1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 LUCID ALTERNATIVE FUND, LP, Case No. 24-cv-08683-SI

8 Plaintiff,

ORDER APPOINTING LEAD

9 v. PLAINTIFF AND LEAD COUNSEL

10 AEHR TEST SYSTEMS, INC., et al., Re: Dkt. Nos. 13, 17 11 Defendants.

12 13 Two competing movants, Lucid Alternative Fund, LP and Yue Guo, have filed motions 14 seeking appointment as lead plaintiff in this securities fraud class action litigation. For the reasons 15 stated below, the Court DENIES Lucid’s motion and GRANTS Guo’s motion. 16 17 BACKGROUND 18 Institutional investor Lucid Alternative Fund, LP filed a complaint in this Court against Aehr 19 Test Systems, Inc. and Gayn Erickson and Chris Siu, Aehr’s Chief Executive Officer and Chief 20 Financial Officer, respectively. Dkt. No. 1. The complaint alleges Aehr propounded materially 21 false and misleading statements in violation of the Securities Exchange Act of 1934 regarding its 22 revenue projections and performance during its fiscal year 2024. Id. Specifically, the complaint 23 alleges that (1) in October 2023 the company advertised that it expected its revenue for the fiscal 24 year to be “at least $100 million,” (2) on an earnings call on January 9, 2024 defendant Erickson 25 reduced the revenue prediction to $75 to $85 million, but reiterated this was a conservative position 26 and that the company could reach the $100 million target, and (3) on March 25, 2024, Aehr issued 27 a press release adjusting its revenue expectation to $65 million for the fiscal year ending May 31, 1 2024. Id. at 11. 2 Lucid initiated a securities fraud class action for a class of persons and entities that purchased 3 Aehr securities from January 9, 2024 to March 24, 2024. Id. at 2. Lucid published notice of the 4 action on December 3, 2024. Dkt. No. 6. The notice established a deadline of February 3, 2025 for 5 parties to seek appointment as lead plaintiff in this action. Id. 6 On February 3, 2024, Lucid and individual investor Yue Guo each filed motions requesting 7 appointment as Lead Plaintiff. Dkt. Nos. 13, 17. Lucid is a hedge fund based in the Cayman Islands 8 that manages approximately $85 million in assets. Dkt. No. 17-6. The fund asserts a net loss of 9 $315,422 for 50,000 shares of Aehr common stock and 1,646 Aehr options contracts purchased 10 during the class period.1 Dkt. No. 17-3. Lucid selected Pomerantz to serve as Lead Counsel. Dkt. 11 No. 17 at 12. 12 Guo is retired, lives in Thailand, and “primarily focuses his time on investing and has over 13 eleven years of investing experience.” Dkt. No. 13 at 6. Guo purchased 17,800 shares of Aehr stock 14 during the class period and presents an associated estimated loss in value of $82,733.84. Dkt. No. 15 14-3. Guo selected Rosen Law to serve as Lead Counsel. Dkt. No. 13 at 7. 16 17 LEGAL STANDARD 18 Section 21D of the Private Securities Litigation Reform Act of 1995 (“PSLRA”), codified 19 at 15 U.S.C. § 78u-4, is “intended to encourage the most capable representatives of the plaintiff 20 class to participate in class action litigation and to exercise supervision and control of the lawyers 21 for the class.” Joint Explanatory Statement of the Comm. of Conf., H.R. Rep. No. 104-369, at 32 22 (1995) (Conf. Rep.). More precisely, Congress sought to “increase the likelihood that institutional 23 investors will serve as lead plaintiffs.” Id. at 34. Under the PSLRA, all proposed lead plaintiffs 24 must submit a sworn certification setting forth certain facts designed to assure the Court that the 25 26 1 Movant Guo contends that Lucid’s losses should exclude 5,000 shares of stock purchased 27 after the close of the class period, resulting in an adjusted net loss of $261,640 for Lucid. Dkt. No. 23 at 5. Lucid responds by noting these purchases are properly included because they are the result 1 plaintiff has suffered more than a nominal loss, is not a professional litigant, and is otherwise 2 interested and able to serve as a class representative. 15 U.S.C. § 78u-4(a)(2)(A). 3 Once the application window for lead plaintiff status closes, the district court must determine 4 which proposed plaintiff is the “most adequate” to represent the interests of class members. Id., 5 § 78u-4(a)(3)(B)(i). The lead plaintiff with the largest financial interest in the case becomes 6 presumptively the most adequate plaintiff as long as they satisfy the requirements of Rule 23 of the 7 Federal Rules of Civil Procedure, in particular the “typicality” and “adequacy” requirements. In re 8 Cavanaugh, 306 F.3d 726, 730 (9th Cir. 2002); 15 U.S.C. § 78u-4(a)(3)(B)(iii)(I). Other potential 9 lead plaintiffs may then rebut the presumption by proving that the lead plaintiff “will not fairly and 10 adequately protect the interests of the class; or [] is subject to unique defenses that render such 11 plaintiff incapable of adequately representing the class.” 15 U.S.C. § 78u-4(a)(3)(B)(iii)(II). In 12 other words: by showing that the lead plaintiff does not meet the typicality and adequacy 13 requirements for class action representation. In re Cavanaugh, 306 F.3d at 730. 14 After the court has designated a lead plaintiff, the lead plaintiff “shall, subject to the approval 15 of the court, select and retain counsel to represent the class.” 15 U.S.C. § 78u-4(a)(3)(B)(v). The 16 PSLRA “clearly leaves the choice of class counsel in the hands of the lead plaintiff.”2 In re 17 Cavanaugh, 306 F.3d at 734. “A court generally should accept the lead plaintiff’s choice of counsel 18 unless it appears necessary to appoint different counsel to protect the interests of the class.” Robb 19 v. Fitbit Inc., No. 16-CV-00151-SI, 2016 WL 2654351, at *7 (N.D. Cal. May 10, 2016) (internal 20 quotation marks and citation omitted). 21 22 DISCUSSION 23 Two parties applied for lead plaintiff status within the designated sixty-day filing period, 24 25 2 One legal treatise interprets the PSLRA differently in this regard: “The 1995 Reform Act 26 expressly gives the trial judge discretion in lead counsel selection. Courts should give some weight to the plaintiff's choice of counsel, but blindly deferring to the choice by the class representative 27 ignores the ‘race to the courthouse’ concerns of the [PSLRA].” Selection of Lead Counsel in Securities Class Actions, 4 Law Sec. Reg. § 12:133. Factors to be considered may include the 1 Lucid Alternative Fund, LP and Yue Guo. The Court finds that movant Lucid has a larger financial 2 interest than movant Guo, regardless of whether the purchases that Guo contests are included in the 3 calculations. The Court further finds that Lucid has made a prima facie showing that it meets the 4 requirements of adequacy and typicality. See Dkt. No. 17 at 8-11; In re Cavanaugh, 306 F.3d at 5 730; In re Mersho, 6 F.4th 891, 899 (9th Cir. 2021). 6 The question for the Court is therefore whether Guo can successfully rebut this presumption 7 by challenging Lucid’s adequacy or typicality. A movant is adequate if the movant and movant’s 8 counsel will vigorously pursue the action and do not have conflicts of interest with other class 9 members. In re Mersho, 6 F.4th at 899-900 (citations omitted). In the typicality inquiry, courts ask 10 “‘whether other members have the same or similar injury, whether the action is based on conduct 11 which is not unique to the named plaintiffs, and whether other class members have been injured by 12 the same course of conduct.’” Veal v. LendingClub Corp., No. 18-CV-02599-BLF, 2018 WL 13 5879645, at *4 (N.D. Cal. Nov. 7, 2018) (quoting Hanon v. Dataproducts Corp., 976 F.2d 497, 508 14 (9th Cir. 1992)). A proposed class representative may be inappropriate for that role when it “is 15 subject to unique defenses which threaten to become the focus of the litigation.” Hanon, 976 F.2d 16 497 at 508 (internal quotation marks and citation omitted). 17 Guo challenges Lucid’s typicality and adequacy on the basis of Lucid’s “extensive” options 18 trading. Dkt. No. 23 at 2-4. The value of a stock option is tied to the underlying value of the stock. 19 Stock options contracts come in two main forms, call options and put options. A party that buys a 20 call option buys the ability to acquire shares of stock by a certain date at a designated “strike price.” 21 If the stock price rises above the strike price, the party holding a call option can then buy the shares 22 at the below-market strike price, therefore making a profit (minus the premium paid for the option 23 in the first place). If the stock price never rises above the strike place, the call option will not be 24 exercised and the option buyer considers the paid premium a loss. Conversely, a party that buys a 25 put option buys the ability to sell a share of stock at a strike price by a certain date to the other party. 26 The party buying the put option hopes the stock price will drop below the strike price, while the 27 seller hopes the stock price stays above the strike price. In short, a party that either buys a call 1 while a party that sells a call option or buys a put option makes money when the stock price stays 2 or falls below a certain level. Investors often use option contracts as a sort of insurance to mitigate 3 investment risk. 4 Courts have taken different approaches when considering whether options traders meet the 5 requirements of adequacy and typicality. Some have disqualified options traders from being lead 6 plaintiffs because their presence “would introduce factual issues irrelevant to stockholder class 7 members, like strike price, duration, maturity, volatility, and interest rates, and [] could subject the 8 class to unique defenses, causing unnecessary conflict.” In re Elan Corp. Sec. Litig., No. 1:08-CV- 9 08761-AKH, 2009 WL 1321167, at *2 (S.D.N.Y. May 11, 2009) (citation omitted); see also Cook 10 v. Allergn PLC, No. 18 CIV. 12089 (CM), 2019 WL 1510894, at *2 (S.D.N.Y. Mar. 21, 2019) 11 [disqualifying movant when 60% of his claimed losses were the result of options trading]. Courts 12 have also ruled out investors in securities fraud actions “who engaged in a trading practice premised 13 on the belief the stock would fall” because such a practice raises “the question of whether the seller 14 was actually relying on the market price.” In re Critical Path, Inc. Sec. Litig., 156 F. Supp. 2d 1102, 15 1109-10 (N.D. Cal. 2001) [considering a short-selling investor]. And specific to put option sellers, 16 one court reasoned: 17 While put option sellers and common stock purchasers may rely on the same general assumption that the underlying stock price will rise 18 (or at least not decrease), [citation], there are also significant differences that draw into question the adequacy of put sellers as class 19 representatives. For example, put sellers operate on different time horizons than do common stock purchasers. Puts are time-limited; a 20 put seller bets that a company's stock value will not decline to a specified strike price within the life of an option. Common stock 21 purchasers do not operate under the same limitations. The Court agrees . . . that appointing movants whose losses overwhelmingly 22 relate to options trades (and whose option-trading strategies may have been motivated by different market incentives than common stock 23 traders) would introduce factual issues irrelevant to the class as a whole. 24 Jaramillo v. Dish Network Corp., No. 23-CV-00734-GPG-SKC, 2023 WL 5312062, at *5 (D. Colo. 25 Aug. 16, 2023); see also Di Scala v. ProShares Ultra Bloomberg Crude Oil, No. 20 CIV. 5865 26 (NRB), 2020 WL 7698321, at *4 (S.D.N.Y. Dec. 28, 2020) [declining to appoint as lead plaintiff an 27 investor “whose losses overwhelming reflect his sale of put options”]. 1 However, courts have also reached the opposite conclusion, finding options traders qualified 2 to be lead plaintiffs in certain circumstances. One decision before Jaramillo held that a put option 3 seller met the typicality requirement because “the put option seller generally relies—in like fashion 4 to a stock purchaser—on the integrity of the price of the underlying stock.” In re Sci.-Atlanta, Inc. 5 Sec. Litig., 571 F. Supp. 2d 1315, 1330 (N.D. Ga. 2007). Courts have deemed typical investors who 6 both traded in common stock and sold put options. See Goldstein v. Puda Coal, Inc., 827 F. Supp. 7 2d 348, 355 (S.D.N.Y. 2011); see also Nursing Home Pension Fund v. Oracle Corp., No. C01- 8 00988 MJJ, 2006 WL 8071391, at *8-9 (N.D. Cal. Dec. 20, 2006) [refusing to disqualify at the class 9 certification stage one of the plaintiffs who made purchases of ordinary common stock and sold call 10 options]. Another court approved an options trader when the majority of the investor’s loss was 11 from common stock, not options. Chauhan v. Intercept Pharms., No. 21-CV-00036 (LJL), 2021 12 WL 235890, at *7 (S.D.N.Y. Jan. 25, 2021). And finally, while acknowledging “a divergence of 13 authority on the subject,” a court has allowed an options trader to be lead plaintiff when the 14 challenging movant failed to provide evidence “suggesting that the nature of his options, the history 15 of their purchase and sale, or some other factor made him inadequate to represent the class.” Hall 16 v. Medicis Pharm. Corp., No. CV08-1821PHX-GMS, 2009 WL 648626, at *4 (D. Ariz. Mar. 11, 17 2009). 18 Here, Lucid purchased common stock, bought and sold call options, and sold put options 19 during the class period.3 Dkt. Nos. 17-3, 17-5. Lucid purchased 16,000 shares of Aehr stock on the 20 open market on January 9 and 10, 2024.4 Id. Then, between January 17 and March 15, 2024, Lucid 21 purchased another 29,000 shares of stock at above-market prices because of obligations incurred 22 from the sale of put option contracts on October 30, 2023 (5,000 shares)5 and January 10 and 11, 23 3 Lucid also bought several put options but it appears these purchases occurred after the class 24 period ended. Dkt. No. 17-3, 17-5. 25 4 In comparison, movant Guo bought a total of 17,800 shares of Aehr stock on the open market over the course of the class period. Dkt. No. 14-3. 26 5 The Court questions whether these 5,000 shares are appropriately included in Lucid’s loss calculations. Lucid incurred the obligation to buy these shares prior to the class period and prior to 27 the alleged misleading statements, then purchased the shares during the class period when it alleges 1 2024 (24,000 shares). Id. Finally, Lucid was obligated to purchase another 5,000 shares in April 2 2024, after the class period ended, as a result of a put option it sold on January 10, 2024. Id. 3 Altogether, 68% of Lucid’s listed stock acquisition was the result of obligations arising from sold 4 put contracts. In addition, Lucid bought and sold call options in numerous transactions. Id. Overall, 5 one could look at the trading information and conclude that Lucid made money from its options 6 transactions, but the most profitable of those transactions—the sale of put options—led to the 7 obligatory purchase of 34,000 shares of Aehr stock, purchases on which Lucid incurred a significant 8 loss. Dkt. Nos. 17-3, 17-5. 9 Considering this transaction history, the Court finds Lucid to be an adequate lead plaintiff, 10 as it sees no basis for a conflict of interest with other class members and no reason to doubt Lucid’s 11 ability to prosecute the action with vigor. See In re Mersho, 6 F.4th at 899-900. The Court 12 recognizes that Lucid did not act like a short seller, betting on a decline in stock value. Cf. In re 13 Critical Path, Inc. Sec. Litig., 156 F. Supp. 2d at 1109-10. 14 However, the volume and multidirectional nature of Lucid’s options trades, in particular its 15 sale of put options, raise legitimate questions about whether it meets the typicality requirement of 16 the PSLRA. Like the disqualified movants in Cook, Di Scala, and Jaramillo, the majority of Lucid’s 17 stock losses are directly traceable to its sale of put options. Roughly two-thirds of Lucid’s stock 18 acquisitions resulted from its sale of put option contracts, potentially “introduc[ing] factual issues 19 irrelevant to stockholder class members.” In re Elan Corp. Sec. Litig., No. 1:08-CV-08761-AKH, 20 2009 WL 1321167, at *2. As the Jaramillo court persuasively notes, options contracts involve 21 different “time horizons” than common stock purchases, which may complicate the question of 22 losses attributable to the alleged fraud on the market. In short, the complexity of Lucid’s options 23 trades raise the specter of “unique defenses” that might distract or even derail the litigation. See 24 Hanon, 976 F.2d 497 at 508; 15 U.S.C. § 78u-4(a)(3)(B)(iii)(II). The Court therefore DENIES 25 Lucid’s motion to be named lead plaintiff on the basis of its atypicality. 26 27 stock was artificially overvalued, Lucid would have benefitted from the alleged overvaluation if it 1 Movant Guo only asserts losses related to the purchase of 17,800 shares of Aehr stock on 2 the open market and thus meets the tests of adequacy and typicality. As Guo is the sole remaining 3 movant before the Court who meets the requirements of the PSLRA, the Court GRANTS movant 4 Guo’s motion to be named lead plaintiff in this action. 5 Movant Guo selected Rosen Law as lead counsel. The PSLRA gives the lead plaintiff the 6 primary say in the selection of lead counsel. 15 U.S.C. § 78u-4(a)(3)(B)(v). The Court finds that 7 Rosen Law has the relevant experience and qualifications to advocate effectively on behalf of the 8 class. See Dkt. No. 14-4. The Court does not consider it “necessary to appoint different counsel to 9 protect the interests of the class” and accordingly designates Rosen Law as lead counsel. See Robb 10 v. Fitbit Inc., No. 16-CV-00151-SI, 2016 WL 2654351, at *7. 11 12 CASE SCHEDULE AND NEXT STEPS 13 If lead plaintiff Guo chooses to amend the complaint, the parties are directed to meet and 14 confer to set a schedule for lead plaintiff’s filing of an amended complaint and defendants’ response 15 to the complaint and to present a joint schedule to the Court. 16 Pursuant to the PSLRA and the Federal Rules of Civil Procedure—as well as for the sake of 17 clarity and efficient case management—lead plaintiff is directed to set out in chart form the 18 securities fraud allegations under the following headings on a numbered, statement-by-statement 19 basis: (1) the speaker(s), date(s) and medium; (2) the false and misleading statements; (3) the reasons 20 why the statements were false and misleading when made; and (4) the facts giving rise to a strong 21 inference of scienter. The chart may be attached to or contained in an amended complaint or will 22 deemed to be a part of the complaint if submitted separately. If lead plaintiff decides to rest on the 23 original complaint, the chart is due by April 25, 2025. 24 Should defendants move to dismiss, the Court cautions that it discourages “[t]he overuse and 25 improper application of judicial notice and the incorporation-by-reference doctrine[.]” See Khoja 26 v. Orexigen Therapeutics, Inc., 899 F.3d 988, 998 (9th Cir. 2018). The Court advises the parties to 27 be judicious with regard to requests for judicial notice in connection with motions to dismiss. 1 CONCLUSION 2 For the foregoing reasons and for good cause shown, the Court hereby GRANTS movant 3 Guo’s motion to appoint lead plaintiff and lead counsel and correspondingly DENIES movant 4 || Lucid’s motion to appoint lead plaintiff and lead counsel. 5 6 IT IS SO ORDERED. 7 || Dated: March 19, 2025 ‘ Ml ee 8

SUSAN ILLSTON

9 United States District Judge 10 11 a 12

15 16

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