November 3, 2017 / 7:29 PM / 2 years ago

How to scare away a lead plaintiff

(Reuters) - When I first got a tip to check the docket of a securities class action against the biopharmaceutical company Tokai, I was expecting to find shady behavior by plaintiffs’ lawyers. The case is just taking shape, and, all too often, competition for appointment as lead counsel brings out the worst in the class action bar.

The first document I looked at seemed to confirm my expectation. It was a Sept. 28 order in which U.S. District Judge Mark Wolf of Boston refused to name a client of the Pomerantz firm as lead plaintiff. The judge called for affidavits from the client, Steven Maxon, and the lawyer who initially referred him to Pomerantz, Brian Schall of Goldberg Law. He also set a second hearing on Pomerantz’s motion for Maxon to serve as lead and ordered Maxon to be available for questioning.

This seemed to me to be unusually intense scrutiny for a lead plaintiff candidate. Maxon, after all, isn’t a pension fund with fiduciary responsibilities to its investors. He’s just a guy – a U.S. Navy veteran who now works as a contractor setting up IT systems on military bases – who lost a big chunk of money when Tokai’s hotly anticipated prostate cancer treatment flopped.

I wondered if Judge Wolf suspected something untoward about Maxon or the plaintiffs’ firms he’d signed up with. Was that why Maxon withdrew as a lead plaintiff candidate on Oct. 17, a week after the judge conducted a telephone hearing on his motion?

I’ve now read all of the case records on Maxon, Pomerantz and Schall, including the crucial transcript of the Oct. 10 hearing, and I’ve come to believe that the firms and their client were not dishonest or unethical. To be sure, Judge Wolf’s inquiry exposed some of the hurly burly of finding and signing securities class action clients. But mostly, it shows that people get scared when a federal judge starts asking unexpectedly aggressive questions about seemingly mundane documents.

“The level of questioning he received was like nothing we’ve experienced before,” said Jeremy Lieberman of Pomerantz. Lieberman said his side “respects that the judge was trying to do this seriously.” But the consequence of Judge Wolf’s inquiry is that a willing and able lead plaintiff was scared away from the case. And at the moment, there’s no investor to replace him.

“The judge was trying to protect the class, to do the right thing,” Lieberman said. “We think it’s unfortunate, though, that Mr. Maxon has withdrawn.”

Like many individual investors in securities class actions, Maxon testified that he learned about the litigation from an online press release. He filled out an online form with the Goldberg firm and heard back from Brian Schall. Maxon eventually sent records of his investment to a different firm, Lundin Law, that works with Schall’s firm. Schall retrieved Maxon’s signed certification from the Lundin firm. Maxon’s records showed he was a promising lead plaintiff candidate. He had lost nearly $400,000 when Tokai’s share price dropped. He’d also bought shares in the company’s IPO, as well as in post-IPO trades. That meant he could be a lead plaintiff for two kinds of claims in a prospective class action.

According to Schall, he followed the directives of the Private Securities Litigation Reform Act in describing to Maxon the responsibilities of a lead plaintiff in a securities class action. He said he also talked to Maxon about bringing in Pomerantz, explaining that his firm has a referral relationship with Pomerantz.

A few different Tokai investors brought securities cases against the company. Robbins Geller Rudman & Dowd sued in Massachusetts state court on behalf of a Chinese investor. Peter Angelos, the famous asbestos plaintiffs’ lawyer, lost more than $10 million on his investment in Tokai; he has sued the company in an individual fraud case.

Maxon was the only investor to move for appointment as lead plaintiff in a consolidated class action before Judge Wolf. Pomerantz moved to be named lead counsel. Wolf scheduled a hearing on the motion for Sept. 28. Maxon dialed in from Djibouti, where he is living during an IT project on a U.S. military base in the East African country.

Judge Wolf spent more than an hour hearing Robbins Geller and Tokai’s lawyers from Wilson Sonsini Goodrich & Rosati argue about whether the state-court class action, which Tokai removed to federal court, should be remanded to state court. By the time the judge was ready to hear from Maxon, the prospective lead plaintiff had left the call.

At that hearing, the judge warned Lieberman that he expects a lot from lead plaintiffs. He said he’d need assurances that Maxon can show up in court. He also asked questions about Pomerantz’s fee agreement with Maxon. Judge Wolf reminded Lieberman that earlier this year, he appointed a special master to review a $75 million fee request in a class action against State Street bank.

The judge’s tone at the Sept. 28 hearing foreshadowed the Oct. 10 hearing with Maxon himself. Judge Wolf demanded precise details about when Maxon had received documents from the Goldberg and Pomerantz firms, when and how he’d signed them and what he understood them to mean. The first problem arose when the judge asked if Maxon had read the complaint his lawyers filed. Maxon seemed confused about what a complaint is. Judge Wolf pointed out that he’d signed a certification attesting to having read the complaint.

“If you didn’t read anything before you signed this and don’t know what a complaint is, why is that statement correct; or is it incorrect?” the judge said.

“I don’t have an answer for that,” Maxon answered.

After some more confusion about whether documents were e-signed or signed via a computer mouse, Judge Wolf warned Maxon about perjury. “Let me explain something to you, Mr. Maxon, since this could have enormous repercussions,” he said. “You’re giving testimony in federal court…. You have a legal obligation to testify to the best of your memory accurately.”

A rattled Maxon later said he had never spoken by phone with Schall, the Goldberg lawyer he originally signed up with. That contradicted Schall’s declarations to Judge Wolf, in which he said that he and Schall had at least two phone conversations lasting about an hour and a half. Schall said his conversations with Maxon stood out in his memory because he’d never before talked to someone in Djibouti and because they talked about Somali pirates.

After the Oct. 10 hearing, Maxon sent his lawyers at Pomerantz an email saying he’d misspoken and did remember talking to Schall on the phone. But by then, Judge Wolf’s suspicion was piqued. He ordered Schall to produce his phone records. Schall did, but the records did not show he’d been on the phone to someone in Djibouti. Schall told Judge Wolf that his carrier, Verizon, informed him that calls via military phones would not show up in his records.

“There’s nothing pernicious here,” said Lieberman of Pomerantz, who responded to an email I sent to both him and Schall. “Clearly, Mr. Maxon spoke to the Goldberg firm.”

Lieberman’s larger point – and it’s an important one - is that Maxon would have been a good lead plaintiff. He knew his responsibilities to Tokai investors. He was an engaged shareholder who understood the fraud allegations against the company. He’s trustworthy, intelligent and motivated to win money for the class. “This is one of the better plaintiffs out there,” Lieberman said. “We feel like everything was done appropriately, that this was a plaintiff who knew what he was getting into.”

Maxon’s capabilities and general understanding of his obligations as a lead plaintiff are clear in the Oct. 10 hearing transcript. For most judges, that would have been sufficient to appoint him lead plaintiff in a case in which he’s the only candidate.

Are Tokai investors better off now that Maxon doesn’t want the job? As I mentioned, at the moment no one has stepped up to serve as lead plaintiff. Pomerantz has proposed issuing a new press release to find a candidate.

I suppose it’s possible that Judge Wolf’s adversarial style with lead plaintiff candidates and their lawyers will benefit the securities class action bar by assuring lawyers prepare their clients for tough questions about their adequacy. I suspect, however, that at least in this case, the Oct. 10 transcript will dissuade lead plaintiff candidates from applying for the job.

The views expressed in this article are not those of Reuters News.

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