Clear Incentives

Two items on the relationship between investors and their counsel.

(1) The battle over the attorneys’ fees award in the Tyco securities litigation continues. At the heart of the dispute is whether lead counsel was bound by its contractual fee arrangement with the lead plaintiff, which provided for a much lower fee award, or could seek whatever level of fees the court would approve. Forbes has a column on the latest filings in the case.

(2) Judge Jed Rakoff is no stranger to securities litigation and is not known for holding back on his opinions. In City of Pontiac General Employees’ Retirement System v. Lockheed Martin Corp., 2012 WL 546475 (S.D.N.Y. Feb. 21, 2012), the judge took on the common practice of plaintiffs’ firms entering into “monitoring” agreements with institutional investors. Under these agreements, the plaintiffs’ firm (without charge) monitors the investments made by the institution to see if any securities class actions should be brought. If the plaintiffs’ firm recommends that a case be brought and the institution agrees, the plaintiffs’ firm will be the institution’s presumptive choice as counsel. Judge Rakoff noted that the practice “creates a clear incentive for the monitoring firm to discover ‘fraud’ in the investments it monitors,” which would appear to undermine the PSLRA’s goal of discouraging lawyer-driven litigation. Nevertheless, the court approved the proposed lead plaintiff and lead counsel, finding that it appeared that the institution had “the ability to properly exercise [its] role as lead plaintiff” and had affirmed at a hearing on the matter that it would play an active part in the litigation going forward.

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