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A Southern District judge has taken the unusual step of selecting a small group of individual investors, rather than an institutional investor, as presumptive lead plaintiff in a securities class action. Both the Greater Pennsylvania Carpenters Pension Fund and a group of five investors led by Shabbir Adib sought to be named lead plaintiff in a suit against the financial software company, eSpeed. The lead plaintiff and its attorneys control much of the litigation strategy. In addition, the lead lawyers generally collect the largest portion of the fees allotted to plaintiffs’ attorneys. Judge Shira Scheindlin, in In Re eSpeed, Inc. Securities Litigation, 05 Civ. 2091, acknowledged that the standards established in the 1995 Private Securities Litigation Reform Act were designed to favor pension funds and other institutional investors in selecting lead plaintiffs. “Appointing a group of unrelated investors lead plaintiff could lead to fragmentation and the problem of determining whose voice reigns when the group cannot agree,” she wrote. “An institutional investor with substantial losses functioning as lead plaintiff is less likely to cause a ‘flurry of otherwise pointless activity’ in the form of disputes within the lead plaintiff group.” However, Scheindlin noted that, while courts in the Southern District were divided as to whether a group of unrelated investors, could serve as lead plainiff, the majority view was that such a group can serve in that role in the appropriate circircumstances. “[W]here 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,” Scheindlin wrote. She wrote that the contest for presumptive lead plaintiff hinged on whether the Adib group had larger losses than the pension fund. Two of the four factors used in determining which plaintiff had the greatest financial interest in the outcome of the litigation — net number of shares purchased during the class period and the total net funds expended — favored the Adib group, Scheindlin wrote. A third factor — the number of gross shares purchased during the class period — favored the pension fund. GREATER LOSSES The fourth factor required a measurement of the parties’ financial losses. The pension fund applied the First-In, First-Out accounting method while the Adib group applied the Last-In, Last-Out method to make this calculation. The methods, often called by their acronyms, FIFO and LIFO, are normally used in the accounting world to calculate the value of inventory. Courts have used both methods in determining loss valuation. “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 a stock price,” the judge said. Plaintiffs accused eSpeed of inflating its stock price by hiding negative information about the company’s prospects. “FIFO, as applied by the Pension Fund,” Scheindlin held, “ignores sales occurring during the class period and hence may exaggerate losses.” If plaintiffs had sold some eSpeed stock during the class period when this alleged deception took place, then they would have profited from the inflated price. “Because this method,” Scheindlin wrote, referring to LIFO, “contemplates the offsetting gains the parties collected during the class period, it is a better measurement of the true damages sustained by the plaintiffs.” The pension fund, it turned out, had sold some of its eSpeed shares during the class period at a significantly higher price than the price after eSpeed’s disclosure of its true financial condition. “Thus the Pension Fund’s losses due to eSpeed’s alleged fraud were actually somewhat cushioned by the sales made when eSpeed’s stock price was high, sales that are not taken into account by the Pension Fund’s application of FIFO,” Scheindlin held. “By contrast,” the judge continued, “the Adib Group’s utilization of LIFO reflects offsetting ‘gains’ that were attained through the sale of stock during the class period.” On that basis, the judge calculated that Adib group lost either $166,743 or $196,795, while the pension fund lost $121,264. Since the group otherwise met the requirements of federal rules for a lead plaintiff, she granted it the status of presumptive lead plaintiff. Laurence Paskowitz of Paskowitz & Associates represented the Adib group. Samuel Rudman of Lerach Coughlin Stoia Geller Rudman & Robin acted as plaintiffs’ counsel. Lionel Glancy of Glancy Binkow & Goldberg in Los Angeles acted as plaintiffs’ counsel. Eric Belfi of Murray, Frank & Sailer acted as plaintiffs’ counsel. Dennis Orr and Joseph De Simone of Mayer, Brown, Rowe & Maw’s New York office represented eSpeed.

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