United States District Court, E.D. Virginia, Alexandria Division
Ellis, III United Slates District Judge.
August 10, 2016, defendant Orbital ATK, Inc.
("Orbital") announced that it had previously failed
to report a loss on a major contract. Following this
announcement, Orbital's publicly traded share price fell,
and shortly thereafter an Orbital stockholder filed a
securities fraud class action lawsuit against Orbital
pursuant to the Private Securities Litigation Reform Act
typical in these types of cases, an early order of business
is the requirement to appoint a lead plaintiff and counsel to
pursue the case on behalf of the class. Although there are
three proposed lead plaintiffs here, only two institutional
investors remain as candidates for the appointment of lead
plaintiff. Both are fully qualified to serve in that role.
Under the PSLRA, however, the proposed lead plaintiff who
suffered the largest loss due to Orbital's alleged fraud
is presumed to be the best representative for the class.
There is no dispute as to which institutional investor
suffered the largest loss, but there is a catch: the
institutional investor that suffered the largest loss has
also served as lead plaintiff in at least 16 securities class
action cases over the last three years. In this respect, the
PSLRA cautions that "a person may be a lead plaintiff,
or an officer, director, or fiduciary of a lead plaintiff, in
no more than 5 securities class actions brought as plaintiff
class actions ... during any 3-year period, " except as
otherwise permitted and "consistent with the purposes of
this section." 15 U.S.C. § 78u-4(a)(3)(B)(vi)
("Five-in-Three Provision" or
"Provision"). Accordingly, the questions presented
in this case are: (1) whether institutional investors are
exempt from the PSLRA's Five-in-Three Provision and (2)
whether the institutional investor in this case that exceeds
the limit of the Five-in-Three Provision should nonetheless
be appointed as lead plaintiff.
facts relating to these threshold motions may be succinctly
named plaintiff in this case is Steven Knurr, who purchased
Orbital securities before August 10, 2016 and suffered a loss
when Orbital's share price dropped. The proposed lead
plaintiffs are two institutional investors: (1) the
Construction Laborers Pension Trust of Greater St. Louis
("St. Louis Laborers") and (2) the Arkansas Teacher
Retirement System. St. Louis Laborers and Arkansas Teacher
Retirement System claim fraud-related losses of $116, 762.10
and $396, 501.10, respectively. Two individual investors,
Christopher B. Cooper and John Kim, also filed a joint motion
for appointment as lead plaintiffs, but withdrew their motion
after the record reflected that their alleged fraud-related
losses were less than the fraud-related losses claimed by St.
Louis Laborers and Arkansas Teacher Retirement System.
are: (1) Orbital ATK, Inc., a manufacturer of aerospace and
defense products for the U.S. government, allied nations, and
other customers; (2) David W. Thompson, Orbital's Chief
Executive Officer, President, and Director, and (3) Garrett
E. Pierce, Orbital's Chief Financial Officer.
Orbital's shares are publicly traded on the New York
complaint alleges that defendants made materially false and
misleading statements concerning Orbital's internal
accounting procedures. Specifically, the complaint alleges
that Orbital entered into a $2.3 billion contract with the
U.S. Army in September 2012 to manufacture ammunition. For
almost a year - between June 1, 2015, and May 9, 2016 -
Orbital filed numerous financial reports with the U.S.
Securities and Exchange Commission purporting to state the
company's revenue and net income. According to the
complaint, the reports failed to disclose a loss on the Army
contract when the loss became apparent in 2015. As a result,
the complaint alleges that the statements defendants made in
their financial reports from June 1, 2015 to May 9, 2016 were
materially false and misleading. When Orbital announced on
August 10, 2016 that it had made misstatements in its
financial reports, Orbital's share price dropped $17.98
(20.25%) that day.
August 12, 2016, two days after Orbital's announcement,
named plaintiff Steven Knurr, consistent with the PSLRA,
filed this class action under Rules 23(a) and (b)(3), Fed. R.
Civ. P., individually and on behalf of all others similarly
situated. The proposed class consists of all those who
purchased or acquired Orbital securities between June 1, 2015
and August 9, 2016 (the class period) and incurred losses
when Orbital announced that it had included misstatements in
its financial reports. Plaintiff alleges that defendants
violated § 10(b), Rule 10b-5, and § 20(a) of the
Securities Exchange Act of 1934. As required by the PSLRA,
plaintiff published a notice on a national wire service
announcing the complaint and notifying members of the
proposed class of their right to move for appointment as lead
plaintiff. See 15 U.S.C. § 78u-4(a)(3)(A)(i).
Accordingly, St. Louis Laborers and Arkansas Teacher
Retirement System filed motions for appointment as lead
properly begins with an overview of the PSLRA and the process
for selecting a lead plaintiff. Congress enacted the PSLRA to
"combat abuse of the class action machinery in
securities fraud cases by ensuring that these class actions
are [not] controlled ... by law firms or professional
plaintiffs with only nominal interests at stake." In
re MicroStrategy Inc. Sec. Litig., 110 F.Supp.2d 427,
434 (E.D. Va. 2000). Instead, Congress sought to ensure that
"reasonably sophisticated plaintiffs with large or at
least, relatively large financial stakes in the case"
would act as lead plaintiffs. Id.
text of the PSLRA reflects that purpose. To begin with, all
proposed plaintiffs must file a sworn certification
"setting forth certain facts designed to assure a court
that the named plaintiff (i) has suffered more than a nominal
loss, (ii) is not a professional litigant, and (iii) is
otherwise interested and able to serve as a class
representative." Id. at 432; see also
15 U.S.C. § 78u-4(a)(2)(A). Importantly, and as relevant
here, all proposed plaintiffs in their certifications must
"identif[y] any other action under this chapter, filed
during the 3-year period preceding the date on which
certification is signed by the plaintiff, in which the
plaintiff has sought to serve as a representative party on
behalf of a class." 15 U.S.C. § 78u-4(a)(2)(A)(v).
next step under the PSLRA requires the first plaintiff who
filed the action to publish a notice in a national business
publication within 20 days of filing the complaint.
Id. § 78u-4(a)(3)(A)(i). That notice must
inform members of the purported plaintiff class about the
pendency of the action and advise the members that, within 60
days of filing the notice, any member can move the court for
appointment as lead plaintiff. Id. §
78u-4(a)(3)(A)(i)(II). Plaintiff Steven Knurr complied with
this requirement by publishing an appropriate notice. A lead
plaintiff must then be appointed within 90 days of the
publication of the notice. Id. §
PSLRA provides guidance on the appointment of a lead
plaintiff. Specifically, the PSLRA states that the court
"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." Id. § 78u-4(a)(B)(i). The
statute provides for a "sequential procedure for
litigants and the district court to follow in determining who
among the members of the alleged class is the 'most
adequate plaintiff to serve as the lead plaintiff."
In re Microstrategy, 110 F.Supp.2d at 432. In
particular, 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": (i) filed the action or moved the court for
appointment as lead plaintiff, (ii) has "the largest
financial interest in the relief sought by the class, "
and (iii) "otherwise satisfies the requirements of [Rule
23, Fed. R. Civ. P.]." 15 U.S.C. §
78u-4(a)(3)(B)(iii)(I). The inquiry under Rule 23, Fed. R.
Civ. P., is not as "searching as the one triggered by a
motion for class certification, because the inquiry focuses
solely on whether the person will be an appropriate class
representative, and not whether the class may ultimately be
certified." In re MicroStrategy, 110 F.Supp.2d
at 435. Thus, the inquiry under the third ...