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In re Herley Industries Inc. Securities Litigation

January 15, 2010

IN RE HERLEY INDUSTRIES INC. SECURITIES LITIGATION


The opinion of the court was delivered by: Juan R. Sánchez, J.

MEMORANDUM

This securities class action involves allegations the plaintiff class purchased stock from Defendant Herley Industries, Inc. (Herley) at inflated prices due to Herley's fraudulent conduct. Galleon Management LP (Galleon)was appointed lead plaintiff more than three years ago, but it has since become clear the now-defunct Galleon can no longer continue in this role.Galleon thus requests permission to withdraw as lead plaintiff.

The remaining class representative, Norfolk County Retirement System (Norfolk), seeks appointment as lead plaintiff. Former lead counsel Kirby McInerney LLP (Kirby) has requested to join Norfolk's counsel, Labaton Sucharow LLP (Labaton), as co-lead counsel. Kirby and Labaton assert this alteration would "serve only the best interest of the class and promote the efficiency of the litigation." Letter of Jonathan Gardner & Ira Press, Dec. 11, 2009, at 2.The Court agrees, and finds no further process is necessary to find a suitable replacement for Galleon. Therefore, Norfolk will be appointed as the new lead plaintiff and Kirby and Labaton shall jointly serve as co-lead counsel.

Facts

This Court appointed Galleon lead plaintiff on November 14, 2006, finding Galleon was the presumptive lead plaintiff under the Private Securities Litigation Reform Act, 15 U.S.C. §§ 78j(b), 78t (PLSRA). Pursuant to the PSLRA's statutory requirements, this Court found Galleon timely moved for lead plaintiff status, had the largest financial interest in this matter, and satisfied the requirements of Federal Rule of Civil Procedure 23. Two other parties filed timely motions to serve as lead plaintiff--Norfolk and Operating Engineers Construction Industry and Miscellaneous Pension Fund (OECI)--but Galleon's alleged loss of more than $2.7 million made it the presumptive lead plaintiff under the PSLRA. Other than Galleon, the class member with the largest financial loss was Norfolk, which claimed losses of approximately $104,000 during the class period. OECI alleged a loss of $68,291.34. Recognizing it was unlikely to be selected as lead plaintiff, OECI advised this Court its financial loss was lower than Galleon and Norfolk, but noted it would be "ready, willing and able to serve as Lead Plaintiff should the Court reject the lead plaintiff applications of the other movants." Mem. in Support of the Mot. of OECI for Consolidation 2 (Aug. 31, 2006).

On September 30, 2009, this Court certified a class of all persons or entities who sustained a loss as a result of purchasing or otherwise acquiring Herley common stock from October 1, 2001, to June 14, 2006, inclusive (the Class Period). At the same time, Galleon and Norfolk were named class representatives. OECI did not seek to be named a class representative.

Two weeks after the class was certified, Galleon's managing partner, Raj Rajaratnam, was indicted on securities fraud charges stemming from alleged insider trading activity at Galleon. The indictment is part of the "largest hedge fund insider trading case ever charged, criminally." Statement of U.S. Attorney Preet Barara, U.S. Department of Justice, at 2 (Oct. 16, 2009), available at http://www.justice.gov/usao/nys/hedgefund/hedgefundinsidertradingremarks101609.pdf. Not surprisingly, Galleon collapsed soon after news of the prosecution became public. By October 21, 2009, Galleon had publicly acknowledged it planned to cease operations. Recognizing its ability to adequately represent the class was severely damaged, Galleon agreed to withdraw as lead plaintiff*fn1 and suggested it be replaced by the other class representative, Norfolk. Galleon's chosen lead counsel, Kirby, has requested it be allowed to serve as co-lead counsel, joined by Norfolk's proposed lead counsel, Labaton. Labaton has agreed to this proposal.

Discussion

As a preliminary matter, the Court must first address whether defendants may challenge the substitution of a lead plaintiff in a securities class action. At the initial appointment stage, defendants are prohibited from challenging the appointment of a lead plaintiff because the PSLRA allows input only from "member[s] of the purported plaintiff class." 15 U.S.C. § 78u-4(a)(3)(B)(iii)(II); see also In re Cendant Corp. Litig., 264 F.3d 201, 268 (3d Cir. 2001) ("[O]nly class members may seek to rebut the presumption [that a party should serve as lead plaintiff], and the court should not permit or consider any arguments by defendants or non-class members."). Precluding arguments from a party whose interests are diametrically opposed to those of the class is logical at the beginning of litigation, when there is little danger of prejudice to the defendant based on the selection of a particular lead plaintiff. See In re Merck & Co. Sec. Litig., 432 F.3d 261, 267 (3d Cir. 2005) (holding a ban on defendants' interference in the appointment of a lead plaintiff "makes sense because defendants will rarely have the best interests of the class at heart").

This does not, however, end our inquiry when it is not the appointment of a lead plaintiff being challenged, but rather the replacement of one. While there is no direct authority in this circuit, several other courts have asserted--or at least presumed--defendants possess a right to challenge the substitution of a lead plaintiff. See, e.g., In re Impax Labs., Inc. Sec. Litig., No. 04-4802, 2008 WL 1766943 (N.D. Cal. Apr. 17, 2008) (allowing, without discussion, defendants to challenge substitute lead plaintiffs); In re Terayon Commc'ns Sys., Inc. Sec. Litig., No. 00-01967, 2004 WL 413277, at *7 (N.D. Cal. Feb. 23, 2004) (holding courts have an "obligation" to consider defendants' arguments regarding the removal of lead plaintiffs). Other courts, however, have expressed doubt as to whether defendants may lodge a challenge against replacement lead plaintiffs. See, e.g., In re Initial Pub. Offering Sec. Litig., 214 F.R.D. 117, 121-22 (S.D.N.Y. 2002) ("[D]efendants have never lodged any objections to the 'adequacy' of the proposed substitute lead plaintiffs, nor is it even clear whether defendants would be entitled to do so."). Given the potential for prejudice to defendants when lead plaintiffs are substituted after years of litigation, this Court concludes defendants may challenge the replacement of a lead plaintiff. Therefore, because this case has been ongoing for three years and is nearly ready for trial, we will give Defendants an opportunity to be heard on the substitution of Norfolk as lead plaintiff.*fn2

In reviewing the merits of plaintiffs' proposal to remove Galleon and appoint Norfolk as lead plaintiff, it is necessary to first decide whether the process to appoint a new lead plaintiff must be recommenced and, if such a procedure is not required, whether Norfolk satisfies the lead plaintiff requirements set forth by the PSLRA.

While the PSLRA creates standards for appointing a lead plaintiff, the statute is silent regarding what procedures are necessary to replace a lead plaintiff when circumstances have rendered a party unable to serve in that role. In several cases, courts faced with the withdrawal of a lead plaintiff provided notice to potential class members and allowed 60 days for new putative class members to file motions to serve as a substitute lead plaintiff.*fn3 See, e.g.,Order on Pending Motions, In re HealthSouth Sec. Litig., CV-03-BE-1500-S (N.D. Ala. Dec. 1, 2004) (holding a lead plaintiff's withdrawal "necessitates the re-opening of the process for the appointment of lead plaintiff"); In re Neopharm, Inc. Sec. Litig., No. 02-2976, 2004 WL 742084, at *2-3 (N.D. Ill. Apr. 7, 2004) (finding the procedure for appointing a new plaintiff must be renewed when the suggested replacement did not originally file a timely motion to serve as lead plaintiff as required by the PSLRA). However, other courts have held that "where a new lead plaintiff is willing to step forward, there is no need to start the process anew when all putative class members were given notice of the opportunity to move for appointment as lead plaintiff by means of the statutorily required published notice." In re Initial Pub. Offering Sec. Litig., 214 F.R.D. at 120 n.5.; see also In re Impax Labs., Inc. Sec. Litig., No. 04-4802, 2008 WL 1766943 (N.D. Cal. Apr. 17, 2008) (granting leave to substitute a new lead plaintiff when the former lead plaintiff was found to lack standing). Moreover, in circumstances somewhat analogous to the dual class representatives present here, if more than one party was appointed lead plaintiff courts have allowed the remaining lead plaintiff to continue in that capacity even if the other party withdraws. See, e.g., In re Bank One Sec. Litig., No. 00-0767, 2002 WL 989454, at *3 (N.D. Ill. May 9, 2002) (allowing one lead plaintiff to maintain lead plaintiff status after the other lead plaintiff withdrew); In re Ins. Mgmt. Solutions Group, Inc., Sec. Litig., 206 F.R.D. 514, 515 (M.D. Fla. 2002) (same).

Regardless of whether there is a full re-opening of the appointment process, the statutory guidelines governing the initial appointment of a lead plaintiff must be satisfied by any substitute lead plaintiff. See In re Initial Pub. Offering Sec. Litig., 214 F.R.D. at 120 (applying the PSLRA guidelines to govern the replacement of a lead plaintiff).The PSLRA requires a presumptive lead plaintiff: (1) timely move for appointment; (2) possess the "largest financial interest in the relief sought by the class"; and (3) satisfy the class representative requirements of Federal Rule of Civil Procedure 23. 15 U.S.C. § 78u-4(a)(3)(B)(iii). A party meeting these criteria will be appointed lead plaintiff unless another member of the class can show the party "will not fairly and adequately protect the interests of the class" or the party is inadequate because it is "subject to unique defenses." 15 U.S.C. § 78u-4(a)(3)(B)(iii)(II); see also In re Cendant Corp. Litig., 264 F.3d 201, 268 (3d Cir. 2001) (asserting courts must consider only these statutory criteria and not "whether another movant might do a better job of protecting the interests of the class than the presumptive lead plaintiff").

Given Norfolk's longstanding involvement in this case and its status as the sole remaining class representative, this Court finds it unnecessary to re-open the process for appointment of a new lead plaintiff. Norfolk claims the second highest financial loss of any plaintiff, making it next in line to serve as lead plaintiff under the PSLRA's criteria. See In re Initial Pub. Offering Sec. Litig., 214 F.R.D. at120 ("It only stands to reason that the appropriate [substitute] lead plaintiff would be the next 'most adequate' plaintiff in accordance with the [PLSRA] criteria."). Norfolk was a timely applicant for lead plaintiff status, and it has remained closely involved in the litigation throughout the class certification stage. It was the only party besides Galleon to seek--and gain--appointment as a class representative. During the class certification process, this Court determined Norfolk met the Rule 23 requirements when it named Norfolk a class representative. In ...


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