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Avon Pension Fund Appointed Lead Plaintiff in GlaxoSmithKline Class Action

December 20, 2007
Corporate Governance Newsletter

A UK pension fund was recently chosen to lead the GlaxoSmithKline PLC securities class action over a number of funds with larger losses. In a significant development, Avon Pension Fund, Administered by Bath & North East Somerset Council was appointed as lead plaintiff, despite the fact that other institutional investors – namely a group of German funds with claimed losses substantially larger than Avon’s – were also actively vying for the leadership position.

According to the Private Securities Litigation Reform Act of 1995, the court is to presume that the investor with the largest financial interest (or largest loss) is the “most adequate” to perform the important role of lead plaintiff. However, this presumption is not absolute, and courts also consider other factors in determining which plaintiff can best represent the interests of the absent class members. Included in these factors is a determination of whether the proposed lead plaintiff is subject to attacks or defenses not applicable to other members of the class.

In appointing Avon as lead plaintiff, Judge Louis L. Stanton relied on an earlier decision in the Vivendi case. In Vivendi, the court engaged in a lengthy analysis of German procedural law to determine whether a judgment from a foreign court would be recognized in Germany. The court noted that German courts might require actual, individual notice before recognizing a US judgment, and that the status of “collective actions remain[ed] unknown in Germany.” The court determined that plaintiffs failed to show with any degree of certainty that German courts would enforce a US judgment, and as a result, the court excluded German purchasers from the class. Based on the Vivendi decision, Judge Stanton stated that “prudence cautions that the arguments [against German investors] are substantial, and in light of that risk it would be improvident to appoint the German Institutional Investor Group as lead plaintiff.”

Given the Vivendi court’s analysis, Judge Stanton then turned to Avon, and after determining that the Fund met the general prerequisites for serving as lead plaintiff, found that Avon was not subject to the same defense that disqualified the German funds: “English courts, when ultimately presented with the issue, are more likely than not to find that US courts are competent to adjudicate with finality the claims of absent class members and, therefore, would recognize a judgment or settlement in this action.” Accordingly, the court appointed Avon as lead plaintiff and Coughlin Stoia as lead counsel.

“In appointing the Avon Pension Fund as lead plaintiff, the court issued a thoughtful opinion resolving certain issues that are at the cutting edge of the extraterritorial application of the federal securities laws,” said plaintiff’s attorney Ramzi Abadou.

The complaint, filed against global drug manufacturer GlaxoSmithKline (GSK), charges the company with making numerous positive statements regarding its aggressively marketed diabetes drug Avandia, while at the same time failing to disclose that the medication increases the risk of heart attacks in users.

Prior to revealing this damaging information to the market, the individual defendants unloaded $17 million of their own GSK shares. The truth was finally revealed on May 21, 2007, when the New England Journal of Medicine released an analysis linking Avandia to the increased risk of heart attacks. On this news, GSK’s stock promptly collapsed as investors realized the serious risk associated with the drug, and the consequent overvaluation of GSK’s stock.

Borochoff v. GlaxoSmithKline PLC, No. 07-Civ-5574, 2007 U.S. Dist. LEXIS 74621 (S.D.N.Y. Oct. 5, 2007); relying on In re Vivendi Universal, S.A., 242 F.R.D. 76 (S.D.N.Y. 2001).

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