On May 16, 2019, Judge F. Dennis Saylor IV of the United States District Court for the District of Massachusetts dismissed a putative class action against the medical device company ReWalk Robotics and certain of its officers and directors under the Securities Exchange Act of 1934 (“Exchange Act”). Yan v. ReWalk Robotics Ltd., No. 17 Civ. 10169 (D. Mass. May 16, 2019). As discussed in our prior post, the Court previously dismissed, with prejudice, claims under the Securities Act of 1933 (“Securities Act”) related to an IPO registration statement for failure to identify a false or misleading statement in the registration statement. The Court also dismissed, for lack of standing, Exchange Act claims based on alleged post-IPO misstatements, because the sole lead plaintiff only purchased stock in the IPO. The prior dismissal of the Exchange Act claims, however, was without prejudice. The lead plaintiff then moved for leave to amend the complaint to add a plaintiff who purportedly had standing to bring the Exchange Act claims. The Court again held that plaintiff lacked standing, and further held that the lack of standing was fatal to the putative class action and could not be cured by amendment.

Plaintiff argued that, even though he purchased his shares before the alleged post-IPO misstatements and therefore could not have relied on them, he nevertheless should remain the lead plaintiff because his Securities Act claims and the Exchange Act claims were based on a “common scheme” to defraud. The Court held, however, that the “common scheme” contention was undercut by the structure of plaintiff’s complaint, which clearly alleged that the Securities Act and Exchange Act claims were based on different theories—namely, the Securities Act claims were based on an alleged failure to disclose the reason the FDA required a post-market surveillance study, and the Exchange Act claims were based on the alleged failure to disclose the company’s difficulties in meeting that requirement. See slip op. at 9. Moreover, the complaint disclaimed reliance on the Exchange Act allegations for the Securities Act claims, and counsel for plaintiff had argued that the two classes were separate. Id. Thus, the Court held that the misstatements alleged by the two classes were not “sufficiently similar” to constitute a “common scheme.”

Plaintiff also argued in the alternative that, even if a “common scheme” were not present, the Private Securities Litigation Reform Act (“PSLRA”) permitted him to assert claims as to which he did not personally have standing. While the Court noted Second Circuit authority supporting the principle that a lead plaintiff does not have to have standing to bring every claim asserted, id. at 9-10 (citing Hevesi v. Citigroup Inc., 366 F.3d 70, 82 (2d Cir. 2004)), the Court held such authority inapposite because plaintiff here “lack[ed] standing to sue on any remaining claim” and there was no support in either the PSLRA or under constitutional standing principles for such a plaintiff to be able to maintain an action. Id. at 10-11.

Plaintiff sought to cure the standing defect by adding a new plaintiff who purportedly had standing to assert the Exchange Act claims. The Court held, however, that “black-letter” law required that substitution of a lead plaintiff can occur only if there initially were multiple lead plaintiffs, because if the sole class representative lacks standing, “this means that the court never had jurisdiction over the matter.” Id. at 11. Although one Southern District of New York case suggested that substitution of a lead plaintiff might be permissible if class counsel’s inadequate investigation caused a mistaken belief as to the lead plaintiff’s standing, id. at 14 (citing In re Initial Public Offering Sec. Litig., 2004 WL 3015304, at *5 (S.D.N.Y. Dec. 27, 2004)), the Court noted that there was no such mistake here. Moreover, “no court appears to have held that a plaintiff in a class action who does not have standing can simply move to amend the complaint to add someone who does.” Id. at 16. The Court thus dismissed the Exchange Act claims and denied plaintiff’s motion to amend the complaint, “without prejudice to the filing of a proper complaint by a proper plaintiff.” Id.