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Shareholder Activist Monks Banned from Serving as a Lead Plaintiff

The proposition that activist shareholders hold private agendas inconsistent with the interests of investors generally has been a core tenet of my scholarship in this area. See, e.g., Shareholder Activism and Institutional Investors.

So I found a recent Federal District of Massachussets decision by Judge Zobel especially instructive. Robert Monks and John Higgins sought to act as lead plaintiffs in a securities case against Stone & Webster, Inc. Monks will be a familiar name to business law types, of course, as he is one of the most prominent self-appointed shareholder activists.

Judge Zobel took that factor into account in denying Monks and Higgins lead plaintiff status:

Both Higgins and Monks are “shareholder activists” and, as such, subject to unique defenses.  Specifically, defendants aver, Higgins and Monks purchased shares of S&W to “engag[e] in activist strategies [and] overcome existing corporate governance problems to enhance shareholder value.” In particular, defendants argue that Higgins and Monks purchased shares of S&W on the theory that the company was poorly managed and that the stock price would likely decline; therefore, they could not have relied on any alleged misstatements.  They point to, inter alia, the following facts: (1) Higgins and Monks “had numerous communications with S&W directors and management”; (2) Monks had two friends “[who] were S&W directors, whom he regarded as sources of inside information”; and (3) Monks “published several books . . . which undermine any suggestion by plaintiffs’ counsel that Monks[ or] Higgins relied on any alleged misstatements by Defendants.”

While their status as “shareholder activists” does not, ipso facto, disqualify Higgins and Monks from serving as class representatives, in this case, the record suggests that they may be subject to unique defenses and therefore do not satisfy the “typicality” requirement.  Accordingly, I decline to name them class representatives.

Since litigation is a primary area of investor activism, this opinion - if followed elsewhere - would be a body blow to the activist community.

The reliance point is particularly interesting. In a misrepresentation case like this one, the fraud on the market theory often permits a presumption of reliance. But that presumption is rebuttable. Although defendants rarely seek to rebut the FOTM presumption with respect to the entire class, since doing so would require a plaintiff-by-plaintiff series of actions, it has become a common way of arguing that proposed lead plaintiffs are not typical of the class and therefore should not be allowed to serve as such.

Here, the court draws a logical inference. Higgins and Monks bought into the company precisely to shake things up. They thought the company was on the decline and wanted to bring their activist tools to bear. Logically, they could not have relied on the alleged misrepresentations. They would have bought stock anyway. (Note, by the way, that they therefore also would lose on transaction causation.)

The court also might have pointed out that Higgins and Monks have an affirmative interest in seeing the stock price fall, at least in the short term, so as to encourage other investors to support their agenda. Here, again, we observe that the interests of activist and passive investors diverge.