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Knurr v. Orbital ATK, Inc.

United States District Court, E.D. Virginia, Alexandria Division

November 10, 2016

STEVEN KNURR, et al., Plaintiffs,
v.
ORBITAL ATK, INC. et al., Defendants.

          MEMORANDUM OPINION

          T. S. Ellis, III United Slates District Judge.

         On 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 ("PSLRA").

         As is 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.

         I.

         The facts relating to these threshold motions may be succinctly summarized.

         The 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.

         Defendants 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 Stock Exchange.

         The 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.

         On 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 plaintiff.

         II.

         Analysis 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.

         The 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).

         The 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. § 78u-4(a)(3)(B)(i).

         The 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 ...


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