Case of the Day: In re China Education Alliance Securities Litigation

The case of the day, In re China Education Alliance, Inc. Securities Litigation (C.D. Cal. 2011), was a securities fraud class action. The plaintiffs were shareholders of China Education Alliance, Inc., and the defendants were the company and several of its officers and directors. The plaintiffs, “despite significant research,” were unable to locate five of the defendants. They therefore moved under Rule 4(f)(3) for leave to serve the missing defendants via the company’s agent for service of process. In the alternative, they sought leave to take discovery aimed at discovering the missing defendants’ whereabouts.

The plaintiffs have done exactly what they should. I consider this to be a much better approach than the approach we have seen in some cases, where the plaintiff makes questionable service and then asks the court to approve it after the fact.

However, the court found that the proposed method of service would not provide due process to the missing defendants, who no longer worked for the company. Because they were former employees, service on the company was not reasonably calculated to lead to notice to the missing defendants. (In a footnote, the court noted that it was not, in fact, clear that none of the missing defendants worked for the company, and in light of the lack of clarity in the affidavits, the court more or less punted, noting that the “discrepancy is irrelevant” because the court was granting the alternate relief sought, namely, early discovery aimed at locating the missing defendants).

The court went on to grant the plaintiffs relief from the stay of discovery that ordinarily attaches to litigation subject to the Private Securities Litigation Reform Act. Discovery aimed at discovering missing defendants did not offend either of the policies of the PSLRA, namely preventing “fishing expeditions” or using discovery costs to force a settlement. Moreover, the plaintiffs would be unduly prejudiced without such discovery, because the lawsuit would be delayed, the missing defendants might escape liability, and “it is likely that [the company] could easily provide this information to plaintiffs.”

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