Credit Suisse Case Spotlights Who Can Lead Securities Lawsuits

A federal magistrate judge’s rejection of a lead plaintiff bid in a proposed securities class action against Credit Suisse Group AG highlights how courts decide if an investor is right for the role.

The judge found Credit Suisse investor Yasni Jimenez wouldn’t adequately represent a proposed class alleging the bank made false and misleading statements about its practice of lending money to Russian oligarchs. Jimenez, who estimated losing $621, was the only investor who requested to be lead plaintiff.

Courts aren’t required to appoint someone as lead plaintiff just because no one else expresses interest in the position, legal scholars say. Judges often rubber-stamp such requests when only one person wants the designation, however, without digging into whether the investor is adequate.

“Here the judge did more than that,” said St. John’s University law professor Michael Perino. “Is it unusual? Sure. Is it impermissible under the statute? Absolutely not.”

Jimenez argued the judge didn’t have the power to reject his request because he was the only candidate for lead plaintiff. The decision highlights other unsettled questions about how judges assess whether an investor should assume the role. It’s unclear how much certain considerations, like the size of losses or attorneys’ fees arrangements, should factor in when no one else is vying for the lead position.

Congress passed the Private Securities Litigation Reform Act in 1995 to limit frivolous securities lawsuits and enacted rules that incentivize institutional investors to lead cases. Lawmakers thought sophisticated institutional or other major investors, with larger financial stakes, could better steer complex securities litigation.

Jimenez was “exactly the kind of plaintiff that Congress was trying to get out of being the representative plaintiff,” Perino said.

Still, Jimenez’s lawyers said it’s unprecedented for an unopposed motion for lead plaintiff to be rejected because the investor’s financial interest in the litigation was small. How much a person lost shouldn’t be given any weight “if no one else wants to do the job,” Villanova University law professor Richard Booth said.

Magistrate Judge Roanne Mann of the US District Court of the Eastern District of New York also found Jimenez’s fee agreement with attorneys was one-sided and favored the lawyers.

Jimenez has until Sept. 26 to file objections to Mann’s order.

Court’s Discretion

Jimenez estimated losing $621 on a $2,052 investment in Credit Suisse stock, which the suit says dipped in price after US lawmakers asked the bank in March about its compliance with sanctions imposed on Russia.

Credit Suisse has suggested Jimenez’s loss was actually much lower—around $42. Mann said Jimenez’s “extremely modest stake (at most, $621) is unlikely to provide the kind of incentive for close supervision of counsel that the PSLRA contemplates.”

Jimenez’s request to be lead plaintiff came after the investor who filed the lawsuit, Carlos de March Bosch, decided he didn’t want to take the lead, citing travel and other professional obligations. Bosch experienced “significantly greater loss than Jimenez,” according to court filings.

Legal scholars agree Mann had discretion to deny Jimenez’s motion. Judges need some ability to evaluate whether an investor can adequately represent a class, they said.

“I don’t believe that the court just has to appoint a sole movant, if that’s all the court has,” University of Richmond law professor Jessica Erickson said.

It’s not uncommon for just one person to ask to be lead plaintiff. Perino and two colleagues analyzed more than 430 securities class action settlements over a six-year span and found almost 30% of the cases included just one motion for lead plaintiff.

But courts’ analyses of a movant’s qualifications, particularly when there is only one, are often “cursory” at best, Perino said.

“Maybe one reason that judges are reluctant to analyze too closely the characteristics of the lead plaintiff if there’s a single movant is essentially that they’re almost determining the outcome of the case,” Perino said.

The PSLRA’s lead plaintiff requirements weren’t meant to be a “determination of the merits of a case,” Perino said. Jimenez said, in court filings, that if his motion were denied, the case “will presumably be dismissed.”

Small Losses

Finding someone inadequate to lead a suit because their losses are too small is “backwards,” Booth said, because a purpose of class actions is to aggregate small claims. He and other legal scholars suggest more should generally be needed for a judge to deny such a request.

“I don’t think a putative lead plaintiff should be rejected simply because they have small claimed losses,” Erickson said.

Mann’s ruling also highlighted a retainer agreement that Jimenez signed with Pomerantz LLP. The agreement— dated the same day that the judge said she wanted to see it—included “a fee provision strongly favoring counsel over the putative class,” the judge said.

It’s reasonable to infer that the agreement didn’t exist until the court asked for it, and that “Jimenez failed to negotiate a fee arrangement that favors the class he seeks to represent,” Mann said, suggesting that showed a lack of interest on Jimenez’s part to effectively manage the litigation.

Judges don’t typically ask to see fee agreements, according to University of Michigan law professor Adam Pritchard. But there is a legal basis to use such agreements to determine whether an investor is looking out for the interest of the class, Pritchard said.

Others, including Perino, have said courts should prefer plaintiffs who have negotiated a fee agreement ahead of time. Pritchard argues, in a forthcoming paper, that judges should look at whether a plaintiff has negotiated a fee agreement that incentivizes attorneys to push for larger settlements.

Although he thinks there’s a legal basis for what Mann did, Pritchard said he could see a federal district judge going in another direction.

“I wouldn’t be surprised at all if the district court judge were to say ‘this guy has the largest losses,’ because he’s the only one, and there’s nothing obviously demonstrating him to be inadequate and therefore he should be appointed lead plaintiff.”