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Rice v. Genworth Financial Inc.

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

August 25, 2017

ALEXANDER RICE, Individually And on behalf of all others Similarly situated,, Plaintiffs,


          Robert E. Payne Senior United States District Judge

         This consolidated securities fraud action is before the Court on two motions seeking appointment as lead plaintiffs and lead counsel under 15 U.S.C. § 78u-4, the Private Securities Litigation Reform Act ("PLSRA") . All of the Plaintiffs in this consolidated action agree that Plaintiffs Alexander Rice and Brian James ought to be appointed as lead plaintiffs and that their counsel should be appointed as lead counsel.[1] The International Union of Operating Engineers Local 478 Pension Fund ("IUOE" or "Union"), which is not a party in this action, and its counsel, seek designation in those capacities, respectively. Having considered both motions, the supporting and opposing memoranda, [2] and exhibits, the Plaintiffs' motion will be granted and the Union's motion will be denied.


         The underlying facts are taken from the COMPLAINT (ECF No. 1) filed by Alexander Rice. The facts, as alleged, are recited as they have been pled, and, for now, they are taken as true. The procedural history is reflected as it developed.

         Genworth Financial Incorporated ("the Company" or "Genworth") provides consumers with mortgage insurance products that allow people to purchase homes. The Company also offers services ranging from homeownership education and assistance programs to individual and group long-term care insurance products." (Compl. ¶ 36) (ECF No. 1). For several years, the Company's financial circumstances were dire.

         "In or around May 2015, the Company received a written proposal to acquire the Company's stock in an all cash transaction at $12.50 per share, a proposal that was later reduced to between $10-11 per share." Id. at ¶ 50. "Other entities also made proposals, including companies A, C and D." Id.

         On October 21, 2016, a Merger Agreement was executed between Genworth and China Oceanwide. Id. at ¶ 44. On October 23, 2016, Genworth and China Oceanwide issued a press release announcing that the companies had reached an Agreement and Plan of Merger, whereby Genworth would be acquired by China Oceanwide. Id. at ¶ 3. The merger provided that "each issued and outstanding share of Genworth common stock [would] be cancelled and automatically converted into the right to receive $5.43 in cash." Id.

         On December 21, 2016, the Company filed a Schedule 14A Preliminary Proxy Statement ("Proxy Statement") with the Securities and Exchange Commission ("SEC"). Id. at ¶ 4. The Proxy statement provided that Genworth stockholders should exchange their shares pursuant to the terms of the Merger Agreement, based, among other things, on the opinion rendered by Genworth's financial advisors, Goldman, Sachs & Co. and Lazard Freres & Cp. LLC. Ixi. The Proxy statement explained that Genworth began to look to sell the Company because, among other things, it "[s]ens[ed] that cash flow may be impacted, which would negatively impact lucrative equity compensation entitlements . . . ." Id. at ¶ 48. The proposals made by companies A, C and D, described above, were not included in the Proxy Statement.

         On January 23, 2017, Alexander Rice ("Rice") filed a Class Action Complaint (the "Complaint"), in which he raised claims under Sections 14(a) and 20(a) of the Securities Exchange Act of 1934. The Complaint alleges that "[t]he Merger Consideration and the process by which Defendants agreed to consummate the Proposed Transaction are fundamentally unfair to Genworth's public stockholders as the Merger Consideration represents only a 4.2% premium to the Company's closing price of $5.21 on October 21, 2016, the last trading day before the Proposed Transaction was announced." (Compl. ¶ 5). "Despite Genworth's prospects for future profitability and growth and Defendants' ability to command a higher transaction value, Defendants chose to enter into the Merger Agreement with China Oceanwide and agreed to onerous deal provisions and other agreements to ensure and protect a sale only to China Oceanwide." Id. at ¶ 75. The Merger Agreement contains a no shop provision as well as a $105 million termination fee agreement. Id. at 79.

         The Complaint filed by Rice alleges several material misrepresentations and omissions in the Proxy Statement provided to Genworth shareholders.[3] In the Complaint, Rice sought injunctive relief, certification of a class, and the enjoining of the proposed transaction, "unless and until Defendants disclose the material information identified above which has been omitted from the Proxy Statement." In the alternative, the Complaint requested recissory damages. (Compl. ¶ C).

         On January 25, 2017, the Company filed a Schedule 14A Definitive Proxy Statement with the SEC. This Proxy Statement recommended that shareholders vote in favor of the Proposed Transaction and announced that the special shareholder meeting to vote on the Proposed Transaction would occur on March 7, 2017.

         On January 25, 2017, Brian James ("James") filed a Class Action Complaint for Violations of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, in which he raised essentially the same substantive claims as those raised by Rice. Rice and James agreed to work together to coordinate their actions. Also on January 25, 2017, the Rosenfeld Family Trust filed a Class Action Complaint in the United States District Court for the District of Delaware, in which it raised substantively similar claims to those raised by Plaintiffs Rice and James.[4] On February 2, 2017, Rice, supported by James, filed PLAINTIFF'S MOTION FOR A PRELIMINARY INJUNCTION (ECF No. 2), which sought to enjoin the shareholder vote on the Proposed Transaction until certain supplemental disclosures were made to Genworth's stockholders.

         On February 6, 2017, Esther Chopp ("Chopp") filed a Class Action Complaint in the United States District Court for the District of Delaware. Chopp raised essentially the same substantive claims as raised by Rice and James. See Chopp v. Genworth Financial, Inc., , No. 3:17-cv-00157-REP (D. Del.) .

         On February 10, 2017, David Ratliff filed in the United States District Court for the Eastern District of Virginia a complaint in which he raised substantively identical claims to those already raised by Rice, James, and the Rosenfeld Family Trust. The Ratliff case was filed and identified as a case related to the Rice case.

         On February 17, 2017, an Emergency Motion to Consolidate Cases and for Appointment of Interim Lead Counsel was filed, in which Rice and James sought the entry of an order consolidating the actions pending before this Court, and appointing Faruqi & Faruqi, LLP, Monteverde & Associates, PC, and Kahn Swick & Foti, LLC ("KSF") as Interim Class Counsel and MeyerGoergen PC as Interim Lead Liaison Counsel. (ECF No. 22) . The Court determined that "all three actions [Rice, James & Ratliff] shall be consolidated and the caption of the consolidated case shall be Rice v. Genworth Financial Incorporated, , Civil Action No. 3:17cv59." (ECF No. 30). On February 23, 2017, the Court consolidated Rosenfeld Family Trust v. Genworth Financial, Inc., No. 3:17cvl56, and Chopp v. Genworth Financial, Inc.,, No. 3:17cvl57 with the consolidated cases, all of which thereafter proceeded under the style Rice, v Genworth Financial, Inc., , No. 3:17cv59.

         The Plaintiffs subsequently reached an agreement with the Defendants, pursuant to which the Motion for a Preliminary Injunction was withdrawn. Also, the parties in this consolidated action advised "that it is their intent that following [Defendant's] disclosures called for in Court Exhibit 1, these consolidated actions will be settled in their entirety and, to that end, counsel intend to prepare a Memorandum of Understanding reflecting the settlement (including releases); and, to that end, counsel shall prepare a schedule of further proceedings respecting class certification and appointment of counsel all of which shall comply with the timing requirements of the Private Securities Litigation Reform Act." (ECF No. 30).

         On March 6, 2016, the Court entered the STIPULATED PSLRA LEAD PLAINTIFF SCHEDULING ORDER. (ECF No. 35). It provided that: "[p]ursuant to 15 U.S.C. § 78u-4 (a) (3) (A), on or before April 17, 2017, any plaintiff in these actions or any other member of the purported class who wishes to serve as lead plaintiff in this consolidated purported class action shall file a motion to serve as lead plaintiff of the purported class and shall state its selection for lead counsel to represent the purported class, subject to approval by the Court."

         On April 1, 2017, the Union filed its motion seeking to be named lead plaintiff and seeking approval of the Union's counsel as lead counsel. (ECF No. 37). Rice and James, with the consent of the other plaintiffs in the consolidated cases, also filed the PLAINTIFFS' MOTION FOR APPOINTMENT OF LEAD PLAINTIFFS AND COUNSEL. (ECF No. 39).

         The Union also has a shareholder derivative action pending in the Delaware Court of Chancery, Genworth Financial, Inc. Consolidated Derivative Litigation, C.A. No. 11901-VCS (the "Delaware State Case") . In that case, the defendants have moved for dismissal and the motion has been heard. However, the Judge in the Delaware State Case explained that "any ruling on a motion to dismiss in the pending derivative case would be advisory in light of the fact that the pending merger was going to extinguish the rights of Shareholders to pursue a derivative claim and so he requested that the parties consult with one another as to whether, in the parties' views, the Court should issue its motion-to-dismiss decision, and, subsequently, the parties informed the Court that it was [their] view the Court should not issue its motion-to-dismiss decision." Additionally, the Union is pursing inspection requests pursuant to 8 DEL. C. §220. Salberg v. Genworth Financial, Inc., C.A. No. 2017-0018-JRS (Del. Ch.).

         The stockholder vote has taken place and the merger was approved; however, the merger of Genworth and China Oceanwide has been pending for several months. Recently, a further delay in the merger was announced.[5]


         Pursuant to the PSLRA, the Court must appoint the "most adequate plaintiff" to serve as Lead Plaintiff. 15 U.S.C. § 78u-4 (a) (3) (B) (i) . To that end, explains the Union, the Court is required to determine which potential lead plaintiff has the "largest financial interest" in the relief sought by the Class and whether that plaintiff is a typical and adequate class representative under Rule 23 of the Federal Rules of Civil Procedure. The Union argues that, of the shareholders involved in these motions, it has the largest financial interest, and that, therefore, there is a presumption that it should be the lead plaintiff.[6] And, the Union contends that it satisfies the requirements of Rule 23.

         Rice and James concede that, of the shareholders involved in these motions, the Union has the largest financial interest in Genworth. Although Rice and James acknowledge that, under the PSLRA, the Union is deemed the presumptive lead plaintiff, they take the view that the Union cannot adequately represent the class based "on the conflict the [Union] has due to its simultaneous prosecution of derivative claims for Genworth and based on its failure to pursue shareholder direct claims as the Rice Group has." (ECF No. 50). In particular, Rice and James maintain that the Union's derivative claim against Genworth in Delaware presents a conflict of interest and subjects the Union to unique defenses, thereby rendering the Union an inadequate lead plaintiff.

         Rice and James further explain that the conflict will continue even after the merger is completed (if it is completed). "There are other scenarios where the derivative case goes on for years, keeping the IUOE Investor Group in a conflicted position. For example, the approval of the Merger could be delayed for over a year, or new evidence could trigger an exception to the mootness rule and the derivative claims could go on after approval of the Merger . . . ." Id.

         In response, the Union argues that there is no conflict because this action and the derivate action in Delaware are related. "In the Derivative Action, the IUOE Investor Group alleges that certain Genworth Financial, Inc. [] executives and directors breached their fiduciary duties by allowing Genworth to engage in securities fraud . . . [and here] the Rice Group is alleging, inter alia, that defendants failed to properly value the derivative claims asserted by the IUOE Investor Group and disclose all material information regarding those claims." Id. Finally, says the Union, "[g]iven the Rice Group's apparent intent to recover only non-monetary relief for the putative class, it is not in a position to claim that appointment of the IUOE Investor Group, a group that plans to pursue money damages against Defendants, will disadvantage the class economically." Id.

         In response to the Court's inquiry, all parties agree that the case is not moot, notwithstanding the settlement of the preliminary injunction aspect of the case and the amended disclosures made by the Company pursuant to the settlement. Rice and James argue that the existence of a settlement does not divest the Court's jurisdiction over the case, but does have a bearing on the lead plaintiff analysis.

         On July 5, 2017, at the hearing on the lead plaintiff/lead counsel motions, the Company weighed in on that issue by arguing that there was no merit to the securities claims that the Union says it would raise if it were appointed lead counsel. The Court gave the parties an opportunity to brief that argument. The Union responded that the Company had no right to argue a position on the lead plaintiff motions. Rice and James essentially adopted the argument advanced by the Company.


         I. Jurisdiction

         "Although neither party has affirmatively argued that the case is moot, resolution of that question is nonetheless essential because, if the case is moot, the Court lacks jurisdiction to proceed further and any opinion would be advisory and thus improper." North Carolina v. Rice, 404 U.S. 244, 246 (1971). Therefore, "a suit must be definite and concrete, touching the legal relations of parties having adverse legal interests . . . However, moot questions require no answer." RL (internal citations omitted). But, if "the parties have a concrete interest, however small, in the outcome of the litigation, the case is not moot." Chafin v. Chafin, 568 U.S. 165, 133 (2013).

         The inquiry to be made here is much like the one presented in Lambert v. Tellabs, Inc., No. 13-cv-07945, 2015 U.S. Dist. LEXIS 156284, at *6 (N.D. 111. Mar. 5, 2015). In Lambert, the shareholders alleged that the company's "disclosures asking shareholders to approve the merger omitted critical information in violation of § 14(a) of the Securities Exchange Act." Id. The shareholders sought "primarily injunctive relief to prevent the merger, but also sought damages in the alternative if the merger were finalized." Id., at 3. The parties negotiated a Memorandum of Understanding, whereby the company "agreed to send out supplemental disclosures to shareholder and thereby cure the alleged defects in their prior disclosures." Id. The district court found "the supplemental disclosures d[id] not render the Plaintiff's disclosure-related claims moot because they addressed only seven of the eleven omissions Plaintiff alleged in her complaint." Iji. at 6. Additionally, the court found that, because the complaint sought "not only an injunction to prevent the merger, but also damages if the merger did go through, " if the court were to reject the settlement agreement, the shareholders could continue with the litigation on the merits in order to seek damages. The district court explained that, "[w]hile injunctive relief is typically the preferred method for remedying disclosure violations . . . damages are available for such violations where the merger has already been consummated." Id. For those reasons, the case in Lambert was not moot.

         Here, as in Lambert, the parties advised that it was their intent to prepare a Memorandum of Understanding reflecting the settlement, whereby certain supplemental disclosures were to be made. The parties here also agreed that the Company would provide certain discovery that would permit verification that the disclosures, as supplemented, were accurate and complete. If the plaintiffs are not satisfied on that point, they can proceed with the litigation including, inter alia, the pursuit of the claim for rescissory damages. And, of course, it is possible that the Court would not approve the settlement and thereupon the case would continue.

         Considering the facts in this record, the Court concludes that the case is not moot and that the Court retains jurisdiction over the case. Thus, it is appropriate now to consider the motions ...

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