It’s not often that we hear about a plaintiff and its lawyers abandoning a big case right on the verge of winning class certification. But that’s just what happened in a securities fraud class action against Chesapeake Energy Corporation.
On Friday a federal district court judge in Oklahoma City certified the class and put a union pension fund and its lawyers at Robbins Geller Rudman & Dowd as in charge of heading up the suit. But up until three weeks ago another plaintiff, Safron Capital, and its lawyers at Abraham, Frutcher & Twersky were vying to lead the case along with Robbins Geller.
The plaintiffs accuse Chesapeake of misleading investors about company stock owned by CEO Audrey McClendon, who was later forced to sell the shares to make up for a margin call at the height of the financial crisis. The investors also allege that Chesapeake failed to disclose that Lehman Brothers was a counterparty to some of its oil and natural gas hedging contracts.
Safron, represented by both Robbins Geller and Abraham Frutcher, had filed the initial 2009 suit in the consolidated case. Its bid to represent the class came under fire from Chesapeake’s lawyers at Orrick, Herrington & Sutcliffe, however, after they learned that Safron’s owner, Rina Rollhaus, ran afoul of the Securities and Exchange Commission back in 1994. The SEC accused Rollhaus of taking part in a so-called “free-riding” scheme, in which she and two other defendants allegedly used brokerage accounts to buy stock they couldn’t afford with the intention of covering the purchases by selling the shares the same day. Rollhaus eventually settled with the SEC.
Chesapeake also homed in on Rollhaus’s history of filing securities class actions through various entities other than Safron. Rollhaus testified that she owned companied including Silverstrand Investments, which sued Amag Pharmaceuticals in 2010, and Citiline Holdings, which sued Istar Financial and Printcafe Software in 2003 and 2008, respectively. The Private Securities Litigation Reform Act bars investors from acting as class representatives in more than five cases over a three-year period, though judges have been known to waive those restrictions.
On March 13, Safron finally withdrew from the case. In a statement, James Jaconette of Robbins Geller said that the decision was made “for personal reasons unrelated to” the SEC charges. “We made clear in the briefing that the law overwhelmingly demonstrates a long-past legal history such as this would not be a detriment to adequacy under Rule 23,” he said.
Safron’s exit from the case last month didn’t end Chesapeake’s efforts to disrupt the class action. The company argued that the other proposed lead plaintiff, the United Food and Commercial Workers International Union’s pension fund, should have known about or investigated Rollhaus’s background. Chesapeake noted that the union’s lawyers at Robbins Geller had a history with Rollhaus, having represented entities she controls in at least two other class actions.
Judge Timothy DeGiusti wasn’t persuaded. Just because the union pension fund wasn’t aware of Rollhaus’s background, he ruled, that didn’t mean it couldn’t represent the class.
Chesapeake’s lawyers at Orrick also argued that the pension fund had ceded its responsibility for its investments to money managers, and they took aim at the fund’s agreement with Robbins Geller to monitor its investments for potential securities claims. While monitoring agreements are common among pension plans and plaintiffs firms, they haven’t always been looked at kindly by the courts. Manhattan federal district court judge Jed Rakoff in particular has criticized Robbins Geller’s monitoring arrangements in two separate cases, most recently in an order in February in a securities class action against Lockheed Martin.
Judge DeGiusti, however, cited rulings by other judges who weren’t troubled by such arrangements and concluded that the fund’s relationship with Robbins Geller passed muster. The monitoring agreement, he wrote, “does not adversely impact [the union fund's] ability to adequately represent the class in this case, nor does itcreate a potential conflict of interest impairing its ability to do so.”
Robbins Geller’s Jaconette welcomed the decision to certify the class. “It is important for public investors in the stock offering at issue to have a potential class remedy, and class certification was a necessary step in that process,” he said. “We are now moving on to the next battle.”
A spokesperson for Chesapeake, represented by Robert Varian of Orrick, did not respond to a request for comment.
