Rice, et al. v. Genworth Financial Incorporated, et al., No. 3:2017cv00059 - Document 76 (E.D. Va. 2017)
Court Description: MEMORANDUM OPINION. See Memorandum Opinion for details. It is so ORDERED. Signed by District Judge Robert E. Payne on 8/25/2017. (sbea, )
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Rice, et al. v. Genworth Financial Incorporated, et al. Doc. 76 IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF VIRGINIA f Richmond Division ALEXANDER RICE, Individually And on behalf of all others Similarly situated, et al., 0 fl AUG 2 5 20!7 CLERK. U.S. DISTRICT COURl RICHMOND VA Plaintiffs, v. Civil Action No. 3:17cv59 GENWORTH FINANCIAL INCORPORATED, et al. Defendants. MEMORANDUM OPINION This consolidated securities fraud action is before the Court on two motions seeking appointment as lead plaintiffs and lead counsel under 15 Litigation Reform Act consolidated action U.S. C. 78u-4, § ( "PLSRA") . agree that counsel International should Union of be Plaintiffs ("IUOE" or "Union"), and its counsel, respectively. 1 seek Having appointed Operating Fund Private Securities All of the Plaintiffs in this Brian James ought to be appointed as their the Alexander Rice and lead plaintiffs and that as lead Engineers counsel. 1 Local 478 The Pension which is not a party in this action, designation in those considered both motions, the capacities, supporting PLAINTIFFS' MOTION FOR APPOINTMENT OF LEAD PLAINTIFFS COUNSEL (ECF No. 39) ("Plaintiffs' Mtn. for Appt.") AND Dockets.Justia.com and memoranda, 2 opposing and exhibits, the Plaintiffs' motion will be granted and the Union's motion will be denied. FACTUAL AND PROCEDURAL BACKGROUND The underlying facts are taken from the COMPLAINT 1) filed by Alexander Rice. as they have been pled, The facts, and, (ECF No. as alleged, are recited for now, they are taken as true. The procedural history is reflected as it developed. Genworth "Genworth") Financial Incorporated Company" or provides consumers with mortgage insurance products that allow people to purchase homes. services ranging programs to products." ("the from homeownership individual (Comp!. The Company also offers and 'JI 36) group (ECF No. education long-term 1). and assistance care insurance For several years, the Company's financial circumstances were dire. "In proposal or to transaction around May acquire at $12.50 2015, the per reduced to between $10-11 the Company Company's share, per entities also made proposals, a share." stock received in an proposal that Id. ':!! at a all was 50. including companies A, written cash later "Other C and D." Id. 2 MOTION OF THE INTERNATIONAL UNION OF OPERATING ENGINEERS LOCAL NO. 478 PENSION FUND, RICHARD L. SALBERG, AND DAVID PINKOSKI FOR APPOINTMENT AS LEAD PLAINTIFFS AND APPROVAL OF THEIR SELECTION OF CO-LEAD COUNSEL ("Union's Mtn. for Appt. ") ( ECF No. 37) . 2 On October 21, 2016, a Merger Agreement between Genworth and China Oceanwide. 23, 2016, Id. at ':11 was executed On October 44. Genworth and China Oceanwide issued a press release announcing that the companies had reached an Agreement and Plan of Merger, whereby Oceanwide. and Id. outstanding at ':11 Genworth would be acquired by China The merger provided that "each issued 3. share of Genworth common stock [would] be cancelled and automatically converted into the right to receive $5.43 in cash." On Id. December Preliminary 21, Proxy 2016, the Statement Company ("Proxy Securities and Exchange Commission Proxy statement exchange their provided shares filed that ("SEC") . to Schedule Statement") Genworth pursuant a the Id. with at ':11 terms of the the The 4. stockholders 14A should Merger Agreement, based, among other things, on the opinion rendered by Genworth' s Freres financial advisors, & Cp. LLC. Id. Goldman, Sachs Proxy statement The & Co. and Lazard explained that Genworth began to look to sell the Company because, among other things, it " [ s] ens [ ed] would negatively entitlements companies A, that impact flow lucrative at may be equity impacted, which compensation 48. The proposals made by C and D, described above, were not included in the II Id. cash Proxy Statement. 3 ':11 On January 23, Action Complaint 2017, Alexander Rice (the "Complaint") , ("Rice") in which he filed a Class raised claims under Sections 14(a) and 20(a) of the Securities Exchange Act of The Complaint 1934. and the process Proposed alleges by which Transaction are that "[t] he Merger Consideration Defendants agreed fundamentally to consummate unfair to the Genworth's public stockholders as the Merger Consideration represents only a 4.2% October premium 21, to 2016, the the Company's last Transaction was announced." prospects for future closing trading day price before growth ability to command a higher transaction value, to enter into the Merger Agreement with $5.21 the on Proposed "Despite Genworth's (Comp!. 'Il 5) . profitability and of and Defendants' Defendants chose China Oceanwide and agreed to onerous deal provisions and other agreements to ensure and protect a sale only to China Oceanwide." Id. at 'Il 75. The Merger Agreement contains a no shop provision as well as a $105 million termination fee agreement. The Complaint filed by Id. at 79. Rice alleges several material misrepresentations and omissions in the Proxy Statement provided to Genworth shareholders. 3 In 3 the Complaint, Rice sought "The Proxy Statement misrepresents and/or omits material information that is necessary for the Company's stockholders to make an informed decision whether to vote in favor of the Proposed Transaction in violation of Sections 14(a) and 20(a) of the Exchange Act. Specifically, the Proxy Statement fails to 4 injunctive relief, certification of a class, of transaction, the disclose proposed the material "unless information and identified and the enjoining until above Defendants which has provide the Company's stockholders with certain material information concerning the process leading up to the consummation of the Merger and information concerning the financial analyses and work performed by Goldman Sachs and Lazard." (Comp. ' 81). "The Proxy Statement fails to expressly indicate whether or not the standstill provisions contained in the confidentiality agreements entered into with any of the Interested Parties contained a "fall-away" provision that allows each of the Interested Parties to submit a superior proposal to acquire the Company." (Compl. ' 82). "Goldman Sachs and Lazard must disclose whether they, any of their affiliates and/or related entities and/or any individual employees of Goldman Sachs and Lazard that were members of the team working on the Genworth account (as described in the "Background" section of the Proxy Statement) , held and/or owned any type of security interest in Genworth, China Oceanwide and/or Asia Pacific and/or any affiliated entities." (Comp!. CJ[ 83). "The Proxy Statement provides that the Board reviewed and considered the Certain Genworth Unaudited Financial Projections and also that both Goldman Sachs and Lazard utilized these projections and/or certain line item financial measure in rendering their fairness opinions. Specifically, in reconciling the Non-GAAP projected financial measures with the GAAP financial measures, as expressly required to do under Regulation G ( 1 7 C. F. R. §24 4. 100 et seq.) , Defendants failed to disclose and/or define "accumulated other comprehensive income (loss), which financial measure was expressly used and omitted in calculating and projecting Genworth stockholder equity (Proxy Statement, 91) , GAAP return on equity ("ROE") , and non-GAAP Operating ROE. Proxy Statement, 92, notes 3 and 4 respectively." (Comp!. CJ[ 84) . "[T] he Proxy Statement provides a materially incomplete and misleading summary of the key financial analyses Goldman Sachs and Lazard performed in support of their fairness opinions." (Comp!. CJ[ 85) . 5 been omitted from the Proxy Statement." In the alternative, (Comp!. 'II C). Complaint requested recissory damages. On January 25, 2017, the Company filed that shareholders vote in favor Transaction and announced that the special to vote on the Proposed Transaction a Schedule 14A This Proxy Statement Definitive Proxy Statement with the SEC. recommended the of the Proposed shareholder meeting would occur on March 7, 2017. On January 25, 2017, Brian James ("James") Action Complaint for Violations of Sections 14 (a) the Securities Exchange Act of 1934, in filed a Class and 20 (a) which he of raised essentially the same substantive claims as those raised by Rice. Rice and James actions. filed Court a agreed to work Also on January 25, 2017, Class Action Complaint for the District of together in to coordinate their the Rosenfeld Family Trust the Delaware, United States in which it District raised substantively similar claims to those raised by Plaintiffs Rice and James. 4 On February 2, 2017, Rice, supported by James, filed 4 On February 10, 2017, two weeks after filing its complaint on January 25, 2017, the Rosenfeld Family Trust filed motions, in the Delaware proceeding, for expedited proceedings and a preliminary injunction seeking to enJoin the March 7, 2017 Genworth stockholder vote. In response, on February 13, 2 017, the Delaware Court ordered an accelerated briefing schedule and set a February 24 hearing date on the motion. On February 14, 201 7, Defendants filed a motion to vacate the Delaware Court's February 13 Order on the grounds that, when 6 PLAINTIFF'S which sought MOTION to FOR A PRELIMINARY enjoin the INJUNCTION shareholder vote on (ECF No. 2), the Proposed Transaction until certain supplemental disclosures were made to Genworth's stockholders. On February 6, Action Complaint District of in 2017, the Esther Chopp United Delaware. ("Chopp") States Chopp District raised Financial, Inc., et al., Court essentially substantive claims as raised by Rice and James. Genworth filed a Class No. for the the same See Chopp v. 3:17-cv-00157-REP (D. Del.) . On States February District 10, 2017, Court for David the Ratliff Eastern filed in the United District of Virginia a complaint in which he raised substantively identical claims to those already raised by Rice, Trust. The Ratliff case was James, filed and the and Rosenfeld identified as Family 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 Rosenfeld Family Trust requested expedited relief, it failed to inform the Delaware Court about the existence of the earlierf iled Virginia Actions. The Delaware Court granted Defendants' motion and vacated the February 13 Order. Thereafter, on February 14 and February 15, 2017, Defendants filed motions to transfer each of the Delaware Actions to this Court or, in the alternative, to stay them pending resolution of the Virginia Actions. 7 the actions pending before this Court, Faruqi, LLP, Monteverde & Associates, LLC ( "KSF") Interim as Lead Interim Liaison Class and appointing Faruqi PC, and Kahn Swick & Foti, Counsel Counsel. and (ECF determined that "all three actions & MeyerGoergen No. 22). PC The Court James & Ratliff] [Rice, as shall be consolidated and the caption of the consolidated case shall be Rice v. Genworth Financial Incorporated, et al., Civil Action No. 3:17cv59." (ECF No. 30). On February 23, 2017, the Court consolidated Rosenfeld Family Trust v. Genworth Financial, Inc., et al., No. 3:17cv156, and Chopp v. Genworth Financial, Inc., et al., No. 3:17cv157 thereafter with proceeded the under consolidated the style cases, Rice, et all al. of which v Genworth subsequently reached an agreement with the Financial, Inc., et al., No. 3:17cv59. The Plaintiffs Defendants, pursuant Injunction was consolidated following 1, to which the withdrawn. action Also, advised [Defendant's] Motion "that the it is for a Preliminary parties their disclosures called for in intent this that in Court Exhibit these consolidated actions will be settled in their entirety and, to that Understanding and, end, reflecting to that end, proceedings counsel counsel respecting intend the to prepare settlement certification 8 Memorandum (including shall prepare a class a releases); schedule of and of further appointment of counsel all of which shall comply with the timing requirements of the Private Securities Litigation Reform Act." On March 6, LEAD 2016, the Court entered the STIPULATED PSLRA PLAINTIFF SCHEDULING ORDER. that: "[p]ursuant to 15 U.S.C. April 17, member 2017, of the (ECF No. 30). any plaintiff purported (ECF No. § It provided 78u-4 (a) (3) (A), in class 35). these who actions wishes to on or before or serve any other 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' ANO COUNSEL. MOTION FOR APPOINTMENT OF LEAD PLAINTIFFS (EC F No . 3 9) . The Union also has a shareholder derivative action pending in the Delaware Consolidated Court Derivative uDelaware State Case") . of Chancery, Litigation, Genworth C.A. No. Financial, Inc. 11901-VCS (the In that case, the defendants have moved for dismissal and the motion has been heard. However, the Judge in "any the motion Delaware to State dismiss in Case the explained pending 9 that derivative ruling case on would a 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 another as to whether, issue its that the parties in the parties' motion-to-dismiss consult views, decision, and, parties informed the Court that it was with one the Court should subsequently, [their] should not issue its motion-to-dismiss decision." the view the Court Additionally, the Union is pursing inspection requests pursuant to 8 DEL. §220. Salberg v. Genworth Financial, Inc., C.A. No. C. 2017-0018- JRS ( De!. Ch . ) . The approved; stockholder vote however, has the merger taken place and the merger was of Genworth and China Oceanwide has been pending for several months. Recently, a further delay in the merger was announced. 5 POSITIONS OF PARTIES Pursuant to the PSLRA, the adequate plaintiff" to 78u-4 To that end, (a) (3) (B) (i). serve as 5 Court Lead must appoint Plaintiff. 15 explains the Union, the "most u.s.c. § the Court See China Oceanwide' s $2. 7bn acguisi ti on of Genworth faces regulatory delay, !BR Life Insurance & Pensions, http://lifeinsuranceandpensions.insurance-businessreview.com/news/china-oceanwides-27bn-acquisition-of-genworthfaces-regulatory-delay-170717-5872025 (July 17, 2017). 10 is required to determine which potential lead plaintiff has the "largest financial interest" in the relief sought by the Class and plaintiff whether that representative these that, Rule 23 a of The Union argues that, Procedure. in under is motions, therefore, lead plaintiff. 6 it has the typical the and Federal Rules class of Civil of the shareholders involved largest financial there is a presumption that And, adequate interest, and it should be the the Union contends that it satisfies the requirements of Rule 23. Rice and James concede that, in these motions, in Genworth. the PSLRA, of the shareholders involved the Union has the largest financial interest Although Rice and James acknowledge that, under the Union is deemed the presumptive lead plaintiff, they take the view that the Union cannot adequately represent the based conflict class "on the the [Union] simultaneous prosecution of derivative claims has due to its 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. 6 At all relevant times, the Union held 39,153 shares of Genworth stock. 11 Rice continue and James even after "There completed) . case goes further on for the are years, conflicted position. explain merger other exception to is keeping the For example, the mootness the where response, because this related. "In the action the the the it is derivative the approval of the Merger or new evidence could trigger rule Union argues and (if will IUOE Investor Group in a and the derivative could go on after approval of the Merger . In conflict completed scenarios could be delayed for over a year, an that derivate Derivative Action, there action the alleges that certain Genworth Financial, Id. II that is in IUOE Inc. claims [) no conflict Delaware are Investor Group executives and directors breached their fiduciary duties by allowing Genworth to engage in securities fraud . inter alia, alleging, . [and here) the Rice Group is that defendants failed to properly value the derivative claims asserted by the IUOE Investor Group and disclose all material information regarding those claims." Finally, intent class, says to the recover only "[g)iven the non-monetary Rice relief Group's for the apparent putative it is not in a position to claim that appointment of the IUOE Investor Group, against Union, Id. Defendants, a group that plans to pursue money damages will disadvantage Id. 12 the class economically. /1 In response to the Court's inquiry, the all parties agree that case notwithstanding the aspect case is not moot, preliminary injunction disclosures made by the of Company the pursuant settlement and to of the the the amended settlement. Rice and James argue that the existence of a settlement does not di vest 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 Court it would raise if it were appointed lead counsel. The gave the parties an opportunity to brief that argument. The Union responded that position on the lead the Company had no plaintiff right motions. to argue a Rice and James essentially adopted the argument advanced by the Company . .ANALYSIS AND APPLICATION OF LAW I. Jurisdiction "Although neither party has affirmatively argued that case is essential moot, resolution because, jurisdiction to if proceed of the case further advisory and thus improper." 244, 246 (1971). that Therefore, question is moot, and any is the "a 13 suit must nonetheless Court opinion North Carolina v. be the Rice, lacks would be 404 U.S. definite and concrete, touching the legal relations of parties having adverse legal interests answer." Id. However, (internal moot citations parties have a concrete interest, questions But, omitted). however small, of the litigation, the case is not moot." require if no "the in the outcome 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, LEXIS 156284, at *6 shareholders alleged Inc., (N.D. No. 13-cv-0794 5, Ill. Mar. that the 5, 2015 2015). company's U.S. Dist. In Lambert, "disclosures the 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 merger were finalized." Id. at 3. in the alternative if the 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. court found "the supplemental disclosures d [id] Plaintiff's disclosure-related claims moot The district not render the because they addressed only seven of the eleven omissions Plaintiff alleged in her complaint." that, Id. at 6. Additionally, the court found because the complaint sought "not only an injunction to prevent the merger, but also damages 14 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, is u[w]hile method for injunctive remedying relief disclosure typically the preferred damages violations 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 provide certain the If parties here also agreed that discovery that would permit disclosures, the plaintiffs proceed with the of the as claim possible that supplemented, are not were satisfied for rescissory the Court not that and point, inter alia, damages. would Company And, approve would verification accurate on litigation including, the of the that complete. they can the pursuit course, it settlement is and thereupon the case would continue. Considering the facts that the case jurisdiction consider the is over not the motions in this record, moot case. and Thus, respecting plaintiff and lead counsel. 15 the Court concludes that the it appropriate the is Court designation retains now of to lead II. Presumptive Lead Plaintiff "[T] he PSLRA provides 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 for the consolidated class action. The PSLRA candidate also provides certain must meet be MicroStrategy Inc. Va. to Sec. specific named Litig., lead 110 F. requirements that a In re plaintiff.u Supp. 2d 427, 432 (E.D. 2000) . First, a complaint is not complete unless the named plaintiff includes 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. [] Second, the first plaintiff to file a class action securities fraud complaint must publish notice of the complaint "in a widely circulated national business-oriented publicationu within twenty days of filing the complaint. 15 U.S.C. § 78u4 (a) (3) (A) (i). That notice must (i) include a description of the claim and the class period, and (ii) inform other members of the alleged class that they may move, within sixty days of the notice, to be named lead plaintiff, whether or not they have filed their own complaint. Id. There is no dispute that all of the prerequisites have been met in this case. Pursuant to 15 U.S.C. § 78u-4 (a) (3) (B) (i), "[n]ot later than 90 days after the date on which a notice is published under 16 subparagraph (A) (i), a the court shall consider any motion made by purported class member in response to the notice, including any motion by a class member who is not individually named as a plaintiff in the complaint or complaints, and 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 (hereafter in this " paragraph referred to as the "most adequate plaintiff") On March 6, 2017, the Court ordered the parties to file Lead Plaintiff Notice in compliance with the No. 35). A. their See PSLRA. (ECF Thereafter, the pending motions were filed. There Is A Rebuttable Presumption Should Be The Lead Plaintiff That The Union The statute creates a rebuttable presumption that the most adequate plaintiff is the 'person or group of persons' who ( i) 'has either filed the complaint or made a motion in response to [notice given] , ' 15 U.S. C. § 78u-4 (a) (3) (B) (iii) (I) (aa), (ii) 'has the largest financial interest in the relief sought by the class,' 15 U.S.C. § 78u4 (a) (3) (B) (iii) (I) (bb) and (iii) 'otherwise satisfies the requirements of [Rule 23, Fed. R. Civ. P.],' 15 U.S.C. § 78u4 (a) (3) (B) (iii) (I) (cc). In re MicroStrategy Inc. (E.D. Va. 2000). Sec. Litig., 110 F. Supp. The Union has neither filed a 2d 427, 433 complaint nor moved for leave to intervene, but it has moved to be appointed as to lead Exchange plaintiff Act. pursuant And, it is Section eligible 17 21 D (a) ( 3) ( B) to be of the considered for appointment as lead plaintiff pursuant to the requirements set forth under the PSLRA. 1. The Rice and The Union Has The Largest Financial Stake In The Litigation IUOE holds James these motions, concede shares that, of of the Genworth common shareholders stock. involved in the IUOE holds the largest financial interest in the litigation. of Genworth 39,153 Rice and James collectively own 17, 223 shares stock. Rice owns 100 shares. James owns 17, 123 shares. 7 2. The Rule 23 Requirement For Typicality And Adequacy To Prosecute The Action As Applicable At This Stage Of The Proceedings "Even if a candidate has the largest financial interest in a case, it is not the presumptive Lead Plaintiff unless it 'otherwise satisfies the requirements of Rule 23 of the Federal Rules of Procedure.' Civil 4 (a) (3) (B) (iii) (I) (cc)." 187 F.R.D. litigation, 246, 250 (E.D. Switzenbaum Va. 1999). u.s.c. 15 v. Orbital At this 78u § Scis. stage Corp., of the the Rule 23 "inquiry is not as searching as the one 7 None of the other plaintiffs have moved for appointment as lead plaintiff. Further, the other plaintiffs own fewer shares than the movants Rice and James. "Plaintiff Ratliff holds just 37 5 shares of Genworth commons stock - barely 2% of the holdings of Movants - and the plaintiffs in the Delaware Actions hold only 200 and 300 shares, respectively - less than 3% of the holdings of Movants." (ECF No. 40). 18 triggered by a motion for class the certification candidate must make at least a preliminary showing that it has claims which are typical of those of the putative class and that it has the others." Cir. to provide adequate Id.; see also In re Cavanaugh, 2002) plaintiff capacity (the court and "must then determine, based representation for 306 F.3d 726, 730 (9th its that focus on the attention on information he has provided in his pleadings and declarations, whether he satisfies the requirements of Rule 23(a)"). Originally, position on Rice and James typicality and did not the challenge capacity representation at this stage of the litigation. 8 the for Union's adequate However, at the hearing, counsel for the Company argued as follows: The Union are the wrong people to bring the 14 (a) claim because either the "union voted for the deal, knowing everything there was to know about the derivative claim, in which event I don't see how they could possibly pursue a fraud claim, or they voted against the deal in which event I don't understand how they can represent a class of people who didn't vote against it because they' re not similarly situated. In fact, they' re completely different from everyone else." 8 See ("Rice Group Memorandum of Law In Opposition") ( ECF No. 50) ("It appears that IUOE Investor Group has the largest financial interest, and by operation of law, gains a presumption of being the most adequate Lead Plaintiff under the PSLRA and Fed. R. Civ. P. 23. However, once a plaintiff is deemed the presumptive lead, "competing plaintiffs have the opportunity to rebut the presumptive lead plaintiff's showing of typicality and adequacy."}. 19 (ECF No. 68, #1892). James challenged knowledge of After the hearing on the motions, Rice the the Union's derivative shareholder vote on the merger. adequacy action based at on the the and Union's time of the As Rice and James put it: In this case, it appears that the IUOE Investor Group seeks damages not because it casted an uninformed vote, but instead because the vote did not go the way it wanted. This is no basis for a Section 14(a) claim, and is an audacious position for a party that sat idly by with superior knowledge of the value of the derivative claims and did not challenge the sufficiency of the disclosures to protect the class before (or after} the vote. See (ECF No. 73} . 9 The Court agrees with the Union that the Company cannot be the party to contest whether the Union can rebut the presumption of the Union's adequacy. with member "a of the Under the PSLRA, that prerogative lies purported plaintiff class" evidence rebutting the lead plaintiff presumption. Lumber Liquidators 12588686, Plaintiffs at *2 Holdings, (E.D. successfully Va. raise Inc., May the No. 14, can See Kiken v. 4: 13cv157, 2014) rebuttable offer ("After 2014 WL Moving presumption of adequacy, the presumption cannot be rebutted by Defendants."}. MEMORANDUM OF LAW IN RESPONSE TO IUOE INVESTOR GROUP'S SUPPLEMENTALMEMORANDUM ADDRESSING DEFENDANTS' OPPOSITION TO APPOINTMENT ("Rice Group's Supp. Mem. Def's Opp."). 20 However, raised argument the subsequently adopted by Rice and by James, is and Company, the applicable to the relaxed Rule 23 analysis and the Company is entitled to weigh in on that argument by satisf [y] Ci vi! Therefore, issue. the the [Company] "[t]he that Court the [Union] requirements of Rule 23 Kiken v. Procedure." will consider do [es] of the the not Federal Rules of Lumber Liquidators Holdings, Inc., No. 4:13CV157, 2014 WL 12588686, at *3 (E.D. Va. May 14, 2014). As explained earlier, 23 is and not appropriate at should motion be for left class Sec. Litig., (D. Md. R. they the Rule In typical be the identical. or re consideration Milestone 168 F. requires Supp. the similar Gruber v. a Scientific the of to class 566 named claims. claims the of 2d 560, that of the class' While same stage of the litigation later Litig., 23(a) (3). should be need not Court's 23 (a) (3) claims be P. Civ. initial certification." 2001). plaintiff for this In re USEC Sec. representative's Fed "[a] wide ranging analysis under Rule the See named claims, Price Waterhouse, 117 F.R.D. 75, 79 (E.D. Pa. 1987). The Union argues that, without regard to its specific knowledge or votes, it has standing to pursue the§ 14(a} claims because "[it was] harmed when Defendants issued a misleading proxy that caused Genworth shareholders to approve a merger for $2.7 billion when the truth was that Genworth was worth at least 21 $2.939 billion." Supp. 393, 1984), 397 the establish Va. (E.D. defendant plaintiff deciding how However, the pursue (ECF No. 70). the In Hershfang v. Knotter, 562 F. 1983), argued aff'd, that not rely vote" to did and the voted Court found securities that claim 725 on the F.2d 675 "uncontroverted the proxy against such a facts materials the plaintiff "because (4th Cir. in transaction. had standing claim employs to a different standard of causation from that applied in a Rule lOb5 claim. A Rule 14a-9 claim 'transactional causation': not the alleged defect in link in the transaction. Co., 396 U.S. added) . at 385, Therefore, that requires only a showing of the proxy solicitation itself, the solicitation, was an essential See, e.g., Mills v. Electric Auto-Lite 90 S.Ct. at 622." Id. at 398 (emphasis in proxy disclosures cases "there can be no doubt that the transaction required shareholder approval which, in turn, required the proxy solicitation. Thus transactional causation existed regardless of whether plaintiff relied on the proxy materials." Id. The same is true in this case. Whether the Union relied on the proxy statement in making its vote, 10 the proxy itself is the basis for the 14(a) claim, thus the Union has standing to pursue 10 The Union has not disclosed whether or not it voted to approve the merger. 22 the claim. And, on that point the Rule 23 inquiry at F. 3d 726, 730-31 (typicality), the Union satisfies See this stage. (9th Cir. 2002) In re Cavanaugh, 306 ("At step two of the process, when the district court makes its initial determination, it must rely on the presumptive certification; there lead is no plaintiff's adversary complaint process and to sworn test the substance of those claims.") . 11 B. Rice And James Have Rebutted The Presumption that the Union Is The Presumptive Adequate Lead Plaintiff "The above presumption largest financial interest] the lead [insofar presumptive of the entity 'unique adequately defenses' plaintiff that render representing the 4(a) (3) (B) (iii) (II) (aa)-(bb) ." Litig., 217 F.R.D. 372, the may only be rebutted by proof that will { 1) not adequately protect the interests of the class or to with 375 such 11 Va. & incapable Wireless, 2003). and is subject Id. class. {E.D. (2) plaintiff In re Cable fairly § of 78u- PLC Sec. To demonstrate No one seems to challenge the Union's position that it has the capacity to provide adequate representation for the class. At this stage, adequacy equates to capability. But, if adequacy were to include an analysis similar to the conflicts issue raised by Rice and James (and discussed below), the adequacy issue could not be resolved in the Union's favor. Rice and James allude to that point, but it is really a matter to be dealt with in assessing the alleged conflict. Nonetheless, because, as discussed below, the Union has serious conflicts, the Union would not meet the adequacy requirement if that requirement were to be assessed beyond the surf ace question of capability. 23 that the lead plaintiff will be inadequate, courts require a showing of "specific support in evidence of the existence of an actual or potential Trust v. e.g., KPMG LLP, Sofran v. (S. D. N. Y. conflict of 223 F.R.D. LaBranche 2004) & Constance Sczesny interest." 319, Co., 324-25 Inc., (emphasizing that the 220 (S.D.N.Y. F.R.D. 2004); 398, PSLRA requires see 403-04 proof of inadequacy and not merely speculation) . Rice and James argue that the Union Therefore, interest in representing the class. contend that (4th conflict Union See Ward v. the class. 180 the Cir. of 2010) interest cannot fairly Union is (internal to def eat subject a conflict of Rice and James and adequately represent Dixie Nat. Life Ins. Co., 595 F.3d 164, citations the conflict must be fundamental."). the has to omitted) ("For adequacy requirement, a that Rice and James also argue that unique defenses that render it an unsuitable lead plaintiff. 1. The Union's Potential Defenses Issue Conflicts And The Unique To rebut the presumption that the Union is not an adequate lead plaintiff, Rice and James contend that the Union has a conflict of interest in this action against the Company because it is pursuing, on behalf of the Company, a derivative action in the Delaware Court of Chancery. In analyzing the alleged conflicts of interest, the Court considers that "[a] conflict is 24 not fundamental when [] all class members share objectives and the same factual and legal positions common [and] have the same interest in establishing the liability of [defendants]. Moreover, a conflict will not defeat the adequacy requirement if Ward v. it is merely speculative or hypothetical." Life Ins. Co., 595 F.3d 164, 180 (4th Cir. 2010) Dixie Nat. (internal quotations omitted). Rice and James assert the following conflicts based on the Union's prosecution of the derivative action: • The derivative case filed by the Union seeks monetary damages from some of the same corporate and individual defendants in this case - but not all of them. It also seeks monetary damages from related individual defendants not named in this case • The derivative case filed by the Union asserts "related" claims against the same but different corporate and individual defendants in this case but not all of them. It also asserts "related" but different claims against individual defendants not named in this case • The Union seeks to represent two overlapping but different classes without benefit of a waiver from the mutual members of both classes • The Union would be conflicted as to the management of the two cases. They are at different stages - the derivative action is subject to a pending motion to dismiss and this action has been referred to settlement negotiations, which are in progress. The fact that the Union is concerned that any potential settlement reached in this case may adversely impact them is prima facie proof that they have a conflict of interest with the putative class in this case 25 • The Union would be es topped or precluded from disputing director and manager liability of overlapping claims, for its different set of defendants, thus reducing the recovery available to the class in this case from the defendants that are named • The apparently sizeable body of confidential information produced under different circumstances from different parties will cause the Union to be the subject of unique defenses and additional motion practice • As plaintiffs in a derivative action, the Union has a right to seek documents that are subject to the attorney client privilege to the extent the privilege is owned by the corporation. If the Union already possesses such documents, it will be conflicted in this case. If not, and it becomes Lead Plaintiff in this case, it will be conflicted in representing the corporation and seeking such documents in the derivative case The Fourth Circuit has not determined whether a plaintiff pursuing a derivative action on behalf of a corporation in one case is per against under the decision 1987) the se conflicted when also pursuing corporation PSLRA. in But, Koenig instructive. v. in a on separate that Benson, In Koenig, case point, 117 as the F.R.D. a direct lead plaintiff Court 330, action 333 finds the (E.D.N.Y. the defendant objected to class certification based on the "alleged atypicality and inadequacy of the representatives.n The basis for that objection was that the class representative and counsel are "presently bringing a derivative suit against [the Defendant in a state court] and this commitment creates a conflict of interest in representing a 26 Id. class in this litigation." that this disqualifies [the "Defendants contend at 334. plaintiff] representative under Rule 23 (a) (4), as an adequate class because his commitments to the derivative suit shows an interest contradictory to that of the class he seeks to represent." representative argued "that this In response, Id. conflict is more the class theoretical than real, and it should not affect class certification at this time, because decertified members." the later Id. if class a true representatives conflict always can prejudices the be class The Court found that there was a disqualifying conflict, explaining that: When a plaintiff brings a derivative suit seeking recovery for the corporation and simultaneously files a class suit for damages against that same corporation, there is an inherent conflict. One court has written, "it is difficult to understand how an attorney can properly represent the interests of a corporation and its present shareholders in a derivative action brought on their behalf, and, at one and the same time, properly represent its present and/or former shareholders in a class action against the corporation without compromising the independence of professional judgment and loyalty to these two groups of clients with potentially conflicting interests." Stull v. Baker, 410 F.Supp. 1326, 1336-37 (S.D.N.Y. 1976). Id; see (E. D. N. Y. also Tuscano v. Tuscano, 403 2005) ("Any individual claims 27 F. Supp. raised by a 2d 214, 223 shareholder in a derivative interest) . Other Koenig, action present an impermissible conflict of 12 courts 117 F.R.D. have disagreed at 334 with a per se approach. Those decisions (collecting cases). teach that a case by case approach is the necessary analytical construct. That is because, even if the existence of simultaneous direct and a derivative actions are not viewed as a per se conflict, conflict for particular case may give rise to a potential someone serving as a class derivative plaintiff at the same time. consider these appropriate." potential Id. conflicts representative and a Therefore the Court must and deal with them as Thus, it is necessary to consider the facts of the case to determine whether a conflict of interest does in fact rebut exist and whether, the presumption if so, that the the conflict is sufficient to Union is an adequate lead plaintiff. 12 Other decisions deliver the same message. See e.g., Wood v. Rex-Noreco, Inc., 61 F.R.D. 669, 674 (S.D.N.Y. 1973); Hawk _I_n_d_u_s_t_r_i_e_s...:,.,__ I_n_c_.__ __ v_. B_a_u_s_c..;_h....;...__&.;.___L_o_m_b...;....<..,_.::;.I. :. .;n.. ::c.. .:. . , 5 9 F. R. D. 619, 6 2 4 (S.D.N.Y. 1973); Ruggiero v. American Bioculture, Inc., 567 F.R.D. 93, 95 (S.D.N.Y. 1972). 28 There Is A Conflict Between The Derivative Class And The Direct Action Class Because Of the Limited Funds Of The Corporation (i) The Court is persuaded by James that there is a and the derivative damages. the argument made by Rice and conflict between the direct action here action in Delaware based on the issue of Their argument is that: [O]n one hand this direct class action seeks recovery from the corporation in the form of rescissory damages, attorneys' fees and other costs. The Derivative Action maintained by members of the [Union] also seeks recovery for the corporation of damages from director defendants, but also recovery or attorneys' fees, accountants' and experts' fees, costs, and expenses for which the corporation itself may be liable. ("Mem. Opp. to IUOE"} (ECF No. 50} (internal citations omitted}. And, that argument is indeed correct in this case. The Union tries to rebut this conflict not by denying its existence, consurrunated, but by explaining that, once the the derivative action will disappear. merger is Although it is true that derivative actions can often become direct actions post-merger, ("the see In Lewis v. Anderson, 477 A.2d 1040 Delaware derivative Supreme action corporation") , the Court passes Union held via provides that the merger no right to authority the to (Del. 1984} to bring a surviving support a finding that the Court should appoint a lead plaintiff based on a possible outcome of a pending merger. 29 And, this Court located no such authority. requirements for PSLRA The the appointment provides of lead timing strict plaintiff, thus postponing the lead plaintiff appointment till the consummation of the merger would be in contradiction to the overall purpose of the statute. The Union clearly stated in oral argument that "most of the time when there's a lead plaintiff appointed, that's not the original plaintiff, and the merger is not -- does not have a set date yet, commonly what the parties stipulate to and the court orders is that the amended complaint be filed after the merger certain set days." (ECF No. 68). That proposed procedural scenario is troubling because this merger has been pending for several months, Thus, This and recently another delay has been announced. it is unclear when, action cannot sit or if, on hold a merger will be consummated. on the speculation that an already long-delayed merger may ultimately come to fruition or on the possibility that the Union will file an amended complaint that eliminates the present conflict. The Court also finds persuasive the argument of Rice and James that the Union's 220 Action potentially serves as a basis to strengthen the Union's derivative 13 case post-merger. 13 See On this point, Rice and James contend: "the [Union] is also pursuing the Section 220 Action in the Delaware Court of Chancery. As part of its demand in that case, the IUOE Investor 30 Ark. 894 Teacher Ret. (Del. 2013) Sys. v. Corp., 7 5 A. 3d 8 8 8, (" [T] his Court recognized two exceptions to the loss-of-standing rule. the subject Countrywide Fin. of a The first claim of is where the merger itself is fraud, being perpetrated merely to deprive shareholders of their standing to bring or maintain a derivative action."). The Court cannot assess the adequacy of a lead plaintiff The merger has not yet been based on possible future events. consummated and the Court must analyze the conflict as it exists today. As of now, the derivative action is still pending and so too is the merger. the derivative Given the nature of the claims here and in action, Rice and James argue, merger. While the there is a conflict. Furthermore, the derivative action can continue postCourt cannot now determine derivative action here will succeed on that front, certainly is not speculative. is clear that the as whether the conflict On this record at this time, possibility of monetary the recovery to it the Group is seeking certain documents and records of Genworth 'to determine, in light of the claims in the Derivative Action, whether the members of the Board pursued and authorized the Acquisition as a means to eliminate potential personal liability for claims in the Derivative Action.' 220 Complaint 16(b). In other words, the [Union] is seeking evidence that would be grounds to continue to pursue the Derivative Action even if the Merger is consummated, under the fraud exception to the loss-ofstanding rule." ("Supp. Mem. Conflict of Interest") (ECF No. 59). At this stage of the proceedings, that contention is correct. 31 corporation in the derivative action is in direct contradiction to the class likely, action Although here. it is possible, that this action will end in settlement, not a certainty, could seek and, rescissory in any event, damages as in Koening, under Tuscano, objectives of the This 14(a). § objectives in this Wood, action. Hawk, action derivative are Where that is still the class plaintiffs here that conflict In other words, renders the Union an inadequate lead plaintiff. here, indeed and at is Ruggiero, odds so, the with there the is a conflict that precludes the relief sought by the Union. (ii) There Is A Conflict Between The Derivative Class And The Direct Action Class Because Of The Different Legal Claims And Different Named Defendants In Each Case The derivative fiduciary duties executives. on However, action in Delaware the part of alleges nine the directors breach and of three this class action "only involves a single schedule 14A Preliminary Proxy Statement and names ten director defendants, two of which are not named in the derivative action, and no executives." (emphasis differences ("Mem. added} . As are significant Opp. argued by because to IUOE") ( Rice and the PSLRA (ECF No. James, "reduces 50) these the liability for an individual defendant based on that defendant's percentage of fault liable, compared to all parties whether or not named in 32 the that are arguably lawsuit." Id. However, "[t] he [Union] would be estopped from disputing manager liability of overlapping claims, director and for its different set of defendants, thus reducing the recovery available to the class in this case from the defendants that are named." Id. This too is a sufficient conflict to rebut the presumption that the Union is an adequate lead plaintiff. On this record, the Court finds that the Union's conflicts are sufficient to rebut the lead plaintiff presumption. II. Lead Plaintiff & Lead Counsel It now is necessary to consider whether the movants and James) PSLRA. should be appointed as lead plaintiffs (Rice under the "Plaintiff Rice held and continues to hold 100 shares of Genworth common stock and Plaintiff James held and continues to hold at least 17, 123 shares of Genworth common stock." Law Support shareholders Lead Plnt.") (ECF involved second largest in financial No. these interest 40). motions, The movants, therefore of the hold the in the Company and thus are presumed to be the most adequate lead plaintiff. 14 14 ("Mem. Further, in Rice and James are moving for the appointment of lead plaintiff jointly. Early on in the litigation, the plaintiffs agreed to work together. "A group consisting of persons that have no pre-litigation relationship may be acceptable as lead plaintiff candidate so long as the group is relatively small . . . and therefore presumptively cohesive." Simmons v. Spencer, 2014 WL 1678987, at *5 (S.D.N.Y. Apr. 25, 2014). While the decision to appoint aggregate lead plaintiffs may implicate PSLRA concerns as to lawyers directing the course of litigation, the Court finds that the problem is not applicable here. James holds the most shares, excluding the Union, with or without the aggregation of Rice's shares. The choice by Rice and James to 33 all respects, and James typicality relaxed Rice have and adequacy shown that they (capability) meet the requirements of Rule 23 that apply at this stage of the proceedings. The lead plaintiff is empowered under the PSLRA to select and retain counsel to represent See 15 U.S.C. consolidated actions. Court finds Kahn that Swick MeyerGoergen PC requisite members Faruqi to approves class members in the 78u-4 (a) (3) (B) (v). The (the "Faruqi Firm") and as Co-Lead Counsel and as Liaison Counsel possess the represent the § LLP ("KSF"} ("MeyerGoergen") experience and Faruqi, & LLC Foti, & the the selection of interests those of firms the as class co-lead counsel and liaison counsel respectively. The Court notes that the current case is a situation where the appointment "[T] he group statute of of allows persons' or U.S.C. § 78u-4 (a) (3} Sec. Litig., James have more 219 (B) than the lead class (i), F.R.D. one plaintiff plaintiff 'member or group (iii) (I) 369, effectively worked 372 to be appropriate. a 'person or of members,' 15 In re Cree, Inc., II 2003). (M.D.N.C. together is since Rice and the beginning of this litigation. "There should be is, however, allowed to some serve question as whether co-lead two counsel." law firms In re work together since the inception of the litigation was based on the parties' mutual shared interests. 34 MicroStrategy Inc. Va. 2000) . Sec. "[T] he Litig., statute counsel to one law firm, 110 F. does not Supp. 2d 427, explicitly 440 (E.D. restrict lead and there may be instances in which a class is well-served by having two or more law firms combine to direct the litigation. firms could share Other courts have held that multiple law lead counsel duties so long as those firms provided assurance that they would work together efficiently and without duplication omitted) . Here, of services." co-counsel have It is clear from the parties' presented by appointment Rice of appropriate. and lead worked papers, James are plaintiffs However, Id. counsel (internal together citations efficiently. that the legal theories identical. with co-lead Thus, counsel are admonished that the is any future application for legal fees must show that there is no overlap of legal work and that counsel have efficiently responsibilities so as to confine attorneys' allocated fees to those that are reasonable in amount and necessarily incurred. CONCLUSION For the foregoing reasons, the MOTION OF THE INTERNATIONAL UNION OF OPERATING ENGINEERS LOCAL NO. 478 PENSION FUND, RICHARD L. SALBERG, AND DAVID PINKOSKI FOR APPOINTMENT AS LEAD PLAINTIFFS AND APPROVAL OF THEIR SELECTION OF CO-LEAD COUNSEL (ECF No. 37) will be denied 35 and PLAINTIFFS' MOTION FOR APPOINTMENT OF LEAD PLAINTIFFS AND COUNSEL (ECF No. 39) will be granted. It is so ORDERED. Isl Robert E. Payne Senior United States District Judge Richmond, Virginia Date: August 2017 36
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