Lead Plaintiff Pick Rejected as Merely 'Pawn of Counsel'

Mark Hamblett

New York Law Journal

A federal judge has rejected a proposed co-lead plaintiff for the Monster Worldwide Inc. securities fraud class action because the representative knew nothing about the case.

Southern District of New York Judge Jed Rakoff said the Steamship Trade Association International Longshoremen's Pension Fund (STA-ILA) was "simply the willing pawn of counsel" because it "has no interest in, genuine knowledge of, and/or meaningful involvement in this case."

Saying he would "not be party to a sham," Judge Rakoff had some pointed words for lead plaintiffs' counsel, lawyers with Labaton Sucharow, saying they left him with the "distinct impression" they "may not have fulfilled their professional responsibilities in proposing STA-ILA as a class representative."

The Labaton firm, as lead plaintiff's counsel, had put forward the pension fund as co-lead plaintiff along with Middlesex County Retirement System.

Rakoff went ahead and certified the class and selected as lead plaintiff the retirement system, which he found better grounded in the facts of In Re Monster Worldwide Inc. Securities Litigation, 07 Civ. 2237.

The plaintiffs claim violations of the Securities and Exchange Act of 1934 by Monster, former CEO and Chairman Andrew J. McKelvey and former general counsel and Senior Vice-President Myron Olesnyckyj.

Christopher Keller of Labaton Sucharow, who is counsel along with Joel H. Bernstein and Mark S. Arisohn said, "We have great respect for Judge Rakoff, but we feel his conclusion was a little harsh."

"The rule requires that the person who is most knowledgeable be produced for deposition, and in this case the client failed to produce someone who was the most knowledgeable," Keller said. "Nothing about this was a sham."

As class representative, the Middlesex County Retirement System will prosecute claims that shareholders were cheated because the online job search company improperly accounted for backdated stock options.

The judge said the requirement for being class representative was a modest one: the representative must have an awareness of the "basic facts underlying the lawsuit" and be unlikely to "abdicate his obligations to fellow class members."

"But the standard is not so low as to be meaningless," Rakoff said, and he found Horace Alston, co-chairman of the longshoremen's pension fund, failed to meet that standard when he displayed barely any knowledge of the action at deposition.

Alston, under deposition by Monster, represented himself as the person at the fund who knew the most about the lawsuit.

"However, Mr. Alston then testified that he did not know the name of the stock at issue in this case, did not know the name of either individual defendant, did not know whether STA-ILA ever owned Monster stock, did not know if an amended complaint had been filed, did not know whether he had ever seen any complaint in the action," and knew nothing of other basic aspects of the suit, the judge said.

Once plaintiffs' counsel was "confronted with this appalling testimony," Rakoff said, they made matters only worse by designating for deposition a second witness, pension fund trustee Stephen Lukiewski.

While Lukiewski seemed to know a lot more about the case than Alston, the judge said that Lukiewski conceded "he had mostly learned about the substance of the litigation only in the week before his deposition and had devoted almost no time to the case."

KNOWLEDGE OF BACKDATING

Monster had tried to defeat class certification by arguing that proof of the element of reliance in the case was highly individualized.

The plaintiffs countered that individual reliance was not a problem because they were relying on the "fraud-on-the-market" theory of Basic v. Levinson, 485 U.S. 224 (1988). Under that theory, the element of investor reliance on material misrepresentations can be presumed for purposes of a Rule 10b-5 action.

Monster countered that the Basic presumption cannot be applied in options backdating cases because if a class member knew of or suspected options backdating, he or she could not have relied on the misrepresentations.

In their memorandum to the judge, the defendants said there was widespread knowledge of options backdating at 140 other public companies at the time Monster's problems were revealed in 2006, and there were institutional and other sophisticated investors in the class who "had the financial acumen and wherewithal to analyze the publicly available information regarding Monster and discover that the company was backdating stock option grants."

Judge Rakoff was not persuaded.

"[D]espite all of this speculation, Monster provides no direct evidence that any putative class member actually knew about option backdating at Monster before the scandal became public on June 12, 2006," he said. "This failure of Monster to produce evidence of a single class member who had actually figured out what Monster claims so many class members would have figured out is telling."

Andrew Levander of the Dechert firm, representing Monster, declined to comment.

Keller said, "We are thrilled with the certification of the class and thrilled that this firm is lead counsel for the class. We were obviously less than thrilled with the court's comments."