Mersho v. United States District Court for the District of Arizona, No. 20-73819 (9th Cir. 2021)
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The Ninth Circuit granted in part a petition for a writ of mandamus and ordered the district court to vacate its order appointing an individual as lead plaintiff in a consolidated securities fraud action against Nikola and related defendants. In the underlying action, plaintiffs alleged that they suffered losses from buying Nikola securities after a non-party report described apparent false statements made by the founder and contained in company advertising materials. Petitioners Mersho, Chau, and Karczynski moved to be lead plaintiff as a group under the name Nikola Investor Group II (Group II).
In a securities fraud class action, the Private Securities Litigation Reform Act (PSLRA) requires the district court to identify the presumptive lead plaintiff, who is the movant with the largest financial interest and who has made a prima facie showing of adequacy and typicality. Once the presumption is established, competing movants can rebut the presumption by showing that the presumptive lead plaintiff will not fairly or adequately represent the class.
The panel granted the petition to the extent it seeks to vacate the district court's order appointing Plaintiff Baio as lead plaintiff. The panel concluded that four of the five Bauman factors weigh in favor of mandamus relief and thus a writ of mandamus is appropriate. In regards to the third Bauman factor, the panel explained that the district court clearly erred by finding that the presumption had been rebutted. In this case, the district court failed to point to evidence supporting its decision, instead relying on the absence of proof by Group II regarding a prelitigation relationship and its misgivings. Therefore, the district court did not comport with the burden-shifting process Congress established in the PSLRA. The panel also concluded that the first, second, and fifth Bauman factors weigh in favor of granting the writ. However, the panel declined to instruct the district court to appoint Group II as lead plaintiff, remanding for the district court to redetermine the issue.
Court Description: Mandamus / Securities Fraud / Class Action The panel granted in part a petition for a writ of mandamus and ordered the district court to vacate its order appointing an individual as lead plaintiff in a consolidated securities fraud action against Nikola Corporation and related defendants. The panel held that in a securities fraud class action, the Private Securities Litigation Reform Act requires the district court to identify the presumptive lead plaintiff, who is the movant with the largest financial interest and who has made a prima facie showing of adequacy and typicality. At step * The Honorable Andrew P. Gordon, United States District Judge for the District of Nevada, sitting by designation. IN RE MERSHO 3 one of the selection process, notice of the action is posted so purported class members can move for lead plaintiff appointment. The statute expressly allows a “group of persons” to move for appointment. At step two, the district court, applying the presumption, must determine which movant is the most adequate plaintiff. At step three, competing movants can rebut the presumption by showing that the presumptive lead plaintiff will not fairly or adequately represent the class. The three petitioners moved to be lead plaintiff as a group, referred to as “Group II.” The district court concluded that Group II had the largest financial interest and had made a prima facie showing of adequacy and typicality. Nonetheless, the district court rejected Group II as lead plaintiff, notwithstanding the presumption. The panel held that the district court’s order was clearly erroneous because it did not give effect to the presumption and effectively left the burden on Group II to prove adequacy at step three of the selection process, even though the burden should have shifted to the competing movants to show inadequacy. The district court considered petitioners’ joint declaration detailing how they would work together but declined to appoint Group II based on its “misgivings” about how they would work together because petitioners had failed to explain how they found each other. The panel concluded that the district court failed to comply with the burden- shifting process Congress established in the PSLRA. Applying the Bauman test for mandamus relief, the panel concluded that factor three, clear error, was satisfied. The first and second Bauman factors weighed in favor of granting the writ because petitioners had no realistic alternative to challenge the district court’s decision absent 4 IN RE MERSHO mandamus relief. The fifth factor also weighed in favor because petitioners raised new and important issues about how courts consider the cohesion of group plaintiffs. The panel therefore granted the petition for writ of mandamus to the extent it sought to vacate the district court’s order appointing lead plaintiff. The panel, however, declined to instruct the district court to appoint Group II as lead plaintiff. The panel remanded to the district court to redetermine the lead plaintiff in a manner consistent with the panel’s opinion.
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