Determination of Loss Causation Inappropriate at Pleading Stage and Plaintiffs Satisfied PSLRA (Private Securities Litigation Reform Act of 1995) Standard for Lead Plaintiff New York Federal Court Holds
Plaintiffs filed a putative class action against AtriCure, Inc. alleging violations of the federal securities laws in connection with its initial public offering (IPO) for allegedly failing to disclose material facts in the company’s Registration Statement. Levine v. AtriCure, Inc., 508 F.Supp.2d 268, 270-71 (S.D.N.Y. 2007). Defense attorneys moved to dismiss plaintiff Levine’s claims in the class action complaint, and plaintiffs James Duncan and Jackie Byrd moved to be appointed lead plaintiffs; the district court denied the defense motion and granted the plaintiffs’ motion, id., at 270.
The only relevant facts for purposes of this article’s discussion are (1) Duncan purchased 200 shares of stock in October 2005 for an average of $12.85 and sold the stock in March 2006 when it was trading at $7.36; (2) Byrd purchased 100 shares of stock in August 2005 for $14.19 a share and sold most of her stock in May 2006 when the stock was $7.90, and the rest in December 2006 for $9.28 a share; and Levine purchased 250 shares of stock in August 2005 for $12 a share and sold them in November 2005 at $11.80 a share for a total loss of $50. Levine, at 271 and n.3. The defense motion to dismiss was based on the insignificant loss suffered by Levine and on the fact that he sold his shares prior to the publication of a Wall Street Journal article that purportedly misled class members into purchasing the company’s stock. Id., at 271.
Preliminarily, the district court held that Levine has adequately alleged that he has constitutional standing, particularly in light of the fact that “the burden of disproving loss causation falls on defendants.” Levine, at 272-73. Because causation is presumed in Section 11 cases, the plaintiff is not required to plead or prove loss causation thus rendering it generally inappropriate to grant a motion to dismiss for failure of plaintiff to suffer damage. Id., at 273. Accordingly, the district court denied the defense motion to dismiss. See id., at 273-74. The court also rejected defense efforts to equate “negative causation” with standing, see id., at 274-75.
With respect to plaintiffs’ request for appointment as lead plaintiff under the Private Securities Litigation Reform Act of 1995 (PSLRA), which directs the district court to select the “most adequate plaintiff” (which in general terms is the plaintiff with the largest financial interest in the litigation), the federal court found that plaintiffs Duncan and Byrd satisfied the PSLRA test and granted the motion to appoint them lead plaintiff. Levine, at 276-77.
The defense also argued that the motion should be denied because the class action lawsuit was filed “using Levine as nothing more than a placeholder, chosen not because of his injuries, but to avoid the expiration of the statute of limitations and provide them with time and a procedure to find a viable plaintiff,” which the defense deemed an abuse of the PSLRA. Levine, at 277. The district court disagreed, explaining that Congress intended to “deter security violations and promote enforcement of the Securities Act,” and those goals are not advanced by dismissing the class action complaint because if the class action allegations are true then the defendant would not be held accountable for its misconduct. Id. Notably, no argument had been made that the litigation was frivolous, id. The district court warned, however, “This is not to say that the plaintiffs’ bar may use a plaintiff merely as a placeholder in securities litigation to obtain a several month extension in which to find an adequate plaintiff. If it is entirely clear that the named plaintiff’s claim was without legal basis, then it may be appropriate to consider sanctions; dismissing the case, the ultimate sanction, should be used with caution, however, as it will severely prejudice the entire class.” Id. In this case, however, the evidence did not establish that Levine filed the class action simply to serve as a “placeholder.” Id., at 278.