We learned this week that investors are not the only ones interested in the social media company Snap’s disclosures as it prepared to go public. In response to questions about mysterious sealed filings in the docket of consolidated securities litigation over its IPO, Snap told Reuters that the U.S. Justice Department and Securities and Exchange Commission have sent the company subpoenas and other requests for information about its IPO disclosures as part of an apparent investigation of Snap’s representations about its competition from Instagram.
Snap, which said it has cooperated with the government inquiry, maintains that its IPO disclosures were “accurate and complete.” It also said the shareholder class action alleging fraud in its IPO materials is meritless.
A prospective government investigation is, at the very least, a morale boost for plaintiffs in securities fraud class actions. At best, it’s a potential affirmation of their theories. But before Snap IPO plaintiffs can get too excited about the newly disclosed SEC and DOJ interest in their case, they’ve got to deal with their own controversy over who will lead the class action.
In September 2017, U.S. District Judge Stephen Wilson of Los Angeles appointed Snap IPO investor Tom DiBiase to serve as lead plaintiff in the consolidated securities fraud litigation. Judge Wilson picked DiBiase over a different investor who claimed much larger losses because the other lead plaintiff candidate, Shinu Gupta, purchased Snap shares after news reports casting doubt on Snap’s user growth projections, a circumstance that would subject Gupta to unique defenses. Judge Wilson selected DiBiase’s lawyers from Kessler Topaz Meltzer & Check as lead counsel in the case.
Kessler Topaz pushed forward quickly. The firm filed a consolidated complaint in November 2017, adding a second named plaintiff, David Steinberg, to the case caption. Investors defeated Snap’s motion to dismiss the case in June 2018 and squelched an attempt by Snap’s lawyers at Wilson Sonsini Goodrich & Rosati to appeal Judge Wilson’s dismissal ruling. In early August, Judge Wilson set a trial date in March 2019 for the case. Later that month, Kessler Topaz moved to certify a class of Snap IPO investors.
Along with its class certification motion, the shareholders’ firm also moved to withdraw David Steinberg as a named plaintiff and to add two different Snap investors, Donald Allen and Shawn Dandridge, to serve as named plaintiffs. Steinberg wanted to withdraw for health reasons, the Kessler Topaz motion said, and Allen and Dandridge would help lead plaintiff DiBiase safeguard investors’ interests as class representatives.
Then things hit a bit of a snag. In September, Wilson Sonsini lawyers traveled to Toronto to depose the lead plaintiff, DiBiase. Kessler Topaz informed Snap’s lawyers that DiBiase could not appear at the deposition for personal reasons. (The firm has subsequently disclosed that DiBiase has health concerns.) Wilson Sonsini asked if DiBiase intended to stay in the case as lead plaintiff. A few days later, Kessler Topaz told Snap’s lawyers that DiBiase would withdraw as the lead. The firm subsequently filed a notice informing Judge Wilson that the lead plaintiff planned to withdraw as soon as the court approved the addition of Allen and Dandridge as class representatives.
“Mr. DiBiase will remain as a lead plaintiff until Mr. Allen and Mr. Dandridge are added as named plaintiffs, and until Mr. Allen and Mr. Dandridge are appointed by the court as class representatives,” the filing said. “These safeguards will further ensure that the substantial work done by the parties to date is not lost, and that this case remains on track to be tried on March 12, 2019.”
Wilson Sonsini immediately protested. In an Oct. 1 filing, Snap’s lawyers said Kessler Topaz was attempting to end-run the lead shareholder selection process mandated by the Private Securities Litigation Reform Act by swapping in new lead plaintiffs for the one investor appointed by the court. “This is not permitted by the Reform Act,” the Wilson filing said. “The court has some flexibility in fashioning a response to the withdrawal of Mr. DiBiase, but the law is clear that the lead plaintiff process needs to be reopened and that an opportunity should be given for the most qualified lead plaintiff candidate to select the lead counsel, not the other way around. The present situation is the opposite of what Congress intended when passing the Reform Act. Instead of lead plaintiff picking counsel, counsel are picking and swapping out lead plaintiffs.”
Snap’s lawyers piled on in their brief opposing class certification, which cast the lead plaintiff controversy as a threshold obstacle. “The sole court-appointed lead plaintiff, Mr. DiBiase, has opted not to continue his role in this case — abruptly declining to attend his noticed deposition hours before it was scheduled,” the brief said. “The court should reopen the lead plaintiff process and appoint a new lead plaintiff — who would then, consistent with the PSLRA, appoint a new lead counsel. Then, and only then, may the court properly consider a motion to certify the class.”
Other shareholders’ firms have begun to circle Kessler Topaz’s case. Faruqi & Faruqi, which represents the lead plaintiff candidate whom Judge Wilson passed over, joined Wilson Sonsini’s opposition to the motion to appoint new shareholders to represent the class, citing cases in which courts have re-opened the lead plaintiff selection process instead of allowing lead counsel to swap in new shareholders. (The best precedent for Wilson and Faruqi seems to be a 2004 ruling from a federal judge in Chicago in In re Neopharm Securities Litigation, 2004 WL 742084.) And two other plaintiffs’ firms, Pomerantz and Levi & Korsinsky, just filed a separate shareholder complaint on behalf of Snap IPO investors in Los Angeles federal court, presumably as a prelude to asking Judge Wilson to name their clients – and them – to lead the case instead of Kessler and its clients.
I’m sure this is all very frustrating for Kessler Topaz, which argues that DiBiase, the court-selected lead plaintiff, has said he’s willing to stay in the job until the class is certified. As the firm has pointed out in its responses Wilson Sonsini, there’s plenty of precedent for judges to make mid-case changes in lead counsel appointments without re-opening the selection process. Just this year, U.S. District Judge Jon Tigar of San Francisco approved (326 F.R.D. 619) the addition of a second lead plaintiff in a shareholder suit against Twitter.
In an email, lead counsel Sharan Nirmul of Kessler said the whole lead plaintiff controversy is a delay tactic by Snap and its lawyers. “Defendants have attempted to stall this case multiple times and are now exploiting the lead plaintiff’s health issue for a litigation advantage,” he wrote. “We have a pending class certification motion with very qualified class representatives, a March 2019 trial date, are deep into discovery, and (are) less than a month away from expert disclosures. While Snap would of course prefer to litigate this case against different adversaries considering the success we have had to date, there is clearly no benefit to the proposed class in unseating the leadership structure.”
To which Snap counsel Feldman of Wilson Sonsini replied, “We will stick with litigating the issue of what happens when a lead plaintiff defenestrates in court, not in a blog.” Faruqi lawyers did not respond to my email requesting comment.
Judge Wilson had planned a Nov. 19 hearing on the class certification and class representative motions but after the government filed sealed motions in the case, he delayed the hearing until Dec. 10. I have a feeling it’s going to be a busy month in the Snap docket.