Can Too Many Cooks Spoil The Settlement?

Many courts have declined to appoint a group of unrelated investors as the lead plaintiff in a securities class action, concluding that a group of this nature will be unable to effectively direct the litigation as envisioned by the PSLRA. See, e.g., In re Milestone Scientific Sec. Litig., 183 F.R.D. 404 (D.N.J. 1998) (“Where multiple lead plaintiffs have divergent interests, the leadership of the class may be divided, and rendered factious.”). If it did not agree with this reasoning before, the U.S. Court of Appeals for the Eighth Circuit probably does now.

In In re BankAmerica Corp. Sec. Litig., 2003 WL 22844301 (8th Cir. Dec. 2, 2003), the court addressed what weight a district court must give to “a fraction of a fractured lead plaintiff group” that objected to the settlement terms agreed to by lead counsel. The plaintiffs alleged losses caused by misrepresentations and omissions surrounding the 1998 merger of NationsBank and BankAmerica to form Bank of America. After the consolidation of numerous actions, the district court appointed a seven-member lead plaintiff group to represent the NationsBank classes and a six-member lead plaintiff group to represent the BankAmerica classes. According to the appellate court, “[n]o members of the lead plaintiff groups were institutional investors nor did they have relationships with one another prior to this litigation.”

Shortly before trial, there was a mediation that led to the signing of a memorandum of understanding with the defendants for a $490 million global settlement of all claims. Three members of the NationsBank lead plaintiff group objected to the settlement. In particular, “[t]hey alleged that class counsel instructed them to leave the mediation because it was futile, but that class counsel remained and reached the proposed global settlement for an amount far below that which they had authorized.” The district court found that the PSLRA is silent on what to do under these circumstances. In the absence of legislative guidance, it held a fairness hearing and determined to approve the settlement despite the objections.

On appeal, the Eight Circuit noted that while the PSLRA “is explicit on the lead plaintiff’s authority to select and retain counsel, it is silent on the other responsibilities and rights that lead plaintiffs have to control, direct, and manage class action securities litigation.” It certainly does not address whether a group of lead plaintiffs have to agree on a proposed settlement before it can be reviewed and approved by the district court. In any event, the appellate court limited itself to the narrower question of “what weight a district court must give to objections from a fraction of a fractured lead plaintiff group” and held that the district court did not abuse its discretion under Fed.R.Civ.P. 23 in approving the settlement despite the objections.

Holding: Judgment of district court is affirmed.

Quote of note: “We leave for another day a determination of how much control over litigation the [PSLRA] confers on a singular lead plaintiff or unified lead plead plaintiff group.”

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