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Rejecting an appeal brought by three law firms that demanded portions of the $55 million in attorney fees awarded in the $3.2 billion settlement of the Cendant Corp. securities litigation, the 3d U.S. Circuit Court of Appeals has ruled that the lawyers who were named to lead the case have the power to say who gets paid. In re Cendant Corp. Securities Litigation, nos. 03-3603, 03-3604, 03-3648. A unanimous three-judge panel found that the 1995 Private Securities Litigation Reform Act (PSLRA) established a “new paradigm” for securities litigation in which the lead plaintiffs and their lawyers call all the shots. “The PSLRA lead plaintiff is now the driving force behind the class’s counsel decisions, and the lead plaintiff’s refusal to compensate non-lead counsel will generally be entitled to a presumption of correctness,” Senior U.S. Circuit Judge Edward R. Becker wrote. The ruling is a setback for three firms-Wolf Haldenstein Adler Freeman & Herz in New York; Miller Faucher & Cafferty in Philadelphia; and Finkelstein Thompson & Loughran in Washington. In a prior appeal, the 3d Circuit had reversed an award of $262 million to the plaintiffs’ lawyers after finding that U.S. District Judge William Walls of the District of New Jersey had erred when he held an auction to select the lead lawyers in the case. Since Walls ultimately allowed the lawyers who were retained by the lead plaintiff to match the low bid, the 3d Circuit found that the error of holding the auction was harmless on the issue of choosing lead counsel. However, since the auction resulted in a fee agreement that differed from the $187 million cap that was placed on the fees in the original retainer, the court held that Walls erred when he awarded a larger fee. On remand, the lead plaintiffs and their lawyers-Leonard Barrack, Gerald J. Rodos and Jeffrey W. Golan of Barrack Rodos & Bacine in Philadelphia, and Max W. Berger, Daniel L. Berger and Jeffrey N. Leibell of Bernstein Litowitz Berger & Grossman in New York-agreed to a $55 million fee award. Walls approved the fee as reasonable, but a new dispute arose when the two firms appointed to serve as co-lead counsel decided to share the fees with just 12 other firms that had been authorized by them to perform work on the case, and refused to pay anything to 45 other firms. In rejecting appeals brought by three of those firms, the 3d Circuit has held that the decision by the lead lawyers as to whether to pay fees to any nonlead firm is entitled to a “presumption of correctness.” Under the PSLRA, Becker said, “non-lead counsel will have to demonstrate that their work actually benefited the class.” Becker found that the appeal by Finkelstein Thompson was easy to reject because it “did nothing more than file a complaint that was substantially identical to dozens of other complaints filed in this litigation.” As for the other two firms, Becker found that the PSLRA sets a strict test for winning fees and that neither firm was able to satisfy the test. Nonlead counsel may refute the presumption of correctness, Becker said, “only by showing that lead plaintiff violated its fiduciary duties by refusing compensation, or by clearly demonstrating that counsel reasonably performed work that independently increased the recovery of the class.” But Becker found that representation of individual class members is “not compensable out of the class’s common recovery.” The three firms that appealed all claimed that they monitored the class action, Becker said, “but none can show that this monitoring independently increased the recovery of the class.” Becker also rejected the argument that the two firms had effectively represented an uncertified subclass of Cendant plaintiffs. Since the subclass was never certified, he said, the two firms had no rights to fees for work on its behalf.

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