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Garbowski v. Tokai Pharmaceuticals, Inc.

United States District Court, D. Massachusetts

March 16, 2018



          WOLF, D.J.

         In these consolidated class actions, it is alleged that Tokai Pharmaceuticals, Inc. and several of its officers, directors, and underwriters committed securities fraud in connection with the development of galeterone, an experimental drug. On September 30, 2016, Steven Maxon and Sanjiv Purohit timely filed competing motions, pursuant to the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u-4(a)(3), seeking consolidation, appointment as lead plaintiff for the class, and approval of their respective selections of lead counsel. Maxon is a contractor for the United States Department of Defense who is working in Djibouti. Purohit subsequently withdrew his motion because Maxon has a larger financial stake in the litigation. However, Purohit stated that he intended the withdrawal to have "no impact on...his ability to serve as a representative party should the need arise." C.A. No. 16-11992, Docket No. 51.

         As explained in this Memorandum, a purpose of the PSLRA is to assure that securities class actions will be directed by lead plaintiffs who are willing and able to select and supervise class counsel. It was intended to end the perceived practice of counsel choosing plaintiffs, operating without supervision, and often profiting greatly from settlements that provided little benefit to class members.

         On September 28 and October 10, 2017, the court held hearings concerning Maxon's motion, which raised questions regarding his suitability to serve as a lead plaintiff and the suitability of Pomerantz LLP ("Pomerantz") to serve as lead counsel. Among other things, although Maxon had previously certified under oath that he had read the complaint, he informed the court that he did not know what a complaint was and had not read anything except a notice on a website before seeking to become lead plaintiff. In addition, although he said he may have spoken to another law firm, Maxon did not know that Pomerantz had filed the motion seeking his appointment as lead plaintiff and selection of it as class counsel until the court expressed its intention to question him. He did not hear from or speak to anyone at Pomerantz until just before the September 28, 2017 hearing in which Maxon attempted to participate by telephone from the United Arab Emirates.

         On October 10, 2017, the court ordered that Maxon and the law firms seeking to represent him provide additional information. On October 17, 2017, Maxon filed a notice that he was withdrawing his motion. Pomerantz proposes that the court reopen the period for class members to apply to be appointed lead plaintiff.

         For the reasons explained below, the court is denying Pomerantz*s request to reopen the period for class members to seek to become lead plaintiff. Although other courts have reopened the period after the withdrawal of a lead plaintiff, it is not clear that the PSLRA grants the authority to do so. In any event, the plaintiffs who filed these cases and Purohit are now eligible to be considered for appointment. Because of the filing of multiple cases, other class members had 103 days-much longer than the 60 days ordinarily provided by the PSLRA-to seek appointment. No institutional investor expressed interest. Nor has any institutional or individual investor expressed interest in becoming lead plaintiff in the five months since Maxon withdrew his motion. Reopening the notice period would further delay the progress of the case, which defendants have a legitimate interest in having resolved as promptly as possible. In these circumstances, assuming that the court has the authority, it is not necessary or appropriate to reopen the period for additional class members to move for appointment as lead plaintiff.

         It is appropriate to provide Purohit an opportunity to renew his request. In addition, the plaintiffs in each case are also eligible to be considered for appointment as lead plaintiff. Therefore, Purohit and each plaintiff are being ordered to file, by April 20, 2018, a motion for appointment in the form required by the PSLRA or a statement that he does not seek to serve as lead plaintiff.

         To provide guidance to potential lead plaintiffs in this case and their counsel, the court is explaining why it would have found Maxon and Pomerantz to be inadequate as lead plaintiff and class counsel respectively.


         Before the enactment of the PSLRA, "[c]ourts traditionally appoint[ed] lead plaintiff and lead counsel in class action lawsuits on a first come first serve basis." S. Rep. No. 104-98 (1995)(reprinted in U.S.C.C.A.N. 679)(the "Senate Report"). "This encouraged a 'race to the courthouse1 among parties seeking lead-plaintiff status." In re Cendant Corp. Litiq., 182 F.R.D. 144, 145 (D.N.J. 1998).

         The previous system also "spawned a cottage-industry of specialized securities litigation firms that 'researched potential targets for these suits, enlisted plaintiffs, controlled the litigation, and often negotiated settlements that resulted in huge profits for the law firms with only marginal recovery for the shareholders.'" Id. "Investors in the class usually ha[d] great difficulty exercising any meaningful direction over the case brought on their behalf" and " [t]he lawyers c[ould] decide when to sue and when to settle, based largely on their own financial interests, not the interests of their purported clients." Senate Report at 6. "[P]laintiffs' counsel in many instances litigate[d] with a view toward ensuring payment for their services without sufficient regard to whether their clients [were] receiving adequate compensation in light of evidence of wrongdoing." Id.

         Section 101(b) of the PSLRA, codified at 15 U.S.C. §74u-4, now governs the appointment of lead plaintiffs in securities class actions. As Judge Patti Saris succinctly explained, that section recognizes that "the selection of the lead plaintiff and lead counsel should rest on considerations other than how quickly a plaintiff has filed its complaint." In re Lernout & Hauspie Sec. Litig., 138 F.Supp.2d 39, 43 (D. Mass. 2001) (Saris, D.J.). The PSLRA aims:

"to increase the likelihood that institutional investors will serve as lead plaintiffs by requiring courts to presume that the member of the purported class with the largest financial stake in the relief sought is the most adequate plaintiff." [H.R. Conf. Rep. No. 104-369 ("House Conference Report") at] 33-34 [1995]. This is predicated upon the conclusion that " [institutional investors and other class members with large amounts at stake will represent the interests of the plaintiff class more effectively than class members with small amounts at stake." Id. at 34. Expressing a jaundiced view of "unsupervised" plaintiffs' attorneys, the [House] Conference Committee was most hopeful that "the plaintiff will choose counsel rather than, as is true today, counsel choosing the plaintiff." Id. at 35.

Id.; see also Arkansas Teacher Retirement System v. Insulet Corp., 177 F.Supp.3d 618, 621 (D. Mass. 2016)(Wolf, D.J.). In essence, the PSLRA aims "to empower investors so that they-not their lawyers-exercise primary control over private securities litigation." Senate Report at 4.

         To achieve those goals, §101(b) establishes a process to "locate a person or entity, whose sophistication and interest in the litigation are sufficient to permit that person or entity to function as an active agent for the class" and "actively supervise the conduct of the litigation" of class actions alleging securities fraud. In re Cendant Corp. Litig., 264 F.3d 201, 266-67 (3d Cir. 2001)(Becker, J.). It requires that "not later than 20 days after the date on which the complaint is filed, the plaintiff or plaintiffs shall cause to be published, in a widely circulated national business-oriented publication or wire service, a notice advising members of the purported plaintiff class-

(I) of the pendency of the action, the claims asserted therein, and the purported class period; and

that, not later than 60 days after the date on which the notice is published, any member of the purported class may move the court to serve as lead plaintiff of the purported class."

15 U.S.C. §77u-4(a)(3)(A)(i).

         "Each plaintiff seeking to serve as a representative party on behalf of a class [must] provide a sworn certification, " "which [must] be personally signed by such plaintiff and filed with the complaint, that:

(i) states that the plaintiff has reviewed the complaint and authorized its filing;
(ii) states that the plaintiff did not purchase the security that is the subject of the complaint at the direction of plaintiff's counsel or in order to participate in any private action arising under this chapter;
(iii) states that the plaintiff is willing to serve as a representative party on behalf of a class, including providing testimony at deposition and trial, if necessary;
(iv) sets forth all of the transactions of the plaintiff in the security that is the subject of the complaint during the class period specified in the complaint;
(v) identifies any other action under [the Securities Act], filed during the 3-year period preceding the date on which the certification is signed by the plaintiff, in which the plaintiff has sought to serve as a representative party on behalf of a class; and
(vi) states that the plaintiff will not accept any payment for serving as a representative party on behalf of a class beyond the plaintiff's pro rata share of any recovery, except as ordered or approved by the court..."

15 U.S.C. §78u-4(a)(2)(A).

         Subsection (a) (3) (B) (i) & (ii) require that "no later than 90 days" after the notice is published, or as soon as practicable after the court renders a decision on a motion to consolidate related class actions:

the court shall consider any motion made by a purported class member in response to the notice, including any motion by a class member who is not individually named as a plaintiff in the complaint or complaints, and shall 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 (hereafter in this paragraph referred to as the "most adequate plaintiff") in accordance with this subparagraph.

(emphasis added). "The most adequate plaintiff shall, subject to the approval of the court, select and retain counsel to represent the class." Id. at §78u-4(a)(3)(B)(v).

         For the purposes of §77u-4 (a) (3) (B) (i), "the court shall adopt a presumption that the most adequate plaintiff in any private action arising under this ...

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