PAUL G. GARDEPHE, District Judge.
Pending before the Court are five motions to appoint lead plaintiff, approve lead counsel, and consolidate two putative class actions brought under the federal securities laws by shareholders of CannaVest Corp. ("CannaVest" or the "Company"). Sallustro v. CannaVest Corp., Case No. 14 Civ. 2900(PGG); Siciliano v. CannaVest Corp., Case No. 14 Civ. 3079(PGG).
CannaVest is a publicly traded company headquartered in Las Vegas, Nevada whose shares are listed on the OTC Bulletin Board under the symbol "CANV." (Cmplt. (Dkt. No. 2) ¶¶ 7-8) CarinaVest's primary business is the manufacture, marketing, and sale of consumer products containing industrial hemp-based compounds, including the hemp plant extract cannabidiol ("CBD"). (Id. ¶ 7)
On April 3, 2014, CannaVest filed a Form 8-K with the SEC stating that it had misreported its financial condition on Form 10-Qs for the quarters ending March 31, 2013, June 30, 2013, and September 30, 2013, and that it intended to issue corrective disclosures for those quarters. (Id. ¶ 28) In trading that day, shares of CannaVest stock fell $7.30 per share, or more than 20%, to close at $25.30 per share. (Id. ¶ 29)
On April 14, 2014, CannaVest filed an Amended Form 8-K in which it disclosed, inter alia, that it had overstated its goodwill by more than 1300% and its sales by more than 17%. (Id. ¶¶ 30, 32) After this second disclosure, the Company's stock declined $4.49 per share, or 19.5%, to close at $18.51 per share. (Id. ¶ 31)
The complaints in these actions were filed on April 23, 2014 (the "Sallustro Complaint") and April 29, 2014 (the "Siciliano Complaint"). The Class Period is defined in both complaints as May 20, 2013 through April 3, 2014. (Sallustro Cmplt. (Dkt. No. 2) ¶ 1; Siciliano Cmplt. (14 Civ. 3079, Dkt. No. 2) ¶ 1)
All movants seek consolidation of these actions, and the Court has received no objection to the requests for consolidation.
Here, consolidation is plainly appropriate. Both cases arise from the same alleged misrepresentations made by CannaVest in its Form 10-Qs for the quarters ending March 31, 2013, June 30, 2013, and September 30, 2013. (Sallustro Cmplt. (Dkt. No. 2) ¶¶ 21-27; Siciliano Cmplt. (14 Civ. 3079, Dkt. No. 2) ¶¶ 20-26) Moreover, the parties assert similar claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and the complaints name the same defendants.
The actions shall be referred to collectively as In re: CannaVest Corp. Securities Litigation, No. 14 Civ. 2900(PGG) (the "Consolidated CannaVest Corp. Class Action"). The Clerk of Court shall file a copy of this Order in the separate file for each of the above-captioned CannaVest Corp. class action cases. Unless otherwise ordered by this Court, future filings in any CannaVest Corp. class action case herein consolidated shall be filed and docketed only under docket number 14 Civ. 2900(PGG). All counsel who have entered appearances in the above-captioned class action cases shall be deemed to have entered an appearance in the Consolidated CannaVest Corp. Class Action under the docket number 14 Civ. 2900(PGG). All motions for admission pro hac vice and all orders granting such motions in the above-captioned actions shall also be deemed filed in the Consolidated CannaVest Corp. Class Action under the docket number 14 Civ. 2900(PGG).
Counsel is directed to alert the Clerk of Court to the filing or transfer of any case that might properly be consolidated as part of this litigation. Any class action involving substantially related questions of law and fact hereafter filed in or transferred to this Court shall be consolidated under the master file number assigned to this case.
Every pleading filed in the Consolidated CannaVest Corp. Class Action under the docket number 14 Civ. 2900(PGG) shall bear the following caption:
The Private Securities Litigation Reform Act of 1995 ("PSLRA") directs the Court to "appoint as lead plaintiff the member or members of the purported plaintiff class that the court determines to be most capable of adequately representing the interests of class members." 15 U.S.C. § 78u-4(a)(3)(B)(i). The PSLRA creates a "[r]ebuttable presumption" that "the most adequate plaintiff ... is the person or group of persons" that "has the largest financial interest in the relief sought by the class," provided that such person or group "otherwise satisfies the requirements of Rule 23 of the Federal Rules of Civil Procedure.'" Id. § 78u-4(a)(3)(B)(iii)(I)(aa)-(cc). This presumption may be rebutted upon a showing that the presumptive lead plaintiff "will not fairly and adequately protect the interests of the class," or "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).
"The PSLRA does not specify a method for calculating which plaintiff has the `largest financial interest'...." In re Fuwei Films Sec. Litig., 247 F.R.D. 432, 436 (S.D.N.Y.2008). Many courts in this District, however, have determined a prospective lead plaintiff's financial interest by looking to "(1) the number of shares purchased; (2) the number of net shares purchased; (3) total net funds expended by the plaintiff[] during the class period; and (4) the approximate losses suffered by the plaintiff[]." In re CMED Sec. Litig., No. 11 Civ. 9297(KBF), 2012 WL 1118302, at *3 (S.D.N.Y. Apr. 2, 2012) (citing Lax v. First Merchants Acceptance Corp., Nos. 97 Civ. 2715, 1997 WL 461036, at *5 (N.D.Ill. Aug. 11, 1997)); see also Richman v. Goldman Sachs Grp., Inc., 274 F.R.D. 473, 475 (S.D.N.Y.2011) (citing same); In re Fuwei Films, 247 F.R.D. at 437 (same). "Most courts agree that the largest loss is the critical ingredient in determining the largest financial interest and outweighs net shares purchased and net expenditures."
There are five contenders for lead plaintiff status. Based on the motion papers submitted to this Court, the relevant financial interest factors are as follows:
Movant Shares Net Shares Net Funds Approximate
Purchased Purchased Expended Losses
During the During the During the Suffered
Class Class Period Class Period
Period
Jane Ish 503 3736 $72,112.397 $65,017.638
Steve Schuck 500 500 $70,000.00 $60,550.00
Otilda Lamont 990 370 $43,260.80 $36,749.00
Wayne Chesner 1100 1100 $57,200.00 $35,200.00
Anamaria Schelling 280 230 $34,425.00 $31,741.50
As an initial matter, movants Lamont and Schelling have not opposed Ish and Schuck's motions, and therefore have not rebutted the "largest financial interest" presumption. Accordingly, Lamont and Schelling cannot be considered for appointment as lead plaintiff, see In re CMED, 2012 WL 1118302, at *4 (citing In re Orion Sec. Litig., No. 08 Civ. 1328(RJS), 2008 WL 2811358, at *6 (S.D.N.Y. July 8, 2008)), and their motions to be appointed lead plaintiff will be denied.
The three remaining movants — Ish, Schuck, and Chesner — each posit different methodologies for calculating loss. By way of background, Schuck purchased 500 shares of CannaVest stock on February 21, 2014,
Ish's loss calculation includes trading losses she realized before CannaVest's April 3, 2014 corrective disclosures. (Ish Corrected Br. (Dkt. No. 39) at 6; Seredynski Decl. (Dkt. No. 40) at 3). "Under Dura Pharmaceuticals v. Broudo, 544 U.S. 336, 342-43, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005), [however,] such losses are not recoverable in a securities fraud action because the losses are not proximately caused by the defendant's misstatements." In re LightlnTheBox Holding Co., Ltd. Sec. Litig., No. 13 Civ. 6016(PKC), 2013 WL 6145114, at *3 (S.D.N.Y. Nov. 21, 2013). In other words, "under Dura and its progeny, any losses that [a plaintiff] may have incurred before [a defendant's] misconduct was ever disclosed to the public are not recoverable, because those losses cannot be proximately linked to the misconduct at issue in th[e] litigation." In re Comverse Tech., Inc. Sec. Litig., No. 06 Civ. 1825(NGG)(RER), 2007 WL 680779, at *4 (E.D.N.Y. Mar. 2, 2007), adhered to on reconsideration, No. 06 Civ. 1825(NGG)(RER), 2008 WL 820015 (E.D.N.Y. Mar. 25, 2008).
"While the Dura court addressed a motion to dismiss, the Court's reasoning applies with equal force to a motion to appoint [lead plaintiff and] lead counsel." In re LightInTheBox, 2013 WL 6145114, at *3. Therefore, when evaluating a plaintiff's financial interest for purposes of selecting a lead plaintiff, courts in this Circuit consider that plaintiff's recoverable loss, and do not take into account losses from shares sold prior to corrective disclosures. See, e.g., Porzio v. Overseas Shipholding Group, Nos. 12 Civ. 7948, et al., 2013 WL 407678, at *3 (S.D.N.Y. Feb. 1, 2013) (denying lead plaintiff status to investor group where most of the stock purchased was sold before corrective disclosure); Bensley v. FalconStor Software, Inc., 277 F.R.D. 231, 235-42 (E.D.N.Y. 2011) (denying lead plaintiff status to a so-called "in-and-out" trader, where stock was arguably sold before the company's disclosure of fraud); In re Veeco Instruments, Inc. Sec. Litig., 233 F.R.D. 330, 333 (S.D.N.Y.2005) (rejecting applicant for lead plaintiff status where applicant had sold all of its stock prior to curative disclosure); see also Kops v. NVE Corp., Nos. 06 Civ. 574(MJD)(JJG), et al., 2006 WL 2035508, at *5 (D.Minn. July 19, 2006) (rejecting lead plaintiff applicant who sold all his shares prior to corrective disclosure); Ruland v. InfoSonics Corp., Nos. 06 Civ. 1231(BTM)(WMC), et al., 2006 WL 3746716, at *5-6 (S.D.Cal. Oct. 23, 2006) (holding that Dura loss is the proper calculation method for measuring parties' financial stake in litigation).
"[T]he court would be abdicating its responsibility under the PSLRA if it were to ignore [the issue of loss causation at the lead plaintiff appointment] stage." In re Comverse, 2007 WL 680779, at *5. Accordingly, "`losses result[ing] from "in-and-out" transactions, which took place during the class period, but before the misconduct identified was ever revealed to the public' are not to be included in loss calculations" for purposes of selecting lead plaintiff. Bensley, 277 F.R.D. at 238 (quoting In re Comverse, 2007 WL 680779, at *3).
It follows that Ish's losses from the sale of 130 CannaVest shares on March 10, 2014 — prior to the April 3, 2014 disclosure — are not recoverable under Dura and cannot be considered in calculating her losses. Ish's recoverable losses thus amount to $56,643.19.
Moreover, "[a]lthough a precise determination of damages is not possible at this stage of the litigation, courts typically equate `largest financial interest' with amount of potential recovery." Ruland, 2006 WL 3746716 at *5 (emphasis in original). Relying on losses that, under Dura, are clearly not recoverable is irreconcilable with this Court's duty to ascertain which plaintiff has the greatest financial interest in this litigation. See, e.g., In re McKesson HBOC, Inc. Sec. Litig., 97 F.Supp.2d 993, 997 (N.D.Cal.1999) (discussing the court's preference for methods that calculate financial interest in terms of recoverable damages, because "[o]ne's `interest' in a litigation is rather directly tied to what one might recover") (internal quotation marks omitted).
Ish argues, however, that "Dura losses are `not usually raised in the context of [determining] who has the largest financial interest,'" (Ish Reply Br. (Dkt. No. 47) at 6 (quoting In re Gentiva Sec. Litig., 281 F.R.D. 108, 115 (E.D.N.Y.2012))), and that — to the extent the issue may be considered at all — it is only when a movant sold "all of its shares before any corrective disclosure, which raises the risk that if a court appoints such a movant, the class could be left with no lead plaintiff after a motion to dismiss or summary judgment." Id. (emphasis in original) (citing In re Gentiva, 281 F.R.D. at 115). In other words, Ish argues that — at the lead plaintiff stage — Dura loss can only be considered where a lead plaintiff applicant has no recoverable loss whatsoever under Dura. Such a plaintiff faces the possibility of being dismissed from the class altogether, and will not be able to satisfy the adequacy or typicality requirements of Rule 23. Because Ish sold only a portion of her CannaVest shares before the April 3, 2014 disclosure, she contends that Dura has no application here. This Court is not persuaded.
In this Circuit, courts frequently consider Dura loss even where, as here, a lead plaintiff applicant has sufficiently pled loss causation as to some of her losses. See In re LightInTheBox, 2013 WL 6145114, at *3; In re Comverse, 2007 WL 680779, at *5. Indeed, in In re Comverse, Judge Garaufis explicitly rejected Ish's argument, concluding that "there is simply no basis for this artificial distinction [between cases
This approach is both consistent with Dura and reflects sound case management, as Judge Garaufis explained:
Id. at *6.
Had Ish's sale of 130 shares on March 10, 2014, occurred after a partial corrective disclosure, her losses from that transaction might have been includable in this Court's financial loss calculation. See In re Gentiva, 281 F.R.D. at 115-16; Ruland, 2006 WL 3746716, at *5 (explaining that a partial fraud disclosure before the end of a class period may mean he suffered recoverable loss). There is no dispute here, however, that the first corrective disclosure took place on April 3, 2014. (Cmplt. (Dkt. No. 2) ¶ 28, 30). Accordingly, transactions that took place prior to April 3, 2014, will not be considered in calculating recoverable loss or in determining lead plaintiff status.
Schuck purchased and retained CannaVest shares during the Class Period. "[T]he PSLRA's 90-day `lookback period,' which governs the calculation of damages, should apply to estimating losses in determining the presumptive lead plaintiff, at least in the absence of any credible argument that a different calculation method should apply." Foley v. Transocean Ltd., 272 F.R.D. 126, 130 (S.D.N.Y.2011). According to Schuck, the applicable "look-back" price is $18.90 per share (Schuck Opp. Br. (Dkt. No. 42) at 7 n. 4 (citing 15 U.S.C. § 78u-4(e)(1))), which yields — as to Schuck — a recoverable loss amount of $60,550. Although Schuck filed his brief several days before the expiration of the 90-day "look-back" period, no party has disputed his "look-back" price.
In his initial brief, Chesner alleged approximate losses of $35,200, calculated using the traditional and statutory method for calculating loss: i.e., total share purchase price minus value of shares sold after corrective disclosure. (Chesner Br. (Dkt. No. 20) at 5 and Ex. 3). In his brief opposing the motions of Ish and Schuck, however, Chesner suggests a different and novel method for calculating loss. Under Chesner's new model, "Dura loss is calculated by crediting only the stock price declines caused by the alleged corrective disclosures," and purchase price is irrelevant. (Chesner Opp. Br. (Dkt. No. 41) at 2). Accordingly, Chesner combines the
Chesner's sole case law support for his new loss model is Espinoza v. Whiting, Nos. 12 Civ. 1711 (SNLJ), et al., 2013 WL 171850 (E.D.Mo. Jan. 16, 2013). Espinoza contains little analysis, however, and — despite Chesner's case citation indicating that Espinoza "collect[s] cases" in which this loss model has allegedly been utilized (see Chesner Opp. Br. (Dkt. No. 41) at 2) — in reality, Espinoza cites no supporting cases. Espinoza itself has never been cited or relied on by another court. Moreover, application of Chesner's proposed new loss model leads to absurd results,
Chesner's new loss model — which renders purchase price irrelevant — is inconsistent with the statutory scheme and with Dura itself. As noted above, the PSLRA provides for a statutory cap on damages that is calculated based on the "difference between the purchase or sale price paid... by the plaintiff for the subject security and the mean trading price of that security during the 90-day period beginning on the date on which [disclosure is made]." 15 U.S.C. § 78u-4(e)(1). Given the statutory scheme, it would be odd to apply a loss model that precludes any reference to purchase price.
Moreover, Dura mandates no such approach. Dura merely holds that, in fraud-on-the-market cases, "an inflated purchase price will not itself constitute or proximately cause the relevant economic loss." Dura, 544 U.S. at 342, 125 S.Ct. 1627. But in holding that a plaintiff must plead loss causation — i.e., a sale or retention of stock after a corrective disclosure — the Supreme Court did not rule that purchase price is irrelevant. To the contrary, the Supreme Court repeatedly states that purchase price might prove relevant to loss analysis. For example, the Dura court states that "[i]f the purchaser sells later after the truth makes its way into the marketplace, an initially inflated purchase price might mean a later loss." Id. (emphasis in original) Similarly, the Court states that, "[g]iven the tangle of factors affecting price, ... the higher purchase price will sometimes play a role in bringing about a future loss." Id. at 343, 125 S.Ct. 1627 (emphasis in original).
While the Dura court suggests that a plaintiff may face significant obstacles in demonstrating that the difference between the purchase price and the post-disclosure lower price is due to the "earlier misrepresentation," rather to than "changed economic
Finally, countless decisions in this District have — in the context of selecting lead plaintiff — premised discussions of loss in part on purchase price. See, e.g., Phuong Ho v. NQ Mobile, Inc., No. 13 Civ. 8125(WHP), 2014 WL 1389636, at *1 (S.D.N.Y. Apr. 9, 2014); In re LightInTheBox, 2013 WL 6145114, at *3; Rosian, 2013 WL 5526323, at *2-3; Bo Young Cha, 2012 WL 2025850, at *4-5; In re CMED, 2012 WL 1118302, at *4; Foley, 272 F.R.D. at 130; Richman, 274 F.R.D. at 477-80; Bensley, 277 F.R.D. at 235-36; In re Fuwei Films, 247 F.R.D. at 437 (appointing lead plaintiff who "calculate[d] his financial interest by multiplying the number of shares of [defendant's] stock he purchased ... by the price paid for those shares, and subtracting the value of the shares he currently holds"); In re Orion Sec. Litig., No. 08 Civ. 1328(RJS), 2008 WL 2811358, at *6 (S.D.N.Y. July 8, 2008) (lead plaintiff "calculate[d] its financial interest by multiplying the number of shares of [defendant's] stock purchased by the price paid for those shares, and subtracting the value of the shares it received when it sold all of its shares"); Kaplan, 240 F.R.D. at 94; In re eSpeed, Inc. Sec. Litig., 232 F.R.D. 95, 102 (S.D.N.Y.2005).
The adoption of a standard in which purchase price never plays a part in determining loss would work a radical change in the law. Dura requires no such result, and Chesner has not cited sufficient authority to persuade this Court that such a change would be appropriate.
Under the traditional method for calculating loss, approximate recoverable losses for the movants are as follows: $56,643.19 for Ish, $60,550.00 for Schuck, and $35,200.00 for Chesner. Accordingly, this Court concludes that Schuck — as the movant with the largest potential recoverable loss — is the presumptive lead plaintiff.
Fed.R.Civ.P. 23 states that a party may serve as a 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 common 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). For the rebuttable presumption to apply, courts have
"Typicality is established where each class member's claim `arises from the same course of events, and each class member makes similar legal arguments to prove the defendant's liability.'" Freudenberg v. E*Trade Fin. Corp., Nos. 07 Civ. 8538, et al., 2008 WL 2876373, at *5 (S.D.N.Y. July 16, 2008) (quoting In re Drexel Burnham Lambert Grp., Inc., 960 F.2d 285, 291 (2d Cir.1992)). However, "[t]he lead plaintiff's claims `need not be identical to the claims of the class to satisfy the [preliminary showing of] typicality.'" In re Fuwei Films, 247 F.R.D. at 436 (quoting Pirelli, 229 F.R.D. at 412).
Here, Schuck contends that he "(1) purchased CannaVest common stock during the Class Period at prices alleged to have been artificially inflated by the false and misleading statements issued by Defendants; and (2) was damaged by the alleged fraud." (Schuck Br. (Dkt. No. 22) at 8). This Court is satisfied that Schuck's claims and legal arguments are similar to those of other investors and therefore representative of the putative class. Accordingly, Schuck has made the preliminary showing required for typicality at this stage of the proceedings.
Schuck has also demonstrated that he will fairly and adequately protect the interests of the putative class. The adequacy requirement is satisfied where "(1) class counsel is qualified, experienced, and generally able to conduct the litigation; (2) there is no conflict between the proposed lead plaintiff and the members of the class; and (3) the proposed lead plaintiff has a sufficient interest in the outcome of the case to ensure vigorous advocacy." Kaplan, 240 F.R.D. at 94. Schuck has retained competent and experienced counsel, and has pleaded a loss suggesting that he will have a strong interest in advocating on behalf of class members. Moreover, no movant has suggested that Schuck's claims are subject to unique defenses or otherwise rebutted his presumptive status as lead plaintiff. Therefore, Schuck will be appointed lead plaintiff.
Under the PSLRA, "[t]he most adequate plaintiff 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). There is a "strong presumption in favor of approving a properly-selected lead plaintiff's decisions as to counsel selection." See In re Adelphia Commc'ns Corp. Sec. & Derivative Litig., No. 03 MDL 1529(LMM), 2008 WL 4128702, at *2 (S.D.N.Y. Sept. 3, 2008) (quoting In re Cendant Corp. Litig., 264 F.3d 201, 276 (3d Cir.2001)).
Here, Schuck has selected the law firm of Federman & Sherwood as class counsel, and seeks court approval of this selection. (Schuck Br. (Dkt. No. 22) at 10). In support of Schuck's request, William
For the reasons set forth above, the above-captioned cases are consolidated under the caption In re: CannaVest Corp. Securities Litigation, and the files of these actions shall be maintained in one file under Master File No. 14 Civ. 2900(PGG). The consolidation is for all purposes, including, but not limited to, discovery, pretrial proceedings, and trial proceedings.
The motion of Steve Schuck to be appointed lead plaintiff is granted, as is Schuck's motion to consolidate related actions and to approve Federman & Sherwood as lead counsel. See Dkt. No. 21. All other motions are denied.
The Clerk of the Court is directed to terminate the motions (14 Civ. 2900(PGG), Dkt. Nos. 19, 21, 24, 27, 34; 14 Civ. 3079(PGG), Dkt. No. 17). The Court will hold an initial pre-trial conference in this matter on April 30, 2015 at 10:30 a.m. in Courtroom 705 of the Thurgood Marshall United States Courthouse, 40 Foley Square, New York, New York, 10007. Counsel for Lead Plaintiff and the Defendants are directed to submit a joint letter and proposed Case Management Plan by April 23, 2015, in accordance with this Court's Individual Rules of Practice in Civil Cases.
SO ORDERED.
