevitably scattershot results are underscored in the BigBand case when the court emphasized that it could not determine one way or another whether the judgment would be enforced in Cyprus or Israel but it was nevertheless proceeding ahead. It is hardly reassuring that the Court more or less acknowledged that it was making its decision in express recognition that it did not know what the relevant law is.
Moreover, with the increasing globalization of investor activity, the prospects for more instances of this kind of exercise, both at the lead plaintiff and at the class certification stage, seems likely. U.S. courts will be increasingly plagued by requirements to discern and make assessments upon the laws of a bewildering array of countries, and make decisions about the substantive rights of aggrieved absent potential class members based on assessments about what a foreign court might do under its law.
Nor is the inaccessibility of some jurisdictions’ laws the only practical issue involved. For example, in the class certification context, and as Adam Savett pointed out on his Securities Litigation Watch blog, the practical alternative for foreign investors precluded from the shareholder class is for those precluded investors to file individual actions, which is precisely what foreign investors precluded from the Vivendi class have done, as Savett documents here.
The complications arising from foreign shareholder litigants’ involvement in U.S. securities actions defy easy solutions, but it seems increasingly apparent that these issues will continue to arise as foreign investors demonstrate their interest in accessing U.S. courts to seek available remedies under U.S. securities laws. While there are no easy solutions, the current ad hoc case by case method, informed only by U.S. courts’ rough and ready assessments of what the laws of other jurisdictions provide and how those jurisdictions’ courts might apply those laws to a U.S. class action judgment, seems poorly calculated to serve the best interests of absent, aggrieved class members.
Speakers’ Corner: On March 6, 2008, I will be speaking at the Mealey’s Subprime-Backed Securities Litigation Conference in New York. I am honored to be included with a very illustrious group of speakers, who will be addressing the critical issues in a very comprehensive way. The program is being chaired by David Grais of Grais & Ellsworth. The entire program agenda and other conference information can be found here.