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CALIFORNIA PUBLIC EMPLOYEES' RETIREMENT SYS. v. CHUBB CORP.

January 10, 2001

CALIFORNIA PUBLIC EMPLOYEES' RETIREMENT SYSTEM, PLAINTIFF,
v.
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

OPINION

This matter comes before the Court upon the motion of the plaintiff California Public Employees' Retirement System ("CalPERS") and putative class members the New York State Common Retirement Fund ("NYSCRF") and John N. Teeple for appointment as lead plaintiffs and the approval of their attorneys, Milberg Weiss Bershad Hynes & Lerach LLP ("Milberg Weiss") as lead plaintiffs' counsel and the law firm of Cohn Lifland Pearlman Herrmann & Knopf ("Cohn Lifland") as liaison counsel pursuant to the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4 and 77z-1 (the "PSLRA" or the "Act"). The Court has jurisdiction over the matter pursuant to 28 U.S.C. § 1331 and 15 U.S.C. § 78aa and 77v(a). For the reasons discussed below, the motion is denied without prejudice and the plaintiff is ordered to re-publish notice in accordance with this Opinion.

I. BACKGROUND
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.

II. DISCUSSION
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 Procedure.
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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