Opinion
12 Civ. 1203 (PAE)
05-31-2012
BO YOUNG CHA, Individually and on Behalf of All Others Similarly Situated, Plaintiff, v. KINROSS GOLD CORPORATION, TYE W. BURT, PAUL H. BARRY, GLEN MASTERMAN, and KENNETH G. THOMAS, Defendants.
OPINION & ORDER
:
This is a putative class action brought under the federal securities laws on behalf of purchasers of Kinross Gold Corp. ("Kinross") common stock between February 16, 2011 and January 17, 2012. Presently pending before the Court are competing motions from four separate investors, each seeking appointment as lead plaintiff (and appointment of their respective attorneys as lead counsel). The four plaintiffs are: (1) IBEW Local Union No. 58 Pension Trust Fund, Annuity Fund, and Sound & Communication Division Retirement Plan ("Local 58 Funds"); (2) City of Austin Police Retirement System ("Austin"); (3) City of Bridgeport Pension Plans A Investment Trust ("Bridgeport"); and (4) Vincent and Lenita Cipponeri ("the Cipponeris"). Both the Cipponeris and Bridgeport have conceded that they lack the largest financial interest in this litigation. The Court's choice is, therefore, effectively between the Local 58 Funds and Austin. Because the Court finds that Austin has suffered the greatest loss, it appoints Austin lead plaintiff. The Court also appoints Bernstein Liebhard LLP, which currently represents Austin, as lead plaintiff's counsel. I. Background
Bridgeport has stated that it supports Austin's motion. See Dkt. 24.
The following facts are drawn from Bo Young Cha's complaint ("Compl.") (Dkt. 1) and the parties' submissions on the lead-plaintiff motions, and are taken as true for the purposes of resolving these motions. The submissions cited herein are: (1) Austin's Memorandum of Law in Further Support of the City of Austin Police Retirement System's Motion for Appointment as Lead Plaintiff and Approval of its Selection of Lead Counsel, and in Opposition to Competing Motions ("Austin Opp'n") (Dkt. 23); (2) Austin's Reply in Further Support of its Motion for Appointment as Lead Plaintiff ("Austin Reply") (Dkt. 26); and (3) the Local 58 Funds' Reply in Further Support of their Motion for Appointment as Lead Plaintiff ("Local 58 Reply") (Dkt. 27).
Defendant Kinross is engaged in mining, exploring, and acquiring gold-bearing properties, among other activities. The company's gold production and exploration activities occur primarily in Canada, the United States, the Russian Federation, Brazil, Ecuador, Chile, Ghana, and Mauritania. Compl. ¶ 24. On August 2, 2010, Kinross and Red Back Mining Inc. ("Red Back") announced a merger, giving Kinross all outstanding common shares of Red Back that Kinross did not already own. Id. ¶ 25. The acquisition expanded Kinross's operations in Africa; analysts following the company projected that one of Red Back's properties in Mauritania, known as the Tasiast property, would serve as the focal point of Kinross's growth going forward. Id. ¶ 28.
On February 16, 2011—the date on which the class period begins—Kinross issued a press release announcing positive financial results for its 2010 fourth quarter. Id. ¶ 29. The company stated that "Tasiast [would] be a cornerstone asset for Kinross" and that, in 2010, "Kinross's proven and probable gold reserves increased by 23 percent." Id. During the next 11 months, the company—including in conversations with analysts and press releases—continued to provide a positive outlook. Id. ¶¶ 29-32, 34, 36-41, 43-45, and 48-50.
On January 16, 2012, Kinross issued a press release reporting its preliminary 2011 results and its 2012 forecast. Id. ¶ 52. The press release disclosed that three major projects, including the Tasiast venture, would require significant capital expenditures. Id. It also disclosed that, "[i]n view of the company's evolving understanding of Tasiast project parameters, and market conditions, including industry-wide increases in capital and operating costs, the company expects to record a material non-cash accounting charge, primarily relating to the goodwill recorded for the Tasiast mine," of $4.6 billion. Id. Following this announcement, Kinross's stock price dropped approximately 19 percent, from $12.65 per share on January 13, 2012, to $10.27 on January 17, 2012. Id. ¶ 53. The Complaint, alleging securities fraud based on Kinross's alleged failure to timely disclose this negative news, was filed on February 16, 2012.
II. Selecting the Lead Plaintiff: The PSLRA Requirements
Motions for appointment of lead plaintiff and approval of lead counsel in putative class actions brought under the Securities Exchange Act of 1934 are governed by the Private Securities Litigation Reform Act ("PSLRA"). Vladimir v. Bioenvision Inc., No. 07 Civ. 6416, 2007 WL 4526532, at *2 (S.D.N.Y. Dec. 21, 2007) (citing 15 U.S.C. § 78u-4(a)(1)). The PSLRA directs the court to appoint as lead plaintiff the party or parties "most capable of adequately representing the interests of class members." 15 U.S.C. § 78u-4(a)(3)(B)(i). Under the PSLRA, there is a rebuttable presumption that the most adequate plaintiff is the person or group of persons that: (1) has either "filed a complaint or made a motion in response to a notice"; (2) in the determination of the Court, has the "largest financial interest in the relief sought by the class"; and (3) satisfies all the requirements of Federal Rule of Civil Procedure 23, which governs class actions.
Id. § 78u-4(a)(3)(B)(iii)(I)(aa).
Id. § 78u-4(a)(3)(B)(iii)(I)(bb).
Id. § 78u-4(a)(3)(B)(iii)(I)(cc).
A. Notice
Both Austin and the Local 58 Funds have met the first requirement, in that each has either filed a complaint or submitted a timely motion for lead plaintiff status. City of Monroe Emps. Ret. Sys. v. Hartford Fin. Servs. Group Inc., 269 F.R.D. 291, 293 (S.D.N.Y. 2010).
B. Financial Interest
In determining who has the largest financial stake in the litigation, courts in this circuit have traditionally applied a four-factor test, first set forth in Lax v. First Merchs. Acceptance Corp., No. 97 C 2715, 1997 WL 461036, at *5 (N.D. Ill. Aug. 11, 1997). These "Lax" factors include:
(1) the total number of shares purchased during the class period;City of Monroe, 269 F.R.D. at 293. Of these factors, courts have consistently held that the fourth factor, the magnitude of the loss suffered, is the most significant. See, e.g., Kaplan v. Gelfond, 240 F.R.D. 88, 93 (S.D.N.Y. 2007) ("Although courts have differed on how much weight to assign to each of the Lax factors, we, as have other courts, shall place the most emphasis on the last of the four factors: the approximate loss suffered by the movant."), reconsidered on other grounds, In re IMAX Sec. Litig., No. 06 Civ. 6128, 2009 WL 1905033 (S.D.N.Y. June 29, 2009); Reimer v. Ambac Fin. Grp. Inc., No. 08 Civ. 411, 2008 WL 2073931, at *3 (S.D.N.Y. May 9, 2008); Bhojwani v. Pistiolis, No. 06 Civ. 13761, 2007 WL 2197836, *6-7 (S.D.N.Y. July 31, 2007); Strougo v. Brantley Capital Corp., 243 F.R.D. 100, 104-05 (S.D.N.Y. 2007); In re Comverse Tech., Inc. Sec. Litig., No. 06 Civ. 1825, 2007 WL 680779, at *3 (E.D.N.Y. Mar. 2, 2007), aff'd on reconsideration, 2008 WL 820015 (E.D.N.Y. Mar. 25, 2008); see also Foley v. Transocean Ltd., 272 F.R.D. 126, 128 (S.D.N.Y. 2011) ("in determining the largest financial interest, 'most courts simply determine which potential lead plaintiff has suffered the greatest total losses'") (citing Takara Trust v. Molex Inc., 229 F.R.D. 577, 579 (N.D. Ill. 2005)). The Court accordingly focuses its analysis on that factor.
(2) the net shares purchased during the class period (in other words, the difference between the number of shares purchased and the number of shares sold during the class period);
(3) the net funds expended during the class period (in other words, the difference between the amount spent to purchase shares and the amount received for the sale of shares during the class period); and
(4) the approximate losses suffered.
The Court has reviewed the first three Lax factors as applied in this case and has determined that, viewed singly or collectively, none is as consequential as the fourth factor. The parties concede that the amount of loss is appropriately decisive here. See Local 58 Reply at 3 ("[T]he dispute here 'revolves around the approximate losses suffered by the lead plaintiff movants . . . .'" (quoting Ellenburg, 262 F.R.D. at 265)).
1. Loss Calculation Methodology: LIFO or FIFO
To calculate the approximate losses sustained by a proposed lead plaintiff in a securities class action, courts, including in this district, typically employ one of two methodologies: First-In-First-Out ("FIFO) or Last-In-First-Out ("LIFO"). Under FIFO, stocks acquired first are assumed to have been sold first in the calculation of losses; under LIFO, stocks acquired most recently are assumed to have been the first sold. See Vladimir, 2007 WL 4526532 at *5. These methodologies can yield significantly different results where, as of the start of the class period, the plaintiff held stocks in the issuer which it had purchased earlier. The Court of Appeals for the Second Circuit has not established a "categorical rule for the appropriate measurement of losses where there is a pre-existing inventory of stock followed by purchases and sales during the class period." Ellenburg v. JA Solar Holdings Co. Ltd., 262 F.R.D. 262, 265 (S.D.N.Y. 2009).
As Austin correctly points out, the overwhelming trend both in this district and nationwide has been to use LIFO to calculate such losses. See, e.g., City of Monroe, 269 F.R.D. at 295 ("courts in this district and others have stated a preference for LIFO over FIFO in assessing loss for purposes of the appointment of lead plaintiff."); In re eSpeed Inc. Sec. Litig., 232 F.R.D. 95, 101 (S.D.N.Y. 2005) ("more recently, courts have preferred LIFO and have 'generally rejected FIFO as an appropriate means of calculating losses in securities fraud cases.'") (citing In re Cable & Wireless PLC Sec. Litig., 217 F.R.D. 372, 378-79 (E.D. Va. 2003)); see also Beckman v. Ener1 Inc., No. 11 Civ. 5794, 2012 WL 512651, at *3 (S.D.N.Y. Feb. 15, 2012); Pipefitters Local No. 636 Defined Ben. Plan v. Bank of Am. Corp., 275 F.R.D. 187, 190 (S.D.N.Y. 2011); Bhojwani, 2007 WL 2197836 at *7. And, of the courts that have used FIFO, some have often done so reluctantly, solely because the parties had not supplied sufficient data on which to conduct a LIFO analysis. See, e.g., Kaplan, 240 F.R.D. at 94; In re Cardinal Health Inc. Sec. Litig., 226 F.R.D. 298, 304 (S.D. Ohio 2005) (criticizing FIFO but using it grudgingly where data did not permit a LIFO calculation).
The courts that have adopted LIFO over FIFO have given several reasons for doing so. First, FIFO has the potential to exaggerate losses, by failing to take into account gains that an investor might have made on the stock that were attributable to its artificial inflation as a result of the alleged fraud; LIFO, on the other hand, takes into account such gains. See In re eSpeed, 232 F.R.D. at 101; Johnson v. Dana Corp., 236 F.R.D. 349, 352 (N.D. Ohio 2006) (noting that under FIFO, "net gains or losses from [sales of preexisting holdings] are excluded from damage calculations."), rev'd on other grounds by Frank v. Dana Corp., 237 F.R.D. 171 (N.D. Ohio 2006).
Judge Shadur's hypothetical is especially helpful in illustrating this point:
Consider an Investor A with accumulated holdings of 10,000 shares of XYZ Corporation that were acquired when everything was on the up and up in terms of corporate disclosures, and that represent the investor's long-term commitment to the company's prospects. Assume further that unknown to Investor A but during what later turns out to be a plaintiffs' class period—a time when the nondisclosure of adverse information caused the stock price to be too high in terms of real value—Investor A both buys and sells an aggregate of 5,000 shares of XYZ stock in various transactions before the stock price later falls out of bed, and that such class-period transactions leave Investor A neither out of pocket nor in pocket when the expenditures for and the proceeds of those transactions are aggregated.In re Comdisco, No. 01 Civ. 2110, 2004 WL 905938, at * 2-3 (N.D. Ill. Apr. 26, 2004) (emphasis in original). In Judge Shadur's hypothetical, using LIFO, all three plaintiffs would be treated—properly—as having lost absolutely nothing as a result of the fraud. See Johnson, 236 F.R.D. at 352. However, a FIFO analysis would yield a different result: Investors B and C would be treated as having not suffered any loss, but Investor A would, unjustifiably, be assigned a loss based on the drop in value of the final 5,000 shares he purchased. Id.
Is there any real question that Investor A, who has thus retained the same long-term stake in XYZ that preceded the class period, has sustained neither gain nor loss from the transactions during the class period? To sharpen the issue even further, is there any question that Investor A is in an economic position identical to that of Investor B, someone who also held 10,000 shares of XYZ before the beginning of what later proved to be the class period, and who didn't trade at all during the class period? Or is there any question that both Investor A and Investor B are in the identical economic position as Investor C, a person who held no XYZ shares before the class period and whose purchases and sales during the class period, each aggregating 5,000 shares, also resulted in a wash in terms of the dollars involved?
Second, LIFO excludes "in-and-out" transactions, purchases and sales that occur during the class period, i.e., after the stock price was fraudulently inflated and before it dropped due to a corrective disclosure. Vladimir, 2007 WL 4526532 at *5. Any gain or loss due to such transactions is reasonably read to reflect price fluctuations attributable to factors other than the fraud, and thus should be excluded from the PSLRA loss calculus.
The Court agrees that, for these reasons, LIFO is a superior methodology, particularly where, as here, one or more of the proposed lead plaintiffs, as of the start of the class period, already held stock in the security at issue. The Local 58 Funds' counterarguments in favor of FIFO are not persuasive. First, the Local 58 Funds note that FIFO is used for certain federal taxation purposes. But that context is entirely different: As various courts have observed, the IRS utilizes FIFO not because it is more precise than LIFO, but because it maximizes taxable income and forces taxpayers to recognize gains that they would prefer to defer or avoid. See Comdisco, 2004 WL 905938 at *2; Johnson, 236 F.R.D. at 353. Second, the Local 58 Funds note that FIFO is commonly used in settlements of securities class actions. But judicial review of this nicety of settlement methodology tends to be less searching; the proper inquiry for the Court at this stage is which methodology yields the more reliable results (i.e., which methodology would be endorsed if the issue were litigated at trial). See City of Monroe, 269 F.R.D. at 295. The answer is, clearly, LIFO.
In this case, both parties agree that under a LIFO analysis, the Local 58 Funds lost $92,617, and Austin lost $251,897. Local 58 Reply at 6; Austin Reply at 1-2. Austin thus suffered substantially greater losses than the Local 58 Funds under the prevailing methodology.
Under a FIFO analysis, the Local 58 Funds loss would amount to $335,317, reflecting substantial losses on shares it purchased prior to the start of the class period. Because Austin did not own any Kinross shares as of the start of the class period, its loss remains $251,897 under FIFO. Local 58 Reply at 6; Austin Reply at 4. --------
2. Loss Calculation Methodology: The "Economic Reality" Method
Alternatively, the Local 58 Funds ask the Court to use what they call the "economic reality" method of calculating losses. This method was used several years ago in a case in this district. See Local 58 Reply at 6 (citing Ellenburg, 262 F.R.D. at 267). In Ellenburg, the district court was presented with a proposed lead plaintiff which (1) held shares purchased before the class period, and (2) sold shares during the class period. Eschewing LIFO and FIFO, the Court was able to manually match the 5,000 shares the plaintiff had bought on a single day before the start of the class period with the exact same number of shares (5,000) that the plaintiff sold on a single day during the class period. The Court therefore was able to cleanly excise these pre-class-period shares from its tabulation of the plaintiff's total loss. Id. at 265-67.
Drawing upon the Ellenburg Court's analysis, the Local 58 Funds argue that the shares of stock they owned prior to the class period can similarly be paired off with shares sold during the class period. The Local 58 Funds argue that doing so would reduce their FIFO-calculated losses by only about $10,000, resulting in a total FIFO-calculated loss of $325,106—exceeding Austin's losses of $251,987. Local 58 Reply at 8.
This case, however, is a far cry from Ellenburg. There, the process of matching purchases and sales was simple and straightforward. Id. at 265-66. With a single pre-period purchase of 5,000 shares three weeks before the class period and a sale of the identical number of shares a bare eight days into the class period, id., the process of manually excising the proposed plaintiff's 5,000 shares was easy and uncontroversial. Not so here: The Local 58 Funds made pre-class purchases of 281,467 shares, see Austin Opp'n at 10, at different prices, spread over eight distinct dates; it sold (on at least three different dates) a total of 42,030 shares of stock during the class period, during which it was also purchasing substantial amounts of additional shares. The Local 58 Funds have not supplied any objective methodology by which all the shares sold can be reliably matched with particular purchases, let alone particular pre-period purchases. There is not, for example, evidence of sales in lots of identical size to purchases, with no intervening purchases or sales. Under these circumstances, the Court declines to credit the Local 58 Funds' ipse dixit declaration that the Ellenburg methodology can be replicated here with similar reliability, or that it would necessarily yield only a $10,000 offset to the Local 58 Funds' FIFO-measured loss. Put differently, the Ellenburg methodology may be workable for the unusual single-purchase/single-sale case, but it is profoundly ill-suited to a fact-pattern such as this, where the exercise of matching purchases and sales is unavoidably subjective and judgmental. On the facts at hand, pairing pre-period purchases with class-period sales would inevitably be fodder for gamesmanship, not a route to a reliable judgment as to aggregate loss.
For the foregoing reasons, the LIFO methodology is most appropriate here. Under that methodology, it is undisputed that Austin has suffered the largest losses and has the largest financial stake in this action. See Local 58 Reply at 8.
C. Rule 23 Requirements
The PSLRA's final requirement is that the proposed lead plaintiff satisfy Rule 23's requirements for class certification: numerosity, commonality, typicality, and adequacy. At this stage of the litigation, however, "only the last two factors—typicality and adequacy—are pertinent." Constance Sczesny Trust v. KPMG LLP, 223 F.R.D. 319, 324 (S.D.N.Y. 2004). A lead plaintiff's claims are typical where "each class member's claim arises from the same course of events, and each class member makes similar legal arguments to prove the defendant's liability." Sgalambo v. McKenzie, 268 F.R.D. 170, 173-74 (S.D.N.Y. 2010) (citations omitted). A lead plaintiff is adequate where it "does not have interests that are antagonistic to the class that he seeks to represent and has retained counsel that is capable and qualified to vigorously represent the interests of the class that he seeks to represent." Glauser v. EVCI Ctr. Colleges Holding Corp., 236 F.R.D. 184, 189 (S.D.N.Y. 2006) (citing Dietrich v. Bauer, 192 F.R.D. 119, 124 (S.D.N.Y. 2000)). Neither Austin nor the Local 58 Funds contests the other's adequacy or typicality.
Because it has satisfied all of the PSLRA requirements—and in particular because it has the greatest financial interest of the proposed lead plaintiffs—Austin has established a rebuttable presumption that it is the most adequate plaintiff.
D. Rebuttable Presumption
Austin's presumption may be rebutted by proof that it "will not fairly and adequately protect the interests of the class" or instead is subject to "unique defenses" that render it incapable of adequately representing the class. 15 U.S.C. § 78u-(4)(a)(3)(B)(iii)(II). No party has offered any such proof. The Court therefore appoints Austin lead plaintiff.
III. Appointing Lead Counsel
The party chosen as the most adequate plaintiff may retain counsel to represent the class, subject to the Court's approval. Id. § 78u-(4)(a)(3)(B)(v). Austin has selected the law firm of Bernstein Liebhard LLP as its lead counsel. Having reviewed the firm's submissions as to its pertinent background and experience, including substantial experience litigating class actions, the Court concludes that Bernstein Liebhard is qualified to serve in this capacity. Accordingly, the court appoints Bernstein Liebhard as lead counsel.
CONCLUSION
Austin's motion seeking appointment as lead plaintiff is GRANTED. The Local 58 Funds's motion is DENIED. The Clerk of the Court is directed to terminate the motions at docket numbers 9, 12, 16 and 19.
The parties are directed to consult the case management schedule (Dkt. 6) for the deadlines in this case. The deadline for the lead plaintiff to file an amended complaint is July 9, 2012. The deadline for defendants to answer or otherwise move with respect to the amended complaint is 40 days after the filing of the amended complaint.
SO ORDERED.
/s/_________
Paul A. Engelmayer
United States District Judge Dated: May 31, 2012
New York, New York