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).
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.
Two recent appellate decisions of interest:
(1) In Central Laborers’ Pension Fund v. Integrated Electrical Services, Inc., 2007 WL 2367776 (5th Cir. August 21, 2007), the court addressed the pleading of scienter under the Supreme Court’s recent Tellabs decision. Notably, the court found that (a) the confidential witness allegations lacked sufficient detail supporting their reliability (although the court stopped short of suggesting that the plaintiffs should provide the names of the witnesses), (b) the argument that the stock trading of one of the defendants was non-suspicious because he traded pursuant to a Rule 10b5-1 plan was “flawed” because the plan was put into effect during the class period, and (c) an inference of scienter cannot be drawn from a Sarbanes-Oxley certification unless the person signing the certification had reason to know or should have suspected that the financial statements contained misrepresentations. The court concluded that the “allegations read in toto do not permit a strong inference of scienter.”
(2) In Employers-Teamsters Local Nos. 175 & 505 Pension Trust Fund v. Anchor Capital Advisors, 2007 WL 2325079 (9th Cir. August 16, 2007), the court considered whether a lead plaintiff decision can be appealed following the dismissal of the underlying case. A group of public pension funds had unsuccessfully moved to serve as lead plaintiff. The lower court subsequently granted the defendants’ motion to dismiss the case. The appointed lead plaintiff declined to file an amended complaint and instead requested that the individual uncertified actions be dismissed with prejudice. The pension funds moved to appeal the earlier lead plaintiff decision, but the appellate court held that because the pension funds never filed their own complaint or intervened in the pending action, they were merely “potential class members in a potential class action suit” and had no standing to bring an appeal.
Institutional Shareholder Services has issued an interesting (and blessedly pithy) paper on the growing role of international investors in U.S. securities class actions. The highlights include:
(1) Since 1999, international institutional investors have sought to serve as lead plaintiffs 182 times in 98 different cases.
(2) The international institutional investors that filed lead plaintiff motions were from 17 different countries. Germany, Canada, and Israel were the countries with the largest number of movants.
In the post-Dura world, in-and-out traders (i.e., investors who both bought and sold their shares during the class period) continue to have difficulties pursuing securities fraud claims. Hard on the heels of the lead plaintiff decision in the Comverse case comes an opinion from the D. of Mass. declining to appoint an in-and-out trader as a class representative.
In In re Organogenesis Sec. Litig., 2007 WL 776425 (D. Mass. March 15, 2007), the court found that during the class period one of the proposed class representatives “sold almost six times as many shares as he purchased.” Under the last-in, first out (“LIFO”) methodology of assessing damages adopted by the court, these trades resulted in the investor making a profit on his trading during the class period and rendered him an unsuitable class representative. The court also rejected the other proposed class representative because the investor made his final stock purchase prior to the date one of the individual defendants joined the company and, therefore, lacked standing to proceed against that individual defendant. Finally, the court found that Milberg Weiss was not an adequate lead counsel based on: (a) the submission of erroneous stock certifications on behalf of one of the proposed class representatives; (b) the possible negative effects of the federal indictment against the firm; and (c) the firm’s failure to clearly inform the court of the role of one of its indicted attorneys in the case.
Quote of note: “The court realizes that refusing to certify a class will make it more difficult to prosecute the fraud alleged in this case. But the allegation of fraud is not alone enough to merit class certification. The additional requirements exist for the important reason of ensuring that the named plaintiffs effectively represent the claims of the absent parties.”
The WSJ Law Blog and the National Law Journal have articles on the case that focus on the lead counsel decision.
While the Dura decision by the Supreme Court suggests that in-and-out traders (i.e., investors who both bought and sold their shares during the class period) cannot establish the existence of loss causation, lower courts have not uniformly applied this principle. In the latest case to consider the issue, In re Comverse Technology, Inc. Securities Litigation, a court in the E.D.N.Y. has issued a decision vacating a magistrate judge’s order appointing the Plumbers and Pipefitters National Pension Fund (P&P) as lead plaintiff in the case. The court concluded that the magistrate judge improperly overvalued P&P’s financial interest in the action by including losses resulting from in-and-out trades.
Citing Dura, the court held that “any losses that P&P may have incurred before Comverse’s misconduct was ever disclosed to the public are not recoverable, because those losses cannot be proximately linked to the misconduct at issue in this litigation.” P&P actually realized a gain on the Comverse shares that it purchased during the class period and held until after the alleged corrective disclosures were made. As a result, the court appointed a different lead plaintiff and lead counsel. The New York Law Journal has an article on the case.
Quote of note (opinion): “While the Dura Court decided a motion to dismiss, and not a lead plaintiff motion, the logical outgrowth of that holding is that [in-and-out] losses must not be considered in the recoverable losses calculation that courts engage in when selecting a lead plaintiff.”
There have been some new developments in a pair of old disputes.
(1) Newsday reports that after a long-running legal battle, a California state court has granted a motion brought by Texas billionaire Sam Wyly and “order[ed] three class action law firms to turn over years’ worth of evidence they collected as part of their lawsuits alleging accounting fraud by former [Computer Associates] executives.” Wyly, who was a class member in the suits, alleges that the litigation was improperly settled for a low amount just prior to Computer Associates’ public disclosures of accounting fraud.
(2) The court presiding over the Halliburton securities class action has granted a motion by the Archdiocese of Milwaukee Supporting Fund, which is acting as lead plaintiff in the case, to remove Lerach Coughlin and Scott + Scott as lead counsel. Legal Pad has a post.
Both the Federal Rules of Civil Procedure and the PSLRA provide that plaintiffs’ counsel in a securities class action may be awarded a “reasonable” fee as determined by the court. Courts generally agree that it is appropriate to cross-check a proposed percentage fee award using the lodestar method (take the reasonable hours expended times a reasonable hourly rate and adjust with a multiplier), but there is no uniformity as to what are the appropriate hours, rates, and multiplier to use.
Bloomberg has an article on the approval of the settlement in the Nortel securities litigation. There are two items of note. First, the overall settlement value apparently has declined by over $1 billion since the settlement was first announced. Second, the court reduced the proposed attorneys’ fees from 8.5% (approximately $96 million) to 3% (approximately $34 million) of the settlement value.
A review of the opinion, which is not yet available online, reveals that the court’s main concern was that the proposed attorneys’ fees award resulted in a lodestar multiplier of 5.8 (i.e., “fees totaling 5.8 times the number of hours actually worked”). The court viewed this as excessive, citing a number of prominent cases (including Bristol-Myers Squibb and Worldcom) where other S.D.N.Y. judges approved attorneys’ fee awards that had lodestar multipliers of 3.5 or less. Based on a 3% award, the lodestar multiplier in Nortel is approximately 2.05.
The Halliburton securities litigation is back in the news, two years after the S.D. of Tex. rejected a proposed settlement of the case. Forbes has an article on a motion by the Archdiocese of Milwaukee Supporting Fund, which is acting as lead plaintiff in the case, to replace Lerach Coughlin and Scott + Scott as lead counsel.
Terayon Communications Systems, Inc. (Nasdaq: TERN), a Santa Clara-based provider of digital video networking applications, has announced the preliminary settlement of the securities class action pending against the company in the N.D. of Cal. The case originally was filed in 2000 and is based on allegedly misleading statements concerning the company’s ability to obtain certification for its technology.
The settlement is for $15 million, with Terayon paying $2.3 million and the rest covered by insurance. Prior to this settlement, the case had been a lightening rod for criticism over the relationship between short sellers and the securities plaintiffs’ bar.