LIFO Wins the Day in Lead Plaintiff Battle

Back in the free-wheeling carefree days of late 1995, the PSLRA’s new approach for selecting the lead plaintiff in securities class actions probably seemed enticingly simple. A court merely chooses the plaintiff (or group of plaintiffs) with "the largest financial interest" to serve at the helm. Despite these lofty hopes, one of the man problems is determining exactly what each plaintiff’s losses actually are. In calculating these losses, courts have long struggled with whether to use the "first-in, first out" ("FIFO") or the "last-in, first out" ("LIFO") technique. They’ve gone both ways, but LIFO wins this time around.

Judge Shira A. Scheindlin (S.D.N.Y.) recognized that "the FIFO method is often used by courts," however she noted that "more recently, courts have preferred LIFO and have generally rejected FIFO as an appropriate means of calculating losses in securities fraud cases. Moreover, in a number of instances where courts have used FIFO to calculate financial loss, they have done so reluctantly. LIFO, by contrast, has been used not only for lead plaintiff calculations, but also to determine compensation amounts for stockholders suffering losses due to securities fraud." Also, "the main advantage of LIFO is that, unlike FIFO, it takes into account gains that might have accrued to plaintiffs during the class period due to the inflation of the stock price. FIFO... ignores sales occurring during the class period and hence may exaggerate losses."

Judge Scheindlin also observed that the lead plaintiff applicant using FIFO "sold shares of eSpeed stock during the class period, when the price was inflated," and therefore its "losses due to eSpeed's alleged fraud were actually somewhat cushioned by the sales made when eSpeed's stock price was high." "By contrast, the other group’s utilization of LIFO reflects offsetting 'gains' that were attained through the sale of stock during the class period. This method matches the last purchases made during the class period with the first sales made during the class period." This further "demonstrates why FIFO... is inferior to LIFO."

Finally, in an unusual twist, the LIFO group (well, the group’s five individuals aren’t actually called that, they're styled as the Adib Group) isn’t quite the lead plaintiff just yet. The court wrote that "members of the class now have the opportunity to present evidence, if they wish, in an attempt to rebut the Adib Group's presumptive status. If no evidence is submitted or the evidence submitted is inadequate to rebut the presumption, the Adib Group will be named as the lead plaintiff."

You can read the decision, issued July 13, 2005, at 2005 U.S. Dist. LEXIS 14104.

Nugget: "The lead plaintiff determination does not depend on the court's judgment of which party would be best lead plaintiff for the class, but rather which candidate fulfils the requirements of the Act."

Nugget: "[A] group of unrelated investors should not be considered as lead plaintiff when that group would displace the institutional investor preferred by the PSLRA. But where aggregation would not displace an institutional investor as presumptive lead plaintiff based on the amount of losses sustained, a small group of unrelated investors may serve as lead plaintiff, assuming they meet the other necessary requirements."