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It is no secret that big money for class action securities litigation firms lies in wooing state pension and retirement funds as clients. But successfully negotiating the courtship with these institutional investors may be getting tougher for firms. With increasing frequency, states are adopting selection processes in which they pick just a few go-to firms when their pension or retirement funds may want to pursue securities fraud cases. These contests are casting calls of sorts, where firms vie for a spot on states’ short lists for lucrative securities litigation work. Whether states are using the competitions in response to criticism that pension fund honchos are in bed with class action firms, or whether states have grown weary of unsolicited pitches from firms wanting their work, it is clear that making the cut is a top priority for securities lawyers. “People recognize they’ve got to get themselves out there and sell their wares,” said Stuart Grant. His firm, Grant & Eisenhofer, based in Wilmington, Del., won about $610 million for its clients in securities class action settlements last year. Recently, the 30-attorney firm successfully made a pitch in Maryland to get on that state’s list. Competition to charm institutional investors, including pension funds, retirement funds and unions, is fierce among the relatively small number of firms that handle complex matters associated with securities litigation. Only about 200 lawyers focus on this type of work, according to one industry attorney, and the same firms repeatedly emerge as lead plaintiffs. Top contenders include Lerach Coughlin Stoia Geller Rudman & Robbins of San Diego; Bernstein Litowitz Berger & Grossmann of New York; Wolf Popper of New York; Barrack, Rodos & Bacine of Philadelphia; and others. In a field once dominated by the now-split Milberg Weiss Bershad Hynes & Lerach, lead-plaintiff status formerly went to the firm that raced to the courthouse to file an action first. But in 1995, that changed with the enactment of the Private Securities Litigation Reform Act (PSLRA). Now lead-plaintiff status is bestowed on the client with the biggest potential loss, and unlike most individual investors, institutional investors can have billions at stake. Of the $9.4 billion recovered in securities settlements since the PSLRA was passed, institutional investors received about 30% of that amount, according to Cornerstone Research. Last year alone, the median settlement amount was $10 million for cases where the lead plaintiff was an institutional investor, as opposed to $5.5 million in cases where no institutional investor served as lead plaintiff. Although states take varied approaches, their selection processes often begin with requests for proposals sent to a number of securities class action firms. Pennsylvania, for example, recently sent out requests to get information from firms it will turn to if its teachers’ retirement fund or its state employee fund should sue. It has created a list with a few firms and will review its choices every three years. While the process in some states includes a personal presentation by competing firms, Pennsylvania bases its selection on papers the firms submit. Attorney Michael Budin, chief counsel for the State Employees Retirement System of Pennsylvania, said that his state began taking requests for proposals as a means of control. “All the firms inundate you with suggestions about securities litigation that would be ripe,” Budin said. “By establishing the pool, we’ll contact them.” But creating a competitive system may be more than just a response to too many sales pitches. Earlier this month, Forbes claimed that shareholder suits filed by state institutional investors are the result of a “cozy cabal of lawyers, unions and public pension funds,” where law firms contribute thousands of dollars to the campaigns of state officials in exchange for securities work. Max Berger of Bernstein Litowitz takes issue with the idea that securities litigation is a rigged system. Forbes said that Berger’s firm landed Louisiana as a client amid contributions of more than $90,000 to that state’s politicians since 1996. Berger said last week that most of the contributions were made by G. Anthony Gelderman, an attorney practicing of counsel with the firm. Berger said that Gelderman is a “lifelong resident” of Louisiana, who gave to “Louisiana politicians who have nothing to do with securities litigation.” Berger also said that Louisiana and other states have selected his law firm on the merits. “Look at the recoveries we achieved. Why wouldn’t they want to hire us?” he said. Indeed, his firm served as co-lead counsel in the WorldCom litigation and helped negotiate a record-setting $2.65 billion settlement on behalf of the New York State Common Retirement Fund. Berger also points to corporate reform as the broader benefit of securities litigation. Morgan, Lewis & Bockius senior counsel John F.X. Peloso, whose firm generally serves as defense counsel, said the appearance of fairness is important for states right now in light of the pay-to-play criticism. “They want to bend over backwards to be perceived as fair and appropriate,” he said. In New York, for example, the State Comptroller’s Office now places advertisements in national and local publications to solicit proposals from firms. The office, under its former and current administration, has come under fire for allegedly playing favorites in selecting counsel. Alan Lebowitz, general counsel for the comptroller’s office, and other senior officials within the office cull through the papers from law firms responding to the requests for proposals and pare down the contenders. The office has three-year contracts with about 15 firms it selected after interviewing 20, Lebowitz said. Some days, the firms vying for a place on the list were lined up outside the comptroller’s office ready to make a pitch. “The securities bar is not a reticent bunch. I’m sure there were times they were running into each other,” he said. Some applicants came ready to dazzle decision-makers with PowerPoint presentations and legions of lawyers. “Our intent was to short-cut that and have a dialogue,” Lebowitz said. Specifically, the New York comptroller’s office was looking for information about the firms’ experience in class actions and derivative cases, their processes for evaluating whether a case should proceed, and the skills of the lawyers who would handle the cases. A fee grid was presented “up front” to the firms “so that everybody knew what it would be,” Lebowitz said. The grid is a complex system of contingency compensation based on amounts of recovery during different phases of litigation. For example, for recovery from zero to $100 million, a selected firm is entitled to 8% of the amount recovered, if the case proceeds through all motions to dismiss and up to the commencement of merits discovery. On the other extreme, for recovery of more than $1 billion, a chosen firm receives $81 million plus 3% of any amount in excess of $1 billion. That fee goes to the firm if it represents the state from the adjudication of summary judgment motions to the end of the case, including appeals. Lebowitz and the other officials, according to a spokesman for New York State Comptroller Alan Hevesi, have no knowledge of which firms may or may not have contributed to the campaign of the state comptroller. The spokesman, David Neustadt, added that Hevesi, as a fiduciary, has the final say regarding the list of firms the selection team provides. ‘Pay to play culture’ Stull, Stull & Brody attorney Jules Brody said the pay-to-play culture is a “well-known secret” in institutional investor securities actions. The client base of his 27-attorney firm is composed primarily of individual investors, Brody said. Still, with offices in New York and Los Angeles, the firm is ranked third in the number of securities class action settlements it has won since PSLRA passed. Despite his assessment of the problems with securities counsel selection, Brody explained he is not out to change the system. “I’m frustrated all the way to the bank,” he said. “I’m not OK with it, but I can’t waste the time. I’ve got too many cases.” Whatever the reason for the creation of the short lists, they appear to be altering the way firms do business. Attorneys say that competition is tough at these beauty contests, where a hometown team may lack the power and pizzazz that national firms have to earn a state’s nod. “Rarely are local firms equipped to represent a state in cases of these sorts,” said Stanley Bernstein, a partner at Bernstein Liebhard & Lifshitz. In the last year, the New York-based firm has competed in several states and won slots in New York, New Jersey, Pennsylvania, Michigan, Illinois and California. Having firms at the ready is critical for states, Bernstein said, since they have only a 60-day window after a case is initially filed to decide whether to move ahead as lead plaintiff. “The last thing an institutional investor should want is to be bombarded by 50 law firms as to whether to proceed,” he said.

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