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Fort Worth Employees' Retirement Fund, et al v. J.P. Morgan Chase & Co.

May 15, 2012

FORT WORTH EMPLOYEES' RETIREMENT FUND, ET AL., PLAINTIFFS,
v.
J.P. MORGAN CHASE & CO., ET AL.,
DEFENDANTS.



The opinion of the court was delivered by: J. Paul Oetken, District Judge:

MEMORANDUM AND ORDER

Currently before the Court in this mortgage-backed securities ("MBS") class action is a motion by Lead Plaintiff Employees' Retirement System of the Government of the Virgin Islands ("Virgin Islands") to withdraw as lead plaintiff, to appoint the Laborers Pension Trust Fund for Northern California ("Laborers") as substitute lead plaintiff, and to approve Laborers' selection of the law firm of Robbins Geller Rudman & Dowd LLP (the current lead counsel for Virgin Islands) to serve as lead counsel.

Defendants J.P. Morgan Securities Inc. (now known as J.P. Morgan Securities LLC), J.P. Morgan Acceptance Corporation I, Brian Bernard, Louis Schioppo, Jr., Christine E. Cole, David M. Duzyk, William King, and Edwin F. McMichael (collectively, the "Defendants") oppose the motion on procedural grounds, and argue that, in any event, Laborers lacks standing to serve as lead plaintiff in this case, and that any claims it may have had are time-barred.

For the reasons discussed below, the Court grants Virgin Islands' motion to withdraw as lead plaintiff, but denies the motion to substitute Laborers without prejudice to renewal of that motion at the procedurally proper time. In addition, the Court holds that Laborers, and other purchasers of MBS certificates from the challenged offering, would have standing to serve as lead plaintiff in this case, notwithstanding the fact that they purchased MBS certificates from different "tranches" within that offering.

I. Procedural History

Familiarity with the procedural and factual background of this case is presumed.*fn1 The Court provides a summary of the procedural history only to the extent necessary to explain its ruling on this motion.

Fort Worth Employees' Retirement Fund ("Fort Worth") filed the complaint in this case in New York Supreme Court on March 11, 2009. The case was removed to this Court on April 10, 2009. (Dkt. No. 1.) Under the lead plaintiff appointment process set forth by the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4(a)(3)(B)(i) ("PSLRA"), notice of the pendency of the suit was issued on July 30, 2009. (Dkt. No. 37, Ex. B.) The suit was described as a securities class action on behalf of all persons who acquired the Certificates of JP Morgan Issuing Trusts . . . pursuant and/or traceable to the J.P. Morgan Acceptance Corporation I ("J.P.

Morgan Acceptance") Registration Statement No. 333-141607 and accompanying Prospectus (collectively, the "Registration Statements") and Prospectus Supplements, for violations of the Securities Act of 1933. (Id.) The notice identified several J.P. Morgan Issuing Trusts "at issue in the action," including J.P. Morgan Mortgage Trust 2007-S3 ("2007-S3"), from which Fort Worth and Virgin Islands had purchased MBS certificates.

Both Fort Worth and Virgin Islands moved for appointment as lead plaintiff. In light of Virgin Islands' showing that it possessed a larger financial interest in the case, thereby rendering it the presumptive lead plaintiff under the PSLRA, see 15 U.S.C. § 78u-4(3)(B)(iii)(I)(bb), Fort Worth filed a notice of support of Virgin Islands' appointment as lead plaintiff, but stated that Fort Worth "remains a plaintiff and class member in this action." (Dkt. No. 43.)

On July 8, 2010, Virgin Islands filed a Second Amended Complaint ("SAC" or the "Complaint"). (Dkt. No. 85.)

On May 5, 2011, Judge Koeltl, to whom this action was previously assigned, granted in part and denied in part Defendants' motion to dismiss the SAC for lack of subject matter jurisdiction and for failure to state a claim. In particular, the Court held that Virgin Islands had standing to bring claims only in connection with the offering in which it purchased securities- the 2007-S3 offering. See Virgin Islands, 804 F. Supp. 2d at 150-51. Claims on behalf of purchasers in all other offerings were dismissed. The Court also dismissed the claims brought under Sections 12 and 15 of the Securities Act of 1933, leaving only the claims under Section 11 of the Securities Act of 1933, 15 U.S.C. § 77k(a) ("Section 11").

On November 18, 2011, Virgin Islands filed the instant motion to withdraw as lead plaintiff and to appoint Laborers in its stead. (Dkt. No. 151.) Defendants have filed an opposition to this motion. (Dkt. No. 158 ("Defs. Opp.").) Defendants argue that it is procedurally improper under the PSLRA to allow the substitution of Laborers as lead plaintiff without re-opening the lead plaintiff appointment process as set forth in the PSLRA. In addition, Defendants argue that Laborers should not be substituted as lead plaintiff because Laborers lacks standing to serve as a plaintiff in this action and because the claims that it would have standing to bring are time-barred under the applicable statutes of limitations and repose.

The Court heard oral argument that primarily focused on the standing issues on March 8, 2012. On March 30, 2012, Virgin Islands filed a notice of recent authority to alert the Court to Judge Swain's decision dealing with issues similar to those raised on this motion in In re Bear Stearns Mortgage Pass-Through Certificates Litigation, No. 08 Civ. 8093, 2012 WL 1076216 (S.D.N.Y. Mar. 30, 2012). (Dkt. No. 168.) Defendants filed a response on April 3, 2012. (Dkt. No. 169 ("Defs. Response").)

II. Discussion

A. Defendants' Standing to Challenge the Withdrawal and Substitution of Lead Plaintiff

As a threshold matter, given the current procedural posture, it is not entirely clear under the statute whether Defendants have standing to oppose Virgin Islands' motion to withdraw as lead plaintiff and to appoint Laborers as substitute lead plaintiff. See In re Initial Pub. Offering Sec. Litig., 214 F.R.D. 117, 121-22 (S.D.N.Y. 2002) ("IPO") ("[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."). Under the PSLRA, the presumptive lead plaintiff is the one who meets particular criteria set forth in the statute, subject to rebuttal "by a member of the purported plaintiff class." 15 U.S.C. § 78u-4(a)(3)(B)(iii)(II). The statute does not provide for any involvement by a defendant in the initial selection of lead plaintiff. However, courts have held that, "[g]iven the potential for prejudice to defendants when lead plaintiffs are substituted after years of litigation," defendants in a putative class action may challenge the replacement of a lead plaintiff at a later stage. In re Herley Indus., Inc., No. 06 Civ. 2569, 2010 WL 176869, at *2 (E.D. Pa. Jan. 15, 2010).

Given that this case is now over three years old, and that many of the arguments raised by Defendants affect their interests and will need to be addressed at some point in the litigation, the Court has allowed Defendants to be heard on this motion.

B. PSLRA Procedure

Defendants argue that it is procedurally improper under the PSLRA to allow the substitution of Laborers as lead plaintiff without re-opening the lead plaintiff appointment process as set forth in the PSLRA. Although there is limited guidance on the proper procedure for the replacement of a duly appointed lead plaintiff, the Court determines that a limited allowance of opportunity for other class members to move for appointment as lead plaintiff is appropriate under the circumstances.

Ordinarily, the PSLRA requires the plaintiff who files the complaint to publish a notice of the pendency of the action, thereby giving members of the class the opportunity to file a motion to be appointed as lead plaintiff. See 15 U.S.C. § 78u-4(a)(3)(A)(i). The statute then provides that the presumptive lead plaintiff is the one who (1) filed the complaint or made a motion in response to the notice; (2) "in the determination of the court, has the largest financial interest in the relief sought by the class"; and (3) "otherwise satisfies the requirements of Rule 23 of the Federal Rules of Civil Procedure." 15 U.S.C. § 78u-4(a)(3)(B)(iii)(I). To satisfy the requirements of Rule 23, a plaintiff must show that

(1) the class is so numerous that joinder of all members is impracticable; (2) there are questions of law or fact common to the class; (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and (4) the representative parties will fairly and adequately protect the interests of the class.

Fed. R. Civ. P. 23(a). At this stage, the moving plaintiff need make "only . . . a preliminary showing that the adequacy and typicality requirements have been met." Janbay v. Canadian Solar, Inc., 272 F.R.D. 112, 120 (S.D.N.Y. 2010).

That presumption may be rebutted "only upon proof by a member of the purported plaintiff class that the presumptively most adequate plaintiff" (1) "will not fairly and adequately protect the interest of the class;" or (2) "is subject to unique defenses that render such plaintiff incapable of adequately representing the class." 15 U.S.C. § 78u-4(a)(3)(B)(iii)(II). The policy behind this procedure is "to prevent lawyer-driven litigation, and to ensure that parties with significant financial interests in the litigation will participate in the litigation and exercise control over the selection and actions of plaintiffs['] counsel." In re NYSE Specialists Sec. Litig., 240 F.R.D. 128, 133 (S.D.N.Y. 2007) (citation and internal quotation marks omitted).

As several courts have recognized, although the PSLRA carefully sets forth the procedure for the initial appointment of a lead plaintiff, the statute is silent as to the procedure for substituting a lead plaintiff if the previously appointed lead plaintiff withdraws. See IPO, 214 F.R.D. at 120. Absent statutory guidance, courts are thus left to craft an order that best adheres to the policy behind the PSLRA.

On the one hand, "[i]t is certainly within the lead plaintiffs' discretion and, perhaps more importantly, part of a lead plaintiff's responsibility to propose their own withdrawal and substitution should it be discovered that they may no longer adequately represent the interests of the purported plaintiff class." NYSE Specialists, 240 F.R.D. at 134. On the other hand, courts have held that in appointing a substitute lead plaintiff they should not "simply assume[] that [lead counsel's] choice of [substitute] lead plaintiff is the most adequate plaintiff." In re Neopharm, Inc. Securities Litigation, No. 02 C 2976, 2004 WL 742084, at *3 (N.D. Ill. Apr. 7, 2004).

Courts have taken different approaches to the replacement of a duly appointed lead plaintiff. Theoretically, a court could require a full re-opening of the lead plaintiff appointment process, essentially starting the process anew and following the PSLRA schedule accordingly, though Defendants do not point to any decision going that far. Some courts have held that the withdrawal of the lead plaintiff requires a limited re-opening of the PSLRA appointment process. For example, in Neopharm, 2004 WL 742084, the court denied the motion to substitute lead counsel's choice as the new lead plaintiff, but did not fully restart the lead plaintiff process and require published notice, as would be required for the initial appointment of a lead plaintiff under the PSLRA. Instead, the court granted the motion for withdrawal and allowed an additional 21 days for any party to move for appointment as lead plaintiff. Id. at *4. Ultimately, the only motion that was filed with the court was that of the proposed substitute lead plaintiff from the original motion; the court granted that motion. *fn2 See Order, No. 02 C 2976 (N.D. Ill. May 18, 2004); see also Order on Pending Motions, In re HealthSouth Sec. Litig.,CV-03-BE-1500-S (N.D. Ala. Dec. 1, 2004) (holding that withdrawal of lead plaintiff "necessitates the re-opening of the process for the appointment of lead plaintiff as mandated by the PSLRA," but not requiring issuance of new published notice, and allowing only 38 days for motions for appointment to be filed, rather than the full 60 days contemplated by the PSLRA).

A court in this District 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." IPO, 214 F.R.D. at 120 n.5; see also NYSE Specialists, 240 F.R.D. at 143 (in slightly different context, holding that "since all putative class members were given notice of the opportunity to move for appointment as lead plaintiff by the original motion, there [was] no need for the Court to re-open the process by ordering a new notice and motion period").*fn3 In IPO, Judge Scheindlin held that she would "deem any movant timely" who either (a) filed the complaint, (b) moved to be appointed lead plaintiff in response to the initial notice of pendency, or (c) moved to be appointed lead plaintiff within 60 days of the withdrawal of the previous lead plaintiff. Id. at 120.

Here, the only other party to file for lead plaintiff status was Fort Worth, the entity that filed the original complaint. In light of what then appeared to be Virgin Islands' greater financial interest, Fort Worth supported Virgin Islands' application but remained a plaintiff and class member in the action. (See Dkt. No. 43.) Since Virgin Islands filed its motion to withdraw and substitute Laborers as lead plaintiff, neither Fort Worth nor any other potential lead plaintiff has sought appointment as lead plaintiff or otherwise intervened.

Under these circumstances, and in light of the authority discussed above and the limited statutory guidance, the Court holds that the most appropriate approach in this case is a modified version of the one used by Judge Scheindlin in IPO. The court will deem timely any movant for appointment as lead plaintiff who either (a) filed the complaint, (b) moved to be appointed lead plaintiff in response to the initial notice of pendency, or (c) moved to be appointed lead plaintiff within 30 days of the withdrawal of the previous lead plaintiff.

Because the Court only now grants Virgin Islands' withdrawal, the time period in which another party may move begins as of the date of this order. Thus, the Court will not simply appoint Laborers now, even though it is "willing to step forward." IPO, 214 F.R.D. at 120 n.5. At the same time, the Court does not find that it is necessary or in the interests of the class to fully restart the PSLRA appointment process. This action-and indeed, this motion-have been pending for quite some time, and any other parties have had ample opportunity to seek to intervene. To ensure that such opportunity is not improperly ...


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