DECISION AND ORDER
By motion dated October 22, 2008, plaintiff William R. Bennett (“Bennett”) moved the Court (1) to be appointed lead plaintiff in this action; and (2) to approve his choice of counsel, Cohen, Milstein, Sellers & Toll, P.L.L.C. (“Cohen Milstein”), as lead counsel for all plaintiffs in the proposed class (the “Class”). Also by motion dated October 22, 2008, plaintiffs Matthew Chia-Yiu Maa (“Maa”), David Dai, Shawn Rad, and Mohammad Khan (collectively, the “Maa Group”), moved the Court (1) to individually and collectively be appointed lead plaintiffs; and (2) to approve their choice of counsel, The Rosen Law Firm, P.A. (“Rosen”), as lead counsel. Finally, by motion dated October 22, 2008, Gordon Chace (“Chace”) moved the Court (1) to be appointed lead plaintiff; and (2) to approve his choice of counsel, Johnson Bottini, LLP, as lead counsel. For the reasons stated below, Bennett’s motion is GRANTED, and the Maa Group’s and Chace’s motions are DENIED.
I. BACKGROUND 1
The claims in this class action arise out of alleged violations of federal securities laws by defendant China Shenghuo Pharmaceutical Holdings, Inc. (“CSP”) between July 23, 2007 and August 20, 2008 (the “Class Period”).
CSP develops products derived from herbs to treat a myriad of health conditions, ranging from cardiovascular disease to the common cold. CSP is a publicly held company whose common stock (1) was and is registered with the United States Securities and Exchange Commission (“SEC”); (2) was traded on the American Stock Exchange (“AMEX”) until August 20, 2008; and (3) was and is governed by United States federal securities law.
On August 20, 2008, CSP issued a press release stating that its financial statements
In a complaint dated August 21, 2008 and filed in this Court, plaintiff Beno Varghese (“Varghese”), individually and on behalf of all others similarly situated, alleges that CSP’s actions during the Class Period violated §§ 10(b) and 20(a) of the Securities Exchange Act, 15 U.S.C. §§ 78j(b), 78t(a), and Rule 10b-5 promulgated thereunder, resulting in damages to himself and others in the Class. 2 On August 23, 2008, Varghese’s counsel issued a notice (the “Notice”) informing potential Class members of: (1) the allegations and claims contained in the Complaint; (2) the purported Class Period; and (3) their opportunity to move the Court to serve as lead plaintiff within sixty days, pursuant to the Private Securities Litigation Reform Act of 1995 (“PSLRA”). Class members Bennett, the Maa Group, and Chace each moved the Court for appointment as lead plaintiff(s) and to have their respective choice of counsel approved as lead counsel.
II. DISCUSSION
A.LEGAL STANDARD
The PSLRA provides the standard for selecting a lead plaintiff in class actions brought pursuant to the Securities Exchange Act. The PSLRA directs that:
the court shall adopt a presumption that the most adequate plaintiff in any private action arising under this chapter is the person or group of persons that—
(aa) has either filed the complaint or made a motion in response to a notice
(bb) in the determination of the court, has the largest financial interest in the relief sought by the class; and
(cc) otherwise satisfies the requirements of Rule 23 of the Federal Rules of Civil Procedure.
15 U.S.C. § 78u — 4(a)(3)(B)(iii)(I).
The Court’s identification of the presumptively most adequate lead plaintiff may be rebutted if class members offer evidence that the presumptive lead plaintiff: (1) “will not fairly and adequately protect the interests of the class”; or (2) “is subject to unique defenses that render such plaintiff incapable of adequately representing the class.” Id. § 78u-4(a)(3)(B)(iii)(II).
B. THE MOTIONS UNDER CONSIDERATION ARE TIMELY
Varghese published the Notice on August 23, 2008. Bennett, the Maa Group, and Chace filed their respective motions on October 22, 2008. The movants’ motions all satisfy the requirement that such motions be filed within sixty days of the Notice’s publication. See id. § 78Ü-4 (a)(3)(A)(i)(II). All three movants therefore satisfy § 78u-4(a)(3)(B)(iii)(I)(aa).
C. BENNETT HAS THE LARGEST FINANCIAL INTEREST IN THE RELIEF SOUGHT BY THE CLASS
1. The Maa Group Is Not an Appropriate Candidate for a Group of Lead Plaintiffs
Though the PSLRA expressly permits a “person or group of persons” to be ap
Historically, district courts have been divided over whether a group of unrelated investors constitutes a “group of persons” that may be appointed lead plaintiff.
See id.; In re Star Gas Sec. Litig.,
No. 3:04 CV 1766,
Accordingly, a proposed group must proffer an evidentiary showing that unrelated members of a group will be able to function cohesively and to effectively manage the litigation apart from their lawyers before its members will be designated as presumptive lead plaintiffs. Factors that courts have considered when evaluating whether a group’s members will function cohesively and separately from their lawyers include evidence of: (1) the existence of a pre-litigation relationship between group members; (2) involvement of the group members in the litigation thus far; (3) plans for cooperation; (4) the sophistication of its members; and (5) whether the members chose outside counsel, and not vice versa.
See, e.g., Freudenberg v. E*Trade Fin. Corp.,
Nos. 07 Civ. 8538 et al.,
However, courts in this District do not hesitate to deny a proposed group’s motion for lead-plaintiff status if the movants have not provided a sufficient evidentiary basis for aggregation or if the court otherwise is persuaded that the proposed group has been assembled as a makeshift by attorneys for the purpose of amassing an aggregation of investors purported to have the greatest financial interest in the action.
See, e.g., In re Tarragon Corp. Sec. Litig.,
No. 07 Civ. 7972,
This skepticism is consistent with core aims of the PSLRA: shifting control of the litigation from the lawyers to the investors and preventing “the manipulation by class action lawyers of the clients whom they purportedly represent.” H.R. Conf. Rep. 104-369, at 31, as reprinted in 1995 U.S.C.C.A.N. 730, 730;
see also In re Donnkenny Inc. Sec. Litig.,
Judge Castel succinctly summarized the state of the law in this District as follows:
The issue is not whether losses or holdings may be aggregated by members of a group seeking to become the lead plaintiff; indisputably, they may. But to enjoy the rebuttable presumption that the statute confers, there must be some evidence that the members of the group will act collectively and separately from their lawyers.
In re Tarragon,
The Court need not delve into the various case-by-case analyses that courts have employed when evaluating whether a proposed group of unrelated investors is suitable for appointment as lead plaintiffs, because the Maa Group fails to provide the Court with any evidence that its members have had any prior pertinent relationships or cooperative efforts, or that they will act collectively and separately from their lawyers.
The Maa Group is composed of four individual plaintiffs who allegedly pur
In denying the aggregation of the Maa Group as suitable lead plaintiffs in this action, the Court does not intimate that the Maa Group’s counsel has intentionally aggregated unrelated plaintiffs for the purpose of artificially creating a group with the greatest financial interest. Nevertheless, the Court finds that absent any evidentiary showing by the Maa Group of its members’ ability to work cohesively together to effectively manage the litigation apart from their lawyers, aggregation of its members’ financial interests for purposes of appointing lead plaintiff is inappropriate.
While the Court rejects the aggregated Maa Group’s motion as lead plaintiffs, the Court may consider Maa, the largest shareholder of the Maa Group, individually, as if he had moved to be appointed as lead plaintiff alone.
See, e.g., Eichenholtz v. Verifone Holdings, Inc.,
No. C 07-06140 MHP,
2. Comparing the Financial Interests of Bennett, Maa, and Chace
The Court must determine next whether Bennett, Maa, or Chace has the “largest financial interest in the relief sought by the class” of those seeking to serve as lead plaintiff in this litigation. 15 U.S.C. § 78u-4(a)(3)(B)(iii)(D(bb).
Though the PSLRA offers no guidance as to how to measure which proposed plaintiff has, the “largest financial interest,” courts in this District overwhelmingly rely on the factors derived from
Lax v. First Merch. Acceptance Corp.,
Nos. 97 C 2715 et al.,
(1) the total number of shares purchased during the class period; (2) the net shares purchased during, the class period (in other words,, the difference between the number of shares purchased and the number of shares sold during the class period)/ (3). the net funds expended during the class period (in other words, the difference between the amount spent to purchase shares and the amount received for the sale of shares during the class period); and (4) the approximate losses suffered.
Kaplan v. Gelfond,
At the outset, it is clear that Chace cannot establish the largest financial interest in this action. Chace purchased 5,350 shares of CSP stock during the Class Period at a cost of $27,592.80. (Declaration of Jacqueline Sailer in Support of Movant Gordon Chace’s Motion for Appointment as Lead Plaintiff and Approval of Selection of Counsel, Ex. B.) He sold 1,753 CSP shares during the Class Period for $6,523.69, and thus holds 3,597 shares at a net expense of $21,069.11. (Id.) Finally, Chace claims approximate losses of $15,277.94. 3 (Id.) Compared to Bennett and Maa, who are discussed in detail below, Chace bought the fewest total shares and net shares, expended the least net funds, and suffered the least approximate losses. The Court therefore finds that Chace does not have the largest financial interest in this action and should not be appointed as the presumptive lead plaintiff. This leaves the Court to consider Maa and Bennett.
During the Class Period, Maa purchased a total number of 70,000 shares of CSP stock at a cost of $268,506.72. (Maa Group Mem. at 5.) He sold 30,000 shares during the Class Period for $146,664.14, and thus still holds 40,000 shares at a net expense of $121,842.58. (Id.) Bennett purchased 26,064 of CSP stock during the Class Period at a cost of $254,604.62. (Declaration of Catherine A. Torell in Support of William Bennett’s Motion for Appointment as Lead Plaintiff and Approval of Selection of Lead Counsel (“Torell Deck”), Ex. B.) Bennett did not sell any of his CSP shares during the Class Period, and thus still holds all 26,064 shares at a net expense of $254,604.62. (Id.) Based upon these submissions, the first two factors favor Maa, as he purchased more total shares and net shares during the Class Period. The third factor, however, favors Bennett, as he expended net funds of $254,604.62 during the Class Period, compared to Maa’s expended net funds of $121,842.58.
The fourth factor, however, is the most important, and Bennett and Maa dispute the proper method of calculating the approximate losses each of movant suffered. Maa urges the Court to assign CSP stock
While the Court finds problems with both proposed methods, the Court need not resolve the proper formula for calculating the approximate losses suffered in this case, as Bennett has suffered greater losses under both proposed valuations. 6 Employing a valuation of $1.89 per share, Bennett’s losses total $205,343.66 and Maa’s losses total $46,278.58. (Bennett Opp. at 4.) Employing a valuation of $0.00 per share, Bennett’s losses total $254,604.62 and Maa’s losses total $121,842.58. (Torell Deck, Ex. B; Maa Group Mem. at 5.) Accordingly, applying either suggested formula, Bennett has suffered greater approximate losses than Maa.
While the first two factors favor Maa and the third factor favors Bennett, the fourth factor in this case — the most important factor — strongly favors Bennett. Because Bennett has suffered greater approximate losses, he has the largest financial interest in the relief sought by the Class as determined by the Lax/Olsten test. Therefore, pursuant to 15 U.S.C. § 78u-4(a)(3)(B)(iii)(I), Bennett shall be adopted by this Court as the presumptive plaintiff if he otherwise satisfies Rule 23 of the Federal Rules of Civil Procedure (“Rule 23”). 7
The final requirement for selecting a lead plaintiff, that the candidate “otherwise satisfies the requirements of Rule 23,” 15 U.S.C. § 78u-4(a)(3)(B)(iii)(I)(cc), is not in contention here. Rule 23 states that a party may serve as class representative only if:
(1) the class is so numerous that joinder of all members is impracticable; (2) there are questions of law or fact com- • mon to the class; (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and (4) the representative parties will fairly and adequately protect the interests of the class.
Fed.R.Civ.P. 23(a).
At this stage in the litigation, a prima facie showing that the requirements of Rule 23 are met is sufficient.
See In re Fuwei Films,
Bennett’s claims are typical of the class. Like other Class members, he alleges that (1) he purchased CSP stock during the Class Period; (2) he purchased shares in reliance on CSP’s misrepresentations; and (3) he suffered damages as a result. (Bennett Mem. at 7.)
See Reimer,
Further, based on the memoranda and declarations submitted by Bennett’s counsel, the Court is persuaded that Bennett has made a preliminary showing that he will adequately protect the interests of the Class. He is represented by experienced and qualified attorneys; the Court is not aware of any interests Bennett may have that are antagonistic to those of other Class members; and he has a significant financial interest in the outcome of action.
See Kuriakose,
Bennett therefore satisfies all three requirements of 15 U.S.C. § 78u-4(a)(3)(B)(iii)(I): He made a motion in response to a notice; he has the largest financial interest; and he made a preliminary showing that he otherwise satisfies the requirements of Rule 23. Accordingly, Bennett is entitled to a rebuttable presumption that he should be appointed lead plaintiff in this action.
E. BENNETT’S PRESUMPTIVE STATUS HAS NOT BEEN REBUTTED
Bennett’s status as the presumptively most adequate plaintiff:
may be rebutted only upon proof by a member of the purported class that the presumptively most adequate plaintiff—
(aa) will not fairly and adequately protect the interests of the class; or
(bb) is subject to unique defenses that render such plaintiff incapable of adequately representing the class.
15 U.S.C. § 78u-4(a)(3)(B)(iii)(II). Neither the Maa Group nor Chace have proffered any “proof’ challenging Bennett’s presumptive status on these bases, and the Court is not aware of any unique or potentially prevailing defenses that may be asserted against Bennett, nor any other reason that would make Bennett unable to fairly and adequately protect the Class. Bennett is therefore appointed lead plaintiff in this action.
F. APPROVAL OF LEAD COUNSEL
The PSLRA instructs that upon appointing a lead plaintiff, he or she “shall, subject to the approval of the court, select and retain counsel to represent the class.” 15 U.S.C. § 78u-4(a)(3)(B)(v). “The PSLRA ‘evidences a strong presumption in favor of approving a properly-selected lead plaintiffs decisions as to counsel selection and counsel retention.”
In re Adelphia Commc’ns Corp. Sec. & Derivative Litig.,
No. 03 MDL 1529,
III. ORDER
For the reasons discussed above, it is hereby
ORDERED that the motion (Docket No. 11) of Gordon Chace to be appointed lead plaintiff and to have his choice of counsel approved as lead counsel is DENIED;
ORDERED that the motion (Docket No. 8) of Matthew Chia-Yiu Maa, David Dai, Shawn Rad, and Mohammad Khan, to be appointed lead plaintiffs and to have their choice of counsel approved as lead counsel for is DENIED; and
ORDERED that the motion (Docket No. 5) of William R. Bennett to be appointed lead plaintiff and to have his choice of counsel, Cohen, Milstein, Sellers & Toll, P.L.L.C., approved as lead counsel is GRANTED.
SO ORDERED.
Notes
. The factual and procedural summary provided below is derived primarily from the following documents: Class Action Complaint, dated August 21, 2008 ("Complaint”); Memorandum of Points and Authorities in Support of William Bennett’s Motion to Be Appointed Lead Plaintiff and to Approve His Choice of Lead Counsel, dated October 22, 2008 ("Bennett Mem.”); Memorandum of Law in Support of Motion of the Maa Group to: (1) Appoint Lead Plaintiffs; and (2) Approve Lead Plaintiffs’ Selection of Counsel, dated October 22, 2008 ("Maa Group Mem.”); Memorandum of Law in Support of Gordon Chace’s Motion for Appointment as Lead Plaintiff and Approval of Selection of Counsel, dated October 22, 2008 ("Chace Mem.”); William R. Bennett’s Memorandum of Law in Opposition to Competing Lead Plaintiff Motions, dated November 10, 2008 ("Bennett Opp.”); The Maa Group’s Memorandum of Law in Opposition to Competing Lead Plaintiff Motions, dated November 10, 2008 ("Maa Group Opp.”). Except where necessary, no further citation to these documents will be made.
. The Court entered an Order on September 26, 2008 consolidating this action with a similar class action, Yu v. China Shenghuo Pharmaceutical Holdings, Inc., No. 08 Civ. 8168 (S.D.N.Y.).
. Whether the Court applies a valuation of $0.00 per share (resulting in approximate losses of $21,069.11), $1.89 per share (resulting in approximate losses of $14,2,70.89), or $1.61 per share, the price proposed by Chace (resulting in approximate losses of $15,277.94), Chace will have suffered the least approximate losses compared to Bennett and Maa.
. The Court is not aware of, nor does the Maa Group direct the Court to, any case in which a court determined whether it is appropriate to employ a $0.00 value per share to calculate approximate losses related to halted stock. Rather, the Maa Group cites to a brief prepared by Cohen Milstein in a separate action, where Cohen Milstein wrote, "As a result of the fraud ... shares have not been traded in the open market.... Given the illiquid nature of these shares, Movants have ascribed $0 per share to approximate the value of their retained shares.” (Maa Group Opp. at 3; Declaration of Phillip Kim in Opposition to Competing Lead Plaintiff Motions, Ex. 1 at 3 n. 3.) In that case, in determining which movant suffered the greatest approximate loss, the Court did not evaluate whether $0.00 per share would be an appropriate method for measuring loss, as it decided that the lead plaintiff suffered the greatest approximate loss under any of the proposed methods of valuation.
See Miller v. Dyadic Int’l, Inc.,
No. 07-80948-CIV,
. Bennett bases his argument on 15 U.S.C § 78u-4(e)(l), contending that the PSLRA mandates that the Court employ " 'the mean trading price of that security during the 90-day period’ after the corrective disclosure.” (Bennett Opp. at 3.) Bennett is mistaken: § 78u-4(e)(l) addresses the PSLRA’s limitation on damages, not the methodology for determining a proposed lead plaintiff's financial interest in the relief sought.
See In re Ribozyme Pharms., Inc. Sec. Litig.,
. The parties’ submissions present the two most extreme prospects — the highest and lowest applicable valuations. While the Court believes that the most accurate valuation lies somewhere between $0.00 and $1.89 per share, the Court need not propose a third price per share. Any valuation between $0.00 and $1.89 will result in Bennett having greater approximate losses than Maa.
. If Bennett does not satisfy the criteria of Rule 23, the Court must repeat the Rule 23 inquiry, this time considering the plaintiff with the next-largest financial stake. The Court so proceeds until it finds a plaintiff who is willing to serve and is able to satisfy the requirements of Rule 23.
See In re Cavanaugh,