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Although two federal appeals courts have frowned on the use of competitive bidding to select lead counsel in securities class actions, the federal judge who first championed the practice in 1990 recently urged Congress to codify auctioning of lead counsel status. Chief Judge Vaughn Walker of the Northern District of California was among the first federal judges in the country to experiment with competitive selection of class counsel as a means of saving investors money in securities cases. In re Oracle Securities Litigation, 131 F.R.D. 688 (N.D. Calif. 1990). But years later, the 3d and 9th U.S. circuit courts of appeals curbed the practice in In re Cendant Corp. Litigation, 264 F.3d 201 (3d Cir. 2001), and In re Cavanaugh, 306 F.3d 726 (9th Cir. 2002). Walker testified recently before the House of Representatives subcommittee on capital markets that not only should Bill H.R. 5491 allow judges the option of competitive bidding as a means of selecting lead counsel, but also that competition among law firms should be more intense. “If anything, this provision should be made even stronger by providing that the court shall not permit a securities class action to proceed unless and until the lead plaintiff has demonstrated that the lead plaintiff has evaluated competing proposals for representation of the class,” Walker said in prepared testimony. “After 16 years on the bench I had forgotten what it’s like to answer questions rather than ask them,” Walker said in an interview, referring to the panel’s two hours of questioning of four witnesses. Driven by Milberg The legislation is driven in part by revelations in the indictment of New York-based Milberg Weiss Bershad & Schulman and two of its partners for allegedly paying $11.3 million in kickbacks to “paid plaintiffs” while receiving more than $200 million in attorney fees from class actions over 20 years. U.S. Representative William Lacy Clay, D-Mo., expressed fear during the hearing that Milberg Weiss was “not an isolated case.” But he pointed out that not everyone is happy with bidding wars among lawyers for the lead counsel spot. Clay noted that the Consumer Federation of America wrote to the committee that “allowing judges to impose a competitive bidding process suggests that costs are the only relevant factor to consider when selecting counsel and that judges are better able than investors to determine what is in their best interests.” The bill, dubbed the Securities Litigation Attorney Accountability and Transparency Act, expands on major reform legislation enacted in 1995. Walker said of the Milberg Weiss allegations and others that he was “unsurprised by these unhappy developments. In my view, the 1995 reform act failed to require the elements essential to effective delegation of public responsibility to private parties and, in the case of securities class actions, for the protection of investors.” Large institutional investors, seen as the most informed and therefore the best potential lead plaintiffs in these cases, have not stepped forward as the 1995 act envisioned. “Lawyers still run many, if not most, securities class actions with little or no oversight by an actual client,” Walker told the subcommittee. But James D. Cox, a securities law professor at Duke Law School who also testified, disagreed with Walker’s embrace of bidding wars, suggesting it would put off institutional investors. Institutions have clear preferences about who their lawyers are and how to conduct the suit, he said. “A shotgun marriage to the lowest bidder is hardly likely to introduce the same dynamics into the relationship between the lead plaintiff and lead counsel,” Cox said. In fact, “there is no need for this legislation,” Cox said, because most circuits have not decided whether auctions are a permissible mechanism for selecting class counsel. An auction for lead counsel is not the only element in H.R. 5491. A controversial “loser pays” provision would allow prevailing defendants to seek attorney fees and expenses from plaintiffs if the “position of the plaintiff was not substantially justified.” The bill would also require lawyers to disclose any potential conflicts with the lead plaintiff or any separate financial payments made, in an attempt to prevent the kickbacks alleged in the Milberg Weiss case. The subcommittee has scheduled no further hearings for the bill.

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