Judge Rakoff Explains Choice of Mississippi Fund to Lead Subprime Class Action

Andrew Longstreth

The American Lawyer

On Tuesday, Manhattan federal district court Judge Jed Rakoff issued a 12-page opinion explaining why he chose the Public Employees' Retirement System of Mississippi and its lawyers from Bernstein Litowitz Berger & Grossmann to lead a securities class action brought on behalf of investors who purchased certificates backed by pools of subprime mortgages from Merrill Lynch. Is this the last nugget of gold in what's been a rich vein of material for us at the Litigation Daily?

You'll recall that we first wrote about the case last month, when Coughlin Stoia Geller Rudman & Robbins and Bernstein Litowitz were vying to become lead counsel in the case. At a hearing in April, Rakoff's jaw dropped when he learned that Coughlin Stoia has a monitoring agreement with its client -- the Iron Workers Local 25 -- in which the firm notifies the pension fund about potential securities litigation opportunities its investment portfolio offers. "If that isn't a gross conflict of interest in violation of the most elementary fiduciary duties, I don't see what is," the judge said.

Rakoff wasn't mollified by the "everyone does it" defense offered up by Coughlin Stoia attorney David Rosenfeld. Nor was he reassured by a response from a representative of the Mississippi fund, who said that it also had plaintiffs firms monitoring its investments for litigation prospects --12 of them, in fact.

In a brief order last month, Rakoff picked Bernstein and MissPERS to lead the case, promising to expand later on the "several difficult issues" posed in the case. On Tuesday, Rakoff explained that the "choice presented a classic dilemma, in the sense of a choice between two less-than-perfect plaintiffs."

His opinion contends that Coughlin's monitoring agreement with the Iron Workers fosters the sort of tactics the Private Securities Litigation Reform Act was supposed to curtail. It also voices skepticism that the Iron Workers' administrator could adequately oversee the litigation (despite a declaration from ethics professor Geoffrey Hazard Jr. of the Hastings College of Law, who defended Coughlin's monitoring arrangement). "The court, from its own observation of the testimony and demeanor of the fund's administrator, readily perceived that he was not particularly sophisticated in evaluating securities class actions and, indeed, had only a rough idea of what this lawsuit was all about," Rakoff wrote. "But who were the 'sophisticated advisers, financial and legal,' who would advise him and the fund 'in determining whether to bring suit'? Why, the very lawyers who would be bringing the suit, Coughlin Stoia."

MissPERS, Rakoff conceded in his ruling, has a similar monitoring agreement with its law firms. But on the key issue Coughlin Stoia raised against MissPERS in the lead plaintiff fight -- that the Mississippi fund had violated a provision in the PSLRA that restricts a party from serving as lead plaintiff in more than five class actions in any three-year period -- Rakoff did not find compelling evidence to disqualify the Bernstein Litowitz client. In fact, Coughlin Stoia's argument appears to have backfired completely, given Rakoff's comparison of its client's qualifications with those of MissPERS.

"It would seem that [the PSLRA's restrictive] provision might apply with less force when the plaintiff is a state agency," the judge wrote. "After all, a state regularly brings suit in hundreds of cases -- and, as already noted, in this case, where the alternative lead plaintiff, the Iron Workers Fund, seems to have little expertise in handling such cases, the accumulated experience of MissPERS in pursuing multiple securities fraud actions seems a benefit more than a detriment."

Darren Robbins of Coughlin Stoia defended his firm's arrangement with the Iron Workers in a statement to the Litigation Daily: "The vast majority of pension funds utilize no-fee portfolio monitoring to assess the impact of securities fraud on fund assets and to submit timely claim forms in order to recover assets on behalf of their defrauded pensioners. Multiple judges, the federal government and a wide variety of experts endorse the use of no-fee portfolio monitoring. Thus, it is no surprise that the vast majority of responsible trustees and fund administrators around the world utilize no-fee portfolio monitoring."

Bernstein Litowitz did not immediately return our call for comment.

This article first appeared on The Am Law Litigation Daily blog on AmericanLawyer.com.