Category Archives: Lead Plaintiff/Lead Counsel

Creating Your Own Losses

Under the PSLRA, the presumptive lead plaintiff in a securities class action is the applicant with the “largest financial interest in the relief sought by the class.”  The largest financial interest is measured by assessing the approximate losses suffered, with courts generally holding that losses suffered as the result of “in-and-out” stock transactions that took place before any misconduct was revealed do not count.

With this background in mind, the court in Topping v. Deloitte Touche Tohmatsu, 2015 WL 1427317 (S.D.N.Y. March 27, 2015) faced a novel procedural twist in assessing competing lead plaintiff applications.  The applicant with the largest claimed losses actually sold all of its holdings before the corrective public disclosure alleged in the original complaint was made.  While that would normally be disqualifying, shortly after the lead plaintiff deadline, the applicant’s counsel filed a “Corrected Complaint” adding allegations about an earlier, partial disclosure that occurred prior to the applicant’s sales.  In its lead plaintiff briefing, the applicant argued that based on the Corrected Complaint, it was not an in-and-out trader and should be appointed.

The court rejected this argument on two grounds.  First, the court found that it could not look to allegations in a corrected or amended complaint filed after the lead plaintiff application deadline in assessing which applicant has the largest claimed losses.  Not only would doing so undermine the timeliness of the lead plaintiff process by inviting additional briefing, but it would prejudice other class members who had relied on the original complaint in determining whether and how to make their lead plaintiff applications.   Second, even if the court were to consider the Corrected Complaint, the alleged partial disclosure did not reveal anything about the alleged fraud and could not be used to demonstrate loss causation.

Holding: Appointed applicant with second-largest claimed losses as lead plaintiff.


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Fire The Torpedoes

The class certification decision in In Diamond Foods, Inc. Sec. Litig., 2013 WL 1891382 (N.D. Cal. May 6, 2013) contains a number of interesting holdings.

(1) Market efficiency is an issue for the finder of fact – A rebuttable presumption of reliance based on the fraud-on-the-market theory is only available to plaintiffs if the company’s stock traded on an efficient market. Market efficiency means that the company’s stock price reflected all publicly available information, which is typically tested by examining a number of empirical factors. In Diamond Foods, the court noted that the Supreme Court and the Ninth Circuit have never addressed “whether market efficiency is an issue for the jury to determine in trial (or, where appropriate, summary judgment), or is a matter reserved for the judge.” The court concluded, however, that the majority of courts correctly “treat efficiency as an issue for the finder of fact.”

(2) Comcast decision inapplicable to securities class actions – In the Supreme Court’s recent Comcast decision, it held that class certification should be denied if damages are incapable of measurement on a classwide basis. The Diamond Foods court found that the Comcast holding was inapplicable to securities class actions, where it is widely accepted that an event study can be “used to identify the economic loss caused by alleged fraud.” Indeed, the defendant failed “to identify any specific complications that would make such a calculation impossible or ill-advised in this case.”

(3) Pay-to-play allegations insufficient to find proposed class representative inadequate – The lead counsel had made political contributions to Mississippi Attorney General Jim Hood, who controlled the lead plaintiff’s selection of counsel. The court found that none of the contributions, however, were made “after counsel were approved by the Court in June 2012.” While lead counsel also had made contributions to the Democratic Attorneys General Assocation in 2012, there did not appear be any “communication between the law firms and Attorney General Hood, or his office, regarding any expectation that the law firms contribute to DAGA or that such contributions would eventually make their way to Attorney General Hood.” Accordingly, the court held that “[d]efendant has not advanced a record adequate to torpedo this action based on a pay-to-play theory.”

Holding: Motion for class certification granted.

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The Back-Up Plan

In a securities class action brought against Central European Distribution Corp., the court received applications for lead plaintiff from Harry Nelis (an individual investor) and the Prosperity Subsidiary Group (a grouping of four institutional investors). Nelis was represented by Pomerantz Haudek, while the Prosperity Subsidiary Group was represented by Robbins Geller. Apparently recognizing that the Prosperity Subsidiary Group’s application was problematic, however, Robbins Geller also submitted a “response” to the court on behalf of another investor, a Puerto Rico public pension fund, in which the fund expressed an interest in being named lead plaintiff if the Prosperity Subsidiary Group was not selected.

In Grodko v. Central European Distribution Corp., 2012 WL 6595931 (D.N.J. Dec. 17, 2012), the court addressed this unusual lineup. The court found that the Prosperity Subsidiary Group had the largest alleged losses, but faced a unique defense based on loss causation. All of the investors in the group had sold their shares well before the disclosures that allegedly revealed the defendants’ fraud. Accordingly, the court denied the Prosperity Subsidiary Group’s application. While the Puerto Rico fund had the next largest alleged losses, Nelis argued that it should not be selected because (a) the Puerto Rico fund had failed to file a timely application for lead plaintiff, and (b) Robbins Geller was engaging in “unethical gamesmanship” based on its representation of multiple plaintiffs.

The court rejected Nelis’ arguments. First, the Puerto Rico fund had filed a complaint in the action. Under the language of the PSLRA, the court held that the filing of an initial complaint is sufficient to entitle the party to consideration as lead plaintiff. Second, the court noted that “Nelis has not cited any legal authority supporting his contention that counsel in a securities class action are necessarily behaving unethically when they represent multiple plaintiffs.” Indeed, Pomerantz Hudek also represented both Nelis and a different investor who had filed one of the initial complaints. Nor was there any apparent conflict of interest between Robbins Geller’s various clients.

Holding: Appointing the Puerto Rico fund as lead plaintiff and Robbins Geller as lead counsel.

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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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Double Check

In a strange story, a court in the S.D.N.Y. has dismissed the lead plaintiff from a securities class action brought against Smith Barney Fund Management and Citigroup Global Markets because, after six years of litigation, it was revealed that the entity had not actually purchased the securities at issue. The lawsuit, originally filed in 2005, alleges various misrepresentations by an investment advisor for certain Smith Barney mutual funds, which later were acquired by Citigroup. According to counsel for the plaintiffs, the relevant brokerage documentation erroneously showed that the Operating Local 639 Annuity Trust Fund had invested in one of the relevant mutual funds (when, in reality, its investment was in a similarly named fund).

The court, in an apparently scathing decision, cited “epic failures” by the attorneys on both sides of the case in not investigating the issue earlier. For its part, “[h]ad Smith Barney simply checked its records, it would have avoided six years of sparring with a phantom opponent.” Bloomberg and the WSJ Law Blog have articles on the decision.

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Timing Is Everything

(1) Given that the PSLRA has been in effect since 1995, federal courts of appeals have been spending a surprising amount of time lately addressing writs of mandamus on how to interpret the statute’s lead plaintiff provisions. Just last month, a Ninth Circuit panel held that a district court cannot reject the lead plaintiff’s proposed lead counsel and substitute lead counsel of the court’s own choosing. In In re Bard Associates, Inc., 2009 WL 4350780, (10th Cir. Dec. 2, 2009), the Tenth Circuit was asked to consider whether an investment advisor who applied to act as lead plaintiff, but did not obtain assignments of its clients’ claims until after its motion was filed, made a valid application. The panel found that the district court did not abuse its discretion when it rejected the investment advisor’s application on the grounds that the investment advisor had failed to establish its standing to sue as of the lead plaintiff application deadline.

(2) Settling a securities class action for $40 million is not that unusual. Settling a securities class action for $40 million after obtaining the dismissal of the case (and before any appellate ruling) is quite unusual. The D&O Diary and The American Lawyer have full coverage of Dell’s interesting settlement announced last week. It certainly seems hard to argue with lead counsel’s conclusion that it was “a very, very good result for the class . . . [p]articularly given the procedural posture of the case.”

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The Groves Of Academe

There is nothing unusual about a court reducing the requested attorneys’ fees as part of its approval of a securities class action settlement. That said, it is rarely accompanied by the written fireworks found in the recent opinion in the UnitedHealth Group options backdating case.

The case settled last year for $895 million (later increased by payments from individual defendants to a combined class fund of $925.5 million). In In re UnitedHealth Group PSLRA Litig., 2009 WL 2482029 (D. Minn. Aug. 11, 2009), Judge James Rosenbaum granted final approval to the settlement, but reduced the requested attorneys’ fees from $110 million (11.92% of common fund) to $64.785 million (7% of common fund).

The court was sharply critical of lead counsel’s reliance on the fee agreement with its client, which (a) had been entered into after the denial of the motion to dismiss, (b) was not the product of competitive bidding, and (c) had an escalating schedule that increased the percentage paid in attorneys’ fees as the recovery increased. The court found that it was not bound by the agreement and “any risk that declining percentages will force class action counsel to settle ‘too early and too cheaply’ is overstated.”

As for the lodestar check, the court rejected lead counsel’s calculation of its expended fees, finding that “the submissions reflect rates far beyond those charged in the Twin Cities market, as well as considerable time billed by staff which is properly counted as overhead.” Based on the court’s recalculation, the awarded fees resulted in a 6.5 multiplier. The court did graciously note in a footnote, however, that if lead plaintiff wished “to divide its aliquot portion of the recovery between itself and its lawyers as provided in their fee agreement, this Opinion should not be read to suggest any opposition.”

Thanks to Securities Docket for the link to the opinion.

Quote of note: “[Lead counsel] supports its request with the expert report of Professor Charles Silver, who asks, ‘Can judges do better than lead plaintiffs when it comes to setting fees?’ He believes not, because ‘[j]udges have neither better information, better access to markets, nor better incentives.’ His argument rests on Adam Smith’s premise that the self-regulated market knows best, and ‘prices are best set by buyers and sellers bargaining in a competitive environment.’ Seldom have the groves of academe and the ivory towers sheltered within their leafy bowers seemed farther from reality. A lecture on the virtues of the unrestrained free market sounds a bit hollow in light of the parties’, this Nation’s, and indeed the world’s, experiences with the beauties of self-regulated financial markets during a period remarkably coterminous with the existence of this case. The Court rejects the proffered expert’s opinion.”

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The Only Crap Game In Town

Senior District Judge Milton Shadur has a colorful history when it comes to applying the PSLRA’s lead plaintiff/lead counsel provisions. It just got a bit more colorful with his decision in Gorham v. General Growth Properties, Inc., 2009 WL 661303 (N.D. Ill. March 16, 2009).

In selecting a lead plaintiff in General Growth, the court was forced to choose between two individual investors, neither of whom had moved for lead plaintiff status within the requisite 60 days after publication of notice of the case. Investor A filed a complaint within the 60-day period, had a small loss, and entered into a high-cost fee arrangement with proposed lead counsel. Investor B only filed a complaint after the 60-day period, had a larger loss, and entered into a low-cost fee arrangment with proposed lead counsel. In pressing its application, Investor A argued that he was – in Judge Shadur’s phrasing – “the only crap game in town” because Investor B had not even filed a complaint within the first 60 days.

Judge Shadur found, however, that “any presumption that [Investor A] is the ‘most adequate plaintiff’ has been fully rebutted by the inferiority of his chosen counsel’s proposal for the fees to be charged to the class members out of any recovery.” Accordingly, the court appointed Investor B as lead plaintiff and his chosen counsel as lead counsel.

Quote of note: “This Court flatly rejects the prospect of having such a tiny wisp of a tail-[Investor A] with his minimal investment in General Growth-wag the very large dog of the plaintiff class. What [Investor A] has to lose in terms of his in-pocket recovery, if the class is successful in the litigation and if his own counsel’s formulation were to apply rather than the far more client-favorable formulation proffered by [Investor B’s counsel], is in the range of a few hundred dollars, while what the class would stand to lose under the [Investor A]-sponsored formula would be measured in millions of dollars.”

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Taking The Lead

A few interesting lead plaintiff/lead counsel decisions from the end of last year (and one article).

(1) In In re Adelphia Comm. Corp. Sec. & Derivative Lit., 2008 WL 4128702 (Sept. 3, 2008) a law firm that did not act as lead counsel in the case moved for a third of the aggregate fee award. The law firm argued that it had provided “an independent and substantial benefit” for the class by initiating and preserving the Section 11 and Section 12 claims that ultimately were asserted against two of Adelphia’s underwriters. The court found no evidence, however, “that the use of those statutes, or their use against [the two underwriters], represents ground-breaking legal or factual analysis.” The law firm was awarded the amount that had been allocated by lead counsel – $155,610, or the time the law firm had invested in the case, at its normal hourly rates, up until the appointment of lead plaintiffs and counsel.

(2) A lead plaintiff cannot receive a disproportionate share of any settlement, but it can seek reimbursement for its costs and expenses. In In re Enron Corp. Sec., Derivative & “ERISA” Lit., 2008 WL 4178144 (Sept. 8, 2008), the court considered whether to reimburse the lead plaintiff for $600,000 in costs and expenses. The lead plaintiff argued that because one of its in-house counsel devoted an estimated 30% of his time to the case, it was forced to employ outside co-counsel on a number of matters. Accordingly, the lead plaintiff sought its costs for the in-house counsel’s time. Despite an objection that the lead plaintiff had failed to identify any “specific costs it was required to pay” because of its in-house counsel’s work on the litigation, the court granted the request.

(3) In Kuriakose v. Fed. Home Loan Mort. Co., 2008 WL 4974839 (Nov. 24, 2008), the Treasurer of the State of North Carolina moved on behalf of the North Carolina Retirement Systems to act as lead plaintiff in the case. Unfortunately for him, the North Carolina State Attorney General filed an opposition “on the ground that the Treasurer lacks authority under North Carolina law either to seek NCRS’s appointment as lead plaintiff or to retain counsel to represent NCRS in this litigation.” The court found that it would not “be in the class’s interest to have a lead plaintiff likely to become bogged down in state court litigation concerning its participation.”

Is there a better way to deal with the selection and compensation of lead plaintiff and lead counsel in securities class actions? The author of The 10b-5 Daily offered a few thoughts on the issue in a Class Action Watch article (Oct. 2008 edition).

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Challenging The Settlement

Judge Vaughn Walker of the N.D. of Cal. has often expressed skepticism about attorneys’ fees payments in securities class actions. So the parties in the Chiron case may not have been surprised when he denied preliminary approval of their $30 million settlement agreement on the grounds that the attorneys’ fees request was excessive. Milberg Weiss had asked for $7.5 million or 25% of the settlement, which Judge Walker found resulted in a lodestar of between 8 and 10. More noteworthy, however, is that the court’s opinion reportedly also: (a) expressed concern over the pending criminal charges against Milberg Weiss; (b) questioned whether the lead plaintiff was an adequate class representative given its approval of the attorneys’ fees request; and (c) suggested that defense counsel, which represents some individuals in connection with the Milberg Weiss-related criminal probes, may have had an incentive not to look too closely at the adequacy issue. The Recorder and Reuters have articles on the decision.

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