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United States District Court, S.D. New York

July 13, 2005.


The opinion of the court was delivered by: SHIRA SCHEINDLIN, District Judge



  Two movants seek to be named lead plaintiff in a class action litigation involving alleged securities fraud by eSpeed, Inc. ("eSpeed"). Movants are (1) the "Adib Group," composed of Shabbir Adib, his family and Mike Weber; and (2) The Greater Pennsylvania Carpenters Pension Fund (the "Pension Fund"). Pursuant to the Private Securities Litigation Reform Act ("PSLRA"), the Adib Group is hereby appointed as the presumptive lead plaintiff.*fn1


  Plaintiffs are investors who purchased eSpeed stock during the class period, from August 12, 2003 to July 1, 2004. The first-filed complaint alleges that plaintiffs sustained losses as a result of false and misleading statements made by eSpeed about the company's profitability and future stock prospects during this period. eSpeed publicly asserted that the company's business plan was proceeding successfully, but, in fact, profitability was decreasing, competitors were eating into market share and eSpeed's initiative to tailor pricing to individual clients was proving to be a failure. On July 1, 2004, eSpeed disclosed its true financial condition and, as a result, eSpeed shares dropped more than $6 per share over a two day period, causing substantial losses to numerous investors.*fn2


  In determining which plaintiff to appoint as lead plaintiff, the PSLRA sets forth a required procedure.*fn3 The lead plaintiff should be the plaintiff "most capable of adequately representing the interests of class members."*fn4 The PSLRA requires that the "most adequate plaintiff" be determined by a two-step competitive process.*fn5

  The first step establishes as presumptive lead plaintiff the "person or group of persons" who meet(s) the following three criteria: (1) the candidate must have "filed the complaint or made a motion in response to a notice;"*fn6 (2) the candidate must have "the largest financial interest in the relief sought by the class,"*fn7 and (3) the candidate must "otherwise satisf[y] the requirements of Rule 23 of the Federal Rules of Civil Procedure."*fn8

  Once the presumptive lead plaintiff has been designated, the court conducts a second inquiry in which members of the class have the opportunity to rebut the chosen lead plaintiff's presumptive status. In order to rebut the designation, class members must prove either that the presumptive lead plaintiff "will not fairly and adequately protect the interests of the class" or "is subject to unique defenses that render such plaintiff incapable of adequately representing the class."*fn9 If the presumptive lead plaintiff is disqualified on these grounds, the candidate's position is forfeited and the court returns to the first phase to determine a new presumptive lead plaintiff. The process repeats itself until a candidate succeeds in both the first and second phases of inquiry.

  IV. DISCUSSION A. Shabbir Adib's Standing

  The Adib Group is composed of five individual investors: Mike Weber, Shabbir Adib ("Adib"), Ruby Adib (Adib's wife), Hatim Adib (Adib's father), and Murtuza Tofafarosh (Adib's cousin).*fn10 Plaintiffs Adib and Weber request to be named lead plaintiffs — Weber on behalf of himself and Adib on behalf of his family as "akin to an investment advisor."*fn11 While it is dubious that being "akin to" an investment advisor should allow an individual to sue on behalf of a collection of investors, I do not reach this issue because even were Adib a bona fide investment advisor, he would not have standing to sue on behalf of his family. In order for an investment advisor to attain standing on behalf of investors the transactions in question must have been executed as if by a single person.*fn12 Moreover, the advisor must be the attorney in fact for his clients, and he must be granted both unrestricted decision-making authority and the specific right to recover on behalf of his clients.*fn13 Adib has not adequately established that he meets these conditions.

  However, while Adib lacks standing to sue on behalf of his family as an investment advisor, such standing is not necessary in order for the Adib Group to be named lead plaintiff. The group is not required to suggest individual members as lead plaintiffs; rather, the group itself, governed by the individuals within it, may be named the lead plaintiff.*fn14

  B. The Validity of the Adib Group

  The lead plaintiff determination does not depend on the court's judgment of which party would be best lead plaintiff for the class, but rather which candidate fulfils the requirements of the Act.*fn15 The PSLRA does not, unfortunately, define what constitutes an appropriate candidate. The Act states that the court must "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" but the Act does not specify whether the "members" must be related in some fashion in order to qualify as an appropriate lead plaintiff group.*fn16

  Courts are divided on the issue. Two cases in the Southern District of New York forcefully assert that unrelated investors may not band together for the purpose of achieving lead plaintiff status, reasoning that investors with no prior relationship will not be as effective at controlling class counsel as would a single institutional entity.*fn17 Other cases, comprising the majority view, hold that unrelated investors may aggregate under certain circumstances.*fn18 One court even goes so far as to argue that "a greater number of plaintiffs allows them, as a group, to wield more control over counsel."*fn19 For the most part, in the absence of explicit limits "the lead plaintiff decision must be made on a case-by-case basis, taking account of the unique circumstances of each case."*fn20 Generally, a lead plaintiff group should be held to a reasonable number, so that the group does not become too unwieldy.*fn21 This logic eschews "a hard-and-fast rule," instead adopting a "rule of reason" along with the general presumption that unrelated "groups with more than five members are too large to work effectively."*fn22

  The fact that the PSLRA was designed to favor institutional investors should be taken into account when determining what constitutes a reasonable group of "members."*fn23 Appointing a group of unrelated investors lead plaintiff could lead to fragmentation and the problem of determining whose voice reigns when the group cannot agree.*fn24 An institutional investor with substantial losses functioning as lead plaintiff is less likely to cause a "flurry of otherwise pointless activity" in the form of disputes within the lead plaintiff group.*fn25

  I conclude, therefore, that a group of unrelated investors should not be considered as lead plaintiff when that group would displace the institutional investor preferred by the PSLRA. But where aggregation would not displace an institutional investor as presumptive lead plaintiff based on the amount of losses sustained, a small group of unrelated investors may serve as lead plaintiff, assuming they meet the other necessary requirements.

  The appropriateness of the Adib Group to serve as lead plaintiff therefore hinges on a comparison between the losses of the Adib Family, Weber, and the Pension Fund. If the Adib family has greater losses than the Pension Fund even without Weber, then Weber may be included in the group and, subject to a determination that the Adib Group meets the requirements of Rule 23(a), the Adib Group will be named the presumptive lead plaintiff. If the Adib family is dependent on Weber's losses to establish aggregate losses greater than the Pension Fund's, then Weber will not be considered as part of the Adib Group, and the Pension Fund will be named presumptive lead plaintiff, assuming that it can satisfy the requirements of Rule 23(a).

  C. Comparing Financial Interest

  In determining which plaintiff has the greatest financial interest in the outcome of a securities litigation, courts have looked to four factors: "(1) the number of shares purchased during the class period; (2) the number of net shares purchased during the class period; (3) the total net funds expended during the class period; and (4) the approximate losses suffered" (the "Lax Test").*fn26 Applying these factors I conclude that the Adib Group has the greatest interest in the outcome of the eSpeed litigation.

  The first three factors of the Lax Test, examining gross purchases, net purchases, and net funds expended, lean slightly in favor of the Adib Group. The Pension Fund bought a total of 22,925 shares of eSpeed stock during the class period, whereas the Adib Group bought 22,800 shares (19,800 without Weber).*fn27 The Pension Fund bought 10,625 net shares during the class period, whereas the Adib Group bought 15,550 net shares (12,550 without Weber).*fn28 Finally, the Pension Fund expended a total of $249,378 in purchasing shares, whereas the Adib Group expended $360,418 ($298,925 without Weber).*fn29 The Adib Group thus surpasses the Pension Fund on factors two and three, but loses to the Pension Fund on the issue of gross shares bought during the class period (all three results are the same with or without Weber).

  Because "the PSLRA expresses little guidance in prescribing a uniform method for assessing a party's financial loss"*fn30 in analyzing the fourth factor of the Lax Test courts must decide the best way to estimate losses, usually choosing between two distinct accounting methods: the "first-in, first out" ("FIFO") and the "last-in, first out" ("LIFO") techniques. For the purpose of loss calculation, the Pension Fund utilizes FIFO and the Adib Group uses LIFO, each movant concluding that it has the greatest losses (whether or not Weber is included in the Adib Group).

  The FIFO method is often used by courts and the Internal Revenue Service to determine losses for tax purposes.*fn31 Further, FIFO has historically been the preferred method of calculating losses "where shares of stock cannot be identified with any particular lots purchased."*fn32

  But more recently, courts have preferred LIFO and have "generally rejected FIFO as an appropriate means of calculating losses in securities fraud cases."*fn33 Moreover, in a number of instances where courts have used FIFO to calculate financial loss, they have done so reluctantly.*fn34 LIFO, by contrast, has been used not only for lead plaintiff calculations, but also to determine compensation amounts for stockholders suffering losses due to securities fraud.*fn35

  The main advantage of LIFO is that, unlike FIFO, it takes into account gains that might have accrued to plaintiffs during the class period due to the inflation of the stock price.*fn36 FIFO, as applied by the Pension Fund and others, ignores sales occurring during the class period and hence may exaggerate losses.*fn37

  An analysis of the Pension Fund's loss as calculated by the Pension Fund demonstrates why FIFO (as applied by the Pension Fund) is inferior to LIFO. In order to arrive at its alleged loss, the Pension Fund sums up the cost of the purchases it made during the class period, and then subtracts from that sum the money it gained back immediately following the class period through the sale of the same number of shares. Specifically, the Pension Fund bought 22,925 shares of eSpeed stock during the class period for a total investment of $494,839.37.*fn38 Following the class period, from July 6 to August 6, 2004 the Pension fund sold the same number of shares, gaining back $271,870.23.*fn39 The Pension Fund's FIFO method of analysis subtracts the later sales from the earlier purchases for a loss of $222,969.14.*fn40

  This analysis ignores that the Pension Fund also sold shares of eSpeed stock during the class period, when the price was inflated. Whereas all the Pension Fund's sales after the class period were made at around $12 per share, sales during the class period were made at between $15 and $27 per share.*fn41 Thus the Pension Fund's losses due to eSpeed's alleged fraud were actually somewhat cushioned by the sales made when eSpeed's stock price was high, sales that are not taken into account by the Pension Fund's application of FIFO.

  By contrast, the Adib Group's utilization of LIFO reflects offsetting "gains" that were attained through the sale of stock during the class period. This method matches the last purchases made during the class period with the first sales made during the class period.*fn42 Subtracting the sales from the purchases, the Adib Group arrives at its base class period losses. Then, shares that were bought during the class period but were not sold during the class period are accounted for as if they had been sold at the average price of the shares in the 90 calendar days following the class period.*fn43 Adding the losses incurred during the class period to the unrealized losses that would have been incurred had the Adib Group sold their remaining stock at the average price immediately following the class period, the Adib Group arrives at its final calculation.*fn44 On this method of analysis, the Adib Group lost $166,743 without Weber (or $196,795 with him), and the Pension Fund lost $121,264.*fn45 Because this method contemplates the offsetting gains the parties collected during the class period, it is a better measurement of the true damages sustained by the plaintiffs.

  Thus the Adib Group has greater losses than the Pension Fund, with or without Weber. Consequently, Weber may be included in the Adib Group as his exclusion has no material affect on the lead plaintiff determination.

  D. Applying the Requirements of Rule 23 Having established that the Adib Group has the greatest losses, the next question is whether the Adib Group "otherwise meets the requirements of Rule 23(a)."*fn46 This analysis need not be as complete as would a similar determination for the purpose of class certification.*fn47 At the lead plaintiff stage of the litigation, "the party moving for lead plaintiff of the consolidated action need only make a preliminary showing that it satisfies the typicality and adequacy requirements of Rule 23."*fn48 As I noted in In re Initial Public Offering Securities Litigation,

Typicality is satisfied where the claims arise from the same conduct from which the other class members' claims and injuries arise. . . . The adequacy requirement is satisfied where (1) class counsel is qualified, experienced, and generally able to conduct the litigation; (2) the class members' interests are not antagonistic to one another; and (3) the class has a sufficient interest in the outcome of the case to ensure vigorous advocacy.*fn49 Members of the class claim to have been injured by a fraudulent inflation of eSpeed's stock price; the Adib Group makes the same claim.*fn50 The Adib Group therefore meets the Rule 23 typicality requirement for the purpose of the lead plaintiff inquiry.*fn51
  Additionally, the Adib Group meets the Rule 23 requirement that the lead plaintiff have the capacity to adequately represent the class.*fn52 The Adib Group's counsel is experienced in class action litigation and has the ability to conduct the litigation effectively.*fn53 There is no reason to believe that members of the Adib Group have interests that are antagonistic to each other, because all allege significant damages due to eSpeed's actions.*fn54 Given these damages, I find that the Adib Group has enough of an interest in the outcome of the eSpeed litigation to ensure that it will vigorously advocate on behalf of the class.


  Having determined, pursuant to the PSLRA, that the Adib Group is the entity with the greatest losses, has submitted a timely motion requesting to be named lead plaintiff,*fn55 and that the Adib Group furthermore meets the requirements of Rule 23(a), the Adib Group is appointed the presumptive lead plaintiff in the eSpeed litigation. Members of the class now have the opportunity to present evidence, if they wish, in an attempt to rebut the Adib Group's presumptive status.*fn56 If no evidence is submitted or the evidence submitted is inadequate to rebut the presumption, the Adib Group will be named as the lead plaintiff. The Clerk is directed to close the motions of the Adib Group and the Greater Pennsylvania Carpenters Pension Fund for appointment as lead plaintiff [docket numbers 7 and 10]. A conference is scheduled for 4:30 PM on Tuesday, July 19, 2005, in courtroom 15C. SO ORDERED.

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