1 2 3 4 5 IN THE UNITED STATES DISTRICT COURT 6 FOR THE NORTHERN DISTRICT OF CALIFORNIA 7 8 STEVEN DOHERTY, et al., Case No. 3:19-cv-03589-CRB
9 Plaintiffs, ORDER GRANTING 10 v. CONSOLIDATION AND APPOINTING LEAD PLAINTIFF 11 PIVOTAL SOFTWARE, INC., et al., AND LEAD COUNSEL 12 Defendants.
13 14 This case stems from three class actions alleging violations of the Securities 15 Exchange Act and the Securities Act. Purchasers of Pivotal Software, Inc.’s (“Pivotal’s”) 16 securities assert that they are entitled to damages caused by Pivotal’s alleged false and/or 17 misleading statements about its financial and business condition. Three sets of motions are 18 now pending—for consolidation, appointment as lead plaintiff, and approval of lead 19 counsel pursuant to the Private Securities Litigation Reform Act of 1995 (“PSLRA”). 20 Most substantial are the motions for appointment of lead plaintiff. Originally, five 21 different plaintiffs sought to be named lead plaintiff. Three of those subsequently 22 withdrew or chose not to oppose, leaving two competing motions: one by Steven Doherty 23 and the Tech Trader Fund LP (collectively, the “Pivotal Investor Group” or “the Group”) 24 and one by the Oklahoma City Employee Retirement System and Police Retirement 25 System of St. Louis (collectively, “Oklahoma”). 26 As discussed below, the Court (1) consolidates the three related securities class 27 actions; (2) appoints Oklahoma as lead plaintiff in the consolidated action; and (3) 1 Loewenfeldt, Busch & Radwick LLP as liaison counsel for plaintiffs in the consolidated 2 action. 3 I. BACKGROUND 4 A. Factual Background 5 Defendant Pivotal is a Delaware corporation with its principal executive offices in 6 San Francisco, California. Doherty Compl. (dkt. 1) ¶ 15. Pivotal and its subsidiaries 7 provide a cloud-native application platform and services in the United States. Id. ¶ 2. 8 Pivotal’s platform allegedly accelerates and streamlines software development by reducing 9 the complexity of building, deploying, and operating cloud-native and modern 10 applications. Id. ¶ 21. Pivotal also allegedly provides strategic services, enabling 11 customers to accelerate their adoption of a modern software development process. Id. 12 Defendant Robert Mee served as Pivotal’s Chief Executive Officer, and defendant 13 Cynthia Gaylor served as Pivotal’s Chief Financial Officer at all relevant times. Id. ¶¶ 16, 14 17. Defendants Mee and Gaylor (the “Individual Defendants”) possessed the power and 15 authority to control the contents of Pivotal’s Securities and Exchange Commission 16 (“SEC”) filings, press releases, and other market communications at all relevant times. Id. 17 ¶ 19. 18 The Plaintiff class consists of all persons and entities, other than the defendants, 19 who purchased or otherwise acquired (1) Pivotal’s common stock traceable to the 20 registration statement issued in connection with Pivotal’s April 2018 initial public offering 21 (“IPO”), and/or (2) Pivotal securities between April 24, 2018 and June 4, 2019 (the “class 22 period”). Id. ¶ 1. 23 On December 15, 2017, the defendants filed a confidential draft registration 24 statement on Form S-1. Id. ¶ 24. The draft went through a series of amendments in 25 response to SEC comments. Id. On or about April 18, 2018, defendants filed a final 26 amendment to the registration statement, which registered over 37 million shares of Pivotal 27 common stock for public sale. Id. ¶ 25. The SEC declared the registration statement 1 the final prospectus for the IPO. Id. ¶ 25. 2 On April 24, 2018, Pivotal completed the IPO, which, upon the underwriters 3 exercising their full overallotment option to purchase additional shares, issued a total of 4 42,550,000 shares priced to the public at $15.00 per share. Id. This generated over $638 5 million in gross proceeds for the defendants. Id. 6 On March 14, 2019, Pivotal issued a press release in which Pivotal disclosed its 7 financial and operating results for the fourth quarter and full fiscal year 2019. Id. ¶¶ 29– 8 31. In that press release, Mee stated that Pivotal was in the “early stages of [a] high- 9 growth market.” Id. ¶ 30. The press release also contained Pivotal’s financial outlook for 10 the first quarter and full fiscal year 2020. Id. ¶ 31. 11 Later on the same day, Pivotal held a conference call with analysts to discuss its 12 financial results for fiscal year 2019 and its guidance for fiscal year 2020. Id. ¶ 32; see 13 also id. ¶¶ 35–39. On that call, Gaylor told analysts and investors that Pivotal “continue[s] 14 to attract new customers and as many [sic] of [its] existing customers grow their 15 investments with [Pivotal].” Id. ¶ 32. Gaylor discussed Pivotal’s “industry-leading” net 16 expansion rate, but also stated that Pivotal “continued to see healthy expansion from 17 existing customers,” and that Pivotal “expect[s] the percentage to come down gradually 18 over time.” Id. ¶ 33. 19 On June 4, 2019, after the market closed, Pivotal issued a press release reporting its 20 financial and operating results for the first quarter of fiscal year 2020. Id. ¶ 47. In that 21 press release, Mee advised investors that “sales execution and a complex technology 22 landscape impacted the quarter.” Id. The June 4 press release also contained a revised 23 guidance for 2020. Id. 24 The following day, on June 5, 2019, Pivotal held a conference call, and multiple 25 analysts questioned Gaylor about the revised guidance. Id. ¶ 48. Following the call, an 26 analyst called the quarter a “train wreck” and characterized Pivotal’s operating results as 27 “disastrous.” Id. ¶ 49. Pivotal’s stock price fell $7.65 per share, or over 40%, to close at B. Procedural Background 1 On June 20, 2019, Steven Doherty filed a complaint asserting claims under Section 2 11 and Section 15 of the Securities Act and Sections 10(b) and 20(a) of the Exchange Act. 3 Id. ¶ 1 (the “Doherty Action”). On the same day, Mikebeb M. Abera filed a complaint 4 asserting claims under Section 11 and Section 15 of the Securities Act. See Abera Compl. 5 (dkt. 1) ¶ 9 in Abera v. Pivotal Software, Inc., No. 19-cv-3601-HSG (the “Abera Action”). 6 The Abera Action named the same defendants as the Doherty Action, and included 7 additional defendants such as Pivotal directors and underwriters of its IPO. Id. ¶¶ 14–40. 8 Doherty published notice of the action on June 20, 2019, which advised investors in 9 Pivotal securities that they had until August 19, 2019 to seek appointment as lead plaintiff. 10 See Wagstaffe Decl., Ex. C (dkt. 22-3). The next day, on June 21, 2019, Peter Kleinman 11 filed a complaint asserting claims under Section 11, Section 12(a)(2), and Section 15 of the 12 Securities Act against the same defendants as the Abera Action. See Kleinman Compl. 13 (dkt. 1) ¶¶ 2, 7–34 in Kleinman v. Pivotal Software, Inc., No. 19-cv-3605-RS (“the 14 Kleinman Action”); Abera Compl. ¶¶ 14–40. 15 All three actions advance substantially the same allegations. The complaints allege 16 that the defendants made false and/or misleading statements regarding Pivotal’s business, 17 operational, and compliance policies. See Doherty Compl. ¶ 1; Abera Compl. ¶ 1; 18 Kleinman Compl. ¶ 1. Specifically, they allege that the defendants failed to disclose that: 19 (1) “Pivotal was facing major problems with its sales execution and a complex technology 20 landscape”; (2) those issues “resulted in deferred sales, lengthening sales cycles, and 21 diminished growth as its customers and the industry’s sentiment shifted away from 22 Pivotal’s principal products because [they] were outdated, inadequate, and incompatible 23 with the industry-standard platform”; and (3) Pivotal’s “public statements were materially 24 false and misleading at all relevant times.” Doherty Compl. ¶ 6. 25 On August 19, 2019, class members Dana Penza, Vasant Punjabi, Mary Anderson, 26 Oklahoma, and the Pivotal Investor Group filed five competing motions to consolidate the 27 related actions, appoint lead plaintiff, and appoint lead counsel. See Penza Mot. (dkt. 7); 1 Punjabi Mot. (dkt. 11); Anderson Mot. (dkt. 16); Okl. Mot. (dkt. 21); Group Mot. (dkt. 29). 2 On August 28, 2019, Penza withdrew his motion, conceding that he does not have 3 the largest financial interest in the relief sought by the class, as required by the PSLRA. 4 Penza Not. (dkt. 35) at 3. On the same day, Punjabi withdrew his motion for the same 5 reason. See Punjabi Not. (dkt. 36) at 1. On September 3, 2019, Anderson filed a notice of 6 non-opposition to competing motions. See Anderson Not. (dkt. 37). Movants Oklahoma 7 and the Group continue to seek appointment as lead plaintiff. 8 II. CONSOLIDATION 9 Federal Rule of Civil Procedure 42(a) permits consolidation where “actions before 10 the court involve a common question of law or fact.” Fed. R. Civ. P. 42(a). 11 “Consolidation is within the broad discretion of the district court.” In re Adams Apple, 12 Inc., 829 F.2d 1484, 1487 (9th Cir. 1987). In determining whether consolidation is 13 appropriate, a court “should ‘weigh the interest of judicial convenience against the 14 potential for delay, confusion and prejudice.’” See Hessefort v. Super Micro Computer, 15 Inc., 317 F. Supp. 3d 1056, 1060 (N.D. Cal. 2018) (quoting Zhu v. UCBH Holdings, Inc., 16 682 F. Supp. 2d 1049, 1052 (N.D. Cal. 2010)); see also Huene v. United States, 743 F.2d 17 703, 704 (9th Cir. 1984). Courts in the Ninth Circuit “have recognized that class action 18 shareholder suits are particularly well suited to consolidation . . . because unification 19 expedites pretrial proceedings, reduces case duplication, avoids the need to contact parties 20 and witnesses for multiple proceedings, and minimizes the expenditure of time and money 21 for all parties involved.” See Hessefort, 317 F. Supp. 3d at 1060 (quoting Miami Police 22 Relief & Pension Fund v. Fusion-io, Inc., No. 13-CV-05368-LHK, 2014 WL 2604991, at 23 *3 (N.D. Cal. June 10, 2014)). 24 The Court agrees with the parties that consolidation of the Doherty Action, the 25 Abera Action, and the Kleinman Action is proper. No party has opposed such 26 consolidation. That the complaints differ slightly does not impede consolidation. See 15 27 U.S.C. § 78u-4(a)(3)(A)(ii) (contemplating consolidation when “more than one action on 1 three actions involve common questions of law and fact related to the Pivotal IPO, and 2 contain similar allegations regarding Pivotal’s public dissemination of false and misleading 3 information to investors during the same time periods. See Doherty Compl. ¶ 1; Abera 4 Compl. ¶ 1; Kleinman Compl. ¶ 1. Consolidation is proper because it serves the judicial 5 interest in convenience, there is no reason to think it would increase delay, including each 6 claim in one action will reduce confusion, and no party has articulated a concern regarding 7 prejudice. 8 Accordingly, the Court orders that: 9 1. The following actions are consolidated pursuant to Federal Rule of Civil 10 Procedure 42(a) for all purposes including, but not limited to, discovery, pretrial 11 proceedings and trial proceedings:
12 Abbreviated Case Name Case Number 13 Doherty v. Pivotal Software, Inc. No. 19-cv-03589-CRB 14 Abera v. Pivotal Software, Inc. No. 19-cv-3601-HSG 15 Kleinman v. Pivotal Software, Inc. No. 19-cv-3605-RS 16 17 2. The consolidated cases shall be identified as: In re Pivotal Securities 18 Litigation and the files of this action shall be maintained in one file. Any other actions 19 now pending or hereafter filed in this District which arise out of the same or similar facts 20 and circumstances as alleged in these related actions shall be consolidated for all purposes 21 as the Court is notified of them. The parties shall notify the Court of any other action 22 which is pending or filed outside of this District which may be related to the subject matter 23 of these consolidated actions when they become aware of such actions. 24 3. Every pleading filed in the consolidated action shall bear the following 25 caption: 26 IN RE PIVOTAL SECURITIES LITIGATION, ___________________________________/ Master File No. 27 III. APPOINTMENT OF LEAD PLAINTIFF 1 Two competing movants seek appointment as lead plaintiff: (1) the Pivotal Investor 2 Group and (2) Oklahoma. For the following reasons, the Court appoints Oklahoma as lead 3 plaintiff of the consolidated action. 4 A. Legal Standard 5 A court is to appoint the “most adequate plaintiff” to serve as lead plaintiff. 15 6 U.S.C. § 78u-4(a)(3)(B)(i). The plaintiff most capable of adequately representing the 7 interest of class members “is the person or group of persons that” (1) either filed the 8 complaint or filed a timely lead plaintiff motion; (2) has the largest financial interest in the 9 relief sought by the class, as determined by the court; and (3) satisfies the requirements of 10 Federal Rule of Civil Procedure 23. 15 U.S.C. § 78u-4(a)(3)(B)(iii)(I). Rule 23 provides 11 that a party may serve as a class representative if (1) its claims or defenses are typical of 12 those of the class, and (2) it will fairly and adequately protect the interests of the class. 13 Fed. R. Civ. Proc. 23(a). 14 The Ninth Circuit has established a three-step process for the appointment of a lead 15 plaintiff under the PSLRA. See In re Cavanaugh, 306 F.3d 726, 729–31 (9th Cir. 2002); In 16 re Stitch Fix, Inc. Sec. Litig., No. 18-cv-06208-JD, 2019 WL 3940954, at *1 (N.D. Cal. 17 Aug. 9, 2019); Bruce v. Suntech Power Holdings Co., Ltd., No. CV 12-04061 RS, 2012 18 WL 5927985, at *1 (N.D. Cal. Nov. 13, 2012). First, the court must determine whether the 19 plaintiff in the first-filed action issued a notice publicizing the pendency of the action.1 20 See Cavanaugh, 306 F.3d at 729. Second, the court must compare the financial stakes of 21 the various plaintiffs, determine which has the most to gain from the lawsuit, and 22 determine whether that plaintiff satisfies Rule 23, particularly its typicality and adequacy 23 requirements. Id. at 730. If so, it is entitled to lead plaintiff status. Id. at 732. If not, the 24 court must then consider the plaintiff with the next-largest financial stake and repeat the 25
26 1 The PSLRA provides that the plaintiff must publish notice alerting members of the purported class of the pendency of the action, the claims asserted, and the purported class period within 20 27 days after filing the complaint. 15 U.S.C. § 78u-4(a)(3)(A)(i). Any member of the purported class 1 inquiry. Id. at 730. Third, the court must consider competing plaintiffs’ attempts to rebut 2 the presumptive lead plaintiff’s showing that it satisfies Rule 23. Id. This can be done 3 using proof that the presumptive lead plaintiff (1) will not fairly and adequately protect the 4 interests of the class, or (2) is subject to unique defenses that render the plaintiff incapable 5 of adequately representing the class. Fed. R. Civ. Proc. 23(a); 15 U.S.C. § 78u- 6 4(a)(3)(B)(iii)(II); see In re Network Assocs., Inc., Sec. Litig., 76 F. Supp. 2d 1017, 1021 7 (N.D. Cal. 1999). 8 B. Discussion 9 Both movants have timely moved for appointment as lead counsel in response to the 10 PSLRA notice.2 Thus, both have satisfied the first PSLRA requirement. The Court first 11 discusses the Group’s qualifications, followed by Oklahoma’s. 12 1. The Pivotal Investor Group 13 Although the Group has the largest financial interest in the litigation, it cannot 14 plausibly allege that its shares are traceable to the Pivotal IPO, and therefore it lacks 15 Section 11 standing. 16 a. Financial Loss Requirement 17 Because the PSLRA does not specify how to calculate “largest financial interest,” 18 courts determine which movant has the most to gain from the lawsuit through “accounting 19 methods that are both rational and consistently applied.” Cavanaugh, 306 F.3d at 730 n.4. 20 Courts consider the “Olsten-Lax” factors to “determine who has the largest financial 21 interest: ‘(1) the number of shares purchased during the class period; (2) the number of net 22 shares purchased during the class period; (3) the total net funds expended during the class 23 period; and (4) the approximate losses suffered.’” Richardson v. TVIA, Inc., No. C 06 24 06304 RMW, 2007 WL 1129344, at *3 (N.D. Cal. Apr. 16, 2007) (quoting In re Olsten 25 Corp. Sec. Litig., 3 F. Supp. 2d 286, 295 (E.D.N.Y. 1998)). Of the four Olsten-Lax 26
27 2 It is undisputed that Doherty, the plaintiff in the first-filed action, published adequate notice on 1 factors, courts in the Ninth Circuit consider the fourth factor, approximate losses suffered, 2 the most determinative. See Richardson, 2007 WL 1129344, at *4; Bruce, 2012 WL 3 5927985, at *2; Hessefort, 317 F. Supp. 3d at 1059. 4 The Group asserts that it suffered an aggregate loss of approximately $592,641 in 5 connection with its purchases of Pivotal securities.3 Group Mot. at 2, 4; Pafiti Decl., Ex. 6 A. This amount is much greater than the loss claimed by Oklahoma, which asserts that it 7 suffered a loss of $253,547.84. Okl. Mot. at 9; Wagstaffe Decl., Ex. B (dkt. 22-2). 8 Oklahoma nonetheless challenges the appropriateness of treating the Group as a group. 9 See Okl. Opp’n (dkt. 39) at 2–5. 10 Despite Oklahoma’s argument to the contrary, see id., aggregation of the Group’s 11 two members is appropriate under the PSLRA. Certainly, some courts in the Ninth Circuit 12 have “rejected groups of plaintiffs who lack a pre-existing relationship as being in 13 violation of the spirit of the PSLRA.” Bruce, 2012 WL 5927985, at *2. See, e.g., In re 14 Netflix, Inc., Sec. Litig., No. 12-0225 SC, 2012 WL 1496171, at *4 (N.D. Cal. Apr. 27, 15 2012) (“courts in [the Ninth Circuit] uniformly refuse to aggregate losses of individual 16 investors with no apparent connection with each other aside from their counsel”); Stitch 17 Fix, 2019 WL 3940954, at *2 (“. . . group of investors who had no pre-existing 18 relationship with one another, and whose relationship and group status were forged only by 19 a lawyer, is not appropriate to be lead plaintiff . . .”). These courts contend that only 20 groups with a pre-existing relationship can ensure client control over plaintiff’s counsel 21 and meet the PSLRA’s goal of eliminating lawyer-driven litigation. In re Versata, No. C 22 01–1439 SI, C 01–1559 SI, C 01–1703 SI, C 01–1731 SI, C 01–1786 SI, 2001 WL 23 34012374, at *4 (N.D. Cal. Aug. 20, 2001). 24 However, other courts in the Ninth Circuit have allowed small groups that lack a 25 pre-litigation relationship to serve as lead plaintiff, so long as the Court determines that the 26 3 The Group (1) purchased 414,741 shares of Pivotal common stock, (2) expended $8,575,628 in 27 net funds on its purchases of Pivotal securities, (3) retained all 64,089 of its Pivotal shares, and (4) 1 proposed group is capable of actively overseeing the litigation and monitoring its counsel. 2 See id. at *5 (“Requiring a pre-litigation relationship, though appealing in its simplicity, is 3 too rigid”); Bruce, 2012 WL 5927985, at *2 (“[w]hile a pre-litigation relationship amongst 4 lead plaintiffs is preferred, it is not required”); Network Assocs., 76 F. Supp. 2d at 1025– 5 26 (discussing information that a proposed group should provide to a court). 6 Although the Group’s initial motion did not provide information related to 7 communication and coordination between its members, the Group later submitted a Joint 8 Declaration in support of its opposition brief. See Pafiti Opp’n Decl., Ex. A (dkt. 38-2) 9 (“Group Joint Decl.”). That the Group did not file the Joint Declaration until after its lead 10 plaintiff motion does not exclude the Court from accepting it. See Robb v. Fitbit Inc., No. 11 16-cv-00151-SI, 2016 U.S. Dist. LEXIS 62457, at *14 (N.D. Cal. May 10, 2016) (joint 12 declaration filed in support of an opposition brief was not excluded). The Group’s Joint 13 Declaration provides the Court with sufficient information about its members, structure, 14 and intended functioning. See Group Joint Decl. ¶¶ 1, 4, 5. Indeed, this information is 15 comparable to the information Oklahoma provided about its own intended functioning. 16 See Wagstaffe Decl., Ex. D (dkt. 22-4) (“Okl. Joint Decl.”). Though the Group’s members 17 do not appear to have had an extensive pre-existing relationship, the Group only consists 18 of two members and the information provided in its Joint Declaration demonstrates that it 19 would be capable of overseeing the litigation and counsel. See Hodges v. Akeena Solar, 20 Inc., 263 F.R.D. 528, 533 (N.D. Cal. Oct. 21, 2009) (joint declaration re agreed upon 21 protocol adequate to allow aggregation). 22 Furthermore, one of the Group’s members—Tech Trader—meets the largest 23 financial stake requirement on its own. Courts in the Ninth Circuit have held that it is not 24 necessary for members of a group to aggregate themselves in order to overcome the largest 25 financial interest requirement if one of the group’s members could meet that requirement 26 by itself. See, e.g., id. at 533; Bruce, 2012 WL 5927985, at *2 (where one of the members 27 of the group met the largest financial interest requirement on its own, court held that the 1 Robb, 2016 U.S. Dist. LEXIS 62457, at *5 (courts are more willing to permit a group of 2 unrelated investors if the group contains an individual investor that would otherwise be 3 entitled to the status as presumptive lead plaintiff). This is not a case in which lawyers 4 aggregated plaintiffs in order to overcome the largest stake requirement because, by itself, 5 Tech Trader suffered a loss of approximately $405,738, which is greater than Oklahoma’s 6 aggregate loss of $253,547.84. See Group Opp’n (dkt. 38) at 9; Pafiti Decl., Ex. C (dkt. 7 30-3). 8 Because the Group has the largest financial interest, both as a whole and as to Tech 9 Trader individually, it is the presumptive lead plaintiff. 10 b. Rule 23(a) Requirements 11 However, the Group fails to satisfy Rule 23(a). Rule 23(a) provides that a class 12 action may proceed if: “(1) the class is so numerous that joinder of all members is 13 impracticable; (2) there are questions of law or fact common to the class; (3) the claims or 14 defenses of the representative parties are typical of the claims or defenses of the class; and 15 (4) the representative parties will fairly and adequately protect the interests of the class.” 16 Fed. R. Civ. P. 23(a). The typicality and adequacy requirements of Rule 23 are the Court’s 17 main focus in this context. See Richardson, 2007 WL 1129344, at *4; Cavanaugh, 306 18 F.3d at 730.4 The presumptive lead plaintiff “need only make a prima facie showing of its 19 typicality and adequacy.” Hessefort, 317 F. Supp. 3d at 1060–61. The PSLRA requires 20 “proof” to overcome the presumption entitling the plaintiff with the largest financial 21 interest in the litigation to appointment as lead plaintiff; speculative assertions are 22 insufficient. See 15 U.S.C. § 78u–4(a)(3)(B)(iii)(II); Armour v. Network Assocs., Inc., 23 171 F. Supp. 2d 1044, 1054 (N.D. Cal. 2001). 24 i. Adequacy Requirement 25 The test for adequacy is whether the presumptive lead plaintiff and its counsel have 26 any conflicts of interest with other class members, and whether they will prosecute the 27 1 action vigorously on behalf of the class. See Staton v. Boeing Co., 327 F.3d 938, 957 (9th 2 Cir. 2003). 3 Oklahoma argues that Doherty, individually, is inadequate due to inconsistencies5 in 4 his PSLRA certifications. See Okl. Opp’n at 7–9. Oklahoma accuses Doherty of either 5 intentionally filing false certifications or of failing to adequately supervise his counsel. 6 Okl. Reply (dkt. 55) at 3–4. The Court rejects Oklahoma’s argument. That Doherty filed 7 inconsistent shareholder certifications does not prevent him from serving as lead plaintiff. 8 See Aronson v. McKesson HBOC, Inc., 79 F. Supp. 2d 1146, 1155 (N.D. Cal. 1999) 9 (movant was not barred for “mere failure to file a certification”). Doherty corrected his 10 mistake as to the certificates when it was brought to his attention. See Group Opp’n at 9– 11 11. No party has provided the necessary “proof” of inadequacy to overcome the 12 presumption in favor of the Group. Accordingly, the Court finds that the Group has met 13 the adequacy requirement. 14 ii. Typicality Requirement 15 The test of typicality is whether other class members have the same or similar 16 injury, whether the action is based on conduct that is not unique to the presumptive lead 17 plaintiff, and whether other class members have been injured by the same course of 18 conduct. See Hanon v. Dataproducts Corp., 976 F.2d 497, 508 (9th Cir. 1992). 19 Additionally, the presumptive lead plaintiff may be atypical if it is subject to “unique 20 defenses which threaten to become the focus of the litigation.” See id. (citing Gary Plastic 21 Packaging Corp. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 903 F.2d 176, 180 (2d 22 Cir. 1990), abrogated by Microsoft Corp. v. Baker, 137 S. Ct. 1702 (2017)). 23 Oklahoma argues that the Group is atypical because it is subject to unique 24 defenses—specifically, that: (1) Doherty is atypical because he was a “day trader” and was 25 previously employed at Dell EMC; (2) Tech Trader is atypical due to its hedge fund 26
27 5 Doherty has twice filed the same June 12, 2019 PSLRA certification, see dkts. 1-1, 1-2, 30-3, but 1 structure and trading method; and (3) neither member of the Group has standing to pursue 2 the Securities Act claims. See Okl. Opp’n at 5, 9–12. Oklahoma’s first two typicality 3 arguments lack the sufficient “proof” required to overcome the Group’s presumptive lead 4 plaintiff status.6 However, as discussed below, the Court finds that the Group did not meet 5 its burden of adequately pleading that its shares are traceable to the Pivotal IPO, and 6 therefore lacks standing under Section 11 of the Securities Act. Accordingly, the Group 7 does not meet the Rule 23 typicality requirement. 8 (i) Legal Framework for Traceability 9 Section 11 of the Securities Act “provides a cause of action to any person who buys 10 a security issued under a materially false or misleading registration statement.” In re 11 Century Aluminum Co. Sec. Litig., 729 F.3d 1104, 1106 (9th Cir. 2013). To prove a 12 violation of Section 11, a plaintiff must show that the securities it purchased were issued 13 under the statement—i.e., that its securities can be traced to that statement. See In re 14 Lendingclub Sec. Litig., 282 F. Supp. 3d 1171, 1179 (N.D. Cal. 2017) (plaintiff bears the 15 burden of tracing shares). 16 The level of factual specificity needed for a plaintiff to adequately allege that shares 17 are traceable to an offering varies depending on the context. See Century Aluminum, 729 18 F.3d at 1107. When all of a company’s shares were issued in a single offering under a 19 single registration statement, it is sufficient merely to allege that the plaintiff’s shares are 20 “directly traceable” to the offering in question. See id. “No further factual enhancement is 21 needed because by definition all of the company’s shares will be directly traceable to the 22
23 6 Doherty’s trading record does not align with that of a “day trader,” but even if it did, courts in the Ninth Circuit have held that being a day trader is not necessarily disqualifying. See, e.g., In re 24 Zynga, Inc. Sec. Litig., No. 12-04007 JSW, 2013 U.S. Dist. LEXIS 9314, at *6 (N.D. Cal. Jan. 22, 2013) (“the Court finds that whether [movant] is a day trader is inconsequential to his request to 25 be appointed lead plaintiff”); Serafimov v. Neptopia, Inc., No. 04-3364 RMW, 2004 U.S. Dist. LEXIS 25184, at *17–*18 (N.D. Cal. Dec. 3, 2004) (“the Ninth Circuit has held that day traders 26 suffer as do other traders under fraud on the market theory”). Additionally, Oklahoma did not provide proof that Doherty, during his employment at Dell EMC, had contact with any Pivotal 27 employees or come into possession of any non-public information retaining to Pivotal. See Group 1 offering in question.” Id. (emphasis in original). However, when a company has issued 2 shares in multiple offerings under more than one registration statement (a “mixed- 3 market”), “a greater level of factual specificity will be needed before a court can 4 reasonably infer that shares purchased in the aftermarket are traceable to a particular 5 offering.” Id. This is a “context-specific task that requires the . . . court to draw on its 6 judicial experience and common sense.” Id. (citing Ashcroft v. Iqbal, 556 U.S. 662, 679 7 (2009)). “[W]hen a company has offered shares under more than one registration 8 statement, aftermarket purchasers usually will not be able to trace their shares back to a 9 particular offering.” Id. at 1107–08 (emphasis in original). Plaintiffs must allege facts 10 from which the court “can reasonably infer that their situation is different.” Id. at 1108. 11 (ii) Factual Background on Traceability 12 The parties do not dispute the following facts. On April 17, 2018, Pivotal issued 13 19,415,075 unregistered shares of its Class A common stock to GE International Holdings 14 (“GE”) prior to its IPO. See Okl. Opp’n at 6. Pivotal’s IPO took place on April 24, 2018, 15 which issued a total of 42,550,000 shares to the public. See Doherty Compl. ¶ 25. During 16 Pivotal’s IPO, GE registered and sold 3,883,000 of its pre-IPO Class A shares. See Okl. 17 Opp’n at 6. The balance of GE’s unregistered 15,532,075 shares were restricted and 18 subject to a 180-day lock up period. See id. On November 6, 2018, after the expiration of 19 the 180-day lock up period, GE sold 9,836,521 unregistered shares of Pivotal Class A 20 common stock; this meant that non-IPO shares amounting to approximately 23 percent of 21 Class A common stock entered the market and comingled with IPO shares. See id.; Group 22 Reply at 6. Therefore, on November 6, 2018, approximately 77 percent of Pivotal shares 23 on the market were IPO shares. On December 12, 2018, GE sold its remaining 5,695,554 24 unregistered shares—and thereby added to the market non-IPO shares amounting to 25 approximately 13 percent of Class A common stock. See Okl. Opp’n at 6. Thus, by 26 December 12, 2018, approximately 36 percent of total Pivotal Class A common stock in 27 1 the market were non-IPO shares and 64 percent were issued in connection with the IPO. 7 2 The parties also do not dispute the amounts and dates that Doherty and Tech Trader 3 purchased Pivotal shares. Doherty first purchased 3,000 shares on April 20, 2018, and 4 subsequently bought and sold shares throughout the class period. See Pafiti Decl., Ex. A. 5 Oklahoma states, and the Group does not contest, that Doherty sold all of his shares on 6 November 2, 2018. See Okl. Opp’n at 6; Pafiti Decl., Ex. A. Doherty then purchased 7 20,221 shares on November 6, 2018—the date the GE stock comingled with the IPO stock. 8 See Pafiti Decl., Ex. A.; see also Okl. Reply at 8 (“in a series of transactions starting on 9 May 8, 2019, almost four weeks before the end of the Class Period, Doherty purchased 10 12,975 shares of Pivotal stock in total, and continued to hold all 12,975 shares on June 4, 11 2019, the date of the corrective disclosure marking the end of the Class Period.”). Tech 12 Trader made a single purchase of 51,114 Pivotal shares on June 4, 2019. See Pafiti Decl., 13 Ex. A. 14 (iii) Discussion of Traceability 15 Given the above facts, there is no dispute that both Doherty and Tech Trader 16 purchased Pivotal shares after the GE and IPO shares comingled in the market on 17 November 6, 2018. See Okl. Opp’n at 6–7; Group Reply at 6 (“the only shares that 18 Doherty and Tech Trader held at the end of the Class Period were purchased after the entry 19 into the market of the unregistered shares previously owned by GE”). This is therefore a 20 mixed-market scenario in which the Group must allege with a “greater level of factual 21 specificity” that its shares are traceable to the IPO. See Century Aluminum, 729 F.3d at 22 1107. Oklahoma argues that the Group has not and cannot do so. 23 The Group responds that courts assessing traceability look to whether the market 24 was dominated by shares from the offering in question or by pre-existing shares. Group 25 Reply at 6 (citing to Sudunagunta v. NantKwest, Inc., No. CV161947MWFJEMX, 2018 26
27 7 At the motion hearing, counsel for Oklahoma argued that the relevant date is December 12, 1 WL 3917865, at *15–16 (C.D. Cal. Aug. 13, 2018), appeal dismissed, No. 18-80101, 2019 2 WL 4130797 (9th Cir. July 19, 2019)). The Group argues that since more than seventy- 3 five percent of shares in circulation on November 6, 2018, and more than sixty percent of 4 shares in circulation on December 12, 2018, were issued in connection with the IPO, those 5 IPO shares dominated the market for Pivotal common stock, “making it highly likely, or at 6 least more than plausible, that the [Group’s] shares were issued in the IPO.” Group Reply 7 at 6. This argument is not persuasive. 8 While it is true that, in mixed-market situations, courts in the Ninth Circuit have 9 discussed whether the market was dominated by IPO shares, they largely did so in 10 explaining why plaintiffs had not adequately alleged standing. See, e.g., Century 11 Aluminum, 729 F.3d at 1108 (plaintiffs lacked standing where 49 million shares were 12 already in the market when 24.5 shares issued in a secondary offering); In re Exodus 13 Commc’ns, Inc. Sec. Litig., No. C-01-2661 MMC, 2006 WL 1530081, at *3 (N.D. Cal. 14 June 2, 2006) (plaintiffs lacked standing where there were more than 550 million shares 15 outstanding when plaintiffs purchased shares, only 13 million of which were issued in the 16 offering in question). 17 This is certainly true in two of the three cases upon which the Group relies. The 18 Group cites to Welgus v. TriNet Grp., Inc., No. 15-CV-03625-BLF, 2017 WL 167708 19 (N.D. Cal. Jan. 17, 2017). Group Reply at 6–7. But in Welgus, the court found that 20 plaintiffs lacked standing where 45 percent of the shares in the market at the time they 21 purchased were secondary offering shares. 2017 WL 167708, at *15. The Group also 22 cites to Abbey v. Computer Memories, Inc., 634 F. Supp. 870 (N.D. Cal. 1986). Group 23 Reply at 7. But in Abbey, the court found that plaintiffs lacked standing where 18 percent 24 of the shares in the market were issued in the offering in question. 634 F. Supp. at 874. 25 The court there added that “a showing that a plaintiff’s stock ‘might’ have come from the 26 relevant offering” is inadequate. Id. It explained: “Relaxing the tracing requirement such 27 that a plaintiff may fulfill it by showing even a high probability that some of his shares 1 liability envisioned by section 11.” Id. at 875. 2 The Group does not cite to any case in which a court has found that only having a 3 favorable percentage is enough to plausibly allege traceability. Indeed, courts in the Ninth 4 Circuit and elsewhere8 have expressly stated the opposite. In In re Quarterdeck Office 5 Sys., Inc. Sec. Litig., No. CV 92-3970-DWW(GHKX), 1993 WL 623310, at *2–3 (C.D. 6 Cal. Sept. 30, 1993), 97 percent of shares in the market were issued pursuant to the 7 offering in question. Despite this high percentage, the court held that plaintiffs lacked 8 standing. See id. at *3. The court explained that plaintiffs’ attempt to use statistical 9 analyses to show that their shares “might” have been issued in the offering in question is a 10 “speculative basis for standing” that, “without more, is insufficient.” Id. Likewise, in In re 11 Lendingclub Securities Litigation, 282 F. Supp. 3d at 1179, the court explained that “only 12 shares that were purchased in the IPO or in the open market [before commingling] are 13 traceable to the allegedly misleading disclosure statement (absent an individualized 14 showing that post-lock-up purchases were individually traceable to the IPO).” The court 15 cited approvingly to Quarterdeck’s holding that “[t]raceability . . . is not a matter of 16 probability, but rather is construed literally and requires a showing that the shares 17 purchased were actually the offending shares.” Id. at 1180. And it noted that in the facts 18 before it, the plaintiff had “purchased shares issued under the allegedly misleading 19 registration statement before they were commingled with any other shares,” and so 20 “probability does not enter into the analysis.” Id. 21 The only other case that the Group cites in support of its dominance argument, and 22 the only one of the three it cites in which a court found standing, is NantKwest. See Group 23
24 8 The Fifth Circuit has also held that a high probability that the shares are traceable to the registered offering is not enough to establish standing to assert a Section 11 claim. See Krim v. 25 pcOrder.com, Inc., 402 F.3d 489, 496–97 (5th Cir. 2005). The court held that, despite there being a 90 percent chance that plaintiff’s shares were from the offering in question, “accepting such 26 ‘statistical tracing’ would impermissibly expand the [Section 11] standing requirement.” Id. at 496. The court supported its conclusion with the following analogy: “Taking a United States 27 resident at random, there is a 99.83% chance that she will be from somewhere other than 1 Reply at 6–7. But NantKwest is distinguishable. In that case, 99.5 percent of shares in the 2 market came from the offering in question, and so it was “highly unlikely that the shares 3 [the plaintiffs] purchased were Non-IPO Shares.” NantKwest, 2018 WL 3917865, at *5 4 (emphasis in original). Moreover, the plaintiffs had also indisputably purchased 800 5 shares before the non-IPO shares even entered the market. Id. at *5–*6. These 800 shares 6 were directly traceable to the IPO itself; therefore, plaintiffs had Section 11 standing. See 7 id. at *6. Here, neither Doherty nor Tech Trader held stocks prior to November 6, 2018, 8 the date when the pre-IPO and IPO shares “comingled” in the market. See Pafiti Decl., Ex. 9 A.9 None of the Group’s shares appear directly traceable to the IPO. 10 Accordingly, the only argument that the Group asserts regarding Section 11 11 standing is a “speculative” statistical argument, akin to the argument rejected by the 12 Quarterdeck court. See Group Reply at 6. It is also a conclusory allegation, similar to the 13 one the Ninth Circuit rejected in Century Aluminum. Simply alleging that stock is 14 traceable because of a favorable percentage does “not give rise to a reasonable inference 15 that plaintiffs’ shares are traceable.” See Century Aluminum, 729 F.3d at 1108. Plaintiff’s 16 shares could have come from the offering, or alternatively, could not have. See id. 17 “Plaintiffs’ allegations are consistent with their shares having come from either source . . . 18 plaintiffs cannot offer allegations that are ‘merely consistent with’ their favored 19 explanation but are also consistent with the alternative explanation.” Id. (citing Iqbal, 556 20 U.S. at 678). “Something more is needed. . . .” Id. Here, the Group failed to allege any 21 additional facts that tend to exclude the possibility that its shares came from GE’s pool of 22 non-IPO shares. 23 The Group has not plausibly alleged that its shares are traceable to the Pivotal IPO 24 and therefore has not plausibly alleged that it has Section 11 standing. Accordingly, the 25
26 9 Doherty purchased Pivotal shares prior to November 6, 2018, but it is undisputed that Doherty sold all Pivotal shares on November 2, 2018. See Pafiti Decl., Ex. A. He then purchased Pivotal 27 shares again on November 6, 2018, but this is after the GE non-IPO shares entered the market. 1 Court finds that the Group is atypical and declines to appoint it as lead plaintiff of the 2 consolidated action. 3 2. Oklahoma 4 If the presumptive lead plaintiff is inadequate or atypical under Rule 23, the court 5 must then consider the plaintiff with the next-largest financial stake and repeat the inquiry. 6 See Cavanaugh, 306 F.3d at 730. In repeating the inquiry, the Court finds that Oklahoma 7 meets the requirements under the PSLRA. Accordingly, the Court appoints Oklahoma as 8 lead plaintiff of the consolidated action. 9 a. Financial Loss Requirement 10 The Oklahoma movant is made up of two institutional investors, the Oklahoma City 11 Employee Retirement System and the Police Retirement System of St. Louis. Okl. Mot. at 12 1. Oklahoma claims that it suffered a combined loss of $253,547.84 as a result of 13 transactions in Pivotal securities. Id. at 9. No party challenges this number or disputes the 14 propriety of aggregating the losses of Oklahoma’s group members under the PSLRA. 15 Indeed, aggregation is appropriate, for the same reasons the Court found it appropriate as 16 to the Group. Therefore, Oklahoma is the movant with the next-largest financial interest in 17 the litigation. 18 b. Rule 23(a) Requirements 19 i. Adequacy Requirement 20 Oklahoma asserts that it will fairly and adequately protect the interests of the class 21 for three reasons. See Okl. Mot. at 10. It contends that no antagonism exists between 22 Oklahoma’s interests and the interests of other class members. Id. It contends that it will 23 vigorously represent the Class’s interests because of Oklahoma’s substantial financial 24 stake in the litigation and standing to pursue all claims alleged. Id. Prior to seeking a role 25 as lead plaintiff, the members of the Oklahoma group held a joint conference call to 26 discuss the merits of the claims alleged, their standing to pursue those claims, the 27 significant losses incurred, and their common goals in maximizing recovery for all Pivotal 1 adequacy by selecting Labaton Sucharow as lead counsel and Wagstaffe, Von 2 Loewenfeldt, Busch & Radwick LLP as liaison counsel. Okl. Mot. at 2, 10–11; Okl. 3 Opp’n at 15. These arguments all support Oklahoma’s claim that it is a cohesive group 4 that will adequately represent all class members. 5 However, the Group argues that Oklahoma is inadequate to serve as lead plaintiff 6 because it has taken positions at the expense of one of its own group members. See Group 7 Reply at 4, 7, 14–15. Oklahoma’s initial motion alleged substantial losses incurred by St. 8 Louis Police—one of Oklahoma’s two group members—on purchases that occurred 9 exclusively after November 6, 2018. See id. at 4; Okl. Mot. at 8–9. As discussed above, 10 Oklahoma’s opposition brief argues that investors who acquired Pivotal securities after 11 GE’s unregistered stocks entered the market lacked standing to pursue Securities Act 12 claims. See Group Reply at 4; Okl. Opp’n at 5–7. If any investor who purchased Pivotal 13 stock on or after November 6, 2019 lacked standing, then St. Louis Police would be 14 disqualified from appointment as lead plaintiff, which reduces Oklahoma’s recoverable 15 damages by roughly $65,561. See Group Reply at 7, 14. The Group argues that 16 Oklahoma’s change in position was purely for tactical advantage, so that Oklahoma could 17 argue that the Group lacked standing to pursue Securities Act claims. See id. at 4. The 18 Group contends that this apparent willingness to exclude a significant number of class 19 members, including one of its own group members, calls into question Oklahoma’s fitness 20 to fulfill the fiduciary obligations of lead plaintiff. See id. at 4, 7, 14. 21 This is not a disqualifying point. Oklahoma raised an appropriate concern 22 regarding a lead plaintiff movant’s Section 11 standing—a concern the Court shares. 23 Moreover, it is undisputed that the other member of the Oklahoma group, Oklahoma City 24 Employee Retirement System, does have Section 11 standing because it purchased and 25 retained Pivotal shares prior to November 6, 2019. See Wagstaffe Decl., Ex. A (dkt. 22-1). 26 These shares are directly traceable to the IPO. Therefore, Oklahoma as a group has 27 standing to pursue Securities Act claims against Pivotal. 1 Oklahoma argues that its claims are typical of the claims of other purchasers of 2 Pivotal securities because they arise from the same course of events and their arguments on 3 liability are identical. Okl. Mot. at 9. Oklahoma adds that both of its members are 4 institutional investors, which are the archetypal lead plaintiffs as envisioned by the 5 PSLRA. See Okl. Opp’n at 15. 6 When enacting the PSLRA, “Congress expected that the lead plaintiff would 7 normally be an institutional investor with a large stake in the outcome.” Network Assocs., 8 76 F. Supp. 2d at 1020. However, as the Group notes, the PSLRA does not require that 9 institutional investors take precedence over individual plaintiffs. See Group Opp’n at 11. 10 The Group argues that Oklahoma, as an institutional investor, should not be appointed over 11 a group of individuals that allege significantly larger losses. See id. at 12. That is correct: 12 a court cannot overcome the statutory presumption in favor of the plaintiff with the 13 greatest financial loss “even if it thinks a different plaintiff would do a better job.” See 14 Bruce, 2012 WL 5927985, at *2. “Nor may the district court consider the relative merits 15 of the plaintiffs seeking lead status.” Id. That Oklahoma consists of institutional investors 16 is therefore not controlling. Nonetheless, no party has provided proof that Oklahoma does 17 not satisfy the typicality requirement. Therefore, Oklahoma is the movant with the 18 second-largest financial stake in the litigation and otherwise satisfies the Rule 23(a) 19 requirements. 20 Accordingly, the Court appoints Oklahoma as the lead plaintiff of the consolidated 21 action. 22 IV. APPOINTMENT OF LEAD COUNSEL AND LIAISON COUNSEL 23 Under the PSLRA, the Court must also appoint lead counsel. 15 U.S.C. § 78u- 24 4(a)(3)(B)(v) (“The most adequate plaintiff shall, subject to the approval of the court, 25 select and retain counsel to represent the class.”). While the appointment of counsel is 26 made subject to the approval of the court, the lead plaintiff gets to select lead counsel for 27 the class. See Cavanaugh, 306 F.3d at 732 (“this is not a beauty contest; the district court 1 || the lawyer offering the best possible fee schedule”). Oklahoma has selected the firm of 2 || Labaton Sucharow LLP, a law firm with experience in prosecuting complex securities 3 || class actions. There is no reason to disagree with its selection. 4 Accordingly, the Court appoints Labaton Sucharow LLP as lead counsel and 5 || Wagstaffe, Von Loewenfeldt, Busch & Radwick LLP as liaison counsel for plaintiffs in 6 || the consolidated action. 7 || V. CONCLUSION 8 For the foregoing reasons, 9 1. The Court CONSOLIDATES the above-captioned securities class actions as 10 || ordered above. 11 2. The Court APPOINTS Oklahoma City Employee Retirement System and 12 Police Retirement System of St. Louis as lead plaintiff in the consolidated action. 13 3. The Court APPOINTS Labaton Sucharow LLP as lead counsel and appoints S 14 || Wagstaffe, Von Loewenfeldt, Busch & Radwick LLP as liaison counsel for plaintiffs in 8 15 || the consolidated action.
s 17 IT IS SO ORDERED. Z 18 Dated: November 8, 2019 CHARLES R. BREYER 19 United States District Judge 20 21 22 23 24 25 26 27 28