Uncertainty as to Validity of Foreign Judgment under German Procedural Law Raises Serious Concerns of Party’s Ability to Serve as Lead Plaintiff in Securities Fraud Class Action New York Federal Court Holds
Plaintiffs filed a securities fraud class action against Glaxosmithkline based on statements made about diabetes drug Avandia that failed to disclose the increased risk of heart attack. Borochoff v. Glaxosmithkline PLC, ___ F.Supp.2d ___, 2007 WL 2907812, *1 (S.D.N.Y. October 5, 2007). Eventually, three separate motions were filed seeking appointment as lead plaintiff in the class action, including one by a “German Institutional Investor Group” that had lost more than $28 million – more than any other putative member of the class action. Id. As the class action was governed by the Private Securities Litigation Reform Act (PSLRA), the district court examined which movant was the “most adequate plaintiff” within the meaning of the PSLRA and concluded that the German group failed to so qualify because of uncertainty in the manner in which a judgment from an American court will be enforced, if at all, in Germany.
In class action litigation governed by the PSLRA, the “most adequate plaintiff” is, inter alia, that “person or group” with “the largest financial interest in the relief sought by the class.” 15 U.S.C. § 78u-4(a)(3)(B)(iii). The presumption under the PSLRA that a particular class action plaintiff is the most adequate representative may be rebutted if the proposed lead plaintiff “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)(bb). In this case, the German Institutional Investor Group was entitled to a presumption that it was the most adequate plaintiff for the class action because it had “suffered a loss of over $28 million” and “has the largest financial interest in the relief sought by the class.” Borochoff, at *1. However, competing movants argued that “all those who purchased in Germany may have to be excluded from the class, because any judgment in this [class] action (whether favoring plaintiffs or defendants) may be refused enforcement by a German court. Id.
Based on the district court’s analysis, there is considerable uncertainty “as to whether a judgment in a U.S. class action would be recognized” by a German court. Borochoff, at *2 (quoting In re Vivendi Universal, S.A., 242 F.R.D. 76, 104 (S.D.N.Y. 2007). At least one court refused to appoint a foreign corporation as lead plaintiff in a class action because of the risk that “[f]oreign courts might not recognize or enforce such a decision from an American court, which would allow foreign plaintiffs in the class to file suit against the defendant again in those foreign courts.” Id., at *3 (quoting In re Royal Ahold N.V. Securities & ERISA Litig., 219 F.R.D. 343, 352-53). The district court in the Borochoff class action found it unnecessary to determine at this stage of the proceeding whether the German group would be excluded from the class, but it concluded that “prudence cautions that the arguments for its exclusion are substantial, and in light of that risk it would be improvident to appoint the German Institutional Investor Group as lead plaintiff at this point.” Id. (footnote omitted).