(Reuters) - What is going on with lead plaintiffs in securities class actions?

A few months back, I told you about a controversy in litigation over Snap’s initial public offering. After a year and a half of intense litigation, with a trial date looming, the court-appointed lead plaintiff suddenly decided he couldn’t continue in the case for health reasons. His lawyers at Kessler Topaz Meltzer & Check proposed swapping in new leads of their choice. Snap’s lawyers at Wilson Sonsini Goodrich & Rosati opposed the swap, as did plaintiffs' lawyers representing different lead plaintiffs candidates. Last month, U.S. District Judge Stephen Wilson of Los Angeles ruled that the lead plaintiff selection process must begin anew.

Now we have nearly the exact same scenario in consolidated securities litigation before U.S. District Judge Richard Seeborg in San Francisco over a $230 million initial coin offering for the cryptocurrency enterprise Tezos. More than a year into the case, after investors squeaked past dismissal and filed their opening class certification brief, lead counsel Hung Ta and LTL Attorneys moved last month to change out lead plaintiff Arman Anvari for two different Tezos investors whom they’d just added as named plaintiffs.

Want more On the Case? Listen to the On the Case podcast.

The substitution motion and an accompanying declaration from Anvari – a former associate at Latham & Watkins, Baker McKenzie and Perkins Coie who won the contest to serve as lead plaintiff because he allegedly lost nearly $270,000 in his Tezos investment – said only that Anvari believed he could not adequately represent all investors “based on various legal arguments which defendants intend to make.”

Those defense arguments, in a nutshell, are that Anvari’s own Internet history, in the form of pseudonymous posts on sites like Reddit and Autoadmit, precludes him from representing the class.

I’m going to explain, but first, you should understand that there’s a lot going on in the Tezos case. Among the defendants, who broadly deny the class action’s allegation, are the U.S. blockchain entrepreneurs Arthur Breitman and Kathleen Breitman and their company, Dynamic Ledger Solutions, which initiated the Tezos project; and the Switzerland-based Tezos Foundation, which the Breitmans established to oversee the 2017 initial coin offering. A big obstacle for investors - in addition, of course, to showing that they were the victims of an unauthorized sale of securities - is establishing jurisdiction in U.S. courts, since the ostensible securities overseer, the Tezos Foundation, is based overseas and the offering’s contract specified Europe as the forum for litigation over the ICO.

Anvari has asserted that he does not recall seeing the forum selection clause, which was not included in the Tezos Foundation’s English-language materials. Judge Seeborg gave Anvari the benefit of the doubt in his dismissal opinion but warned that his preliminary forum selection holding might “ultimately prove to be fleeting procedural mercy.”

The Breitmans and their company, in a newly-filed response to lead counsel's motion to swap in new lead plaintiffs, claim that Anvari's own Internet history casts doubt on his representations. The defendants, represented by Baker Marquart, are calling for Judge Seeborg to reopen the lead plaintiff selection process mandated by the Private Securities Litigation Reform Act. “The PLSRA simply does not contemplate that lead counsel should be able to unilaterally decide who will represent the putative class and control the litigation; indeed such an outcome contradicts the clear purpose of the statute,” the brief said. (The Tezos Foundation, which has separate counsel, did not file a brief responding to Anvari’s motion to withdraw.)

But the Breitmans' brief goes way beyond simply calling for a new lead plaintiff selection process. It attacked Anvari. The defendants, in the brief and an accompanying exhibit, disclosed that they had dedicated “significant resources” to investigating the lead plaintiff’s Internet activity, uncovering various pseudonyms under which he commented on Tezos in Reddit and Autoadmit forums. According to the defendants, their investigations turned up evidence that made him unfit to represent the class.

In addition to their assertion that Anvari may have known about the forum selection clause, the defendants claimed to have found posts suggesting that Anvari did not consider Tezos blockchain cryptocurrency to be a security, a potentially problematic position for an investor claiming the Tezos ICO violated federal securities laws. They also said Anvari’s posts showed that he continued to buy Tezos tokens even after he sued over the ICO. In addition, the defense brief alleged, a handful of Anvari’s posts used “crude and vulgar” language that the defendants called “racist, homophobic and anti-Semitic.”

In an email statement, Anvari said, “Although I no longer desire to be involved in this litigation, I categorically deny the defendants’ malicious and gratuitous attacks on my character and their claims that I am hateful toward any group of people.”In an email statement, Anvari said, “Although I no longer desire to be involved in this litigation, I categorically deny the defendants’ malicious and gratuitous attacks on my character and their claims that I am hateful toward any group of people.”

His attorney Hung Ta also sent me an email statement. “Mr. Anvari has sought the court’s permission to withdraw from the lawsuit, and he will cease to be involved with the suit at that point,” the statement said. “None of the parties object to his withdrawal. In the meantime, a number of other individuals have stepped forward to substitute in as lead plaintiff. We’re keenly focused on assisting the court in this process and continuing to move the claims against Tezos forward for the benefit of our class members.”

The point of this story isn’t to highlight the alleged foibles of any particular lead plaintiff. It’s instead to emphasize that shareholder law firms and lead plaintiff candidates had better be prepared for intense scrutiny when they step forward to head securities class actions. We saw that last year, when U.S. District Judge Mark Wolf of Boston scared off a prospective lead plaintiff in a case against the biopharmaceutical company Tokai. Even institutional investors are not immune, as Judge Wolf’s investigation of an Arkansas pension fund in the State Street case proves.

Securities class action filings are at near-record levels. And since 2013, according to Cornerstone Research, individual investors – like Arman Anvari in the Tezos case – have far outstripped pension funds and other institutional investors as lead plaintiffs. In 2018, individuals were lead plaintiffs in 60 percent of the securities class actions filed. You can see the trend in the stream of press releases that follow stock drops, in which plaintiffs' firms announce investigations and urge shareholders to contact them.

What incidents like the Tezos lead plaintiff dispute show is that those investors, and the lawyers so eager to sign them up to serve as lead plaintiffs, should think long and hard about whether they’re ready for that exposure.