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NEW YORK — A federal appeals court last week vacated class certification in six key cases in the massive litigation over dot-com-era initial public offerings — a potentially devastating setback for plaintiffs in the biggest consolidated securities class action in U.S. history. The Dec. 5 decision by a three-judge panel of the U.S. Court of Appeals for the 2nd Circuit leaves in doubt whether plaintiffs will ever be able to certify a class against IPO underwriters in the more than 300 cases that make up In re IPO Securities Litigation. It may also help to unravel a pending $1 billion settlement agreement reached between IPO issuers and the plaintiffs, lawyers involved in the case say. The case, filed in 2001, alleges that 55 underwriters, 310 issuers, and hundreds of individual corporate officers conspired to manipulate the market for IPOs of Internet and high-tech stocks during the 1990s. New York-based U.S. District Judge Shira Scheindlin consolidated thousands of suits into 310 class actions and certified six of them to test arguments about whether the entire docket should move forward. But the 2nd Circuit said Scheindlin used a lower standard of proof than she should have when certifying the classes. In an opinion by Judge Jon Newman, the circuit said the case was “bristling with individual questions” and plaintiffs hadn’t sufficiently proven that enough common issues existed among potential class members. The circuit remanded the cases back to Scheindlin. Six plaintiffs firms, including Bernstein Liebhard & Lifshitz and embattled class action powerhouse Milberg Weiss Bershad & Schulman, are managing the plaintiffs’ case. Milberg serves as lead counsel. Together, the plaintiffs firms are representing more than 7 million shareholders. Fred Isquith of Wolf Haldenstein Adler Freeman & Herz, one of the six plaintiffs firms, said he believed the case would go on, but that it’s not clear “in what form or shape.” “For better or worse, I wish we had won,” Isquith said. Howard Sirota of New York’s Sirota & Sirota, another of the plaintiffs firms, said, “It’s a disaster . . . everything is thrown into chaos. The court has said that the individual issues predominate over the common issues, which is fatal to the certification of a class.” If the classes can’t be certified, then the thousands of individual cases will have to be litigated separately, he said. It’s not clear whether that’s feasible. The underwriters’ defense is being led by Gandalfo “Vince” DiBlasi, a partner at Sullivan & Cromwell. DiBlasi could not be reached for comment. Dozens of corporate defense firms have lined up for the underwriters in the case. Aside from Sullivan & Cromwell, other key players include WilmerHale; Mayer, Brown, Rowe & Maw; Kirkland & Ellis; O’Melveny & Myers; Clifford Chance; Gibson, Dunn & Crutcher; Simpson Thacher & Bartlett; Paul, Weiss, Rifkind, Wharton & Garrison; Sidley Austin; Skadden, Arps, Slate, Meagher & Flom; Arnold & Porter; and Proskauer Rose. Issuers also have a heavyweight legal team, led by Jack Auspitz, a Morrison & Foerster partner. In 2005 they received preliminary approval for a settlement that would guarantee the plaintiffs at least $1 billion in recovery from all defendants. The deal had some unique provisions. If the plaintiffs recover less than $1 billion from the underwriters, the issuers will pay the difference. Now that it looks as if the underwriters could pay nothing, the issuers may try to get out of the settlement, say lawyers involved in the case. Scheindlin hasn’t given final approval for the settlement, and could nix it based on last week’s decision. The 2nd Circuit’s decision came on a day when rifts were already developing among members of the plaintiffs committee leading the litigation. Before the decision was handed down, Sirota said he would seek to remove Milberg Weiss as lead counsel. He said the May indictment of the firm and two of its name partners, David Bershad and Steven Schulman, on charges that they paid $11.3 million in kickbacks to serial plaintiffs in securities suits is a burden on plaintiffs in the IPO case. (While Bershad remains with the firm, Schulman resigned on Dec. 8.) In Sirota’s view, the indictment has undermined the firm’s ability to credibly represent the shareholders in the IPO litigation. The shareholders allege that, among other things, investment banks demanded kickbacks from institutional investors. “In the criminal trial, [Milberg and its partners] deserve a presumption of innocence,” Sirota said. “But in the civil case, they are an anchor around our necks.” Sirota had asked for a conference with Scheindlin and the members of the plaintiffs committee running the case to argue for a change in lead counsel. The move came a day after a committee conference call in which Sirota and Milberg Chairman Melvyn Weiss vehemently disagreed about settlement negotiation strategy. Weiss, through his assistant, declined to comment. Sirota said he wasn’t sure if he’d pursue removing Milberg in light of the 2nd Circuit’s decision. It was unclear, however, whether Sirota would have received much support from his fellow plaintiffs lawyers. “We have been prosecuting it effectively and efficiently for the last five years,” said Stanley Bernstein of Bernstein Liebhard, who serves as vice chair of the plaintiffs executive committee. “Notwithstanding the problems confronting Milberg Weiss, our clients have not communicated any desire to change the leadership.”
Elizabeth Goldberg is a staff writer for The American Lawyer , an ALM publication.

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