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CALIFORNIA PUBLIC EMPLOYEES' RETIREMENT SYS. v. CHUBB CORP.
January 10, 2001
CALIFORNIA PUBLIC EMPLOYEES' RETIREMENT SYSTEM, PLAINTIFF,
THE CHUBB CORPORATION, DEAN R. O'HARE, DAVID B. KELSO, HENRY B. SCHRAM, EXECUTIVE RISK INC., STEPHEN: J. SILLS, ROBERT H. KULLAS AND ROBERT: V. DEUTSCH, DEFENDANTS.
The opinion of the court was delivered by: Brown, District Judge
This action arises under the Securities Act of 1933, 15 U.S.C. § 77a,
et seq. (the "Securities Act") and the Securities Exchange Act of 1934,
15 U.S.C. § 78a, et seq. (the "Exchange Act"). The gravamen of the
plaintiff's complaint is that the defendants defrauded investors in Chubb
Corporation ("Chubb") and Executive Risk Inc. ("Executive Risk") when
Chubb artificially inflated the price of its stock between April 27, 1999
and October 25, 1999 in order to effect a stock-for-stock merger between
Chubb and Executive Risk in July 1999. See Complaint for Violation of
§§ 10(b) (and Rule 10b-5), §§ 14 and 20(a) of the Securities
Exchange Act of 1934 and §§ 11 and 15 of the Securities Act of 1933
("Complaint") at ¶ 1. The plaintiff alleges that by artificially
inflating Chubb's stock price, the defendants "reduced the number of
shares Chubb had to issue to acquire Executive Risk, saving Chubb at
least $300-$400 million, while enabling the top three insiders of
Executive Risk to receive millions in special benefits and payments upon
the sale of Executive Risk to Chubb." Id. (emphasis in original).
The plaintiff's complaint alleges three causes of action. In Count I
CalPERS asserts a cause of action under Section 10(b) of the Exchange
Act and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5, on behalf of all
purchasers of Chubb stock between April 27, 1999 and October 15, 1999 and
owners of Executive Risk stock who exchanged their Executive Risk shares
for Chubb shares in July 1999 claiming that the investors were defrauded
by the defendants when the defendants made materially false or misleading
statements about Chubb's financial condition and future performance. See
id. at ¶¶ 138-41. In Count II CalPERS asserts a claim under Section
11 of the Securities Act of 1933 (the "Securities Act") against Chubb,
O'Hare, Schram and Kelso on behalf of all shareholders of Executive Risk
who exchanged their Executive Risk shares for Chubb shares in July 1999
alleging that a registration statement filed by Chubb for 14.8 million
newly registered shares issued to Executive Risk shareholders in the
stock-for-stock merger of the companies was false or misleading. See
id. at ¶¶ 142-47. CalPERS also alleges a cause of action on behalf
of Executive Risk shareholders in Count III, but under Section 14(a) of
the Exchange Act alleging that the proxy material provided to Executive
Risk shareholders was false or misleading and caused the Executive Risk
shareholders to vote in favor of the stock-for-stock merger of the
companies in July 1999. See id. at ¶¶ 148-53.
The only named plaintiff in the complaint is CalPERS, which did not own
Executive Risk shares at the time of the merger and, thus, according to
the allegations on the face of the complaint may not have standing to
assert the claims alleged in Counts II and III as those counts assert
causes of action on behalf of Executive Risk shareholders only.
Notwithstanding this obvious threshold deficiency in the plaintiff's
claims, the plaintiff filed with its complaint the sworn "Certification
of Named Plaintiff Pursuant to Federal Securities Laws," which indicates
that Ted White, Manager, Corporate Governance Unit at CalPERS, reviewed
the complaint and authorized its filing.
On or about October 30, 2000, the moving parties filed a motion seeking
the appointment of the group of three lead plaintiffs as co-lead
plaintiffs and approval of lead counsel pursuant to the PSLRA,
15 U.S.C. § 78u-4 and 77z-1.*fn1 The moving parties are the named
plaintiff, CalPERS, NYSCRF, which is another institutional investor that
purchased Chubb shares during the class period but did not own Executive
Risk shares in July 1999, and John N. Teeple, who is an individual
investor and the only moving class member who owned shares of Executive
Risk at the time of the merger. No other potential lead plaintiffs have
moved or opposed the motion, although the motion is opposed by the
defendants.*fn2 On November 27, 2000, the Court heard the arguments of
counsel and the matter is now ripe for disposition.
The motion for appointment of lead plaintiff and approval of lead
counsel arises under the provisions of the PSLRA. See In re Lucent, 194
F.R.D. at 144. The PSLRA, according to its legislative history, was
enacted in response to perceived abuses of federal securities class
actions through which a race to the courthouse often resulted in
non-representative plaintiffs and their attorneys controlling the
litigation and reaping disproportionate fee awards at the end of the
case. See id.; Burke v. Ruttenberg, 102 F. Supp.2d 1280, 1303 (N.D.Ala.
2000); In re Party City Securities Litigation, 189 F.R.D. 91, 103
(D.N.J. 1999). "The PSLRA provides a method for identifying a
plaintiff, or plaintiffs, who is, or are, the most strongly aligned with
the class of shareholders, and most capable of controlling the
selection, and actions, of counsel." In re Lucent, 194 F.R.D. at 144;
see also In re Party City, 189 F.R.D. at 103 (citations omitted).
Among other things, the PSLRA altered the procedure to be employed by
courts in appointing the lead plaintiff for a purported class. See In re
Lucent, 194 F.R.D. at 144-45; Ravens v. Iftikar, 174 F.R.D. 651, 654-55
(N.D.Cal. 1997). "Rather than selecting as the governing plaintiff in a
securities class action the first plaintiff to reach the courthouse
door, the district court is to choose the most adequate plaintiff to
oversee the litigation." Burke, 102 F. Supp.2d at 1307. The Act
provides, in relevant part:
the court shall consider any motion made by a purported
class member in response to the notice, including any
motion by a class member who is not individually named as
a plaintiff in the complaint or complaints, and shall
appoint as lead plaintiff the member or members of the
purported plaintiff class that the court determines to be
most capable of adequately representing the interests of
the class members. . . .
The selection of the most adequate plaintiff under the PSLRA is
governed by a rebuttable presumption in favor of the class member with
the largest financial interest in the outcome of the litigation. See In
re Lucent, 194 F.R.D. at 145; In re Nice Systems, 188 F.R.D. at 215; In
re Cendant Corp. Litigation, 182 F.R.D. 144, 145 (D.N.J. 1998).
Specifically, the Act provides that
the court shall adopt a presumption that the most
adequate plaintiff in any private action arising under
this chapter is the person or group of persons that
— (aa) has either filed the complaint or made a
motion in response to a notice under subparagraph
(A)(i); (bb) in the determination of the court, has
the largest financial interest in the relief sought by
the class; and (cc) otherwise satisfies the
requirement of Rule 23 of the Federal Rules of Civil
15 U.S.C. § 78u-4(a)(3)(B)(iii)(I) (emphasis supplied). This
presumption of adequacy may be rebutted only "upon proof by a member of
the purported plaintiff class that the presumptively most adequate
plaintiff — (aa) will not fairly and adequately protect the interest
of the class; or (bb) 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). The PSLRA further provides that
once the most adequate plaintiff is selected, the "most adequate
plaintiff shall, subject to the approval of the court, select and retain
counsel to represent the class." 15 U.S.C. § 78u-4(a)(3)(B)(v).
Procedurally, the PSLRA provides that the plaintiff who files the
initial action must publish notice within 20 days of filing that informs
class members of the pendency of the action, the claims asserted in the
complaint, the class period, and their right to file a motion for
appointment as lead plaintiff. See 15 U.S.C. § 78u-4(a)(3)(A)(i).
Within 60 days of the publication of that notice, any member of the
putative class may move the court for appointment to serve as lead
plaintiff. See 15 U.S.C. § 78u-4 (a)(3)(A)(i)(II). The statute
further provides that within 90 days ...
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