Securities Law Updates | New Judicial Opinions
July 28, 2008
NY District Court Rejects Pension Fund's Bid to Gain Class Rep Status, But Certifies Backdated Stock Option Class Suit Versus Monster Worldwide
In Re Monster Worldwide Inc. Securities Litigation
No. 07 Civ. 2237, U.S. District Court for the Southern District of New York, 7/15/2008
In this backdated stock option fraud suit against employment web site parent company Monster Worldwide, Inc., the U.S. District Court for the Southern District of New York denied the motion of Steamship Trade Association-International Longshoremen’s Association Pension Fund to be accorded class representative status for failure to meet the requirements of the law. According to the district court, the basic requirement for appointment as class representative was that the representative must have an awareness of the "basic facts underlying the lawsuit" and be unlikely to "abdicate his obligations to fellow class members." Here, the pension fund's co-chairman Horace Alston failed to meet that standard when he displayed barely any knowledge of the action at deposition. The district court was thus prompted to conclude that the pension fund could not remotely be relied upon to protect the interests of the class against the possibly competing interests of the attorneys. No such inadequacy was apparent, however, in the case of the other lead plaintiff, Middlesex County Retirement System, which was therefore approved as class representative. The district court likewise granted the plaintiffs' motion for class certification, stating that defendant Monster provided no direct evidence that any putative class member actually knew about option backdating at Monster before the scandal became public.
This is a private securities fraud action brought on behalf of a putative class of investors. The two named plaintiffs, the Middlesex County Retirement System (“Middlesex”) and the Steamship Trade Association-International Longshoremen’s Association Pension Fund (“STA-ILA”), alleged that the three defendants—Monster Worldwide, Inc. (“Monster”), Andrew J. McKelvey (former CEO and Chairman of Monster), and Myron Olesnyckyj (former General Counsel, Senior Vice President, and Secretary of Monster)—violated sections 10(b), 20(a) and 20A of the Securities and Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a), and 78t-1. Opinion, p. 1. Plaintiffs moved for class certification and for appointment of Middlesex and STA-ILA as class representatives. Id.
In partially granting plaintiffs’ motion for appointment for appointment as class representatives, the district court observed that one of the two lead plaintiffs, namely, STA-ILA, suffered from a more fundamental inadequacy, i.e. an inadequate familiarity with, and concern for, the litigation.
According to the district court, a class representative must “not simply lend() his name to a suit controlled entirely by the class attorney,” as the class is “entitled to an adequate representative, one who will check the otherwise unfettered discretion of counsel in prosecuting the suit.” Id., p. 6, citing Beck v. Status Game Corp., 1995 WL 422067, *4, 6 (S.D.N.Y. 1995). “To be sure, the requirement is modest: class representative status may be denied only ‘where the class representatives have so little knowledge of and involvement in the class action that they would be unable or unwilling to protect the interests of the class against the possibly competing interests of the attorneys.’ “Id., citing Baffa v. Donaldson, Lufkin & Jenrette Sec. Corp., 222 F.3d 52, 61 (2d Cir. 2000).
Here, as part of class certification discovery, defendants deposed STA-ILA witness Horace Alston, Co-Chairman of the fund, who testified that he was the person at STA-ILA most knowledgeable about the lawsuit. Id., p. 7, citing Zeiss Decl., Exhibit 5 at 10. However, Mr. Alston then testified that he did not know the name of the stock at issue in this case, did not know the name of either individual defendant, did not know whether STA-ILA ever owned Monster stock, did not know if an amended complaint had been filed, did not know whether he had ever seen any complaint in the action, did not know that defendant McKelvey had moved to dismiss the complaint, and did not know that STA-ILA had moved for pre-discovery summary judgment. Id., p. 7, citing Declaration of Arunabha Bhoumik in Opposition to Lead Plaintiffs’ Motion for Class Certification dated April 25, 2008 (“Bhoumik Decl.”), Exhibit A at 36, 48, 50, 52-54, 57, 79, 132, 140.
He also testified that STA-ILA had hired the Angelos Law Firm to represent it in this litigation, that he would “guess” that Angelos then hired Labaton Sucharow LLP as Lead Counsel, that STA-ILA had granted counsel at Angelos’ permission to file “any complaint for any reason they deemed necessary,” and that STA-ILA did not review the complaint in this case before it was filed. Id., citing id. at 43-44, 50-53.
According to the district court, the foregoing events established beyond a doubt that STA-ILA had no interest in, genuine knowledge of, and/or meaningful involvement in this case and was simply the willing pawn of counsel. STA-ILA could not remotely be relied upon to protect the interests of the class against the possibly competing interests of the attorneys. Indeed, the entire set of events discussed above left the district court with the distinct impression that plaintiffs’ counsel might not have fulfilled their professional responsibilities in proposing STA-ILA as a class representative. In any event, the district court concluded that STA-ILA could not qualify as a class representative.
No such inadequacy was apparent, however, in the case of the other lead plaintiff, Middlesex, which was therefore approved as class representative.
With regard to plaintiffs’ motion for class certification, the district court ruled in favor of plaintiffs. Monster had tried to defeat class certification by arguing that proof of the element of reliance in the case was highly individualized.
The plaintiffs countered that individual reliance was not a problem because they were relying on the “fraud-on-the-market” theory of Basic v. Levison, 485 U.S. 224 (1988). Under that theory, the element of investor reliance on material misrepresentations can be presumed for purposes of a Rule 10b-5 action.
Monster further argued that the Basic presumption cannot be applied in options backdating cases because if a class member knew of or suspected options backdating, he or she could not have relied on the misrepresentations. Defendant also asserted that there was widespread knowledge of options backdating at 140 other public companies at the time Monster’s problems were revealed in 2006, and there were institutional and other sophisticated investors in the class “who had the financial acumen and wherewithal to analyze the publicly available information regarding Monster and discover that the company was backdating stock option grants.” Opinion, pp. 11-12, citing Monster Mem. at 14.
But the district court rejected Monster’s arguments. Despite all of this speculation, Monster provided no direct evidence that any putative class member actually knew about option backdating at Monster before the scandal became public on June 12, 2006. This failure of Monster to produce evidence of a single class member who had actually figured out what Monster claims so many class members would have figured out is telling. Nor was this case remotely analogous to those where reliance arguments have defeated motions for class certification or precluded plaintiffs from relying on the Basic presumption. Id., citing In Re IPO, 471 F.3d at 42; Teamsters Local 445 Freight Div. Pension Fund v. Bombardier, Inc., 2006 WL 2161887, *12 (S.D.N.Y. Aug. 1, 2006).
“Here, in contrast to these cases, none of the public information regarding options backdating was so blatant and so directly addressed to Monster as to be facially sufficient to preclude plaintiffs from relying on the Basic presumption for purposes of this motion for class certification.” Id.
On the basis of the foregoing, the district court granted plaintiffs’ motion for class certification. Further, plaintiff Middlesex was approved as class representative, and plaintiff STA-ILA was disapproved as a class representative.
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