Fairy Tales, Lead Plaintiffs, And The PSLRA

If the judge ain’t happy, ain’t nobody happy. Proving that axiom correct, Judge Vaughn Walker of the N.D. of Cal. issued a fairly amazing order last week in the Copper Mountain securities litigation, expressing displeasure with both plaintiffs and the 9th Circuit over the lead plaintiff/lead counsel selection process in that case.

The PSLRA provides that the “presumptively most adequate lead plaintiff” in a securities class action is the movant who “has the largest financial interest in the relief sought by the class” and “otherwise satisfies the requirements of Rule 23 of the Federal Rules of Civil Procedure.” To summarize the process, the judge’s task is to determine which plaintiff has the largest financial interest, evaluate whether that plaintiff meets the adequacy and typicality tests of Rule 23(a), and, if that plaintiff meets the requirements, declare that plaintiff the presumptive lead plaintiff (a presumption that may then be rebutted by other plaintiffs). The court must also approve the lead plaintiff’s choice of counsel.

Three years ago, Judge Walker determined that he would not name the lead plaintiff movant in the Copper Mountain case with the largest financial interest as lead plaintiff because that candidate, known as the CMI Group, failed to demonstrate that it was an adequate lead plaintiff. Judge Walker based his decision on the CMI Group’s failure to negotiate a “competitive” fee arrangement with proposed lead counsel and named a different movant as lead plaintiff. See In re Quintus Sec. Litig., 201 F.R.D. 475 (N.D. Cal. 2001) and In re Quintus Sec. Litig., 148 F. Supp. 2d 967 (N.D. Cal. 2001).

The CMI Group petitioned the Ninth Circuit for a writ of mandamus. In In re Cavanaugh, 306 F.3d 726 (9th Cir. 2002), the court overruled Judge Walker’s decision. The panel, in an opinion written by Judge Alex Kozinski, found that the lower court had failed to follow the statutory language of the PSLRA in appointing the lead plaintiff. In particular, the court found that “a straightforward application of the statutory scheme . . . provides no occasion for comparing plaintiffs with each other on any basis other than their financial stake in the case.” Moreover, the lead plaintiff process “is not a beauty contest” and information about fee arrangements “is relevant only to determine whether the presumptive lead plaintiff’s choice of counsel is so irrational, or so tainted by self-dealing or conflict of interest, as to cast genuine or serious doubt on that plaintiff’s willingness or ability to perform the functions of lead plaintiff.” Accordingly, the Ninth Circuit vacated the lower court’s order and instructed the lower court to proceed with the CMI Group as the presumptive lead plaintiff.

On remand, however, the CMI Group apparently decided to no longer seek lead plaintiff status (or, as Judge Walker puts it, “vanished – fled the scene – gone south – maybe vaporized”). In his order, Judge Walker compares the situation to a “heroic prince” turning into a “frog” and is incredulous over the course of events:

“By vindicating their ‘right’ to be the presumptive lead plaintiffs through the extraordinary remedy of mandamus (and establishing circuit precedent of no little value to their lawyers), the CMI group might seem to possess a tenacity and determination seldom seen on the battlegrounds of federal litigation. But what might seem apparently is not. Could there have been some motivation other than vindicating the interests of defrauded investors behind the mandamus proceedings? Could it be that the Ninth Circuit panel, perceiving the black letter of the PSLRA, was actually reading a fairy tale?”

Also not surprisingly, Judge Walker appears to believe that the CMI Group’s decision vindicates his earlier order. Noting that “Cavanaugh would seem to establish that the largest stakeholder’s selection of counsel must be approved unless that selection is either mad or crooked,” the court finds that the opinion converts the PSLRA into “a straightjacket against judicial measures to ensure that [securities class actions] genuinely benefit investors, not lawyers.” In the absence of the CMI Group, Judge Walker ends up simply reappointing the earlier lead plaintiff to the position. “The moral of the story,” the court concludes, “will be left to you, dear readers.”

The Recorder has an article (via law.com – free regist. req’d) on the case in today’s edition. Judge Walker’s order is not yet available online.

Addition: The opinion is now on Westlaw – In re Copper Mountain Sec. Litig., 2004 WL 369859 (N.D. Cal. Feb. 10, 2004).

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Filed under Curiouser and Curiouser, Lead Plaintiff/Lead Counsel

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