The District Court vacated the Magistrate Judge’s lead plaintiff appointment in a securities class action asserting claims under sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 relating to the alleged unlawful grant of backdated stock options to Defendant’s senior executives.

The District Court first found that, under the Private Securities Litigation Reform Act, among competing candidates for lead plaintiff status who have timely filed complaints, the class member with the “largest financial loss” is presumptively the lead plaintiff. It then determined that the Magistrate had improperly calculated the loss that the two principal lead plaintiff candidates suffered. Specifically, in determining the losses sustained by the appointed candidate, the Magistrate included losses that the candidate incurred on “in-an-out trading” that occurred prior to any public disclosure of the alleged misconduct.

The Court ruled that such losses were not recoverable because they were not proximately linked to the misconduct alleged. The Court then determined that once those losses were netted out, the objecting class member had, in fact, sustained the greatest loss and, thus should be designated the lead plaintiff. (In re Comverse Technology, Inc., 2007 WL 680779 (March 2, 2007 E.D.N.Y.))