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Congress has been trying to curb lawyer-driven class actions for more than a decade, but that hasn’t stopped a recent contest over the right to take the lead in suing XM Satellite Radio from getting ugly. Lawyers from class-action giant Lerach Coughlin Stoia Geller Rudman & Robbins and Washington-based plaintiffs firm Cohen, Milstein, Hausfeld & Toll duked it out for lead counsel, with Lerach carrying the day and Cohen, Milstein crying foul. Filed by XM shareholder Morris Satloff in May, the class action against the company stems from a dramatic decrease in its stock price starting in July 2005. D.C.-based XM projected it would have 6 million subscribers. But Satloff’s lawyers, Steven Toll of Cohen, Milstein and Deborah Gross and Robert Frutkin of Pennsylvania-based Law Offices of Bernard M. Gross, allege that in the months leading up to the company’s 2005 year-end financial report, XM officials, including Chief Executive Officer Hugh Panero, doled out huge amounts of money on marketing and promotions to try to reach its subscriber goal while misrepresenting quarterly statements and press statements that XM would reach that goal. The announcement by XM on Feb. 16 that costs for new subscribers had risen to $89 a month from $64 resulted in a significant loss in its fourth-quarter earnings. The news caused the company’s stock price to drop 28.5 percent, according to court documents. ( XM’s stock closed Thursday at $13.69 on Nasdaq, down from a 52-week high of $36.91.) Satloff argues that key personnel at XM liquidated their own shares before disclosing the negative information to the public. After Satloff’s filing, other shareholders came forward, but only five groups, which allege more than $1.3 million in total damages, vied to be named lead plaintiff by the court within the 60-day filing constraint. The “Union Pension Group,” made up of the Boca Raton Firefighters and Police Pension Fund and Plumbers Local 267 Pension Fund, represented by Lerach Coughlin partners David Rosenfeld and Samuel Rudman, stated it had the largest losses, which were more than $551,000. Before the Private Securities Litigation Reform Act, passed by Congress in 1995, the courts used a first-to-file rule, and then coalitions would form to share the burden of the work. Now courts decide the fitness of lead plaintiff based primarily on largest shareholder loss. Seventeen days after the filing period, two of the individual movants withdrew and joined forces with another shareholder group to form the XM Shareholder Group, with total alleged losses of more than $730,000. This group argued that it could best represent the class because the Lerach Group members were “niche plaintiffs” and “failed to demonstrate any unity or cohesion.” Further, the XM Shareholder Group contended that the newly combined group was motivated by “concern over the lack of information available on the backgrounds or qualifications of the Lerach Group,” according to a joint opposition filed by Daniel Sommers and Toll from Cohen, Milstein, along with lawyers from New Orleans-based Kahn Gauthier Swick; Manhattan Beach, Calif.-based Yourman Alexander & Parekh; Atlanta-based Motley Rice; and D.C.-based Cuneo, Gilbert & LaDuca. HUVELLE RULES Despite the PSLRA, which states that the lead plaintiff should have the largest financial stake, Judge Ellen Segal Huvelle of the U.S. District Court in Washington ruled on Aug. 1 that the XM Shareholder Group’s concerns “ring hollow,” especially considering that the group’s original lead counsel, Motley Rice, had later filed a separate motion supporting the Union Pension Group. Huvelle came to the conclusion that the XM Shareholder Group tried to circumvent the PSLRA’s intent of reducing the number of individuals forming groups who do not have pre-existing relationships. Calling the group’s concerns “disingenuous,” Huvelle ruled that the pension fund group, headed by Lerach Coughlin’s legal team, would be the lead plaintiff. “Some judges will look at the affiliations more strenuously than others,” says David George of Lerach Coughlin. “Some groups of people put together solely for lead plaintiff, the judge won’t necessarily appoint. It’s not a bright-line rule.” Yet others involved in the case say they weren’t surprised by Huvelle’s ruling. “Post-motion recombinations of groups are generally viewed by courts as an indicator of lawyer-driven machinations, rather than any kind of organic identity of interests among the group members, and, as a consequence, it’s usually strongly frowned upon and rarely successful,” says Donald Enright of Finkelstein, Thompson & Loughran, who is representing two individuals in the case. Lerach Coughlin has until Sept. 26 to file the plaintiff’s amended complaint. XM’s lawyers, headed by outside counsel Charles Davidow of WilmerHale, have until Nov. 14 to file their motion to dismiss. “This case wouldn’t have merit even if Clarence Darrow were trying it for the plaintiff,” says Davidow.
Anna Palmer can be contacted at [email protected].

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