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Once-rebuffed investor group wins lead in Nikola class action after 9th Circuit appeal

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Trevor Milton, founder and former-CEO of Nikola Corp., exits the Manhattan Federal Courthouse following an appearance in New York City, U.S., July 29, 2021. REUTERS/Eduardo Munoz

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(Reuters) - A long-shot appellate bet has paid off for three investors who lost millions of dollars on their holdings in Nikola Corp and will now lead the securities fraud class action against the electric truck maker.

Their appointment as lead plaintiffs, in a Nov. 18 ruling by U.S. District Judge Steven Logan of Phoenix, marks one of the first applications of new procedures established by the 9th U.S. Circuit Court of Appeals in the investors’ mandamus case. Logan’s ruling, said co-lead counsel Jeffrey Block of Block & Leviton, clarifies that trial courts evaluating lead plaintiff motions by investor groups should focus on whether the groups have shown an ability to work together on the litigation – not on whether investors knew each other before the case.

That’s a boon for shareholder lawyers, who often bring together pairs or small groups of investors for bids to lead securities class actions. As you know, the candidate who claims to have lost the most money as a result of the alleged fraud is presumed to be the lead shareholder, although competing lead plaintiff candidates can try to rebut that presumption. So investors who team up to combine their claimed losses may have a better chance at the presumptive lead spot.

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Logan’s new decision in the Nikola case shows that rival lead plaintiffs can’t knock investor groups out of contention simply by arguing that the groups have been assembled by plaintiffs lawyers. The case also, as I’ll explain, offers a good instructions for investor groups (and shareholder lawyers) worried about fending off lead plaintiff challenges.

The Nikola class action alleges that investors were defrauded when the company and former CEO Trevor Milton made false claims about Nikola’s technological advances and manufacturing capabilities. The company, which did not respond to my query, announced earlier this month that it would pay $125 million to settle a prospective U.S. Securities and Exchange Commission case mirroring the allegations in the private litigation.

The judge overseeing the class action refused last December to appoint the Nikola investor group as lead plaintiff. The group, represented by Pomerantz, Labaton Sucharow and Keller Rohrback, in addition to Block & Leviton, claimed the biggest losses in the case – more than $6 million, compared to only $1.5 million from the candidate with the next-largest claim. Moreover, two of the three investors in the group individually lost more money than any of the other lead plaintiff candidates.

The investors in the group submitted a joint declaration explaining that they decided to team up because they all have a big stake in directing the class action. The declaration outlined group members’ plans to work together to oversee plaintiffs lawyers, including through conference calls at least every three months.

The trial judge nevertheless said he had “misgivings” about the group. Logan conceded that the Nikola group was the presumptive lead plaintiff, based on its collective losses. He also found that the group would be an adequate representative for the shareholder class. But he said that trial courts in the 9th Circuit have generally frowned on investor groups with pre-existing relationships. The Nikola group, he said, was composed of people who didn’t know each other and “appear to have joined [together] solely for purposes of litigation.” Logan instead appointed an investor with claimed losses of just $700,000, a small fraction of the group’s claim.

Block & Leviton and Pomerantz filed a mandamus petition asking the 9th Circuit to use this case as a vehicle to refine its guidance on when investor groups can be appointed to lead shareholder class actions.

Mandamus petitions rarely succeed – but this one did. In July, the 9th Circuit vacated Logan’s lead plaintiff order and laid out instructions for how to proceed on remand. Logan went wrong, the appeals court said, by failing to give enough weight to the presumption that the investor group should be named lead. Once he determined that the group would be an adequate representative for the class, the 9th Circuit held, it was up to competing lead plaintiff candidates to prove that the group was not actually capable. Logan erred, the appeals court said, by focusing on the group’s perceived failure to explain its origins.

On remand, the investor group had a strong case for its adequacy, especially, Block said, because individual members of the group had sustained bigger losses than rival candidates. Competing lead counsel from The Rosen Firm asked Logan to hold a hearing to find out whether the investor group had been brought together by Block & Leviton, Pomerantz and other plaintiffs firms but the judge refused.

Even if the group was formed solely to submit a lead plaintiff motion, he said, the joint declaration about members’ plans to oversee the case quelled those concerns. That all-important declaration, he said, “evidences the cohesiveness of the members and their adequacy to serve as lead plaintiff.”

Logan seems to be only the second judge to apply the 9th Circuit’s instructions from the mandamus ruling. In August, U.S. District Judge Edward Chen of San Francisco discussed the ruling in an order appointing two pension funds to lead a securities class action against Fibrogen Inc, but those funds had a pre-existing relationship.

I should point out that, according to Block, there’s a potentially significant caveat to the 9th Circuit decision and Logan’s interpretation: They do not resolve whether investor groups can meet adequacy requirements when their individual losses are smaller than those claimed by a competing lead plaintiff candidate and they can only allege larger losses in combination. The 9th Circuit preserved trial judges’ discretion in that circumstance, Block said, to withhold the lead plaintiff presumption from the investor group.

But if you represent the investor with the biggest alleged losses, teaming up with other shareholders will no longer cast a cloud on your lead plaintiff bid in the 9th Circuit. You don’t have to explain the group’s past as long as your clients are prepared to pledge their future oversight.

Read more:

Nikola to pay $125 mln penalty in SEC settlement

Nikola investors get second chance at lead role in lawsuit

9th Circuit signals it will clarify rules for investor groups to lead class actions

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Alison Frankel has covered high-stakes commercial litigation as a columnist for Reuters since 2011. A Dartmouth college graduate, she has worked as a journalist in New York covering the legal industry and the law for more than three decades. Before joining Reuters, she was a writer and editor at The American Lawyer. Frankel is the author of Double Eagle: The Epic Story of the World’s Most Valuable Coin.

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