Category Archives: Lead Plaintiff/Lead Counsel

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 enhance with a multiplier), but there is no uniformity as to what are the appropriate hours, rates, and multiplier to use.

In an interesting decision, Chief Judge Vaughn Walker of the N.D. of Cal. (who is no stranger to controversy on the subject of attorneys’ fees) attempts to establish a more rigorous method of assessing the reasonableness of a proposed fee. The court’s exhaustive lodestar analysis in In re HPL Technologies, Inc. Sec. Litig., 2005 WL 941586 (N.D. Cal. April 22, 2005) includes adjusting the value of the common stock portion of the settlement because of its illiquidity, lowering the hourly rates cited by the attorneys based on national standards, and creating hypothetical scenarios to establish a reasonable multiplier range. Although the court ultimately reduces the proposed percentage fee from 15% to 11% based on the lodestar crosscheck, it concedes that its “excursion has led it to take up legal issues that have not been briefed by counsel” and expressly grants leave for lead counsel to move for relief from the judgment. The 10b-5 Daily will keep an eye on further developments.

Quote of note: “The court can envision no defensible normative reason in this case–or indeed in common fund cases generally–that the amount of the fee ought to depend on the method used to compute it. Both methods should result in a ‘reasonable’ fee, and reasonableness cannot logically depend on whether the fee is expressed as a percentage of the recovery or the product of hours and rates.”

Under the PSLRA, the lead plaintiff in a securities class action is presumptively the party with the largest financial interest in the relief sought by the class (i.e., the movant who alleges the most potential damages). The presumption may be rebutted, however, by a showing that this party will not fairly and adequately protect the interests of the class or is subject to unique defenses not applicable to other class members. In creating this provision, Congress sought to encourage the participation of institutional investors as lead plaintiffs.

An open question is to what extent this legislative history, as opposed to the plain language of the “largest financial interest” presumption, should influence a court in its selection of a lead plaintiff. To put it another way, what happens when the mechanism created by Congress does not result in the preferred outcome? In two recent cases, courts appear to have been swayed heavily by Congressional intent.

In Malasky v. IAC/Interactive Corp., 2004 WL 2980085 (S.D.N.Y. Dec. 21, 2004), the court found that an individual investor had the largest financial stake in the case and was otherwise qualified to act as lead plaintiff. Nevertheless, the court held that because the individual investor was “not an institutional investor,” he would be paired with an institutional investor as co-lead plaintiff.

Taking this analysis even a step further, in In re Cardinal Health, Inc. Sec. Litig., 2005 WL 238073 (S.D.Ohio Jan. 26, 2005), the court rejected an institutional investor, at least in part, because it was not a pension fund. Based on a statement in the House Conference Report on the PSLRA, the court found that the “PSLRA prefers pension funds.”

There has already been one appellate decision, on a writ of mandamus, holding that “a straightforward application of the [PSLRA lead plaintiff] statutory scheme . . . provides no occasion for comparing plaintiffs with each other on any basis other than their financial stake in the case.” See In re Cavanaugh, 306 F.3d 726 (9th Cir. 2002). More appellate courts may be asked to take up this issue in the future.

In a three-way matchup that will have the securities litigation bar watching, the Recorder reports (free regist. req’d) that the recently split law firms of Milberg Weiss and Lerach Coughlin are battling it out for the lead plaintiff/lead counsel position in the securities class actions filed against Chiron, a flu vaccine manufacturer, in the N.D. of Cal. Who will preside over this battle? None other than Chief Judge Vaughn Walker.

Judge Walker recently got into a highly-publicized disagreement with Milberg Weiss (when the two firms were still together) over the lead plaintiff contest in the Copper Mountain litigation. After the proposed lead plaintiff represented by Milberg Weiss decided not to fill that role (despite having won a 9th Circuit appeal on the issue), Judge Walker compared him to a “heroic prince” who turned into a “frog.” Stay tuned.

A court in the W.D. of Wash. has dramatically cut the requested attorneys’ fees in the InfoSpace securities class action settlement. The case settled prior to a decision on the motion to dismiss for $34,300,000. Plaintiffs’ counsel sought attorneys’ fees of 25% of the settlement fund (i.e., approximately $8.5 million). Interestingly, objections to the fee request were filed by three public pension funds.

In its decision (In re InfoSpace, Inc. Sec. Litig., 2004 WL 1879013 (W.D. Wash. Aug. 5, 2004)), the court noted that the Ninth Circuit has established 25% of a settlement fund as a “benchmark” award for attorneys’ fees in common fund cases. Nevertheless, the court found that a “25 percent benchmark does not promote the objectives of the PSLRA.”

In the InfoSpace case, there was “a modest risk to recovery” and if the requested fees were awarded the damaged investors would only receive about 14 cents per share. Under these circumstances, the court decided to apply a lodestar method (take the reasonable hours expended times a reasonable hourly rate and enhance with a multiplier) to determine the fee award. After various rate adjustments, and applying a multiplier of 3.5, the court awarded attorneys’ fees of approximately $4 million.

Quote of note: “In contrast to the 14 cents per share (or 0.10 percent recovery) to the class member investors, the 25 percent fee requested by plaintiffs’ counsel, $8,456,353, results in an almost seven-fold increase for plaintiffs’ counsel based on the number of hours spent on this case and the very high billable hourly rates reported by the attorneys. Such a result is unfair and does not provide a sound basis for an award of attorneys’ fees in this case. Such an award would also constitute a substantial windfall to the attorneys to the detriment of the class members who would only recover pennies on the dollar. The Court concludes that the lodestar method provides a more accurate basis for fees to be awarded in this case.”

The Wall Street Journal has an article (subscrip. req’d) on the lead plaintiff hearing held last week in the mutual fund trading practices cases. (The 10b-5 Daily has posted about the cases frequently, most recently on speculation that the settlements could total $1 billion.)

Quote of note: “‘Nobody should expect to get rich off this case,’ said U.S. District Judge J. Frederick Motz in early April. ‘If there is any recovery, the great bulk of the recovery should go to those who were injured, not to their lawyers, particularly in light of the fact that so much of the underlying investigative work has already been done by public authorities,’ he added. ‘Any of you who have expressed an interest as being appointed as plaintiffs’ counsel are forewarned that we mean what we say. You may wish to reconsider your request for appointment in light of this observation.’ The admonishment did little good. Six dozen lawyers showed up at last week’s hearing to angle for a lead counsel spot.”

Quote of note II: “Legislation passed by Congress in 1995 and affirmed in court rulings dictate that plaintiffs with the largest financial stake in a case should get lead-plaintiff status, which usually makes their lawyers lead counsel. But it isn’t always clear which investor suffered most, especially when there are different ways of showing harm. In the mutual-fund cases, lawyers presented myriad formulas to make their clients look like the biggest losers.”

A few years ago, Senior Judge Milton Shadur of the N.D. of Ill. issued a lead plaintiff decision in the Comdisco securities litigation. See In re Comdisco Sec. Litig., 150 F. Supp. 2d 943 (N.D. Ill. 2001). The decision disqualified the Pennsylvania State Employees’ Retirement Systems (“PASERS”) from serving as lead plaintiff despite the fact that PASERS had the most claimed losses of any of the movants. The court reasoned:

It turns out that when the Class Period of January 25 through October 3, 2000 (which is the proper referent) is focused upon, PASERS’ claim that it suffered some $2.4 million in losses in connection with its investment in Comdisco common stock is only a mirage created by PASERS’ adoption of a FIFO (first-in-first-out) approach to its dealings in the stock. In fact PASERS was an active trader during the Class Period, with 15 separate sales that more than matched its purchases during that time frame: Its Class Period purchases of Comdisco common stock aggregated 213,800 shares, while its sales during the same period totaled 218,400 shares. And when those transactions are properly matched, rather than by the impermissible application of a FIFO methodology (which by definition brings into play PASERS’ pre-Class-Period holdings as the purported measure of its claimed loss), PASERS’ Class Period sales at inflated prices caused it to derive unwitting benefits rather than true losses from the alleged securities fraud–so much so that [another movant] demonstrates that PACERS derived a net gain of almost $300,000 (rather than any net loss at all) from its purchases and sales during the Class Period.

In essence, the court applied a “last-in, first out” (LIFO) methodology in examining PASERS’ trades and determined that PASERS did not have any cognizable losses based on the alleged fraud.

A member of the plaintiffs’ bar subsequently wrote an analysis of the case entitled Fee-Fi-Fo-Fum: Why The Rejection Of FIFO Is . . . Not Smart, 2 Class Action Litig. Report (BNA) 786 (2001). The article concluded that Judge Shadur’s decision to use LIFO to determine PASERS’ losses had the effect of improperly comparing green apples (pre-class-period shares) with red apples (class-period shares) because it brought “into play the sale of pre-class-period holdings.” In the author’s view, “it is only the inflated purchases that are relevant, because only those shares relate to the fraud.”

Apparently, plaintiffs’ counsel in the Comdisco case (which is still pending) recently brought the article to Judge Shadur’s attention. The judge was not amused. In an unusual memorandum opinion issued this week, Judge Shadur decided to clarify his earlier statements on the topic. See In re Comdisco Sec. Litig., 2004 U.S. Dist. LEXIS 7230 (N.D. Ill. April 26, 2004). The court noted that “one possible consequence of working with apples may be the production of applesauce — as Webster’s Third New Int’l Dictionary (unabridged) 104 defines that product: ‘an insincere expression of opinion: an assertion that is patently absurd and usu. phrased in exaggerated terms: BUNK, BALONEY (I know applesauce when I hear it — Ring Lardner).'” The court found that this was the case here, because any real-world analysis of losses required the use of LIFO.

“Simply put, the article’s attempted criticism of the use of LIFO in determining the identity of the ‘most adequate plaintiff’ under the [PSLRA] impermissibly ignores the obvious fact that with every securities class action having to identify a class period, the focal point of the inquiry must begin (for standing purposes and otherwise) with purchases or sales — or both — during that class period. And in turn that focus calls for a primary concentration on class period transactions, with is consistent with LIFO rather than FIFO treatment. Regrettably the cited article, like the source from which it drew its Fee-Fi-Fo-Fum title, is no better than a fairy tale.”

Astute readers will note that this debate is closely related to the larger debate over what is necessary to adequately plead loss causation in securities class actions.

Addition: Both decisions referenced in this post can be found at this website under case number 1 01-CV-2110.

The 10b-5 Daily has previously posted about the remarkable lead plaintiff/lead counsel order in the Terayon Communications securities class action pending in the N.D. of Cal.

In Judge Patel’s order, she removed Capital Partners and one of its employees as lead plaintiffs and wondered “whether counsel for plaintiffs actively participated in or provided advice to plaintiffs regarding their scheme to cause a fall in Terayon’s stock price.” The court found “it is probable that there is a conflict not only between lead plaintiffs and the class but also between lead counsel and the remainder of the class.” Lead counsel was asked to provide a written response to a number of questions and defendants were given leave to take further discovery on the issue.

The written response has been submitted in a March 24 filing by lead counsel. According to an article (via law.com – free regist. req’d) in The Recorder, lead counsel argued “that some of the contentions advanced by defendants are manifestly wrong, and led the court to express concern that this action might be the product of improper conduct, when in fact there was no improper conduct.” Lead counsel also provided the court with information about its communications with Cardinal and denied that it had extended the class period to hide Cardinal’s short position in Terayon’s stock.

Quote of note: “The firm also asked to have another hearing before Patel to further defend its actions in [the case]. Patel has yet to decide if she’ll schedule another hearing.”

Two interesting lead plaintiff/lead counsel decisions from last week.

(1) There are usually a number of initial complaints filed in a securities class action, with later filers often copying, in whole or in substantial part, the allegations in the first-filed complaint. Some courts have questioned whether this practice meets the requirements of Federal Rule of Civil Procedure 11, but it usually does not become an issue in the lead plaintiff/lead counsel contest.
In Taubenfeld v. Career Education Corp., 2004 WL 554810 (N.D. Ill. March 19, 2004), however, one of the candidates for lead plaintiff argued that another candidate should be rejected because it had “selected counsel that has not independently investigated this case but instead simply copied the work product” of other counsel. The court declined to comment “on the appropriateness of copying another plaintiff’s complaint verbatim” and held that the issue did not affect the candidate’s adequacy to serve as lead plaintiff. The court also noted that there was evidence, in the form of an affidavit, that the proposed lead counsel had conducted an independent investigation of the claims (but apparently declined to include any additional allegations in its complaint “because it would have given the defendants more time to prepare defenses to such information”).

(2) Sometimes even an unopposed motion for appointment as lead plaintiff can be rejected. In Huang v. Acterna Corp., 2004 WL 536951 (D. Md. March 18, 2004), the court found that the class notice published by the plaintiffs was insufficient because: (a) it did not provide enough information for potential lead plaintiffs; and (b) it was published in The New York Times, which might not meet the PSLRA’s requirement that notice appear in a “widely-circulated national business-oriented publication or wire service.”

The court instructed the plaintiffs to send a more informative notice directly to the largest financial and institutional investors in the company, which “can be easily identified by defendants and submitted to plaintiffs.” No word on the propriety of requiring the defendants to help find a better lead plaintiff to prosecute the case against them. Ouch. (Securities Litigation Watch also has a post on this decision.)