In this Expert Commentary, James M. Wilson Jr. describes In re Vivendi Universal, S.A. Securities Litigation, a case from the Southern District of New York in which the district court disallowed German and Austrian shareholders of a corporation from participating in a class action lawsuit because of its conclusion that the courts of Austria or Germany would not recognize any final resolution of the case.
Mr. Wilson writes: On March 22, 2007, in In re Vivendi Universal, S.A. Securities Litigation, 241 F.R.D. 213 (S.D.N.Y. 2007), the United States District Court for the Southern District of New York held that German and Austrian shareholders of Vivendi Universal S.A. should be excluded from the class action brought for alleged violations of the U.S. federal securities laws. The Court permitted other foreign shareholders, from England, France and the Netherlands, to be included in the class. The Court reasoned that German and Austrian courts will not give res judicata effect to judgments or settlements in a U.S. "opt-out" class action. Because lawsuits could be brought after judgment by Austrian and German investors against defendants alleging the same wrongdoing that is the subject of the class action, the Court concluded that the adjudication of German and Austrian shareholders' claims in the U.S. class action did not meet the "superiority" requirement of Rule 23(b)(3). The Court held that it was "probable" that England, France and the Netherlands would give res judicata effect to the judgment and, consequently, these shareholders could be included in the class along with American investors. The "res judicata" argument is being used not only by defendants to attempt to defeat class certification under Rule 23(b)(3), but also by other class members who are seeking to be appointed lead plaintiff under the Private Securities Litigation Reform Act of 1995, which requires a preliminary assessment of certain Rule 23 factors early in the litigation.
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The Private Securities Litigation Reform Act of 1995 (15 U.S.C. §78u-4)(“PSLRA”) provides procedures for the selection of a class member(s) to act as lead plaintiffs in complex class actions alleging securities fraud. The class member with the largest financial stake in the litigation and who otherwise satisfies Rule 23’s typicality and adequacy requirements is entitled to a presumption as the most adequate plaintiff to represent the class prior to class certification. Armour v. Network Assoc., 171 F. Supp. 2d 1044, 1051 (N.D. Cal. 2001). This presumption may be rebutted by showing the presumptive lead plaintiff is subject to unique defenses. 15 U.S.C. § 78u-4(a)(3)(B)(iii)(II).
Increasingly, foreign investors, in particular large institutional investors, are vying to be appointed lead plaintiff in PSLRA cases. And, in response, other domestic investors are arguing that such foreign investors cannot adequately represent the class because they face the unique “res judicata” defense. The results are mixed.